When the financial markets meltdown sent the U.S. economy into a tailspin late last year, Rob Claxton, senior vice president of marketing for discount retailer Big Lots, breathed a sigh of triumphant relief. This was the chance he and other company executives had been waiting for, a golden opportunity to take Big Lots’ business to the next level. As consumer spending fell off a cliff and other retailers started going into bankruptcy, the Columbus, Ohio-based company embarked upon an expansion and rebranding strategy by exploiting some of the best deals in commercial real estate in over a decade.
“We saw huge opportunity and had been waiting for real estate pricing to come down to be more in line with our model,” says Claxton.
With national retail vacancy rates at 10 percent and rent prices down in virtually every market, Big Lots moved quickly to renegotiate existing leases and open stores in new locations such as Bangor, Maine, and Lancaster, Pa., at reduced rates. That expansion has helped Big Lots, which stocks its 1,300 stores with overproduced or discontinued merchandise, become one of the better performing retailers during the recession. The company will open a record 49 stores this year, more than in the past three years combined. Mirroring many other retail companies, Big Lots will also close some underperforming stores, but instead of a planned closing of 50 stores, only 35 will shutter.
Joan Storms, a retail analyst for Wedbush Morgan Securities in Los Angeles, says she believes Big Lots is laying solid groundwork for growth when the economy eventually recovers. In recent quarters, Big Lots has seen small declines in its same store sales, a key metric for retail companies, but Storms does not think that will last. “They’re getting better quality merchandise into the stores, doing better customer service, and improving the look of the stores,” she says.
Storms estimates that Big Lots has been able to get rental rates for new stores that are in some cases 30 percent less than prices two years ago. As one real estate executive puts it, landlords everywhere are being “very, very flexible.” One type of deal Big Lots has taken advantage of is known as a “blend and extend,” whereby tenants with several years or less remaining on a lease get cuts in rent or a specified number of months of free rent in exchange for signing a new lease. “Tenants have the most negotiating leverage I’ve seen since the early 90s,” says Bob Bach, senior vice president and chief economist for the commercial real estate broker Grubb & Ellis in Santa Ana, Ca.
Access to more-affordable upscale real estate has allowed Big Lots to create several showcase stores in so-called A-plus real estate, which was once off limits for the frugal retailer. In Columbus, Ohio, and Orlando, Fla., Big Lots moved into space vacated by the bankrupt Linens ’N Things; both are located near large upscale malls. Claxton says the stores feature wider aisles, softer lighting, more sophisticated displays, and a less cluttered look. “We want to appeal to our loyal customers but also attract consumers who don’t shop with us very often,” he says.
Appealing to those two different classes of customers is a delicate dance. Big Lots faces the risk that in luring new, more upscale shoppers, the store will dilute its brand appeal among core discount customers. The company’s expansion strategy also runs the risk of falling victim to a longer than expected recession that could leave Big Lots with too many underperforming stores.
To deal with these issues, Claxton has made subtle but meaningful shifts in the company’s marketing. Gone is the word “closeouts” from the corporate vocabulary. Research showed that people harbored negative associations with the word. “It means the stuff that nobody else wanted; junk,” says Claxton. Now Big Lots refers to its rock-bottom prices on brand name goods as “the real deal.”
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