Hot Topic: Small Companies, Big Returns

By David F. Carr  |  Posted 2003-10-16

Hot Topic: Small Companies, Big Returns

At least once a year, Hot Topic Vice President of Technology John Horwath spends a day working at one of the chains stores, selling body jewelry, spiked chokers and other current emblems of "alternative" youth culture.

At 44, Horwath is old enough to be the target of youth rebellion, with a daughter starting college and a son in high school. In a company where purple hair and pierced tongues are part of the corporate culture, he hasnt taken the plunge for anything more radical than a diamond stud earring. He professes a sincere affection for the music of Kid Rock and Linkin Park, but also enjoys country artists like Kenny "No Shoes, No Shirt, No Problems" Chesney.

Of course, what matters to Hot Topic is not so much Horwaths musical tastes as his ability to help the retailer stay in tune with its customers needs—which is why he considers the creation of a wide area network one of his greatest hits. To Horwath, its not about the technology: Its about giving the stores staff the means to be the companys eyes and ears for new selling opportunities. Moving fast on that personal market research is critical in the youth fashion business.

Hot Topic made a $1.5 million capital investment in the network in 2002. Keeping more than 500 stores connected will add more than $1 million to the chains operating expenses this year. Those expenditures can be partly justified by shorter lines at cash registers thanks to faster credit-card verification, and by savings on supplies made obsolete by Web applications, such as paper forms and printed reference materials.

But the big hidden benefit is the new hot line connecting the store employees to marketing and other managers at the companys offices in City of Industry, Calif.

After all, whos in a better position to know what music the customers are listening to and what clothes and accessories theyre wearing than the employees who see them every day?

Its a natural extension of a broader program encouraging suggestions from the field. By longstanding policy, Hot Topic translates its "All About the Music" slogan into action by reimbursing store employees for concert tickets if they write up a report on the fashions they saw at the show. The network encourages store employees to share style tips and suggestions by dashing off a quick e-mail from the same personal computer that powers the cash register. Alternatively, they can pick up a Cisco IP (Internet Protocol) phone and make a toll-free call to headquarters to tip off buyers for the chain on a trendlet that might be forming.

"If a local band is doing really well, our store people can e-mail the music buyers and the rock T [shirt] buyers so they know to stock that product in that particular store," Horwath says. Before the WAN, the stores didnt make much use of e-mail because messages could be sent only at the beginning or end of the day, when the modem lines were no longer needed for credit-card transactions.

Justine Schunick, 23, who manages a Hot Topic in Mentor, Ohio, says all-hours e-mail helps because she is often too busy to pick up the phone when she has an idea she wants to share. She describes herself as "like the more freaky customer we have—color hair dye all the time, lots of piercing. Anything thats big, black and scary is what I buy." Still, what she wants for her store is what the customers want to find there, whether its her style or not, and she has lots of suggestions for the buyers at headquarters. She can tell headquarters is listening. "A hundred times Ive hit Send on an e-mail, and the phone has rung," Schunick says. "Or someone will e-mail me right back, and in five minutes well have had a whole conversation."

That tighter connection with store employees is proving to be one of the main benefits of the network, says president Jerry Cook, who championed the project. "Theyre like a cubicle away" from headquarters, Cook says. "That real-time linkup of all the store associates just aids the store communication process thats already in place at Hot Topic."

Since opening its first store in 1989, Hot Topic has used its knowledge of alternative styles to build a business projected to reach $550 million in sales this year. Many merchandising ideas, like a reversible plaid skirt thats a current hot seller, came from store employee suggestions. The number of stores in the chain has more than doubled in the past three years, to over 500, and Hot Topic has added a second brand, Torrid, that sells to girls size 12-26.

Next page: The WAN improves efficiencies with instant access.

WAN Improves Efficiencies

The network speeds sales more from the always-on connection than the increased bandwidth. Although some stores are getting further bandwidth upgrades, Hot Topic began by ordering 64-kilobit-per-second fractional T1 circuits, with a committed information rate of 32 Kbps. That means only half the total bandwidth is guaranteed. Credit-card authorization doesnt require a lot of bandwidth, but it works faster when theres instant network access. Over dial-up, the process took about 20 to 30 seconds—longer if the modem failed to connect or if employees at different registers were trying to put through transactions at the same time. Over the WAN, credit-card authorization takes 2 to 3 seconds, and multiple transactions can go through simultaneously. In a busy season such as back-to-school or Christmas, that can make the difference between long lines or short ones, lessening the risk that frustrated customers will walk away without making a purchase.

Hot Topic started connecting stores in summer 2002, after a 15-store test in the spring. About 40 stores were not connected in time for the holidays, so Hot Topic was able to contrast their sales performance with that of the wired stores. While the company will not disclose the details, it does say that an 11% increase in the number of checkout transactions, based on stores open a year or more, proved critical at the end of 2002, given that the dollar amount per transaction declined slightly, from $22.50 to $22. The net result was a 9.7% improvement in same-store sales. Sales reached $148 million during that period, bringing the total for 2002 to $443 million.

Some of that increase in transactions was a matter of marketing and merchandising—getting the right products and the right customers into the stores. Cook notes that the number of transactions has remained higher in 2003, up 7% in the most recent quarter, and the speed of credit-card processing is less of a factor after the holidays. But even if the WAN were only credited with boosting transactions by 1% during the holiday quarter, that translates into about $1 million in sales.

Kimberly Greenberger, a Lehman Brothers stock analyst, says few other youth retailers have made a similar investment, but for Hot Topic the network linking its stores makes sense. Hot Topic enjoyed sales per square foot of $619 last year, higher than any other youth apparel retailer. By Greenbergers calculations, among apparel retailers as a whole, Hot Topics performance is second only to Chicos FAS, which sells trendy womens clothes. Faster checkout processing "means they can raise the ceiling on store productivity (another term for sales per square foot)," she writes by e-mail. She also calls the networks role in getting store employees to suggest products, bands and trends, "a real competitive advantage."

A WAN investment is still exotic among operators of mall boutiques, and malls typically are not wired to make hookup easy. Hot Topic contracts for WAN service from AT&T, which in turn works with local phone companies to secure the connection to each location. But then Hot Topic finds itself dealing with phone company technicians who dont necessarily bring the connection all the way to the store. Instead, they may switch on service at the phone network access panel thats easiest for them to reach, even if its on the other side of the mall from the Hot Topic store. In one case, it was literally a mile away, Horwath says, and he had to get that one moved.

More often, the answer has been to hire electrical contractors to worm their way through ceiling crawlspaces and snake a network cable over to the store. These setbacks typically added days or weeks to the process. In one case, because of particularly bad mall wiring, Hot Topic was billed for 10 months worth of access to a WAN circuit before the store there could be connected.

"Wed be trying to turn on 25 stores a week, and wed hit almost none," Horwath says. "Do I sound bitter?" He cant seem to get the local phone companies to pay attention to his complaints because he had to work through AT&T as an intermediary, and so far he hasnt been convinced any other long distance carrier would do better.

The only solution he has found is perseverance. As the process moves from connecting existing stores to wiring new ones, Hot Topics construction managers have learned to order the lines early and leave plenty of time for troubleshooting before the opening.

For all these frustrations, Horwath, who joined the company in 2001, finds other things to like about the job. He recalls that during his job interview Chief Executive Officer Betsy McLaughlin passed him a laminated card outlining the companys values and made sure he read it. Prominent among them was "a passion for music." Store employees are expected to be able to talk knowledgeably with customers about current music and the related fashions. The same ethos is drilled into the heads of everyone at headquarters, where TV monitors hanging from the rafters play music videos all day long, and the walls are plastered with concert posters.

Horwath reinforces the message with a standard "what are you listening to right now?" ice-breaker at department planning sessions. "Somebody volunteers every week to play a track or two off their CDs and talk about why theyre listening to that and what it means to them," he says. It might not be the way some other 40-somethings want to spend their day, but Horwath enjoys it. Besides, its a lot more fun than figuring out how to stretch a network connection from one end of a mall to another.

Next page: Hot Topic Base Case.

Hot Topic Base Case

Company: Hot Topic


The annual sales per square foot for this 500-store retail chain. The average at competing youth-oriented retailers is $367, according to an industry survey by Wachovia Securities.

Business: Retailer of music-influenced apparel for young people, with an emphasis on alternative styles. Torrid, a second brand of stores for young women, bills itself as "The Alternative for Sizes 12-26."

Headquarters: City of Industry, Calif.

Key Business Executive: Gerald Cook, president (formerly chief operating officer)

Key Technology Manager: John Horwath, vice president of technology

Project: Eliminate dial-up credit-card authorization and time-consuming paper-based processes by deploying a wide-area network linking stores to headquarters. Include support for Internet phones and in-store e-mail.

Objectives: Improve customer service, solicit more style and product suggestions from employees, and boost sales with faster store checkout.

Technology Used: Cisco routers, firewall, and IP phones; GERS and Traversity retail operations software; JDA Softwares Arthur Allocation for determining store merchandise needs; IBM Regatta server and "Shark" Enterprise Storage Server.

Lessons for Big Companies: Dont just focus on saving money. Improved customer service and better communication between headquarters and store staff will lead to higher sales.

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