MEMO *This case study is for academic purposes. It’s 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 LNT’s 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 decision-making 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 high-return 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.

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Table of Contents

INTRODUCTION   3  

EXTERNAL  ENVIRONMENTAL  ASSESSMENT  –  CURRENT  AND  FUTURE  TRENDS   3  BARRIERS  TO  ENTRY   3  DEGREE  OF  RIVALRY   4  BUYER  POWER   4  ECONOMIC  DOWNTURN   4  MARRIAGES   5  SUPPLIER  POWER   5  

INTERNAL  ENVIRONMENTAL  ASSESSMENT   5  NEED  FOR  STRATEGY   5  FINANCIAL  DIFFICULTIES   6  

OPTIONS   6  

EVALUATION  OF  ALTERNATIVES  AND  RECOMMENDATION   8  STRATEGY   8  CUSTOMER  SERVICE   9  MARKETING   9  ECHO  BOOMERS   9  INTERNET   10  STORE  LAYOUT   10  MERCHANDISE   10  RESPONSE  TO  THE  RECESSION   12  

CONCLUSION   12  

APPENDIX   14  EXHIBIT  1   14  EXHIBIT  2   14  EXHIBIT  3   15  

BIBLIOGRAPHY   15    

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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

industry’s 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.

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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 2008-

2010. 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.

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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

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unable to catch up with BBB’s 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 BBBY’s strategy. We are both specialty stores and carry high quality

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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.

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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. BBBY’s 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

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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

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Americans, are holding entry-level positions in today’s workforce, which means it’s 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, it’s about

creating communities. Generation Y is community based and rely on reviews and word-of-

mouth. 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. What’s 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 LNT’s 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 decision-

making 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-financial-

institutions/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