The Fall of Bombay
Bob Nourse, 1993's Entrepreneur of the Year, says he retook the reins of the Bombay Co. because he saw trouble ahead. But is he really tearing it down for the thrill of trying to build it again?
In October 1994 Robert Nourse and his wife, Aagje, walked into a New Orleans outlet of the Bombay Co., the specialty-furniture retailer. The company was holding its annual "scratch and dent" sale, intended to clear slightly damaged furniture from its stores in order to accommodate fresh merchandise for the holiday season.
The event was in full swing, and as testament to Bombay's retailing clout, sales were so brisk that many of the floor samples had already been sold, leaving the space half empty. It was a scene that should have heartened Bob Nourse, who was more than just another browsing customer. He was the president and chief executive officer of the $300-million chain.
But as Nourse strode across the meagerly stocked floor -- passing Queen Anne desks, trompe l'oeil mirrors, and antebellum tilt-top tables -- his fury built, until he suddenly turned and yelled to no one in particular, "What the hell is going on here?"
Startled shoppers froze as the towering Nourse, six feet six inches tall, then confronted a stock boy -- wearing a baseball cap -- who was assembling a piece of furniture. According to people who were there, Nourse snatched the cap off the employee's head and shoved it in his chest, while snarling, "This isn't a goddamn baseball diamond." He then walked over to the store manager, who happened to be on the phone, attempting to hire an employee. "Get off the goddamn phone," Nourse yelled at him.
Some customers, horrified by the outburst, subsequently vowed never to shop at Bombay again, after embarrassed store employees explained to them who Nourse was. One, a lawyer, offered to represent the stock boy should he choose to take legal action against the company. Notes a former store manager: "If that had been a customer, we would have called security and thrown him out. If an employee had done that, we would have fired him on the spot."
In the case of Bob Nourse, that was not exactly an option. Nourse was Bombay, and what he saw that day -- the half-empty store, the sloppily dressed worker -- only confirmed his growing belief that the company was suffering without his sure instincts to guide it. In early 1991, Nourse had ceded daily operations to a professional manager who had successfully put Bombay on a strong growth path. In that time, sales had risen from $140 million to $317 million, while the chain had doubled its retail square footage to more than 1 million square feet. But subtler signs beneath those robust numbers convinced Nourse that rapid growth was taking a heavy toll.
Profitability, Nourse says, was declining, employee turnover was rising, and the company had been slow to introduce new products. Having spent 15 years growing Bombay from one location in a Toronto mall to 450 stores all over North America, Nourse believed that no one understood the business as well as he did. He saw no other choice but to step in and remake Bombay -- to save it from being consumed by its own success.
But as he demonstrated in New Orleans -- an incident he declines to talk about -- Bob Nourse can act impulsively when he doesn't like what he sees. Having taken it upon himself in the last year to rebuild his company, Nourse has also presided over its partial dismemberment. He summarily closed a 58-store division, taking a huge write-down. He has fired, demoted, or driven away numerous top managers. And thus far, Bombay's bleak numbers -- most months, there have been sharp declines in same-store sales since Nourse reassumed daily control -- serve only to raise questions about his motives.
Still, Nourse insists that he knows best.
"People say, 'Why didn't you just leave a good thing alone?' " he says. "But, my God, I'd be remiss if I just sat back. My job is to look out, see the warning signs, and do something about them."* * *
Two years ago Bob Nourse, serene and confident, appeared on the cover of Inc. as its 1993 Entrepreneur of the Year. At the time, Nourse headed up a company very much intact. In the fiscal year ending July 3, 1994, revenues for the specialty retailer of home furnishings totaled $317 million, up from $112 million in 1990, while operating-income earnings increased even faster, rising from $5.8 million to $22.9 million.
But when Nourse walked into that New Orleans store that day in October 1994, he saw only chaos, and he would soon have the numbers to back up his impulse to return to daily operations. Bombay was about to report a break-even quarter ending September 30, after four years of unbroken earnings gains. By October inventory had ballooned to $15 million above normal levels. By year's end, the company's stock would lose two-thirds of its value.
Bombay, it seemed obvious, needed new direction. Or did it?
A case can be made -- and is, vehemently -- that Bombay was neither faltering nor lacking for leadership to cope with its growth pains. Many employees, past and present, credit former executive vice-president Michael Glazer, whom Nourse hired to run the company day to day, with being a sure force behind the company's meteoric growth. They say that whatever slowdown Bombay experienced resulted from Nourse's having stepped in and choked off a thriving business. To make their case, those advocates step back and look at a different set of numbers.
Michael Glazer arrived at Bombay in September 1990, two months after the close of fiscal year 1990. In the fiscal year ending July 3, 1994, Bombay reported net sales that were up 184% from fiscal year 1990. Over the same period, however, operating income rose faster -- by 290% -- while Bombay's total retail square footage grew by 162%. In sum, Glazer had wrung more sales, and even more earnings, out of relatively less space. From April 1991 to December 1994 Bombay's same-store sales rose nearly every month. In fact, for 18 straight months during that streak they rose by more than 10%. Says a former Bombay executive: "Michael was very tactical; he was always thinking. Bob Nourse had a great concept, but it was Michael Glazer who turned Bombay into a real business."
But today Glazer is gone, having officially "resigned" last January. He has moved on to become president of $1.5-billion Consolidated Stores, based in Columbus, Ohio. Meanwhile, Nourse presides over a company from which numerous senior managers defected in the wake of Glazer's departure -- and monthly same-store sales continue to drop. In October the stock melted down to a four-year low of just $5 a share, an 85% decline from its peak.
Nourse's move to reassert control points to the volatile relationship that often develops between an entrepreneur's identity and his or her company. In Nourse's case, as with most entrepreneurs, his corporate creation generated more than wealth. It nourished his ego and gave him standing in the eyes of his peers.
As Nourse saw it, sales like the one in New Orleans violated more than just Bombay's marketing strategy; such promotions threatened to drain the company of what made it special to him. Having stepped away from Bombay, Nourse was apparently unprepared to see it grow in ways he neither recognized nor liked. He missed the Bombay he had crafted.
As a result, the pain he has inflicted on the business and its employees -- as described by many present and former colleagues, most of whom, fearing retribution, refused to allow their names to be used in this story -- raises troubling questions about what entrepreneurs really mean when they say they love their businesses and know what's best for them. Are they talking about the exhilaration of starting up? The challenges of growing fast? Or do they cherish the kind of emotional "home" that a company provides? It helps to know the answers, because the business will one day, inevitably, change, leaving its builder with a painful void to fill. That quandary makes stepping back in, as Nourse has done, the most naturally tempting -- and the most potentially disastrous -- move of all.
But amid the turmoil, Nourse himself seems unfazed -- he's emboldened, really -- by what he surveys. "Do I think I know the company better than anybody else? Yes, absolutely." Like many entrepreneurs, he seems to sense an opportunity, no matter how dire the circumstances. "We were not a company that had its back to the wall. We weren't losing money," Nourse asserts. "We were coming to grips with these issues early on." That may be so, but perhaps a nearer truth about Bob Nourse is that what he has loved about Bombay has been the building of it. And now he is determined to keep on building, even if it means having to tear down his masterwork to satisfy that need.* * *
When Michael Glazer joined Bombay, more than 5 years ago, he brought 18 years of experience in retailing to the company. He had spent his entire professional life in the field; most recently, he'd spent 11 years as chairman and CEO of Platt Music Corp., a specialty retailer that operated electronic-goods departments within department stores.
In contrast, Bob Nourse's career bespeaks a certain restlessness. He has a B.S. in electrical engineering, an M.B.A., and a doctorate in marketing. He spent nine years in academia, often as a visiting professor at prestigious business schools such as Harvard and Stanford. From there he turned to the untenured terrain of venture capital, where he worked with and managed a potpourri of companies. Nourse did not create Bombay, but he built it, after buying the Canadian rights in 1979 from an entrepreneur who was losing money on sales of just $1.5 million. Nourse embedded his restlessness into the concept itself: store layouts changed every two months, and consumers who shopped at Bombay could take their furniture home with them, rather than endure the traditional wait of two weeks or more for delivery.
Inside the house that Nourse built, Glazer forged a different sort of creation. More comfortable with people than Nourse -- whose office was on the seventh floor, while his key operating people worked on the fourth -- Glazer inspired a loyal cadre of managers and field people. "Michael was a real motivator. He knew how to excite people and generate sales," says Bill Goodlatte, Bombay's director of human resources. (When contacted by Inc., Glazer cited a clause in his severance agreement that forbids him from commenting publicly on Bombay.)
Since Glazer spent much of his time on the phone connecting with his district and store managers, Nourse was free to travel more with his wife, Aagje (pronounced "Ahkia"), a Bombay vice-president. They met with designers in Europe and vendors in Asia. They wooed analysts on Wall Street. Nourse was Bombay's ambassador to the financial community, always bringing good news as the early 1990s unfolded. And that, oddly enough, opened a rift between the two men.
For the seven years prior to Glazer's arrival, Bombay's stock had languished below $5 a share, even dropping for stretches to below $2. To the investment world, the company was as foreign and as sleepy as its name implied. But by late 1993, Nourse -- with Bombay's impressive operating numbers to back him up -- had become a pied piper to Wall Street. By then a dozen financial analysts followed the stock. In December 1993 the shares hit $32, up from a low of $2 in December 1990, three months after Glazer arrived at Bombay's headquarters, in Forth Worth. The soaring stock price and Bombay's strong growth story became emblems of pride to Nourse. But that, somehow, was not enough.
Trouble first surfaced in February 1994, when Bombay reported financial results for the quarter ending December 31, 1993, which included the crucial Christmas season. The company, as expected, put up big numbers, with earnings per share rising more than 50%, from 26¢ to 40¢. But Wall Street, guided by Nourse's fulsome projections, was expecting 41¢. The 1¢ shortfall sent the stock tumbling.
"Bob was really unhappy about that," recalls a former manager at Bombay. "He blamed Michael for putting too many things on sale. He said, 'If you guys hadn't spent so much money on promotion, we would have made that extra penny.' Michael responded, 'Bob, how do you think you got that 50% increase in the first place?"
And that set the stage for sharper clashes.
Glazer had come to Bombay steeped in the rough-and-tumble world of mass- market discounting. Those close to him say he saw the retailing world of the 1990s permanently altered by the likes of bare-knuckled retailers such as Wal-Mart, as well as by the cash-strapped consumer increasingly reluctant to pay full price. Accordingly, Glazer believed Bombay had to be smarter and more aggressive in its promotions.
Nourse, on the other hand, had built Bombay on products of proprietary design that offered value. Since his customers believed they were buying well-designed furnishings that could not be found elsewhere and appeared to cost more than they really did, Nourse believed Bombay need not discount or promote as aggressively as other retailers.
"Year after year we built the company on a differentiated strategy -- selective promotions, a lot of fashion, good visuals," says Nourse. Under Glazer, he adds, the company had swung away from that and was courting disaster by putting too much product on sale. "When a retailer starts to treat its products as commodities, it undermines its own loyalty to the product and to the people working in the stores," Nourse says. "In the long term, that's not a sustainable strategy." Nourse believed Bombay could slow sales growth by discounting less. That would keep Bombay's margins up and, more important, preserve its identity -- in which Nourse had invested so much of himself.
Those conflicting visions -- sharpened by Nourse's inclination to believe that he, as the company builder, knew best -- tore at the company, finally ripping it open after a single event in May 1994, Bombay's annual Customer Appreciation Day sale.
Under Glazer's direction, the one-day sale had boosted volume handsomely each year. In 1993 it had brought in $8 million, up from $4 million the year before. In 1994 the final figure for the sale topped $13 million, with a net profit of $5 million.
By all accounts, Glazer's lieutenants were elated by the results. The event produced the single biggest sales day in company history and contributed toward making that month the most profitable May ever.
But that's not how Nourse saw it. The next day he was fuming about the sale. While senior managers recall expecting congratulations for their efforts, they instead encountered a snarling Nourse, who vowed, "This won't happen again." He was angry that the sale had been such a success. He was convinced it had damaged Bombay's image with customers -- even though it lasted all of one day.
Reflecting on the sale, Nourse says: "We should be promotional, but there is a danger in going too far. It destroys the company's ability to compete in the long run." Nourse concedes that it's hard to forgo the revenues the sale produced, but, he contends, "there are some kinds of promotional activities that we just won't repeat."
The May sale moved Nourse to take a stronger hand in daily operations and change Bombay's course. Meanwhile, the merchandising staff had already bought inventory for future promotions in 1994. Now Nourse clamped down on the number and extent of those promotions. In October he scrapped a 10-day sale of Queen Anne furniture, which in prior years had been a big success. Sales slowed; inventory backed up, accruing to $15 million above normal levels by October, coincident with Nourse's New Orleans tirade.
The inventory issue only deepened starkly differing perceptions about strategy within the management ranks. Nourse points to that inventory overhang as evidence of a company growing too fast and not tending margins in a slowing retailing climate. "In 1994 we were ordering inventory based on sales trends we saw in 1992 and 1993, and that was no longer happening by 1994," he claims.
To the contrary, assert others who worked for Bombay at the time. That inventory buildup was evidence of Nourse's having choked off a vibrant business. "Bob handcuffed Michael," says Earl Welliver, a former Bombay vice-president. "He wouldn't let him run the promotions he wanted to run."
As sales fell and profits slumped, so did morale.
Nourse's reaction to the May sale and his subsequent moves dismayed senior managers at Bombay. They, after all, received performance bonuses based on the company's sales and earnings. They also received base salaries that were below industry averages, with the expectation that hefty bonuses would more than compensate. But now, with Nourse slowing Bombay's growth, executive bonuses based on 1994 performance would fall by as much as 75%.
Money seemed to engender an abstract -- and awkward -- relationship between Nourse and his senior managers. Although Bombay paid low base salaries, one of Nourse's refrains to his managers was, "You're on my list. I'm going to make you a millionaire."
Earl Welliver recalls that the last time Nourse told him he was going to make him a millionaire was about a month before Welliver left the company, in August 1995. By then his stock options were so far underwater, he had paper losses approaching $500,000. The stock he owned, which he'd bought regularly through an employee stock purchase plan, had lost more than 85% of its value. Even worse, he had encouraged his son to buy Bombay stock -- and he had lost $60,000. Welliver, now 60, had spent 30 years in retailing and was contemplating retirement after Bombay. "This was going to be my last job," he muses.
Meanwhile, Glazer kept imploring Nourse to worry less about making people millionaires and more about paying his field people a living wage. Before a recent salary increase ranging from 10% to 30%, Bombay's district managers, who typically oversee about 10 stores grossing about $8 million a year in the aggregate, averaged $32,000 in base salary. In an exemplary year, they might earn another $9,000 as a bonus. In a down year, as each of the past two years has been, they earn little or no bonus. Bombay district managers often work six days a week. Store managers fare no better. Until recently, they had an average base salary of $22,000 and could optimally earn another $7,000 as a bonus. "We had some store managers we were paying $16,000 and $17,000," says human-resources director Goodlatte.
Just as Glazer made little headway persuading Nourse to revamp compensation in time to keep employees from scattering, he had no luck selling him on a plan to salvage Alex & Ivy, Bombay's ambitious foray into selling European country-style furnishings.
Alex & Ivy had a curious inception and a fitful evolution. Named after Aagje Nourse's two cats, it was largely seen within Bombay as her fiefdom. Accordingly, it evolved slowly, perhaps reflecting Aagje's known penchant for tinkering with product, design, and concept. Bob Nourse and Aagje, now the number two executive at Bombay, started the division in 1990 on a prototype basis. By July 1993 they had opened just 9 stores. Then they began rolling the concept out. By July 1994 there were 38 stores and counting. Nourse assured his audience at Inc.'s annual Entrepreneur of the Year conference in November of that year that the division was headed toward having "several hundred stores." Yet, six weeks later, in January 1995, Nourse shut down the division, taking a $41-million write-down.
Alex & Ivy "wasn't working out," he now says. As evidence, he points to the fact that there was creeping cannibalization of Bombay sales -- even though prior market research had concluded there would be very little cannibalization, and at the Inc. conference, Nourse had said there was "very little crossover, only 5%" between the two divisions.
"Maybe I shouldn't say this, but we ramped it up too fast. That was a bad decision," says chief financial officer Jim Herlihy. "We should have sat tight in the 20-store range for a while. It would have worked at that level."
The bungling of Alex & Ivy created further tension between Nourse and Glazer. According to Welliver, Glazer presented a plan to salvage Alex & Ivy. The division was losing about $2 million on an annualized basis -- or about 6¢ per share. That was hardly an onerous sum for Bombay, with its balance sheet boasting $30.6 million in cash in January 1995. Welliver says that Glazer proposed consolidating the management of Alex & Ivy stores with Bombay stores'. That would reduce overhead and get Alex & Ivy to break even. He further proposed changing the division's name to relate more to Bombay, in order to leverage the franchise's popularity.
Glazer's proposal fell on deaf ears. "It wasn't moving in the direction I wanted it to go," Nourse now says of Alex & Ivy. It was, in his words, "a drain." Besides, Nourse had now focused his energies on a much bigger building -- or rebuilding -- project: Bombay.
After Bombay announced the closing of Alex & Ivy, more than a dozen venture capitalists contacted the company, inquiring whether the division was for sale.* * *
While the closing of Alex & Ivy took its toll on earnings, angered Wall Street, and triggered a shareholder lawsuit, employee morale may have taken the biggest hit. In January 1995 Nourse restructured Bombay. Glazer "resigned," with scant public explanation. (Insiders say he was fired.) Nourse assumed Glazer's duties. A number of vice-presidents were demoted.
As 1995 unfolded an exodus of key people ensued. The company lost two of its four regional managers. It lost both its vice-president and director of store operations, and its director of loss prevention. It lost its chief merchandising officer, whose departure was not publicly acknowledged by Bombay until three weeks after he left. It lost one-third of its 36 district managers.
Bob Nourse began traveling in the field, looking for answers. He went into stores, talking to employees and customers. His findings? Customers were looking for new products -- and waiting for merchandise to go on sale, he reports.
In May 1995 Bombay scheduled its Customer Appreciation Day sale to be open only to its "preferred customers." It hoped to generate about $10 million in sales, according to one manager who worked on the event. When presale indicators suggested tepid interest, the sale was thrown open to the public. The event generated just $4 million in sales, versus $13 million a year earlier.
The company subsequently brought in a consultant to, as Nourse puts it, "help us refocus." He quickly adds that the move did not signal "weakness in management."
Ted Damon, a board member since 1984, says, "I have a lot of confidence in Bob and Aagje. They are very talented and competent people. The situation that has developed at Bombay is that it was growing too fast. Things were going too well."
Meanwhile, Nourse's strategy of slowing sales and improving margins did not pay off in the first half of 1995. In the first six months, the period ending July 29, Bombay's same-store sales declined 12%, while its gross margin fell from 35.2% to 29.6%. During that period Bombay had an operating loss of $3.1 million on sales of $147.6 million, versus an operating profit of $7.25 million on sales of $142.5 million for the same period in the previous year.
Bombay CFO Herlihy explains: "In the spring we were much less promotional, virtually nonpromotional. We found that was not driving enough business into the stores. Being nonpromotional just doesn't work out. The customer responds to sales."
Indeed, Robin Murchison of Southcoast Capital Corp., in New Orleans, one of the few analysts who still follow Bombay, says, "Bombay's price points are still too high." In a report issued last September 5, she wrote: "After six months of disappointing sales volumes, it was concluded that a return to a more promotional environment might be necessary. The company is seeking to generate gross-margin dollars as opposed to stabilizing gross-margin percentage."
That describes what Bombay was doing under Michael Glazer -- and it's one big reason Bob Nourse cut him loose.
Seated at a table in his office at Bombay headquarters, Bob Nourse looks relaxed and assured, wearing a beige turtleneck and a double-breasted sport coat. In the big growth years of 1992, 1993, and 1994, Nourse and his wife received salaries and bonuses totaling $5,147,080. They also received other compensation in the form of company contributions to a stock purchase, a 401(k) plan, and insurance totaling $661,097. They also exercised stock options, realizing gains worth $14,650,345.
With little prodding, Nourse launches into a reasoned and analytic defense of what has happened since he reassumed the reins of the business. "Our performance the first six months has not been as good as we had hoped," he concedes. "But the kinds of things we are doing will produce material improvements later this fall and next spring. We have said that all along."
He points specifically to a broader product line and the fact that in September 30% of furniture sales were newer, nonmahogany products. "I am much more optimistic than I was three or four months ago," he says.
Still, the following week Bombay announced a same-store-sales decline of 7% for September, the fifth monthly decline since Nourse replaced Glazer. September fell short, says Herlihy, because one bad week hurt all retailers. Interviewed in October, Nourse cautioned that that month would be a tough comparison, owing to the liquidating of inventory a year ago that artificially inflated sales. (Two weeks later Bombay reported a 5% decline in same-store sales for October. For the third quarter, it reported a loss of $1.6 million on a 9% decline in sales.) Asked then how he anticipated the vital Christmas season, Nourse replied: "Well, we don't sell computers. We're very ready for Christmas, but there's a lot of uncertainty out there."
There's uncertainty not just about how Bombay will fare in the coming months but also about what it has been through in the last year and a half. Some who know the company contend that the pain was needless. They say that the Bombay story boils down to nothing more than an embattled company builder and his wife reaching out to reclaim what they've built -- for all the wrong reasons. "Bob saw Michael as the most revered person in the company. He and Aagje were no longer in the limelight," says Welliver, the former vice-president. Adds another former manager: "Aagje hated Michael; she was jealous. Bob ended up firing Michael to please his wife. They made a conscious decision to take back their company."
As for Bob Nourse, he doesn't have time for such theories. "You'll know a year from now by our performance whether what we've done is right," he states. "The proof will be in the pudding. No one will be asking then if ego or jealousy had anything to do with this." He, for one, is too busy doing what he loves: building a business. He's got plans to raise margins and speed the flow of new products. Perhaps building a company on the scale of the Bombay Co. inevitably nurtures an unhealthful possessiveness, a blind confidence in the entrepreneur that he or she always knows best when the subject is the company. After all, Nourse told his audience at the 1994 Entrepreneur of the Year conference, at which he delivered a keynote speech, "the greatest challenge of business is change, the need to reinvent your business. You built your business. You know it best. You should act on your own convictions."
But now, as Nourse coolly defends and explains what has gone on at Bombay in the past 18 months and why he is the right person to take it back to the future, there's a palpable sense of diminishment despite his bravado. "I'm doing what a CEO is supposed to be doing," he says in a subdued tone. "If I'm wrong, I'll probably lose my job. And if I'm right, I'll be a little more humble."
In 1993 Nourse was Inc.'s Entrepreneur of the Year. 'Do I think I know the company better than anybody else?' asks the man who discovered the Bombay Co. when it was just one store, in 1979. 'Yes, absolutely.'
Vice-president Aagje Nourse, his wife, traveled with him from Asia to Wall Street and helped launch Alex & Ivy, an ambitious spin-off that grew to 58 stores.
In January Nourse pulled the plug on Alex & Ivy, taking a $41-million write-down. Six weeks earlier, he had predicted Alex & Ivy would grow to 'several hundred stores.' He now says it was 'a drain.'
Departure of a Key Executive
Michael Glazer, who some say 'turned Bombay into a real business,' left in January 1995. Insiders say he was fired. 'You should act on your own convictions,' Nourse had recently advised entrepreneurs.