Co-branding Strategic Alliances and Multi-channeling 11 3

<p>As the fairy tale usually goes: "Once upon a time...." In the dynamic world of retailing, "once upon a time" is about
five minutes ago. Once upon a time, retailers jealously guarded their concepts. The retail platform was considered a
proprietary expression of the retailer's unique identity, designed to create a direct connection with its customers.
Today, the hallmark of the retail marketplace is co-branding and strategic alliances. By mixing and matching
concepts, retailers seek to leverage off of both their brand equity and the brand equity of others to connect with
customers and drive sales.

</p><p>At the same time, the nature of what constitutes the retail platform is changing as well. Once upon a time, there
were bricks and mortar with catalogues to reach the places where there was insufficient traffic to support the fixed
costs associated with brick-and-mortar storefronts. Then, with the advent of the Internet, e-tailers were born with
virtual storefronts and catalogues accessed by their customers on the World Wide Web. Today, the most successful
retailers are those that have developed a multi-channel approach to distribution. These retailers combine
complementary platforms to increase customer penetration and product visibility.

</p><p>These developments provide several lessons for restructuring professionals engaged by retailers and sellers of
branded consumer products. First and foremost is that in the current retail environment, both they and their clients
must be nimble to survive. As the pace of change accelerates, the marketplace demands operators and merchants to
move quickly to both seize opportunities when they are presented and when investments do not work out, to cut
losses so that assets can be re-deployed. Second, that success will typically require an evaluation of options to move
outside the retailer's own product mix and selling platform. Nimble retailers will capitalize on opportunities to
expand their product offerings and the contact points between themselves and their potential customers.

</p><p>A critical component of any effort to expand selling platforms and product offerings is the management of
expenditures, both in terms of dollars and human resources. As every restructuring professional knows, the most
vital resource in any turnaround is management time and attention. This truism takes on even greater meaning in the
24/7 environment of the modern retailer. Fortunately, options exist today to expand selling platforms without
significant expenditures of cash and manpower.

</p><p>Just five years ago, retailer access to the Internet as a selling vehicle typically required a significant investment in
terms of web site development, merchandising and fulfillment infrastructure. Today, several options exist that give
retailers seeking to develop an Internet selling platform the ability to do so on a cost-effective basis. For example,
established e-tailers such as Amazon.com have forged strategic alliances with retailers to promote and sell their
products from its online store.

</p><p>An alternative structure that may be even more appealing to a resource-strapped retailer is provided by companies
such as Global Sports Inc. (GSI), a company that sells sporting goods over the Internet. Under the GSI model, GSI
develops a web site using the logo and brand identities of sporting goods retailers with whom it has contracted. GSI
then buys the inventory and handles all of the marketing and fulfillment. The consumer who accesses the web site
of its favorite sporting goods retailer has no idea that it is really on a web site operated and owned by GSI. GSI
pays the sporting-goods retailer a royalty based on sales through the web site, thereby creating an additional revenue
stream for the sporting goods retailer as well as additional marketing exposure and brand equity.

</p><h3>The Toy Story</h3>

<p>A prime example of a retail sector where the development of co-branding relationships and alternative revenue
streams is essential to survival is the toy market. As toy retailing evolved, the model had already become extremely
challenging as toy retailers were expected to lose money for 10 months, hopefully break even in November, and
make their entire profit in December. Enter the mass merchant category killers Wal-Mart and Target.

</p><p>Wal-Mart is now the largest toy retailer in the United States, accounting for approximately 25 percent of total sales.
Wal-Mart's strategy last season was very simple. It used its tremendous buying power to extract favorable deals
from vendors. It sold "hot" toys at 25 to 40 percent below the price that the same toys sell for in most specialty toy
retailers. It sold basic toys at 10 to 15 percent below other retailer's prices. During the nine months of the year when
toy retailing is at best a break-even to slight-loss proposition, Wal-Mart devoted a modest amount of shelf space to
the toy category. It ramped up for the fourth quarter and aggressively discounted to ensure it was cleared of holiday
goods well before Christmas actually arrived. By then, the shelf space devoted to toys had shrunk materially and
was replaced with higher turning product.

</p><p>The effect of this strategy on the specialty toy retailers was devastating. Of the top three specialty toy retailers,
two—FAO Schwarz/Zany Brainy and KB Toys—have commenced chapter 11 cases. The third, Toys 'R' Us,
recently closed all 146 of it Kids 'R' Us stores, having agreed to transfer a substantial portion of the related real
estate to Office Depot, an office supply store, and its 36 Imaginarium stores. FAO Schwarz/Zany Brainy have
liquidated all but two FAO Schwarz stores, and KB Toys is in the process of closing 400 of its 1,300 stores.

</p><p>In an effort to survive, the specialty toy retailers have all turned to co-branding and multi-channeled distribution
strategies. Thus, KB Toys is now operating seasonal toy departments within Sears department stores. Both KB
Toys and Toy 'R' Us have also taken the "store-within-a-store" concept to supermarkets and drug stores. In a sense,
these retailers are emulating the Wal-Mart model by ramping up toy departments in shelf space devoted to non-toy
items for three-quarters of the year with the goal of clearing those goods by the end of the year.

</p><p>Similarly, a linchpin of FAO Schwarz's restructuring strategy coming out of its 2002 chapter 11 case was the
development of toy departments within the mainstream department stores owned by Saks Inc. such as Proffit's and
Carson Pirie Scott. That strategy was combined with catalogue and web-based selling platforms. Unfortunately,
FAO Schwarz emerged from its 2002 bankruptcy case with insufficient resources to weather the storm of
competition it faced in the fourth quarter of 2003. It will be left to its new owner, freed from the shackles of all but
two of FAO Schwarz's leases, to capitalize on the opportunity to carry forward the strategy that FAO Schwarz
seemingly set upon too late.

</p><h3>In Retail, the Only Constant Is Change</h3>

<p>In the retail marketplace, constant reinvention is critical to survival. "Once upon a time" was only five minutes
ago, and by the time trends are fully understood, it is usually too late to capitalize on them. In any retailer
restructuring, the costs of developing additional brand equity and traction among consumers is often prohibitive.
Co-branding and strategic alliances offer one avenue for creating additional leverage in the marketplace and
additional revenue opportunities. Finally, the development of multi-channeled distribution programs has become
increasingly important. Retailers need to look outside of their own formats and into the boxes of others to identify
opportunities to create greater market share and fuel top-line growth.

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