Controversial

Pizza, Urban Outfitters And The 2015 Holiday Retail Blues

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There is an elephant in the room in 2015, which is that Christmas is coming and no one is feeling all that festive this year.

Except Amazon. It’s been Christmas over there since Prime Day.

But everyone else seems to be having a rather muted response to the most wonderful time of the year. Starbucks went with the unadorned minimalist cup, Nordstrom isn’t hanging its Christmas decorations until after Thanksgiving, Apple is more or less ignoring Black Friday and REI is doing them one better and skipping out on Thanksgiving weekend physical commerce entirely. Walmart is bailing on the doorbuster.

And, Walmart invented the doorbuster.

But that muted attitude can’t really be blamed. So far it’s kind of been a bitter buche de noel this year. Counted off, the run up to holidays in 2015 has basically been the 12 days of Christmas in retailer hell.

Seriously.

U.S merchants in the last several weeks have faced:

  1.    Too much inventory,
  2.    Weak retail sales,  
  3.    A strong dollar depressing international markets,
  4.    A long string of bad earnings reports from mega-players,
  5.    Falling foot traffic,
  6.    Underperforming mobile,
  7.    Underperforming products,
  8.    Slow ports,
  9.    A hiccupy stock market,
  10.    A slowing Chinese economy,
  11.    Amazon’s ever-expanding land grab,
  12.   Totally confusing EMV integration.

Given the general lack of partridges or pear trees on that list, physical retail’s newfound love of restraint during this holiday season is pretty understandable.

Which isn’t to say there is no good news for the physical merchants. There is, after all, always pizza — guaranteed to bring cheer wherever it is served.

Which is likely why Urban Outfitters Inc – has recently embraced it so wholeheartedly with the acquisition of the Pizzeria Vetri chain, as well as “virtually all” other Vetri family restaurants,excluding the flagship “Vetri” restaurant, for less than $20 million, according to reports.  

And while the move has been called “eyebrow raising” and “one of the strangest acquisitions in retail history,” Urban Outfitters is betting that a big — if affordably priced — move might just be the ticket to turn the tides on a second half of the year that has been bruising thus far.  

A Rough Quarter

Urban Outfitters Inc., parent company of the eponymous brand as well as Anthropologie, BHLDN, Free People and Terrain announced its pizza plan in conjunction with some Q3 results that were disappointing to say the least.

The report included weak store sales growth of 1 percent, a big miss on the 4.3 percent forecast ahead of the call. Sales overall were up 3 percent, but approximately $825 million in revenue (~$52 million in profits) was rather short of the ~$1.2 billion analysts were looking for. That’s bad news and a big reversal from this April, when Urban Outfitters was posting its highest ever stock prices.

And the recent earnings results are not Urban Outfitters’ only big public miss of late.

About a month ago, Urban Outfitters was the subject of countless think pieces about what’s gone wrong in the American workplace when information leaked about an apparent attempt by upper management to encourage salaried workers to “volunteer” their off-time to “pack and prepare packages for shipment” out of the company’s new fulfillment center in the town of Gap, Pennsylvania.  

Urban Outfitters described it as a “team building activity,” while critics decried it as a flagrant violation of labor laws.

In any event it was a public relations disaster that was then paired with massive shipping delays out of the Gap, Pennsylvania location, which managed to bring on massive investor doubts about the actual state of affairs in the location.  

The representative we spoke to had no comment at the various issues in Gap, or how shipping is going today, though Urban Outfitters CEO Richard Hayne did concede in his call with investors after the earnings were announced that the transition to the new facility “turned out to be a bigger job than expected.”

“Consequently, wholesale order fulfillment in October, one of the peak wholesale shipping months was more back-end loaded than normal,” said Hayne, before also noting that tech issues have been fixed and better staff has been hired, which is probably an improvement of a volunteer system.

However, even with the esoteric problem with a new fulfillment center entirely fixed, Urban Outfitters’ difficulties are not fixed. Its problems in many ways are not unique. It is facing the same problems as a lot of brands popular that were with Generation X in its younger days in the ’90s and early aughts like the Gap and J. Crew are facing. Today’s market is moving on to fast fashion and customers on the whole are willing to dedicate fewer dollars to fashion.  

But while their problems are not unique, especially in a rapidly evolving fashion environment, their solution of buying into a pizza chain certainly is.

An Updated Consumer Experience, With A Side of Pepperoni

Building the better customer experience, as we have covered before, is a popular concept that is simple sounding right up until a retailer tries to do it and runs into a glut of options and combination of options. The methods are different, but the underlying objective is essentially the same: creating in-store experiences that can’t be easily duplicated online and that will be sticky for consumers.

And sticky, as it turns out, can be an awfully high mountain to climb. And food is sticky from a consumer spending standpoint these days. Customers may not be lining up to buy clothes (unless they’re Balmain Fauxture), but they are surely spending money on dining out.  

“Eating out is particularly central to the millennial experience . This is not a generation of people who cook,” a spokesperson noted. “Pizzeria is particularly huge in that group and so it is just a very natural extension of where we are as a brand. We’ve seen that in our stores where we’ve experimented with coffee and other light eating experiences.”

And Urban Outfitters has been experimenting in expanding the traditional definition of a retail apparel store with concept stores featuring nail salons and performance spaces.

But Urban is not trying to break into casual dining on its own. Intead, it’s buying into Pizzeria Vetri, which manages to double as both an up and comer and an established player. Pizzeria Vetri was named the best pizza restaurant in America by Food & Wine magazine, and its founding chef, Marc Vetri, was named one if its Top 10 new chefs. And, well, it’s not quite your Italian grandmother’s pizza.

“At this pizza spot by Marc Vetri, one of the country’s best Italian chefs, the Neapolitan pies come with thick, chewy crusts and toppings like prosciutto crudo and roasted fennel,” Food & Wine noted.

How exactly Urban Outfitters plans to leverage the new pizza acquisition, or the six pizzeria locations already in existence, remains to be fully flushed out — though the nearly universal opinion is that the stores will be run in conjunction with, and likely support of, Urban retail locations.

Pizza And Retail: Milk And Cookies Or Milk And Orange Juice?

If forced to sum up Wall Street’s reaction to the pizza plan to boost retail in a single word, we would have to go with “seriously” as the average of every comment made on this acquisition on the Internet over the last 48-hours.  

Some of those comments reflected “seriously, what a neat idea,” but most were less enthusiastic, with many questioning the wisdom of scaling a completely different vertical (especially one as difficult as restaurants) when there are clear problems in the core business.

“Urban Outfitters’ restaurant venture is more a distraction than anything, in our opinion,” analysts from Cantor Fitzgerald wrote in a note on why they were downgrading Urban Inc’s stock. “We think investors already have enough concerns regarding the company’s ability to simultaneously sustain momentum at its … core brands.”

“While the potential overlap of the customer base is obvious (URBN shoppers surely like gourmet pizza!), the challenge of operating a new business and successfully integrating it with URBN is not insignificant,” another analyst wrote.

With all those doubts came a stock price beating. Urban’s share fell 13 percent on its earnings announcement to its lowest point in my years.  

Remember when we said everyone likes pizza?  

We were wrong.

Wall Street definitively did not like pizza yesterday.

But are they being too hard on Urban Outfitters?

It is hard to make a judgement without more information on the proposed implementation, despite the market’s opinion to the contrary.  

It is certainly a high-risk gamble. Millennials do like pizza, but among the reasons they like it so much is that it is (and has been) one of the most easily available and inexpensive on-demand food items in the market. One could go to Urban Outfitters to eat a really fancy pizza — or one could sit at home in their sweats and eat a classic pizza and shop online.  

Also, on a purely practical level, while pizza is delicious, like most Italian food, it is also rather carb heavy and fattening. It might not be the ideal thing to feed people right before they walk into a dressing room, particularly if one’s target market is fashionable, young women who are concerned about their weight. Pizza might not be what one wants to eat before trying on skinny jeans.  

On the other hand, Urban Outfitters clearly has to do something, lest it continue to watch eCommerce and fast fashion compete to see who can eat its lunch the fastest. Pizza may seem like an unorthodox choice, but if it manages to drive foot traffic, it will also be the turnaround story about how they served lunch instead of having theirs eaten.

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