Rack Room Shoes, Inc.

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Rack Room Shoes, Inc.

8310 Technology Drive
Charlotte, North Carolina 28262-3387
U.S.A.
Telephone: (704) 547-9200
Fax: (704) 547-8159
Web site: http://www.rackroomshoes.com

Wholly Owned Subsidiary of Heinrich Deichmann-Schuhe Gmbh & Co. KG
Incorporated: 1974 as Lerner Shoes, Inc.
Employees: 2,500
Sales: $200 million (2005 est.)
NAIC: 448210 Shoe Stores

Rack Room Shoes, Inc., is a leading discount footwear retailer. Owned by Germany's privately owned Heinrich Deichmann-Schuhe Gmbh & Co. KG, Rack Room has 380 stores in 23 U.S. states. Its subsidiary Off Broadway has another 76 outlets in nine states; and the parent company has a half-dozen U.S. locations under its own banner, Deichmann USA. Leading national brands make up about three-quarters of the company's offerings, but it does carry private label items as well. Björn Gulden, chairman of Deichman Schuhe, also serves as Rack Room's president. Fashion-conscious women aged 18 to 55 (often working mothers) are the prime target of the company's marketing efforts, which attempt to create an emotional connection by featuring ordinary customers in ads, and through cause-related marketing.

NORTH CAROLINA ORIGINS

What became Rack Room Shoes, Inc., was formed in 1922 by Phil Levinson. Levinson started out with a single shoe store in Salisbury, North Carolina. The business became known as Phil's Shoes. Levinson began adding stores in the 1950s after taking a son-in-law, Mort Lerner, into the business. Lerner bought the company in 1956 and served as chief operating officer until retiring in 1993.

By 1967, Phil's had spread to the nearby communities of Hickory and Statesville. In April of the year, the company announced it was entering Burlington, North Carolina, through the acquisition of a ladies' shoe store called Goldman's Shoes Inc., which carried similar name-brand merchandise. Goldman's had been formed in 1930 by Isadore "Issy" Goldman. Like Phil's, it had remained family owned, being run by Goldman's widow and son for a few years before the merger.

Morton Lerner stayed with the business after it merged with U.S. Shoe Corporation in 1969. Lerner bought three of the stores from United Shoe and incorporated the business in North Carolina as Lerner Shoes, Inc., on February 11, 1974. Its stated purpose included the wholesale and retail trade of men's women's, and children's footwear and accessories, as well as purses and hosiery.

By the early 1980s, the company was trying a different kind of outlet, descriptively dubbed Rack Room Shoes. At Rack Room, instead of relying on shoe salesmen to retrieve the correct sizes from the back, customers could browse from stock kept in plain view. This saved labor costs, allowing for discount prices.

GERMAN OWNERSHIP IN 1984

By this time, Germany's Heinrich Deichmann-Schuhe Gmbh & Co. KG was looking to enter the U.S. market on its way to becoming the world's largest privately owned shoe store chain. Deichmann-Schuhe traced its origins back to a cobbler's workshop opened in Essen in 1913. It had grown to annual sales of around $250 million to Lerner's roughly $20 million at 19 stores. Represented by Philadelphia investment banking firm Financo, Inc., Deichmann bought a controlling interest in Lerner Shoes in July 1984, whereupon its owner Heinz-Horst Deichmann became Lerner's chairman.

A couple of other businesses (Lerner's Inc., Lerner's of High Point, Inc., and Lerner-Kouns Shoes, Inc.) were merged into Lerner Shoes in early 1985. Deichmann invested in an ambitious expansion program after acquiring Lerner, whose growth necessitated the installation of a new computer system in 1988 at a cost of $400,000. By the end of the decade, the chain had more than 100 stores.

Gene V. Bordeaux was promoted to president of Lerner Shoes in 1993 upon the retirement of Morton Lerner. The chain was officially renamed Rack Room Shoes, Inc., in March of the next year. In 1995, the corporate headquarters moved to a 66,000-square-foot facility in the much larger metropolis of Charlotte, North Carolina.

By this time Rack Room had more than 200 stores. The company's business methods were becoming more corporate and technologically savvy. Tools such as market research were incorporated into site selection from the late 1990s and in other areas later. The company also updated its system for managing its many leases in 2002, which allowed it to save more than $1.5 million in the first two years by aggressively pursuing early termination options and co-tenancy clauses. In 1999 the company upgraded its store data communications by tapping into a mall-based satellite network of Hughes Network Systems.

NEW METRO MART CONCEPT

Rack Room had 300 stores by 2000, and was renewing its expansion efforts. The chain spread slowly north to New Jersey and west as far as Ohio and Houston. At the same time, it introduced its new "Metro Mart" concept: much larger stores (up to 10,000 square feet) designed to make them more visually interesting and easier to navigate. Orange was chosen as the main color because it conveyed a sense of value as well as style, an official told Shopping Center World. Its planners followed the industrial warehouse style made popular by Old Navy and other discounters, then added bright, neon graphics and lifestyle posters. The corporate logo was also updated around the same time.

Rack Room bought Off Broadway Shoe Warehouse in 2002. The Atlanta-based Off Broadway Shoe Warehouse had been formed in the early 1980s. It competed with Rack Room at the lower end of the market but claimed to have a trendier selection. Rack Room, however, maintained that its European ownership kept it on top of footwear trends. Off Broadway continued to operate independently after the acquisition with 30 stores in the East Coast and Midwest regions, and in California.

WAL-MART STYLE MARKETING

Rack Room was reportedly spending a $3 million to $4 million budget on advertising (at least in the mid-1990s). Much of this was for broadcast media. Its television ads were known for witty scenarios involving shoes and individual family members. These spots were not entirely inoffensive to all populations, however. Professional drivers complained about one ad's portrayal of a slovenly trucker making an unwanted pass at a woman at a gas station. Working mothers were the company's target audience.

COMPANY PERSPECTIVES

All of our products—shoes, handbags and accessories—reflect the latest fashions for dress, casual, trends, and athletic wear at the best prices for the whole family. Our selection includes Skechers, Nine West, Steve Madden, Dockers, Rockport, Columbia, Nike, Reebok, New Balance and many others. We offer our customers savings by selling the top brands at a significantly reduced percentage off manufacturers' retail prices. Our own private brands, commissioned from the best manufacturers in the business, deliver top quality and style at great savings. Our knowledgeable sales people are dedicated to customer service, and we offer a very customer-friendly return policy. Our combination of style, selection, value, service and convenient locations has made Rack Room Shoes one of the fastest-growing shoe retailers in the nation.

The marketing and advertising took a different turn after Rack Room hired a veteran of Wal-Mart to oversee these functions. The company eschewed traditional newspaper inserts in search of a personal connection with shoppers. Following the Wal-Mart playbook, one of the goals was to have customers perceive Rack Room Shoes as a local neighborhood store, rather than as an interchangeable unit of an anonymous multinational corporation.

In one initiative, repeated yearly, Rack Room solicited its own shoppers to apply to be models in print advertising and displays for the stores. The "Models Wanted" program was soon drawing more than 1,200 applications a year. The company also sponsored the local NFL team, donating shoes to underprivileged children in the name of the Carolina Panthers, and in 2005 made donations to charities related to the Hurricane Katrina disaster.

The failure of a couple of large mall-based shoe retailers, Kinney and Thom McCann, probably contributed to the growth of Rack Room and other big box chains. Though Rack Room was growing rapidly, it was eclipsed by Shoe Show Inc., also based in North Carolina. Larger still was Payless ShoeSource, Inc., which dominated the category with more than 5,000 stores nationwide.

Rack Room reached 380 stores in 2002 and sales were up to $450 million, according to one estimate. However, the same source later reported sales at just $200 million in 2005. The company by then had 336 stores, which it continued to renovate by widening the aisles and initiating other improvements.

KEY DATES

1922:: Phil Levinson opens a shoe store in Salisbury, North Carolina.
1956:: Levinson's son-in-law Morton Lerner buys Phil's Shoes.
1967:: Phil's Shoes merges with Goldman's Shoes Inc. of Lumberton, North Carolina.
1969:: The company merges with U.S. Shoe Corp.
1974:: Morton Lerner acquires the business and incorporates it as Lerner Shoes, Inc.
1984:: Germany's Deichmann Schuhe acquires Lerner Shoes, including its new Rack Room open stock stores.
1990:: Lerner Shoes has more than 100 stores.
1994:: The company is renamed Rack Room Shoes, Inc.
1995:: Company headquarters is relocated to Charlotte; Rack Room stores number more than 200.
2002:: Atlanta's Off Broadway Shoe Warehouse is acquired.

The company's corporate parent, Deichmann Schuhe, was based in Essen to the west of Germany and operated in ten other countries in Europe. Rack Room officials told the Charlotte Observer that this gave them insight into upcoming sales trends. Deichmann had sales of about $2 billion a year. In the previous couple of years, it had opened six stores in the United States under the Deichmann USA banner. Rack Room was scheduled to open 30 stores in 2006, plus another ten for its Off Broadway unit.

Frederick C. Ingram