It's How We Play the Game

by Ed Stack

  At the risk of beating a dead horse, an important ingredient of that success has been getting our leadership team into the field. Our stores are spread over the entire country these days, from Portland, Oregon, to Portland, Maine, and if it weren’t for the fact that the leadership makes the time and effort to visit our store managers and listen to what they have to say, we’d have far less insight into what our customers need and want.

  I alluded before to the other big ingredient, too: we’ve been willing to constantly redesign our stores. We’ll build a prototype, and as soon as it’s up and running, we get to work on a new one. In fact, we’re often working on a new new prototype before the new one is complete. We’re always trying to come up with new ways to present the merchandise and inspire our customers. To live by the words of our mission statement: “To be the number one sports and fitness specialty retailer for all athletes and outdoor enthusiasts, through the relentless improvement of everything we do.”

  It’s not easy. We’ll never be content to kick back and relax. In an environment in which so many big retailers have failed to change with the times and technology, we have come to see it as necessary. Complacency kills.

  CHAPTER 15 “PEOPLE SHOULD KNOW WHEN THEY’RE CONQUERED”

  I’ve mentioned that I’ve long been a student of retail. Beginning with books about captains of the industry that I read after college, I’ve sought to understand why some companies have failed and others have grown into giants. One of the themes that emerges time and again is that once successful, too many outfits fail to take their smaller competition seriously, right up to the moment that the little guy grows big enough to do them serious harm.

  Decades ago, when Adidas was the world’s premier athletic footwear company and the category’s biggest player, it seemed to dismiss the emergence of the running craze, which enabled Nike to single-handedly create the running shoe market. Had Adidas taken the upstart seriously and recognized that it had a good idea, the Germans would likely have stunted Nike’s growth while it was still finding its legs.

  Nike grew into a behemoth but overlooked the huge untapped market for women-specific athletic footwear—in particular the sneakers you’d use for aerobics. That left room for Reebok, which had been around since 1958 but remained all but unknown, to introduce the Reebok Freestyle, which it seemed that every woman in America bought. In a few years, Reebok became the official footwear supplier to the NFL and the NBA and saw its sales soar. A little later, Adidas, Nike, and Reebok overlooked the opportunity created by compression clothing, which opened the door for Under Armour.

  You have to pay attention. You can’t take anything for granted, and that goes for not only competitors but shifts in public tastes or habits. F. W. Woolworth grew into one of the world’s biggest retailers by snagging prime downtown real estate in city after city. It operated 2,850 stores at its peak after World War II; its lunch counters were among the biggest suppliers of prepared food anywhere. But Woolworth failed to anticipate the public’s exodus to the suburbs, and by the time it saw what was happening, its downtown real estate was a millstone. It closed its last five-and-dimes in 1997.

  Yet Woolworth is also a success story, because in 1974 its Kinney Shoes division opened a new specialty store called Foot Locker. Kinney shut down not long after Woolworth’s department stores, but Foot Locker prospered in the sneaker explosion of the 1980s and beyond. Today it’s the country’s biggest athletic shoe retailer, and a major Dick’s competitor. At least some people at Woolworth were paying attention.

  As a company, we’ve tried to stay alert to what’s happening in the market and in the country at large. We’ve kept an ear to the ground regarding trends. And no matter how big we’ve grown, we’ve tried to keep tabs on smaller competitors, to give them our attention and respect. I remember reading that Sam Walton would walk into a Kmart or other Walmart competitor and take stock of what its people were doing right, rather than dismiss them for what they did wrong.

  It’s easier said than done, but that’s an important piece of guidance. You have to view your competition as inspirations for improvement, because they often have something to teach you. Blow them off at your peril. That lesson is part of our own history, because if Jack Smith at Sports Authority hadn’t waved off our importance to Jerry Gallagher, we might not be around today.

  All of this is prelude to a visit I made to a massive sporting goods store in Columbus, Ohio, in the mid-1990s. It was called Galyan’s, and it was a sexy, two-story palace of a place—seventy-five thousand square feet, with a forty-two-foot climbing wall, a towering glass façade, an open atrium occupied by a lavish steel tree, putting greens, an archery range. Outside was another forty thousand square feet of play and product-test space: basketball courts, a pond for test-paddling kayaks, hiking trails, and a mock campground for tent set-ups.

  This was theater as much as it was retail, but it was damn good at both. You could spend all day at this store. It was fun. It was hands-on. And the merchandise it sold went even broader and deeper than ours: while we catered to the beginner, the intermediate athlete, and the enthusiast, Galyan’s offered the more arcane and expensive gear that appealed to the super-enthusiast. I was impressed, and more than a little worried by what I saw. These guys were really, really good—so much so that for the first time in my career I found myself thinking that I’d met a competitor who might be better than we were. No might about it. They were better. I was particularly taken by the way the store’s design split the merchandise between two levels. It gave us a lot of ideas.

  Galyan’s was still a little company at that point, but it was poised to grow fast. It dated back to a grocery store opened in 1946 by Albert and Naomi Galyan in Plainfield, Indiana, just west of Indianapolis. The store sold hunting and fishing gear on the side and evolved until, by Albert’s death in 1975, it was devoted solely to sporting goods. His son Pat took over management of the store, bought out his mom three years later, and started expanding a few years after that. By the early 1990s, the chain had four stores in central Indiana, all fairly standard big-box stores of under forty thousand square feet. With that Columbus store, though, it introduced a new Galyan’s prototype and started calling itself “the World’s Coolest Sports Store.”

  I kept my eye on the company as Pat Galyan retrofitted his first four stores to emulate his flagship, then opened a sixth. I grew more uneasy when, in 1995, the small chain was bought by the Limited—very good store operators and meaningfully bigger than us. The new owners announced plans to build up to fifty new Galyan’s megastores by 2000. Meanwhile, a group of us visited the Galyan’s stores in the Minneapolis area and came away further unsettled. The selection they offered, especially on outdoor gear, hunting, and fishing tackle, was amazing. I couldn’t say whether they were making money, but their stores looked great, were well stocked, and had a lot of people working the floor. It was clear that if they perfected their model, they’d be lethal to anyone in their path, us included.

  Our first response was to build a two-level store of our own at a mall in Hartford, Connecticut, in an effort to better understand them. We hired a design firm to work with me, Bill Colombo, and our head of stores, Joe Schmidt, and together we came up with quite a few interesting elements for the place, including a simulated hockey rink in the part of the store where we sold hockey gear. But the whole turned out to be less than the sum of its parts. We overengineered the store, making the simple complex at every turn, and the resulting eighty-thousand-square-foot beast cost a bundle to build and never quite worked. It was a rarity among Dick’s locations: it never made much money.

  While we tried to get a handle on what had gone wrong, Galyan’s upped the stakes. It moved into Chicago, established a firm hold on Atlanta, and announced plans to open in Pittsburgh. We managed to intercept their lease at a suburban Pittsburgh shopping center, putting a Dick’s there instead. But where we went head-to-head, we didn’t fare well. They took a bite out of us.

  The easiest solut
ion was to buy them before they got too big, so we approached the company. I sat down with their CEO, had a conversation. He more or less told me, as politely as he could, to pound salt.

  About a year later, they gave us an opening. We noticed they were outrunning their capacity to manage the business, just as we’d done a few years before. They were opening too many stores, too quickly, over too big an area—from their Indianapolis base they were trying to ride herd on gargantuan stores from Las Vegas to Chicago to Boston to Atlanta—and they hadn’t built the systems they needed to manage such growth. They didn’t seem to have a cohesive real estate strategy, either. It’s always tempting to move too soon into big, high-profile markets, and we figured that was what they were doing. So they stumbled. They didn’t open even half the stores they’d talked about—by the end of 1999, the chain boasted twenty locations. At that point, the Limited sold a piece of its stake to a private investment firm called Freeman Spogli & Co.

  The ink on that deal had barely dried when we caught wind that they were making a second run at Pittsburgh. They aimed to put a store in the planned Mall at Robinson, almost within sight of our offices near the airport. We defended our turf. I drove two hours to meet with the developers, who were based in Cleveland. We had dinner, and as it was clear that getting the deal done meant beating Galyan’s at its own game, we promised that we’d build a two-level store in their mall that would equal or better the other guys. I hit it off with the old-school retail owner of the development firm, and they agreed to include us.

  The project packed a lot of risk. We’d already tried the two-story format and hadn’t done it well. If we bungled the job here, it would cost us a lot of money, and it would make us a laughingstock in our own backyard. But we had to do it. We had to perfect this two-story format if we were to head off the threat that Galyan’s represented. We couldn’t be competitive with our standard, one-level stores, good as they were. Besides, this was home. This was where we’d make our stand.

  So we redesigned our two-level prototype from top to bottom, avoiding all the design and inventory mistakes we’d made in Hartford. The Robinson store was a beautiful place, and when it opened in February 2001, it was a sensation: it did nearly $20 million in sales its first year, far outpacing anything we’d done before. We were so confident that we had the model down that we opened another two-story store in Richmond, Virginia. It scored big, too. Within a couple of years, we’d grown so comfortable with these bigger, more complex stores that we decided to go on the offensive. We’d take the fight to Galyan’s.

  * * *

  It was in the midst of all this drama that my marriage spun into pieces. Its end had been coming for years. I’d been focused on the business. Denise and I were each other’s best friend, but we grew more distant, and though we struggled to get our marriage back on track, we couldn’t. This is one of the biggest regrets of my life. Denise is a wonderful, warm woman and has been an exceptional mother to our five children. We broke each other’s hearts.

  I was fortunate to get another chance at love. Donna Burnett had worked at Dick’s for years and was having problems in her own marriage. We both sensed a spark between us but steered clear of each other for a long time. Until we didn’t.

  I moved out of the house in 2003. Denise and I divorced three years later.

  * * *

  At Dick’s we studied our adversary, seeking to understand it. In 2001, at about the time we opened the Robinson store, Galyan’s had issued an IPO. In the wake of its stock sale, Freeman Spogli owned about 30 percent of the company, the Limited about 22 percent, and the public the rest. Galyan’s public offering opened their books to us, providing a wealth of details about their sales and earnings.

  When we analyzed the numbers, it became clear that they made a lot of their money in central Indiana and Columbus, where they were most firmly established. We did market research on their customers in those places and found that while they loved the selection of merchandise Galyan’s offered, they were frustrated by having no alternative to the chain and suspected that it was gouging them on prices. There was room for another player. What we had to do was obvious: go into Indianapolis, where they were strongest, and pulverize them.

  So we put up three stores right on top of theirs—two double-decker, eighty-thousand-square-foot boxes and a single-story fifty-thousand-square-footer—and we poured our resources into getting them ready. In the spring of 2004, eight weeks before we opened, we ran ads in the paper, on billboards, on the radio and TV, even on the sides of buses, that consisted simply of the word Wait. It was a refinement of our entry into Syracuse seventeen years before, and it sparked a tremendous response—all around Indianapolis, people were wondering and talking about these ads.

  The next round of spots featured kids and adults playing baseball, basketball, soccer, golf and other sports saying, “I’m going to wait,” or “Of course, I’m going to wait,” or “Why wouldn’t I wait?” One radio talk show invited listeners to call in with guesses on what it was all about. The show’s hosts concluded that they were ads from a Christian group out to convince kids to abstain from sex.

  Finally, we unleashed ads explaining it all—that Indy was about to get stores with Under Armour, great selection, low prices. We promised to be the better choice for the city’s sporting needs. We opened all three stores on the same day in April, and by close of business took in a million dollars. That bears repeating: we had never done a million dollars in sales from three stores in one day. And we were just getting started. We did ad blitzes thanking the city for the biggest grand opening in our history and promising great events to come. We dialed up the pressure and never let up. When the quarter ended, Galyan’s hadn’t done so well. We made another overture to buy the company and were again rebuffed. This time, we didn’t take no for an answer.

  We could have waged a war of attrition with them, and I’m confident that we would have prevailed. But buying them made a lot more sense. First, it got them out of the way. Plus, it got us into markets where we didn’t overlap—expensive markets such as Atlanta, Boston, Chicago, Dallas, Denver, Las Vegas, Salt Lake City, and Washington, DC. Had we tried to shove our way into those places on our own, we’d have been the third sporting goods retailer on the scene and faced a tough, costly fight to establish any respectable market share.

  So we gave them what’s called a “bear hug”—basically, a letter to a target company’s board, putting it on notice that a takeover attempt is under way, and to which it must respond. We sent word to Galyan’s directors asking to buy the company. We offered a premium price per share, high enough that the board had to take it seriously. The company responded by arranging to meet us surreptitiously at an out-of-the-way hotel in Boston’s Back Bay neighborhood. They sent a delegation, and I went with Mike Hines and a couple of others on our management team. The guy who was representing Freeman Spogli & Co. wasn’t a fan of our offer. He was upset that we’d given them the bear hug and seemed committed to resisting it in any way he could. Freeman Spogli did not want to sell.

  The Limited wanted to hear us out, however, and we figured that if our price was right, we’d entice a sufficient number of public shareholders to vote with the Limited to sell. We went back and forth on social issues, such as where the company would be headquartered (Pittsburgh, naturally), and a litany of terms and conditions. Following the first meeting, I didn’t participate in the face-to-face discussions—the guy from Freeman Spogli was so mad at me that we didn’t think it helpful to have me in the room. Over the next several weeks, our general counsel, Bill Newlin, led the negotiation for Dick’s. Ultimately, the only thing to wrestle over was price, and in the wee hours, Bill called me. “Just got done negotiating,” he said. “They want another quarter.” As in, an additional twenty-five cents per share.

  “Okay,” I said, “what do you think we should do?”

  “Screw ’em,” Bill said. “I wouldn’t give them another quarter.” He sounded annoyed, which was unusual. Bill
was typically the picture of calm. I understood his position. We were already paying a lot for the company—more than it was worth, objectively speaking. Still, it was worth a lot to us to make this deal.

  “Bill, another quarter amounts to four and a half million dollars,” I said. “In the grand scheme of things, it doesn’t make that much of a difference, and we want these stores in these markets.”

  “So you’re telling me you want me to give them another quarter?”

  “Yes, Bill,” I said. “I’d like to give them another quarter.”

  “Fine!” he said. He hung up. Ten minutes later, he called back. He sounded back to his usual calm self. “Yeah, everything’s good,” he reported. “They took the quarter.”

  * * *

  We paid $362 million for Galyan’s. The day after the deal was announced, Bill Newlin and I flew to Indianapolis to meet Galyan’s management team. And let me tell you, the reception we got was icy cold. We weren’t made to feel welcome.

  We talked to them about how similar our businesses were—that they’d both been founded as tiny, family-owned stores and had expanded only after years of small-town operation. The Galyan’s people didn’t want to hear it. They were gut-shot that their bosses and shareholders had sold them out to the enemy. We never got a good grip on the company culture, but I think it was built around the idea that they were better than everyone else—which, actually, might have been true—and now they couldn’t fathom how the lesser mortals at Dick’s had won the fight.

  It was clear that it wasn’t going to be an easy assimilation, so Bill Colombo moved to Indianapolis to guide their integration into our systems, then shut down their offices and move the operation to Pittsburgh. He had his hands full. We had inventory coming in for the holidays. Galyan’s had inventory coming in. Some of our merchants decided we should have similar merchandise in both, so they bought more inventory for Galyan’s. An overabundance resulted. We didn’t control our inventory well, which resurrected unwelcome memories from the mid-1990s when we’d nearly tanked.