Face to Face

In the competitive home-furnishings business, retailers Crate and Barrel and the Container Store have found a way to work together -- boosting sales for both

Gordon Segal is on the phone from Chicago, and he sounds cheerful even though he's been using crutches to get around. A week ago, the Crate and Barrel CEO and cofounder tore ligaments in both knees on the ski slopes. Also in on the conference call is Kip Tindell, president and cofounder of another burgeoning home retailer, the Container Store, based in Dallas. The two men are old friends, and they chitchat briefly about Segal's ski injury before getting down to the business of discussing their intertwined growth strategies. Both companies -- Crate and Barrel in the home-furnishings business and the Container Store in the home-storage-and-organization business -- are now favoring freestanding stores for new locations rather than malls. And the two companies are moving forward (without a contract) on a long-term strategy of opening new stores right next to each other. The reason: Consumers love the concept. Segal and Tindell explain their strategy to Inc. staff writer Mike Hofman.

Inc.: How did all of this start?

Tindell: About six years ago we were both speaking at a conference in Dallas. The two of us went to lunch at the Fairmont Hotel to catch up. We started talking about how we drew the same customers and how great it would be to develop new stores together. Rather than be like typical, paranoid retailers, we would help each other's business. It was an exciting-as-hell meeting.

Inc.: How do you help each other's business by being located next to each other?

Segal: You always have to think about what's right for the customer, and more is always better. The more choices you give customers, the more they like it. If retail stores in the same category can get together and develop property in the same neighborhood with adequate parking, customers will like it. I know that, because I've had more people tell me that they like having Crate and Barrel and the Container Store together. It's just like going back to the high streets in Europe. That's what's happening in retail. [ Editor's note : In 1998 Segal sold a majority stake of Crate and Barrel to German mail-order retailer Otto Versand GmbH & Co. Segal retains operating control of the company.]

Inc.: But I thought malls are to the United States what high streets are to Europe.

Segal: We've come to realize in the past 10 years that shopping malls -- except for a few -- are not increasing in popularity. People don't want them. So we're focusing on neighborhoods and small specialty retail developments.

Inc.: Why are malls not doing so well?

Segal: Things are basically changing. Starting in the 1950s, people developed shopping malls with two to three department stores as anchors. The department stores were often given free space by the mall developers. But the specialty stores had to pay rent because they were seen as benefiting from the traffic that the department stores brought in. But then everybody began to realize that the good specialty stores drew as much traffic as the department stores.

Inc.: I understand that high rents would keep some businesses away from the mall, but isn't it still a good thing to have all those stores under one roof?

Segal: Well, people are strapped for time. They're concerned about the parking situation and how long it takes to get in and out of a mall. You can't go to a shopping mall for 15 to 20 minutes; you have to go for two to three hours. But people want to get to the one or two stores they need, and get in and out.

Tindell: It's not only a time issue but also a freshness issue. There are some very good shopping malls -- 8 or 10 of them across the country. But there are many that are run very poorly; they're really old in terms of their concepts, and they have the same tenants as every other mall around the country. And department stores all seem to have the same merchandise. We want to be in an environment that's fresher, newer, more fun, and more innovative. Retail cannot be boring.

Inc.: How did you transform the plan you discussed over lunch at the Fairmont into a reality?

Segal: It took only a few months. It was just a matter of taking that philosophy through development. Our first collaborative project was creating a home-furnishings corridor in Lincoln Park, in Chicago. We found a fantastic location where both stores shared the same parking lot. The guy who does our real estate talked to the guy who does Kip's real estate. He flew up from Dallas to check it out, and we agreed that we would both go into the space. The goal that we had in mind was to create something like a fairground.

Inc.: A fairground?

Segal: Sure, like a trade fair. As merchants, we go to trade shows -- maybe in Miami or in Frankfurt -- to look for new merchandise, and there will be 1,000, 5,000, or maybe even 10,000 vendors exhibiting. It's convenient to go to one place to see them all. It's efficient. When vendors and suppliers come together in Frankfurt, I can see more of them in a few days than I could see if I had to travel from factory to factory around Europe. If I had to do that, it would take months to see as many.

Tindell: I think the trade-show fair is a great analogy. Each day spent in the environment is incredibly efficient. And people appreciate that. The second development we did together is in Dallas, and people come from as far away as Fort Worth to shop there.

Inc.: Explain why your two companies, in particular, work well together.

Tindell: When two retailers attract the same target consumer, they'll get cross-shopping a very high percentage of the time. Our store manager in Chicago reports that 30% of the people who come into one store will go into the other store. And our sales staffs really know each other's stuff. I know that at the Container Store, employees love Crate and Barrel, and vice versa. Salespeople guide customers back and forth.

Segal: We have 90% customer overlap with the Container Store and 5% product overlap. It's really the best of both worlds: Customers can come for Kip's products but end up in our store, or they can come for our products and end up in his store. We simplify things for them. Customers save time, because they can go to one place and find everything for the home. We do mostly tabletop products, and Kip's store does mostly storage products. But it's all related to the home.

Inc.: Do those side-by-side stores outperform your other locations?

Segal: The evidence is that they're probably doing 15% to 20% better than our average store.

Tindell: And that last 20% of revenue is often where a lot of your profit comes from, so that's really important.

Inc.: If it's such a success, why not create a joint venture?

Tindell: The issue's never really come up, and that's not really the spirit of the thing. It's a friendly, cooperative effort. This way, we're both free to cooperate when we want to, but we're under no obligation when we don't want to.

Consumers choose the new clustered stores over the malls.

Inc.: Let's say you have a store manager who's really good at his or her job. Aren't you afraid this person might be lured away by the other guy?

Tindell: We try to be good neighbors. I think we pay our people approximately the same. It's not going to work if we're trying to hire each other's people. We're trying to craft something that's good for both of us.

Inc.: Other companies have followed you into certain locations. How can you be sure that they'll be good neighbors?

Segal: In Chicago we now have Restoration Hardware and Pottery Barn near us. Bed Bath & Beyond is two blocks away, and Ethan Allen's a block in another direction. Within a three-block radius, you have six or seven home-furnishings stores. Every time another one opens, all our businesses get better. That's because customers flock to the corridor. They get more choices in home furnishings here than anywhere else in the Chicago area. In Dallas, there are eight or nine other furniture companies in a four-block area. The same rule applies.

Tindell: And it's actually fun bringing in smaller retailers. They have a newness about them. Take Cookworks, for example. It's a wonderful new store, a tiny company based in Santa Fe. The employees of Crate and Barrel and the Container Store are thrilled to have that store nearby because it adds something new for the customer.

Inc.: Was it difficult to convince employees that this strategy would work?

Tindell: Our companies have an open-minded, unprovincial type of thinking. At first, maybe people said, "They'll take business away from us" or, "They'll compete for employees." But we've convinced everyone that, long-term, this will be great for us. I think both Gordon and I are proud of this type of thing, and our real estate guys know it.

Inc.: But so far you've only done it in your home cities, where you have more control. Are you sure store managers in other cities will buy into this strategy?

Tindell: We're both eager to do more of these deals. We're looking into doing something in the Washington, D.C., area, and we're trying to find property in Los Angeles that would work. We'll go forward whenever either party finds the right space.

Inc.: The image I've always had is of retailers secretly shopping in other stores to steal ideas. Don't you risk that by creating those clusters?

Segal: The better retailers just look at other stores to get a sense of price points, display, and products. Copiers don't succeed over time. Good retailers have a point of view about what they are and who they are.

Tindell: No one has been copied more in retail than Gordon Segal, but nobody does Crate and Barrel better than Crate and Barrel. When you steal from a competitor, you can capture one dimension, maybe -- but not a company's heart and soul. And our companies do have heart and soul. We've been around for 22 years and Crate and Barrel has been around for...

Segal: For 38 years.

Tindell: It sounds arrogant, I guess, but we like the idea of handpicking our neighbors if we can. You can merchandise the inside of a store, and you can merchandise the front of your store, but to be able to merchandise a whole shopping center, that gives you a wonderful advantage.

Segal: That's right. If we're next to another store like ours, we can create an experience that's better for the customer. This is what the shopping mall did. The future might be a specialty center that would be all home-furnishings stores, with maybe a cafÉ that adds to customer satisfaction. Sure, we'll be competing for the customers. But this is what good retailers want to do. The only guys who should be paranoid are the ones who do not have good stores.

Please e-mail your comments to editors@inc.com.