How This Specialty Retailer Contains the Competition

The Container Store Group (NYSE: TCS  )  stands out from its peers as probably the only listed specialty retailer of storage and organization products. As more consumers choose to consolidate their purchases at a single retailer for convenience and cost factors, how does The Container Store compete against the retail giants such as Wal-Mart and specialty-retail chains like Bed Bath & Beyond?

Unique merchandising strategy to avoid competitor overlap
The Container Store holds its ground against larger competitors through its sourcing capabilities. Half of its fiscal 2012 sales were generated from products exclusive to The Container Store, and management believes that there is little merchandise overlap between it and national retailers. Its purchasing team is also very experienced, with the average buyer having working at The Container Store for about 15 years. As a result, The Container Store's new product pipeline is very robust with about 2,000 new SKUs (stock keeping units) added annually.

Furthermore, its Swedish subsidiary Elfa, a design and manufacturer of shelving and drawer systems, plays a big part in The Container Store's success. The Container Store's Elfa line of products is the best-selling and highest-margin of its product portfolio and made up close to a quarter of its 2012 sales. Since The Container Store owns Elfa, it doesn't have to worry about losing its star products or cost pressures from third-party suppliers.

Similarly, Target (NYSE: TGT  ) has traditionally relied on unique product lines developed in collaboration with designers to fend off price competition from competitors like Wal-Mart. For example, its limited-edition Prabal Gurung line was completely sold out in a single day in February 2013. Prabal Gurung is a Nepalese American fashion designer who has had celebrities like Oprah Winfrey and Lady Gaga among others sporting his designs.

Target also ensures that it gets the maximum mileage possible by being in the limelight at fashion shows. Last September, Target announced its collaboration with Peter Pilottoat the designers' runway show at London Fashion Week. By providing its customers with exclusive products at affordable prices, Target has successfully won the hearts and minds of its customers.

Since cost efficiency typically accrues to the large retailers, specialty retailers have to focus on product differentiation to compete and survive.

The most valuable assets off the balance sheet
From an accounting perspective, employee wages and training costs are simply expensed on the income statement; people can't be capitalized as assets like tables and chairs on the balance sheet under any sort of accounting rules. Although the retail business is seen as asset-intensive with inventories and prized real estate locations contributing significantly to profitability, good people still hold the keys to success in the minds of many retailers.

The Container Store shares the same views. This is validated by its actions and results in three aspects of its people management: hiring, training, and retention.

Firstly, fewer than 4% of people who send in their resumes to The Container Store eventually get recruited. As a comparison, the hiring rate for Google is about 0.5%. Furthermore, nobody understands customers' needs better than customers themselves, and most of The Container Store's hires are current customers.

Secondly, The Container Store provides 260 hours of training to new full-time employees in their first year of work. In contrast, the average employee for a retail organization puts in about 43 hours per year for training, according to research by Training Magazine.

Thirdly, its attrition rate for full-time employees is about 10% annually, while the figure is above 100% for the retail industry. According to an article in the Philadelphia Business Journal, the average salary for The Container Store's staff is 50% higher than the industry average, at the very minimum. In addition, The Container Store has never experienced work stoppages due to strikes since it opened its first store in 1978.

It is possible to draw parallels with another of Charlie Munger's favorite retailers, Costco Wholesale (NASDAQ: COST  ) . Costco employees enjoy an average wage per hour of approximately $21, and 88% of them are secured by company-sponsored health insurance. One strong signal of Costco's pro-employee stance is that it remained closed on Thanksgiving, unlike its peers Wal-Mart and Target. It was a day of lost sales for Costco, but it probably meant the world for its employees who managed to spend Thanksgiving with their loved ones.

The results of these efforts speak for themselves. Costco's staff retention rates are approximately 90% for all hourly workers and 94% for those who stayed at the company for more than a year.

Foolish final thoughts
The Container Store exemplifies two of the critical success factors for retailers. Firstly, you must make sure your 'internal customers' (staff) are happy before they can make your external customers satisfied. Secondly, you either sell the same products cheaper than competitors or sell products that the competition doesn't sell.

The living room isn't just for storage
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