Big Lots, Inc. Business Information, Profile, and History

Company Perspectives:

We are the nation's largest broadline closeout retailer. The Company's goal is to build upon its leadership position in closeout retailing, a growing segment of the retailing industry, by expanding its market presence in both existing and new markets. The Company believes that the combination of its strengths in merchandising, purchasing, site selection, distribution and cost-containment has made it a low-cost, value retailer well-positioned for future growth.

History of Big Lots, Inc.

Big Lots, Inc., the nation's largest closeout retailer, sells everything from consumables, seasonal products and furniture to housewares, toys and gifts. The company operates over 1,300 closeout stores in 45 states. The stores operate under the names Big Lots, Big Lots Furniture, Pic 'n' Save and Mac Frugal's Bargains. The company's wholesale operations are conducted through Big Lots Wholesale, Consolidated International, and Wisconson Toy, and online shopping is available at http://www.biglotswholesale.com. Big Lots differentiates itself from the dollar stores and large-scale discount retailers by offering a wide range of products and prices in their 25,000 to 50,000-square-foot stores. Big Lots acquires leftover, discontinued, and otherwise unwanted products from approximately 3,000 vendors located around the world. Some of the vendors include Proctor & Gamble, Mattel, and small-scale manufacturers in China and the Philippines.

Consolidated Stores Corporation

When Consolidated Stores Corporation (CSC) went public in 1985, just three years after opening their first closeout store, with a $33.4 million stock offering, the majority of the funds raised went to pay off debt incurred during the purchase of CSC from its main stockholders, the Shenk and Schottenstein families, who also happened to be key stockholders and executives in the new CSC. Only $1.9 million of the money raised was earmarked for the opening of 40-45 new stores. The new CSC, upon acquiring the old CSC, switched the company's fiscal year to the traditional retail fiscal period and divested two of CSC's subsidiaries, AMT and Covairs Auto Parts store, in order to focus the company's operations on one market: the retail and closeout business.

CSC hit the jackpot when they opted to expand their closeout wholesale business into retail. Since that first store opened, in 1982, CSC opened more than 300 additional stores and became the nation's largest closeout chain. In the wake of an excellent fiscal year, CSC targeted 1988 as a year to catch its management and management systems up to its explosive growth. Sol Shenk, Chairman and founder of CSC told Discount Store News in 1998, "We knew how to secure merchandise, but were lacking in installing procedures and people. The bottom line was that sales were down, the warehouse was a mess." Shenk added, "We were not able to meet projections. We didn't have the attributes and professional skills of a company our size." James Guinan, president of CSC's retail operations, explained that another problem the company faced was that the buying lines simply couldn't absorb the number of stores they were opening in early 1987. "... As a result, [we] filled the shelves with a lot of low-end goods ...[that were] great for the consumer, but the margins weren't there." CSC's solutions for the problems Shenk and Guinan discussed were to bring in a "whole new layer of top management people," to improve operations by developing new systems including a computerized truck routing system, an electronic mail system, and a centralized training system to help standardize store operation. To increase CSC's margins, they planned to venture into market unfamiliar to them--the soft goods market--and also, into the import market.

When CSC was named, by Discount Store News, one of the ten most profitable chains in 1994 it seemed that the changes and improvements that the company had instituted had indeed improved operations and margins. CSC continued to open retail stores across the United States, stores in the Midwest were routinely called Consolidated Stores, while stores opened in other regions of the United States were called either Big Lots, Odd Lots, Itzadeal, or All For One.

Consolidated Stores Expands Further

CSC expanded its retail toy business, which included its operation of 115 Toy Liquidators, the Wisconsin Toy wholesale operation, and sixteen The Amazing Toy Store retail outlets, with the $315 million purchase of Kay-Bee Toys in 1996. CSC purchased Kay-Bee Toys with high hopes. "Toys is the best closeout business we have. We think we will be the true value player in toys," said Michael Potter, Senior Vice President and Chief Financial Officer of CSC, at the time. However, it wouldn't be long before CSC opted out of the retail toy market altogether.

CSC's expansion was not complete with its latest purchase; the company needed more distribution capacity. In 1997, CSC purchased a 665,000 square-foot distribution center in Montgomery, Alabama in order to cut distribution costs to its southern stores. The company also set its sights on improving its furniture business. In 1998, CSC operated 171-furniture departments within its Big Lots general discount stores and had 26 freestanding Big Lots furniture stores. The company planned on opening 50 additional freestanding furniture and 100 additional furniture departments in the coming year.

Consolidated Stores Rethinks Business Plan

The first sign that long-time closeout store Consolidated Stores Corporation was thinking about drastically altering their business structure appeared when the Board retained the investment banking firm Credit Suisse First Boston to help the company pursue strategic repositioning alternatives. The company's intent to refocus their business became crystal clear when, on June 27, 2000, Consolidated Stores announced that its Board of Directors had decided to divest its toy operation, Kay-Bee Toys Division--separating the toy division irrevocably from the company's closeout business. Kay-Bee Toys (and Toy Liquidators), purchased by CSC in the mid-1990s for $329 million, had been a disaster from the get-go as they were purchased just as the toy market was experiencing over-expansion. After the purchase, however, CSC continued to sink money into Kay-Bee Toys when they put $80 million into KBKids.com.

The divesture was orchestrated quickly, and on December 8, 2000 the company announced that the $305 million sale of Kay-Bee Toys was complete. An affiliate of Bain Capital, Inc. purchased the Toy division in conjunction with Kay-Bee Toys management, who were retained to lead Kay-Bee Toys.

In a press release announcing the finalization of the sale of Kay-Bee Toys, Michael J. Potter, Chairman and Chief Executive Officer of Consolidated Stores said, "This sale is an important step forward in the strategic repositioning of our company. With the divestiture of Kay-Bee, we are now able to focus on a single closeout business model, which represents our core competency. As the country's largest closeout retailer, we believe we are uniquely positioned to grow our business well into the future."

Big Changes

Upon scaling the company's interests down to focus solely on their closeout retail business, Consolidated Stores launched a wide-reaching plan to improve their overall business. On May 15, 2001, the first step of the process, changing the company's name from Consolidated Stores Corporation to Big Lots, Inc, took place. "The name change is a step toward building a strong brand," said Michael J. Potter in an article written for Business First-Columbus. The name change brought Big Lots, Inc.'s more than 1,300 stores together under the Big Lots name. 856 stores already operated under the Big Lots name and the remaining stores who operated as Odd Lots, Mac Frugal's and Pic 'n' Save were slated to have their names changed by the end of 2002.

Along with the name change, the company planned to spruce up the brand's image in order to attract a more affluent group of bargain shoppers. Al Bell, Vice Chairman of Big Lots told HFN Weekly in May 2001, "We want to appeal to a broader demographic, to appeal to the customer who wants a bargain but doesn't necessarily need a bargain." Some of the superficial changes that Big Lots made to win over these customers included improved lighting, restrooms and floors. Big lots invested $80,000 per store to repaint and otherwise improve the stores. Changes to the company's stock of products included plans to expand their home furnishings and seasonal items. The basic plan for upgrading the stores was to make them brighter, friendly and to offer better service. In addition to rebranding many stores, Big Lots intended to open approximately 80 new Big Lots stores in 2001 and launched a customer-service training program.

Big Budget Advertising

By bringing all of their stores together under the Big Lots name, the company afforded themselves a simpler task in advertising. Rather than launching multiple advertising campaigns for multiple stores, Big Lots could now focus their entire advertising budget on the Big Lots brand. The company pledged $27 million to the Big Lots advertising effort, well more than double the company's marketing budgets for the previous years. SBC Advertising, the firm that handled the company's advertising for the past 3 years, managed the campaign. Upon taking control of the Company, Mr. Potter decided to cancel multiple advertising circulars (that the company had relied upon to bring in business). The circular advertising strategy was streamlined, to allow the company to invest more time and money on their new, big budget advertising campaign.

The campaign included 3 new television spots featuring the company's 3-year spokesman, Jerry Van Dyke. The spots followed an introductory TV, print, and radio campaign that focused on the markets where the Big Lots name was new. The TV spots were designed to help cast Big Lots as "a meaningful and acceptable alternative for consumers," said David Dennis to ADWEEK in July 2001, SBC Advertising's president, he continued, noting that the perception to overcome is "that you have to hide in the closet and be ashamed to shop" at closeout stores. Comedian Mr. Van Dyke had been an effective spokesman as he was known by all generations for his work on both The Dick Van Dyke Show, and Coach which many people watch in re-runs.

The advertisements aimed to convey the message that not only was shopping at Big Lots nothing to be ashamed of, but that it was the smart way to shop. Additionally, the advertisements strove to convey the message that people who wanted to save the most money and get the best products needed to shop at Big Lots every week because the products in the stores are changed frequently.

Continuing Change in 2001

Big Lots faced a $10.7 million loss, in August 2001, caused by slow sales, lowered profit margins and the company's continued investment in converting its multiple non-Big Lots-named stores into Big Lots. In response to the dwindling share price (the share price fell 9 cents) the Company slashed prices countrywide.

Other major changes Big Lots underwent during the fall of 2001 included an upgrade of the company's merchandising systems. Previously the stores had been disorganized; products were displayed on shelves with little reason and the distribution infrastructure needed attention. Big Lots invested in a 300,000-foot expansion of its Montgomery, Alabama distribution center, enabling it to serve over 300 stores in the southeast. Enlarging and expanding upon the number of distribution centers allowed Big Lots to stock their stores with more items, which offered customers a deal-hunting shopping experience that the company hoped would inspire weekly visits to the store. Each store received a new truckload of merchandise weekly, which made it possible for the same customer to return once a week and find new deals, new brands and different items. The advertising campaigns stressed the fun and savings potential of shopping at Big Lots on a weekly basis.

While this type of treasure hunt shopping experience was integral to the Big Lots concept, the Company found that their customers also needed a predictable element to their shopping; customers needed to have certain products delivered consistently. By expanding the size of the Big Lots distribution centers, Big Lots was able to supply customers with both new, unexpected products and a host of standards (like diapers and other household products). All of the company's stock was tracked by a renovated data processing system that let buyers track Big Lots stock in order to learn which products were moving and which were not. The renovated data processing system eventually allowed Big Lots managers to get a more complete picture of what they needed to stock in their particular store for each coming week.

Big Lots also invested in educating and training their store-level employees in order to supply customers not only with more and better-organized products but with an improved customer service experience. Joe Cooper, vice president and treasurer of Big Lots, told Home Furnishing Network in January 2002, "In today's competitive environment, we can no longer allow basic customer service to be a limiting factor in our success. Through a new customer service program, stores are focusing on operating initiatives that come directly from what customers have told us they value. We are measuring our progress from our customers' perspective and provide incentives that encourage associate involvement and improvement." Another effort to boost customer service was tied to customer's responses on random customer service polls (some customers would receive a survey on the back of their sales receipt, that if they completed they received $3). The surveys allowed employees to earn bonuses for positive customer feedback, further motivating staff to focus on customer service.

The large amounts of money and attention put into rebranding and improvement did not immediately show a positive financial effect. Despite low sales for 2001, Michael Potter took a long-term and optimistic view when speaking with MMR, "[We] remain enthusiastic about our key strategic initiatives. ... The 204 stores we've converted to the Big Lots name this year have delivered strong initial sales increases. Those strong results combined with ongoing store and merchandising initiatives reinforce our view that this year's investment in repositioning will drive positive results over the coming years."

Big Lots on the World Wide Web

While the stores were undergoing rebranding and new distribution centers were being built, Big Lots expanded its business to include an online, business-to-business store. Big Lots launched its website, www.Biglotswholesale.com in November 2001. The website enabled businesses to shop 16 product categories, sell seasonal specials, and $1 clearance items. Because there was no membership fee to shop the site, it was possible for non-business customers to make use of the site also.

Continued Expansion

In the beginning months of 2002, the advertising campaign and a particular commercial entitled "Closeout Moment," beat out approximately 700 entrants to receive honors as a finalist at the Retail Advertising Conference's Awards. Although the advertisement didn't win first place it, in the words of Kent Lasen, Executive Vice-President of Merchandising, "claimed the people's choice" (as reported in Retail Merchandiser, April 2002). Financially, the advertising campaign and overall company facelift has begun to work wonderfully--the average number of transactions increased 4.3 percent and the size of the average transaction increased by 9.7 percent. Consumables, a long-time cash cow for Big Lots, continued to post double-digit sales gains (they already made up 30 percent of Big Lots' sales).

With the unification strategy and rebranding efforts working as planned, Big Lots set its sights on continued expansion. Furniture departments were added to many Big Lots stores, and, in 2002, owned 62 free-standing furniture outlets. Big Lots furniture departments and stores were instant successes as they consistently carried furniture with brands like Pier-1 and sold the stock at 30 percent-50 percent off what customers would pay in the name-brand store. When customers became familiar with Big Lots' possible inventory, the furniture segment of Big Lots grew at least 35 percent, becoming one of Big Lots most profitable sectors.

As Big Lots saw their TV commercials making a difference in the markets they were broadcast to, the company began drafting plans to open 53 new stores in 2002, all in Big Lots current 45-state market. The Company also tested another upgraded design for the Big Lots stores in May 2002; the design included even cleaner and brighter specifications, improved merchandise layouts and new signs.

2002: Big Lots Reports First Quarter Growth

On May 21, 2002, Big Lots reported first quarter net income of $12.2 million, compared to earnings of $0.3 million in the first quarter of 2001. Michael Potter attributed the successful quarter to all of the restructuring and strategic initiatives that the company had undergone since the divesture of Kay-Bee Toys. Customer traffic rose every month since November 2001 after falling for three straight years. There is no doubt that much of Big Lots success is due to the leadership of Michael Potter, who took over the company as Kay-Bee Toys was divested. The company predicted that the coming years will see a rise in sales and stock shares.

Principal Divisions:Big Lots Wholesale; Closeout Division.

Principal Competitors:99 Cents Only Stores; Kmart Corporation; Target Corporation; Wal-Mart Stores, Inc.; Tuesday Morning.

Chronology

• Key Dates:
• 1967: Sol Shenk opens his first discount wholesale and retail store, focusing on auto parts.
• 1967-1971: Shenk's stores grow into a small chain of Corvair Auto Stores.
• 1982: Consolidated Stores Corporation opens its first Odd Lots closeout store.
• 1985: Consolidated Stores goes public with a $33.4 million stock offering.
• 1994: Consolidated Stores named one of the ten most profitable chains in 1994.
• 1996: The company purchases of Kay-Bee Toys for $315 million.
• 1999: Internet retail site KBkids.com LLC is launched as a joint venture with BrainPlay.com.
• 2000: Consolidated Stores divests Kay-Bee Toys Division in a $305 million sale, focusing the company's attention on its closeout business.
• 2001: Consolidated Stores changes its name to Big Lots, Inc. and launches a $27 million campaign to re-brand its McFrugal's, Pic 'N' Save, and Odd Lots stores; the company launches a business-to-business Web site, www.Biglotswholesale.com and begins construction of a 1.2 million square-foot distribution center in Durant, Ohio.