99 Cents CaseEssay Preview: 99 Cents CaseReport this essay99 Cents Only Stores is one of the leading retailers in the deep-discount sales industry. The first 99 Cents Only Store opened in 1982, and as of March 31, 2006, the company operates 232 retail locations, including 164 in California, 36 in Texas, 21 in Arizona, and 11 in Nevada. The stores carry mostly name-brand general merchandise, including food and beverages, health and beauty aids, cleaning supplies, house wares, hardware, stationery, toys, gifts, pet products, and clothing.
The chain makes purchases from over a thousand suppliers, including such notables as General Electric, Colgate-Palmolive, General Mills, Johnson & Johnson, Procter & Gamble, Kraft, Nabisco, and Unilever. Stores cover an average of 22,000 square feet, and average $4.3 million in net sales per store. Overall, 99 Cents Only Stores experienced a 13 percent company-wide increase in sales in 2004, totaling $972 million. By 2006, total sales projected to over $1 billion.
The majority of products can be restocked regularly. 99 Cents Only Stores also feature close-out merchandise, which is not available for reorder. The deep-discount industry is characterized by the purchase of close-out and special opportunity merchandise at costs below wholesale. Deep-discount retailers pass the savings on wholesale from these purchases to customers, who are able to buy products at prices that are well below retail. There is increasing competition with other deep-discount retailers for this special-situation merchandise, and some competitors have more financial resources and buying power than 99 Cents Only.
99 Cents Only Stores recipe for continued growth is to open more stores while expanding same-store sales and trying to wring more out of each dollar to keep profit margins higher than competitors. The company has set a target of expanding its store square footage by 25 percent every year and believes that the states in which it already operates have the potential to support over 400 stores. Approximately half of the new stores launched in 2004 were in Texas. These stores are serviced by a 741,000-square-foot distribution center near Houston that the company purchased for $23 million in 2003.
How does 99 Cents Only Stores manage its widespread chain of stores while keeping down costs? The answer is, with information technology, but on a budget. In 2003, despite opening 38 new stores and beginning operations in the new distribution center in Texas, the companys IT budget did not surpass $5 million. Although David Gold, 99 Cents Onlys founder and chairman, resists computer technology in his own office, he knows that computers have played a large role in enabling his company to grow. Gold introduced Radio Shack TRS-80 personal computers to the business in the 1980s. Golds son, Jeff, now president and COO, programmed the companys first order-entry and warehouse inventory systems on those computers.
Today the company obviously requires far more computing power. The task of choosing and implementing that power without breaking the bank fell to Robert Adams, vice president of information services for 99 Cents Only Stores. 99 Cents Only Stores is not a typical single price point business. The average 99 Cents Only Store is about five times larger than the industry standard and generates approximately four times more in sales than its competitors ($4.3 million to $1 million). 99 Cents Only Stores also differs from its competitors in its target customer demographic, even pursuing locations in high-income areas. David Gold says, “Rich people like to save money too, and they do it in higher volumes.”
With these factors in mind, Robert Adams continues to improve and expand the company while keeping the clientele satisfied and not spending too much money. For example, he saved the company tens of thousands of dollars on database management software licenses by searching the Web for the best price available rather than simply defaulting to the usual vendor. Adams acknowledges that he is able to make such decisions because the company is family-owned and -run, which concentrates the power among only a few people. In fact, most projects that the company takes on are implemented rapidly because there are fewer people involved in the decision-making process.
At every step of the way, Adams evaluates actual cost versus business value to the company of every initiative, whether it involves technology, real estate, or the melding of the two. Because Adams has a programming background, when it comes time for the company to deploy a new system, he can effectively weigh the cost of purchasing software off the shelf against the cost of writing the software code himself or with his IT team. Because 40 percent of 99 Cents Only Stores products flow through the inventory only once because they are close-out items, the companys systems need to be very flexible to deal with unique nonrepeating items in inventory. Given these parameters, Adams often finds that the cost of buying prepackaged software combined with the time and cost required to customize such software for the deep-discount business makes programming the companys systems in-house the better option.
One of Adamss greatest challenges was launching the companys new distribution center in Texas in 2003. The sale of the facility, which David Gold purchased for $23 million from Albertsons, included over 200,000 square feet of refrigerated storage, approximately 500,000 square feet of dry storage, forklifts, cabling, and furniture. Working with a tight time constraint, Adams had to decide between revising the warehouse management system he had designed for the companys distribution center in City of Commerce, California, so that it could be used in Texas and purchasing a system from a developer or vendor. Adams already knew that his own system would have to be replaced in California to keep up with the companys aggressive growth plans, so he set about finding a warehouse management system that allowed
The warehouse was then expanded to include more equipment, a new food service center, a large number of grocery store spaces, and warehouses in the Central Valley. Although the logistics of a typical Texas warehouse was daunting, the warehouse had the resources needed to meet the needs of a new client, and the market forces already in place for grocery stores in California and San Francisco made it possible for David to acquire a warehouse facility to satisfy any of the requirements of his larger, more expensive operations.
In May 2003, he and his partner Michael Binder, then a partner at Albertsons, made a contract sale of the facility to a leading independent company that had been working in the warehouse for two years. A second independent company, called SBC International, took over the storage facility and began using the warehouse for the sale of the building and services. However, the facility had also been used for several other things, including the distribution of bottled water to its customers, a system that had been using a lot more storage space than the warehouse, and the new headquarters for a food service center.
David, who at this point was still trying to decide between being a retail food service provider and getting an independent, big business, decided at this time that he thought it wiser to have a warehouse located outside Los Angeles that didn’t take up much real estate and that could be rented from a developer. Although the warehouse in Los Angeles didn’t have much commercial need, David wanted at least one office space, both in the warehouse the company bought and in his hometown of Austin, Texas. He began developing his warehouse warehouse plans in November 2003, before the first warehouse sales for July 2003 began.
In the process, David found that the space he wanted was limited to only one location, which he decided to take on for the logistics of his plan. He worked quickly to complete a plan that was nearly identical to his one, and was promptly selected by a local market. It was at this point that David’s warehouse plans were developed in small increments to help make it feasible to manage multiple locations. He did some quick planning as well, including going over all the information about the warehouse, and building out a plan that included all the possible possible uses. He chose to add the warehouse to a more limited number of locations with all of its services and all of David’s unique business model, for as long as possible, to allow for better coordination between his warehouse owners and their customers. This included the use of high quality warehouse space and warehouse facilities, as well as location scouting. He also planned to utilize this space as a test case for his plans.
After a brief meeting of the local business community, David became excited to begin the process of building his warehouse, and he had several good ideas going into planning his next move. However, as the plan progressed, the warehouse owner began to feel frustrated that the warehouse he had just purchased was completely without one of its main elements. However, he was able to get his warehouse’s services through to the warehouse owner who was ultimately able to provide them so that he could offer them to the community at large.
Some may suggest, that the warehouse owner, perhaps an entrepreneur, could help