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GLOBAL SUPPLY MANAGEMENT FORUM

CASE: GS-34 DATE: 9/27/04 (REV’D. 04/07/05)

Lyn Denend prepared this case under the supervision of Professor Hau Lee as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.

Copyright © 2004 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved. To order copies or request permission to reproduce materials, e-mail the Case Writing Office at: cwo@gsb.stanford.edu or write: Case Writing Office, Stanford Graduate School of Business, 518 Memorial Way, Stanford University, Stanford, CA 94305-5015. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means –– electronic, mechanical, photocopying, recording, or otherwise –– without the permission of the Stanford Graduate School of Business.

WEST MARINE:

DRIVING GROWTH THROUGH SHIPSHAPE SUPPLY CHAIN MANAGEMENT

Our goal is to be the best billion dollar boating company every day.

—John Edmondson, Chief Executive Officer, West Marine

The whole company has culturally undergone a huge shift in terms of recognizing the value of supply chain management to the success of the organization and our ability to grow.

—Pat Murphy, Senior Vice President of Logistics, West Marine

It was the evening of January 13, 2003 at West Marine’s Watsonville, California headquarters. In the morning, CEO John Edmondson would announce to West Marine’s shareholders, the press, the boating community, and the employees of the two rival companies that West Marine was acquiring BoatU.S.’s retail stores, Internet/catalog business, and wholesale operations. Although the negotiations had gone on for months, only a small handful of individuals within West Marine had been involved. BoatU.S.’s founder and CEO had insisted on secrecy, and had changed his mind about the sale more than once during the negotiation process. The two companies had been fierce competitors for years. Edmondson, and his counterpart at BoatU.S., knew the announcement would come as a shock to the loyal employees and customers of both organizations. In the spring of 1996, West Marine had acquired another one of its major competitors: E&B Marine. While the mechanics of the acquisition had gone relatively smoothly, the company quickly discovered that its infrastructure was not strong enough to support an organization that had almost doubled in size overnight. West Marine’s supply chain was especially hard hit, with its systems and processes proving inadequate to keep all 72 West Marine and 63 E&B Marine stores amply stocked. The results had been disastrous. Peak season out-of-stock levels climbed to more than 12 percent and, correspondingly, sales dropped by almost 8 percent within the first year following the transaction.

For the exclusive use of A. Bregante, 2018.

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West Marine: Driving Growth Through Shipshape Supply Chain Management GS-34

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Edmondson was brought in after the E&B Marine acquisition to execute a company turnaround. For more than four and a half years, he had been focused on rebuilding West Marine. The company installed a new senior management team, invested in new systems and processes throughout the organization, and initiated a major cultural change. Edmondson and his team were proud of West Marine’s recent achievements⎯particularly in the supply chain arena. Yet, on the eve of the company’s latest acquisition, he wondered whether they had done enough to effectively support another 62 BoatU.S. stores without experiencing the negative repercussions of the E&B Marine acquisition. Edmondson took a deep breath⎯savoring the “calm before the storm.” West Marine’s course had been set. Now he only needed to launch the journey and hope for smooth sailing.

SETTING SAIL: COMPANY BACKGROUND

Anchors Aweigh

Randy Repass founded West Marine in 1968. Repass worked briefly as a computer engineer in Silicon Valley, but found the high technology industry to be rather cold and impersonal. An avid boater, he sought refuge in his hobby and began selling nylon rope by mail order out of his garage. Driven by a desire to improve the way people shopped for boating supplies (and his personal dissatisfaction with service at his local boating store), Repass next opened a small boating outlet in Palo Alto, California in 1975. The store sold rope, as well as other miscellaneous boating supplies and accessories. Most importantly, it was dedicated to providing knowledgeable, friendly customer service to the boating community⎯a company of boaters helping fellow boaters. As the organization’s customer base grew, so did its business model. Repass began acquiring and opening boating supply stores along the West Coast. He also gradually expanded the company’s product line to include anchor and dock equipment, boat hardware, maintenance and safety products, electronics, boating apparel, water sports equipment, fishing supplies, and more (see Exhibit 1 for illustrative store and product photos). In 1978, West Marine founded its port supply business and began selling products to boat yards, boat dealers, and other wholesale customers. By 1987, the company had 15 stores. That same year, West Marine began producing its first catalog. In 1991, the company opened its first stores on the East Coast. In 1993, West Marine went public under the Nasdaq symbol WMAR (see Exhibit 2 for a more complete timeline of company milestones).

Making Headway in 2002

By late 2002, West Marine had become the largest boating supply retail chain in the nation, with operations in the U.S., Canada, and Puerto Rico, approximately 5,000 peak season employees, and annual sales of approximately $530 million. In total, West Marine offered more than 50,000 products through its stores, Web site, and catalog, including an extensive collection of private- label goods.

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Channels The company had more than 250 stores, with retail operation accounting for approximately 82 percent of its business. West Marine had three primary types of stores. Most standard stores averaged 8,000 square feet, carried 8,000 to 10,000 stock keeping units (SKUs), and generated roughly $1.5 million in sales per year. The company also had a growing number of express stores that averaged 2,800 square feet, carried 2,500 SKUs, and generated $600,000 to $800,000 in annual sales. In its continued pursuit of growth, West Marine had recently begun experimenting with a third store format⎯the megastore. These outlets were located in large markets (like Fort Lauderdale), ranged from 24,000 to 30,000 square feet, carried 30,000 SKUs, and were expected to generate $10 to $15 million per year. Megastores were intended to be “destination stores,” featuring interactive displays, boater education, and an unparalleled in- house selection. The remaining 18 percent of West Marine’s business was generated via Internet and catalog orders, as well as sales to commercial customers. West Marine’s catalog was more than 1,000 pages, making it the most extensive in the industry. It offered retail and wholesale customers access to 35,000 of the company’s SKUs, featured full color photographs of the most popular products, and reached more than 1 million boaters a year. The company’s online store included all 50,000 SKUs, but mirrored the catalog to provide customers with a consistent experience across channels. Similarly, West Marine operated a call center that provided real-time customer support for catalog, Web, and in-store interactions. Like West Marine’s associates in the stores, call center representatives were known for having a depth of specialized boating experience and a strong commitment to customer satisfaction. Because they received a high level of service and a similar buying experience regardless of the channel, West Marine’s customers tended to shop freely between the stores, the Internet, and the catalog. For example, some customers relied on the stores for last minute purchases and to acquire products they wanted to “touch and feel.” However, they would use the Web or catalog to research, compare, and buy products when they had more lead-time, or to take advantage of special offers. “Our most profitable customers shop in all three channels,” explained Tony Gasparich, VP of direct sales. “We broke down the barriers between catalog, Internet, and our stores so that our customers can shop wherever, and whenever it’s most convenient for them.” 1

Customers West Marine had a strong base of both wholesale and retail customers. The port supply (or wholesale) division accounted for approximately 9 percent of the company’s sales. Typical wholesale customers included boat yards, boat dealers, and even some small-scale competitors (e.g., “mom and pop” marine supply stores). In total, West Marine had 33,000 wholesale customers who shopped at its stores (using a wholesale signer’s card) or ordered via catalog and Web. A team of 40 direct sales people and 10 inside sales representatives also served the company’s larger wholesale accounts, advising them on the best products for their needs and nurturing these relationships. “We try to help them do their jobs better,” explained Chris Bolling, West Marine’s VP of port supply.

1 All quotations attributed to representatives from West Marine were collected by the author via personal interviews, unless

otherwise noted.

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This document is authorized for use only by Anthony Bregante in SCM 800 Fall 2018 Aggon taught by NORMAN AGGON, The Pennsylvania State University from Aug 2018 to Jan 2019.

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On the retail side, West Marine’s customers fell into three primary categories: sailors (30 percent), large power boaters (40 percent), and trailer boaters (30 percent). The average West Marine customer tended to be male, college educated, 39 to 55 years old, married with children, and in the top 10 percent of wage earners in the U.S. The company amassed considerable knowledge about its customers through the implementation of loyalty programs that offered discounts to shoppers (among other benefits) in exchange for their membership information. Loyalty program members accounted for more than 70 percent of all West Marine sales. As Tom Carey, the company’s senior VP of marketing put it, “This level of participation is off-the- charts for most retailers. It gives us a huge advantage in looking at what our customers are doing, understanding what they think, and modeling their purchasing behaviors.” West Marine also used this customer data, along with boat ownership and geographic information, to customize its marketing efforts. Rather than blanketing the nation with a single one-size-fits-all version of a promotional mailing, the company created different versions of its fliers for warm and cold weather climates, and for each of its primary customer segments (for a total of six targeted mailings for each promotion). The promotional fliers were created approximately twice per month, and had a circulation eight times greater than the largest independent boating publication. As a result, West Marine’s vendors were eager to be spotlighted within the mailers, and would frequently pay the company to be included, as though they were buying ad space in a magazine.

Industry Position In 2002, the boating supply market accounted for approximately $6 billion of the total $25.6 billion boating industry.2 While general industry performance was relatively strong, RBC Capital Market estimated that the boating supply sector was declining three to five percent per year.3 At the time, there were more than 5,000 retailers in the boating aftermarket. However, West Marine was one of only three major national boating supply companies.4 West Marine, BoatU.S., and Boater’s World controlled just 10 percent of the total market, with local, independent retailers accounting for the remainder of total sales.5 Like the rest of the industry, West Marine’s stores were concentrated in the three primary U.S. boating markets⎯the West Coast, the Northeast, and the Southeast. Despite its West Coast roots, 68 percent of the company’s business was located in the two major eastern regions where industry growth rates were slightly better and higher population densities enabled the company to achieve greater operational efficiencies6 (see Exhibit 3 for highlights from a 2002 analyst report). The boating aftermarket was considered a specialty retail market. Outside of its immediate peer group, West Marine benchmarked itself against companies like Brookstone, Cost Plus, Autozone, and other high performing, small cap retailers. While West Marine performed competitively against these companies, it had lower sales per square foot and fewer inventory turns than many other specialty retailers.7 This was due, in part, to the extreme seasonality of West Marine’s business. Over 60 percent of the company’s total sales typically occurred

2 Carole Buyers, “West Marine Inc.: The Clear Leader in a Fragmented Industry,” RBC Capital Markets, October 15, 2002, p. 3. 3 Ibid. 4 Ibid, p. 5. 5 Ibid. 6 Ibid., p. 8. 7 Ibid., p. 9.

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between the months of April and September, with stores in most areas remaining largely unproductive during the winter season. In addition, West Marine’s service philosophy contributed to these challenges. The company’s goal of having “what the customer needs, when the customer needs it” meant that the average West Marine store carried a significant portion of products with relatively low sales velocities. In fact, the company estimated that 20 percent of its in-store items accounted for roughly 80 percent of its sales. The rationale for this approach was that boaters had to be able to stop by a West Marine store on their way to their boats and be able to find whatever they needed to spend the day on the water. If the stores did not have the right products on hand, then their customers would potentially lose a day of boating (not to mention their faith in West Marine’s ability to act as a one-stop-shop for all of their boating needs). Fortunately, RBC Capital Markets estimated that the relatively low investment cost of a West Marine store and its high contribution margin helped offset its lower inventory turns relative to other specialty retailers.8 While West Marine had led a trend toward consolidation in the retail boating supply industry, the industry’s manufacturers and dealers remained highly fragmented. Many suppliers were small organizations with insufficient capital and infrastructure to support growing, organized retailers such as West Marine. West Marine’s market research indicated that, among other factors, supply chain failures and the corresponding declines in consumer satisfaction were causing boaters to leave the sport, as well as deterring new entrants.