MEMO

*This case study is for academic purposes. Its a simulation. DATE: March, 2006 TO: Robert DiNicola, CEO, Linens N Things FROM: Tina Khaladze RE: Turnaround Plan for LNT

Executive Summary Maturity of the housewares fragmented industry, projected recession in the United States, changing trends in the marketplace and unclear strategy of Linens N Things are some of the challenges we are facing today. We have fallen behind our competition and have not kept up with the dynamics of the market place. Time has come to reevaluate and redefine our strategy, improve efficiency, raise funds and coordinate all the activities of LNTs value chain according to the strategy. We need to base our strategy on our competencies, such as our brand name and the quality of our products. We have to go beyond operational efficiency and differentiate ourselves more distinctively to gain competitive advantage. The best option is to choose a focus differentiation strategy, offer high quality products and service and target medium to high income families, mostly echo boomers generation, who are getting married, purchasing homes and need appliances. The best way to capture this audience is through the Internet as this segment spends the third of their time online. It is important for LNT to put our efforts in marketing at this point to raise brand awareness and loyalty. We need funds for advertisement, quality personnel and beautiful store designs. There are several ways to raise funds. First of all, we need to improve our operational efficiency. We should enhance our inventory management process by decentralizing decisionmaking of product distribution geographically, to customize merchandise according to various locations. Secondly, we should build more distribution centers across the United States to reduce transportation costs. We should also distribute products directly from suppliers to the stores to avoid inventory-holding costs in warehouses. Most importantly, we should retain only highreturn stores and close non-profitable ones across the country. This will help us in saving maintenance costs of the stores in bad locations, in focusing on the fewer stores better and improving quality of each store.

Table of Contents
INTRODUCTION EXTERNAL ENVIRONMENTAL ASSESSMENT CURRENT AND FUTURE TRENDS BARRIERS TO ENTRY DEGREE OF RIVALRY BUYER POWER ECONOMIC DOWNTURN MARRIAGES SUPPLIER POWER INTERNAL ENVIRONMENTAL ASSESSMENT NEED FOR STRATEGY FINANCIAL DIFFICULTIES OPTIONS EVALUATION OF ALTERNATIVES AND RECOMMENDATION STRATEGY CUSTOMER SERVICE MARKETING ECHO BOOMERS INTERNET STORE LAYOUT MERCHANDISE RESPONSE TO THE RECESSION CONCLUSION APPENDIX EXHIBIT 1 EXHIBIT 2 EXHIBIT 3 BIBLIOGRAPHY 3 3 3 4 4 4 5 5 5 5 6 6 8 8 9 9 9 10 10 10 12 12 14 14 14 15 15

Introduction
Linens N Tings faces external as well as internal challenges that could prevent the company from remaining an industry leader. Some of these problems are maturity of the industry, competition, and bad strategy. Even more, a lack of well-defined strategy, estimated economic downturn in the United States and other occurring events could potentially have a negative affect on the company if no measures are taken. On top of all these, we are in a bad financial position and have no funds to finance activities that would help us fight back. In order to turn around LNT from a heavy financial position and to insure a sustainable future, first we should reevaluate and redefine our strategy, stick to it once defined, and coordinate all the activities according to that strategy. After choosing the strategy, we need to plan our course of action for readiness in harsh economic times and industry trends. In the end, we need to figure out ways to raise funds to implement this plan. I will be providing answers to the issues posed above throughout this memo. I am going to point out some of the main issues and challenges LNT is facing today, analyze the external and internal environment where LNT operates and offer some options, evaluate them, and give recommendations about the best course of action for our company.

External Environmental Assessment Current and Future Trends

Barriers to Entry
No single enterprise has a large enough market share to be able to impact the houseware industrys direction today. Industry is either declining or not changing, entry barriers are low and access to the industry is unrestricted. We need to readjust to the fragmented, mature market, even if it takes to change our whole strategy.

Degree of Rivalry
One of the biggest challenges for LNT is the maturity of the fragmented industry and its competition. Both, volume and specialist leaders are in a much better financial position than LNT. They have adapted to the changing market conditions and have well-established strategies and market positioning. It is hard for LNT to compete against low-cost discounters. As for specialty retailers, Bed Bath & Beyond has covered large territories all over the United States. Our competitors could take over our entire customer base.

Buyer Power
Economic Downturn One of the largest barriers LNT is facing is estimated state of the economy in upcoming years. Downfall of the economy is predicted in the United States. The Probability of recession goes up to one, every five or ten years (Exhibit 1). A recession is predicted in the years of 20082010. Buyer power will increase as people will have less disposable income for shopping and less and cheaper weddings will follow. More people will be shopping in low cost stores such as Wal-Mart. In the event of an economic downturn, people will stop eating out as much and will cook at home more often. Buyer inclination towards substitute products in this case, of troubled economic times, is favorable to us. They will also stay home to watch TV rather than going to movie theatres. An economic downturn will have a negative effect on consumer spending. However, the Federal Government will lower interest rates to aid the economy (Exhibit 2). Lower interest rates on mortgages in upcoming years will encourage people to buy homes. Home purchases, in turn, will boost consumer spending for home goods, such as furniture and appliances; thus, demand for our products will increase.

Marriages Marriages have declined since the beginning of 2000, but the number of married Americans is still increasing. Strangely enough, even though echo boomers have reached the age, where most Americans get married, analysts expect a further decline in the number of weddings for a few years at a minor average annual rate of 2% (Exhibit 3). This is mostly due to the expected downturn in the economy and a trend of echo boomers marrying at a later age. It is expected that many of them will go back to school instead of working. Marriages will mostly happen after they start working. Even though this is an unfavorable trend, the decline is

insignificant. It is important to increase our marketing efforts during these years.

Supplier Power
Fortunately, we have access to international suppliers. We can continue purchasing products with competitive prices due to weakened supplier power. This is also an opportunity to diversify our product lines and offer various international products. Especially attractive are Asian suppliers with affordable prices and decent quality products. Domestic supplier product prices are going down as well, due to an increasing number of international suppliers, particularly those in Asia. This is also favorable for the houseware industry.

Internal Environmental Assessment

Need for Strategy
In order to defeat the competition, we need to somehow distinguish ourselves, and continue to offer a different strategy, which is a challenge. Until now we have had a low cost strategy combined with quality products, which has become ineffective. We cannot be as efficient as our competitors are, but we have no funds to differentiate ourselves. We have been

unable to catch up with BBBs current growth strategy and geographic expansion. We have to build on our strengths and core competencies, LNT brand name and quality of our products to gain competitive advantage. We also have to adjust to changes in the market and the industry and find a unique place among our competitors.

Financial Difficulties
Another challenge is our low budget. How is it possible to make any changes with such a limited budget? We need to diversify and offer new lines of products and design stores

according to the customer appeal. However, it is impossible to do anything with our current income. Even our customer service is threatened by reductions in the total number of employees as well as the number of full-time employees per store. We need to figure out the ways to raise funds whether it is closing our stores, becoming more efficient or an IPO.

Options
It seems, that our competitors have positioned themselves well and have found their place in the market. Discounter stores such as Wal-Mart and Target are focusing on volume and have a low cost strategy attractive to people with low to medium incomes. Moreover, they are improving quality due to easy access to low cost and quality products from Asian manufacturers. Low cost is one of the strategic options LNT could stick to. We could also take advantage of cheap supply and target a broad range of consumers. We have been offering every-day value to our customers and products with no-frills anyway, despite the high quality of our goods. Another option is to stay in the grey area, between low cost and high quality, brand name products and grow, based on product and geographic expansion. This is a strategy that we have been following, similar to BBBYs strategy. We are both specialty stores and carry high quality

brand-name products. We have been both, growing based on product and geographic expansion. However, despite so many similarities, BBBY seems to be doing much better than us. One of the options could be opening superstores in as many locations as BBBY. Of course, we need high amounts of funds to accomplish that. Another option is to decentralize the decision-making process in the inventory management according to geographic locations like BBBY has done. This would help us better customize our products to the consumers of various locations. This could be financially

challenging as well. We could also imitate BBBY stores design with nice layouts, tall shelves and so on. However, this will not necessarily distinguish us from our competitors. When it comes to differentiating ourselves, we have an option to do it based on our strength and quality of our product. One of the alternatives is to choose a focus differentiation strategy and attract high-income families, echo-boomers who are planning to get married and newly-established families, who need houseware in their new homes. Use of the Internet more intensively would be helpful in this case. Online shopping and online advertisements are perfect for targeting echo boomers. All this of course, necessitates funds, which we lack so much. One of the options to raise funds is closing our low-performing stores. This would let us concentrate on the remaining, high-performing stores and focus on the quality instead of the quantity. We desperately need funds for any strategy we choose to follow, to improve our efficiency and position ourselves. One of the other ways to raise funds is an Initial Public Offering. However, that might not allow us to adapt well to the current market, be flexible and easily adjust our strategy.

Evaluation of Alternatives and Recommendation

Strategy
The industry has matured, fragmented and fierce competition requires us to change our strategy and differentiate ourselves from competitors by introducing a more unique value proposition. We have to also distinguish ourselves for the upcoming trend toward industry consolidation when we will have to compete against larger and stronger players. Throughout the history of LNT, we have been trying to maintain a low cost strategy and high quality products through operational efficiency. We have come to realize that we cannot compete with home textile discounters such as Wal-Mart and Target only based on operational efficiency anymore, especially since they have started upgrading the quality of their products. While we should be trying to improve our operational efficiency, it is impossible to beat them with prices. What we should do is gain a competitive advantage by differentiating ourselves based on our core competencies. We should offer high quality, brand name and private label products, improve customer service and focus on quality rather than volume. However, this does not mean that our prices should skyrocket. Buyers are price sensitive and low cost is important in the houseware industry. We should still try to achieve high operational efficiency through good inventory management practices and distribution. BBBYs decentralized decision-making

according to various geographical locations has brought to them many benefits. We should do the same to customize products according to consumer tastes in various geographical locations. We should also gradually establish distribution centers in all parts of the United States (North, South and West) to save transportation costs. In order to improve our operational efficiency, we should also reduce costs of warehousing inventory to a minimum and engage our distribution

centers in shipping directly from manufacturers to store locations, rather than keeping inventory in the warehouses. This will be implemented more easily when we have distribution centers spread all over the United States.

Customer Service
We have to realize, that we cannot pursue growth strategy through geographic expansion, like BBBY does. We are not in the same financial position to keep expanding geographically. We even started reducing our staff in the currently owned stores. Employees are what make up an organization and we have to make sure we have enough of them and that our customer service is superior, as it is crucial in the retail industry. Customer service should be an integral part of our differentiation strategy. Instead of building more stores, we should on the contrary, close many of them and focus on the remaining ones. This will allow us to put more funds into each store, increase the number of employees per store thus offering better customer service. We would also be able to improve the design of the stores.

Marketing
Echo Boomers Moreover, we should put remaining funds into marketing and advertisement to position ourselves as a higher end retailer and increase brand loyalty. We should intensively use marketing efforts in order to create consumer demand for housewares, which is generally stable or declining and to generate new business by attracting customers from our competitors. We should target more niche demographics rather than going for the broad audience and volume. Our demographics should be middle to high-income successful individuals, who have savings and are ready to get married and settle down. Echo boomers, the next dominant generation of

Americans, are holding entry-level positions in todays workforce, which means its a great time to focus on these demographics. Internet Echo boomers are raised in brand conscious world, saturated with media, which emphasizes our need to advertise. It is not about reaching out to masses anymore, its about creating communities. Generation Y is community based and rely on reviews and word-ofmouth. The Internet contributes to this immensely. It is very important for LNT to focus its resources on the Internet as well. Echo boomers spend a third of their lives online. People shop online increasingly and it is an opportunity to improve our customer service, by engaging our customers online and creating long-lasting relationships with them. Event though, the Internet has lowered prices due to transparency, we have no option of not utilizing it because our competitors will and prices will be effected anyway. Besides, Internet has created possibilities of customizing advertisements to individuals and this is an opportunity for us to easily reach out to the niche market we will be targeting. Store Layout It is important to note, that echo boomers are multitasking, self-reliant, independent individuals, used to doing things themselves. This means, we do not need too many sales personnel if we layout the stores accordingly. This is one of the reasons our superstores were successful. However, this does not mean that we should compromise the quality of service and not have the needed number of employees at every location.

Merchandise
We should also offer more depth of the merchandise and diverse lines of products, to differentiate ourselves. Access to the international suppliers will help us diversify our products.

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Exclusive, high-end houseware from all over the world will help us differentiate ourselves and attract our target market. Besides, many of the Asian products are affordable. However, we have to be picky and choose the best quality products to maintain our image. We will however, purchase products from domestic suppliers as well due to the quality of their products. Besides, their prices are going down due to the increasing number of international suppliers, particularly Asian suppliers. We should offer a range of kitchen appliances and TV furniture a lot since more people will be dining home and watching TV instead of going out due to recession. We should also offer more depth of the merchandise and diverse lines of products, to differentiate ourselves from BBBY. Much of the echo boomers demographics is environmentally conscious and we should offer them recycled, environmentally friendly products. This will not only attract customers, but will create brand loyalty and respect. Cause-related marketing is another way to attract echo boomer generation. We should sell a lifestyle based on trust and emotion to echo boomers, not only a product with no-fillers. We should create a cozy atmosphere in our stores so that they feel as if they are at home. We should go beyond low-cost product promotion and modest store design like BBBY did. We should also offer more tech gadgets since echo boomers are technologically savvy and enjoy convenience of technological products. Whats more, even though our strategy has been offering products with no-fillers, echo-boomers are graphics-oriented, thrive on change and variety and need quick, or even instant gratification. Traditional modes of marketing and only value-oriented products with no-fillers might seem boring for them. We should offer a large product variety with visually stimulating decorations. Times, people, tastes change and only easily adapted, flexible organizations remain successful in a dynamic environment.

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Response to the Recession

We need to also take measures to insure we are ready for the economic downturns. Shutting down stores would assist us to meet challenging times financially stronger and readily. Since location is a large part of the success for a retail store, we should retain stores only in the best locations. We have to retain stores with the most profitability and rate of return. IPO would restrict us from implementing all the necessary changes. We would have much more flexibility in carrying out all the changes and our course of action while staying private. Advertising and marketing efforts will raise our brand awareness and loyalty, and encourage consumer spending, which is extremely important in tough economic times, especially after mortgage interest rates go down and people start purchasing houses and home appliances. We have to also take advantage of their disposable income once they do not have to pay high interest rates anymore. We will encourage customers with our marketing efforts to shop at LNT. Declining marriages means, we have to advertise even more to target those couples that do get married.

Conclusion
As we have seen, recession in the United States and dynamics of the housewares market will greatly influence LNTs condition. We need to not only make operational changes, but overall reevaluate our strategy and approach to the market. We cannot operate at the level of operational efficiency being the driver of the business and grow depending on product and geographic expansion. While it is important to perfect operational efficiency, we need to first define our strategy, built on our strengths and competencies. The best way we would be able to find our place in the market, is by choosing focus differentiation strategy, offer our high quality

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products and attract average to high income individuals, mainly echo boomer generation, who are getting married, creating families, purchasing houses and need exquisite, versatile houseware products. We need to increase our marketing efforts in order to capture this audience. The best way to go about this is through the Internet as echo boomers spend almost the third of their time online. We also have to perfect our inventory management process by decentralizing decisionmaking of product distribution geographically, to customize merchandise according to various locations. We should also establish more distribution centers across the United States to save up on transportation costs and distribute products directly from suppliers to the stores to save up on inventory holding costs in warehouses. Another way to save costs, be profitable and raise funds is to close down non-profitable stores all over the U.S. We should retain only high-return stores. That way, we will not be spending money on maintaining low return stores and will be able to push all our resources and focus on the remaining ones. We will be choosing quality over quantity. Our focus will be customer service, high quality product, beautiful store design and layout.

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Appendix
Exhibit 1
Historical and Projected U.S. Recession Probabilities June 1967 February 2008

Exhibit 2
U.S. Mortgage Interest Rates 1983 2006 and Projected decrease 2007 - 2010

2007 2008 2009 2010

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Exhibit 3

Bibliography
- - http://theechoboom.com/2010/09/the-echo-boom-statistics/ http://askville.amazon.com/exact-relationship-recession-Interest-rates-fixed-financialinstitutions/AnswerViewer.do?requestId=12138282 - - http://activerain.com/blogsview/1483881/mortgage-interest-rates-1983-2009 http://www.cdc.gov/nchs/nvss/marriage_divorce_tables.htm

Tina Khaladze

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