New concepts keep Rich's afloat - Rich's Department Stores

Discount Store News, August 21, 1995 by Pete Hisey

BERLIN, N.H. -- The neighboring towns of Berlin and Gorham here in New Hampshire form a microcosm of the double-pronged maelstrom that has plunged New England retailing into a seven-year depression.

The long-standing recession has resulted in wave after wave of layoffs, and Wal-Mart is in the final approval stages that will bring a full-size store to this tiny market (total population is about 20,000) and another to North Conway, about 25 miles south.

This same pattern has plunged many of the region's leading discount retailers--Ames, Bradlees, Stuarts--into bankruptcy, liquidation, and has depressed earnings at most of the rest.

One small-town retailer, Methuen, Mass.-based Rich's Department Stores, has managed to not only survive but prosper in the face of long-term recession and rapidly increasing encroachment by Wal-Mart.

The company, which recently absorbed two units of liquidated competitor The Fair, has slowly added units to its core discount base, while shifting into other concepts, like craft shops, to keep gross dollars growing even as same store sales flatten or drop.

A small but key growth area is its 11-unit $10*$2*$3*and Up concept, which takes advantage of vacant real estate adjoining Rich's stores and increased demand in small towns for rock-bottom prices.

Merchandise manager Phil Carfagno, a 30-year retail veteran with extensive closeout experience, brought the concept to Rich's when he joined the company as a toy buyer in 1992. The first unit opened that year in St. Johnsbury, Vt., and the chain has slowly taken off, averaging about $500,000 per 3,000-sq.-ft. unit and returning gross margins in the mid-40s, with virtually no overhead.

"I looked at the [all-one-price] dollar stores, which were flying then, in the early 90s, and thought that here was a trend that just couldn't last," Carfagno said. "But there was clearly a need for this type of retailer; the problem was that they were all selling the same imports that they bought for 35 cents and sold for a dollar. You could buy the same stuff for the same price anywhere, and it was inevitable that inflation and competition were going to kill the concept."

By moving the price point up to $3 (and tagging only the $2 and $3 items), "we could bring in brand names like Fisher-price and Colorforms," Carfagno said. The company then added a special purchases section, isolated from the rest of the store, that pushed price points even further, but also offered tremendous value on clearly recognizable branded goods, particularly in the toy area, where $19*$2*$3* and Up recently offered a The Lion lung playset for $7 (vs. $11.99 or so at most discount outlets).

The company has several small regular programs, like foil products, hair care, infant care products and toys, Panasonic batteries, spices, and private label analgesics and other OTC medicines, but each occupies only 2 to 4 linear ft. The bulk of the store consists of regularly rotating closeouts in three basic categories, toys, housewares and cleaning products, with whatever else Carfagno--who acts as a one-man merchandising team--can find that offers clear value. Many of the continuous categories undercut the competition by eliminating a distribution step, Carfagno said. The chain recently added a full line of Bodycology goods, including soaps and facial treatments, at $1 every day, compared to $3.49 or so at many outlets. "They were really hot until recently, and they're still doing well," Carfagno said. "But a brand like that at that price really makes a statement to our customers."

The chain organizes its products by price, with one aisle, for instance, dedicated to $2 goods only. To cut back on labor (each store only employs five people), $1 merchandise isn't tagged at all. At the Gorham store, an experiment in stocking products by category was underway, but Carfagno said that he expects to stick with stocking by price.

Over the years, Carfagno has worked in toys, H&BC, housewares and several other categories for retailers like Jordan Marsh, Revco and Purity Supreme "so I know most of the vendors in the categories we stock. Our size makes us useful to them, because we can take 300 items, or 30,000, and we make a decision on the spot. We're not planogrammed, so if something's a great deal, we don't worry about finding room for it." Larger closeout specialists have little use for really small lots and in areas like toothpaste or analgesics are constrained by their planogram.

That flexibility is a hallmark of Rich's, which has gone against the tide in New England and grown slowly but steadily over the past five years, to $270 million in 1994. "You're not going to get far going head to head with Wal-Mart," Carfagno said. "With them, there's no bottom in a price war." Rich's has shifted to areas that Wal-Mart doesn't address or merchandises lightly (a recent endcap offered several skus of carbon monoxide and radon detectors) and stays away from Wal-Marts strengths.

"The closeout business matches Rich's way of doing business pretty closely," Carfagno said. "The whole company is geared to getting in and out quickly. We're flexible and opportunistic."