Urban Outfitters' Glen Senk: Look for the Right Culture, Diverse Opinions and 'Bad News'

Knowledge@Wharton

According to Glen T. Senk, the key to success is hiring and cultivating the right people. At a recent Wharton Leadership Lecture, the CEO of Philadelphia-based retailer Urban Outfitters underscored the importance of recruiting and developing a team that is a good fit for corporate culture -- and then listening to what those employees have to say, even when the feedback isn't always positive. "When you are the CEO, everyone wants to 'yes' you; no one wants to give you bad news," said Senk, who began working at Urban Outfitters in 1994 and took the top job in 2007. "But I have to pull [the bad news] out of them. I need to know what I'm doing wrong."

Another tenet of Senk's philosophy is the importance of pursuing a career for the sheer enjoyment of the work, rather than for money. The wisdom of that viewpoint became apparent to Senk in 1989, when he successfully battled cancer. "You realize you have to take responsibility for doing what is right for you," Senk noted. "You have to live a life you want to lead." Senk added that focusing on living what he called an "authentic" life has paid huge dividends. "A lot of my friends who went on to be very successful in investment banking or law or consulting ... are not as happy as I am. There is not a day that I don't wake up bounding out of bed and can't wait to get to work."

The payoff to Senk's formula is evidenced by Urban Outfitters' rapid expansion. Over the last 10 years, the company's operating income has grown by 36% annually as the firm built a large stable of successful brands -- the core Urban Outfitters line aimed at women 18 to 30 years old; Anthropologie, a clothing and accessories retailer focused on women ages 28 to 45; Free People, a fashion-forward line of clothing and retail stores focused on women in their 20s; the Scandinavian-inspired modern apparel and footwear brand Liefsdoittir, previously sold at upscale department stores but now exclusively at Anthropologie stores, and new efforts in the garden and bridal arenas.

Although Urban Outfitters posted a 17% rise in net sales in 2010, the company has also been grappling with consumers' reluctance to trade in the skinny jeans and tunic tops that have been popular in recent years for the wide-legged pants and slimmer tops that now dominate the runway. Last week, Urban Outfitters posted net earnings of $39 million for the quarter ending April 30, down from $53 million last year. In addition, net sales were down 6% at Anthropologie and the Urban Outfitters brand posted only a 1% gain, although Free People racked up a 30% increase.

In March, the company reported a 3% decline in fourth quarter earnings for fiscal 2010, missing analysts' predictions for the first time in nearly two years. As a result, shares of the company fell 17%. Stephen Murray, global president of the namesake Urban Outfitters line, announced in April that he was leaving after a year. Senk is taking over his duties in the interim and told analysts last week that he plans to become more involved with choosing fashions and merchandise as the company attempts to turn the tide.

From the Concorde to Main Street

Senk's career at Urban Outfitters was almost a nonstarter. In the early 1990s, he left a position as senior vice president and general merchandise manager at kitchenware and home goods retailer Williams-Sonoma and decided to start his own business. While raising money for that venture, he met Urban Outfitters founder Richard Hayne. When Hayne tried to entice Senk to join his company, Senk initially took a pass. Instead, Hayne agreed to help bankroll Senk's as yet undefined new venture. "I was terrible at raising money," Senk noted with a laugh. But Hayne ultimately became a mentor to Senk, and when Senk decided to return the money he had raised to investors, he took Hayne up on his job offer. He started out running one store, the Anthropologie prototype outlet.

"I went from supervising 200 people, having two assistants and flying on the Concorde [at Williams-Sonoma] to running one store that did less than $1 million," Senk said. "I had a vision for myself and what it could be. And I believed so strongly in the culture [Hayne] had created at Urban."

Senk described that culture as one where creative, collaborative and curious people are given the freedom to operate almost like entrepreneurs. Diversity -- including diversity of race, religion and political views -- is also central to that vision. "Dick Hayne is a Republican," Senk noted. "I'm the first openly gay CEO of a Fortune 1,000 company." While Senk and Hayne may differ politically, Senk considers such disparity of opinion to be an advantage. "We believe as a company in hiring diversity, not because it is politically correct, but because diversity makes us stronger. I look for people who complement me, not [people] who look at the world the same way that I do."

Senk said the willingness of Urban Outfitters managers to debate with him and with each other drives the company's success. For example, 11 years ago, an executive at Anthropologie asked for funding to create a website for the company. Senk initially dismissed the notion, arguing that the brand's customers weren't likely to shop online. "The day it went live, we had [an impressive number of] hits," Senk recalled. "You want people who are challenging each other."

In fact, Senk described Urban Outfitters' culture as one of consistently testing the status quo and thinking entrepreneurially. Members of the company's merchant team are encouraged to take one trip every year to a non-traditional location -- Brazil or Africa or Thailand, for example -- to hunt for new ideas and concepts for the stores. Each store functions essentially like a small business; managers are free to experiment with the merchandising and presentation in their stores. The company does, however, closely measure the performance of each location. "We are constantly looking at who is [at the top and who is at the bottom of the] rank and what can [we] learn from the more successful people," he noted. "We are gut driven -- but we verify with data."

'The Theater of Retail'

Senk learned the importance of discipline at an early age. He started riding horses when he was just nine years old and was competing on a national level by the time he was a teenager. "It doesn't matter what you tell the horse as long as you don't change your mind midair," Senk said. Managing a large workforce is in some ways similar. "I can't wake up one day and want one thing, and wake up another day and want something else. You have to have very clear priorities and be very consistent. The fastest way to lose people is to give them a different set of objectives every day."

Senk's winnings from those competitions helped to pay for his undergraduate studies at New York University and his MBA from the University of Chicago. While in business school, Senk decided he wanted a career in retail. "When I was getting my MBA, I did a little bit of work with Quaker Oats and I didn't like it. It was too slow for me. I love the theater of retail. I love that I can control every part of the experience -- the product itself, the pricing, the way the product is sold, the way we communicate and so on."

Early on, Senk set his sights on landing a job at Bloomingdale's. He described calling the company 46 times asking for an interview before he finally got one. After graduating from business school in December 1980, he started with Bloomingdale's in January of 1981, staying with the company for nine years. He decided to leave when he realized the tremendous challenges facing the department store industry.

Senk went on to short stints at Habitat, a London-based home furnishings retailer, and Williams-Sonoma. The mistake in both cases, he noted, was that he was a bad fit for the cultures of those companies. "If it is not a culture fit, you probably will not do well. Spend time in the lunch room, spend time with the receptionist -- spend time with the real people in the organization if you want to know what the culture is really like."

Looking forward, Senk sees tremendous opportunity for Urban Outfitters. While he thinks the Urban Outfitters and Anthropologie lines have enough penetration in the North American market -- growing too ubiquitous would hurt both brands' images, he adds -- Senk expects more expansion for those chains overseas. He also predicts that some of the company's newer brands, including Terrain for outdoor living and BHLDN for the bridal market, could become major presences. "Our goal is to do $10 billion in sales by 2020," Senk noted. "My guess is we'll have six to eight brands that are doing $500 million plus [in sales]."

Senk is also excited about how technology will revolutionize, not only e-commerce, but also the operation of bricks-and-mortar stores. Currently, the company is piloting a new mobile point of sale system in 21 stores which allows customers to make purchases in places other than the cash register. Senk envisions a future where stores get rid of cash registers entirely and use mobile devices to make shopping a more personal experience for consumers.

For all his success, Senk gives a lot of thought to his own weaknesses. "I have seen ego destroy so many people in many businesses," he noted. "You have to be humble and open to learning every day." Part of that, he argued, is being patient. "Thank you, Dick Hayne, for mentoring me for 14 years, so that when I became CEO, it was seamless. But thank you to me for being mentored for 14 years. I could have taken a CEO position at many other companies, but I was patient."

Is Groupon's Business Model Sustainable?

Knowledge@Wharton

What customer wouldn't want to score a deep discount on dinner, beauty treatments and other services, especially during a downturn? Barely three years old as an industry, online group buying sites are witnessing rapid growth, as more subscribers sign up, more partner businesses sign on, revenues climb and venture capitalists swarm to invest, further driving up business valuations as a result.

The most prominent group buying site, Chicago-based Groupon, has 2011 revenues estimated at between $3 billion and $4 billion. Google last December offered to buy the firm for $6.4 billion. After the acquisition was unsuccessful, the search giant launched its own venture, Google Offers. Facebook, too, is entering the space, joining the roughly 500 group buying sites that have emerged worldwide.

But much of that "wild exuberance" is miscalculated and could bring ruin to investors, warns Wharton marketing professor David Reibstein in an interview with Knowledge@Wharton. Taking Groupon as a case in point, he says the industry's current growth rates are unsustainable. Also, he faults the site's business model, arguing that it will leave customers, suppliers and investors disenchanted.

An edited transcript of the conversation appears below:Knowledge@Wharton: Online group buying sites are a growing industry. Competition is fierce. More than 500 group buying sites have sprung up even though the industry is in its infancy. What is driving all this action?

David Reibstein: Part of it is because the Internet has provided a lot of power to the customer. Group buying has provided the ability to pool customers together to give them much more collective bargaining power. There's been a long history of customers trying to pool resources so they can buy more. Often there would be resellers who pool together and form cooperatives or even franchises that would collect individuals, but now consumers are pooling their buying interests together. And so, it is turning a lot of power over to the customer. That's great.

Knowledge@Wharton: What are the strengths of this industry?

Reibstein: It continues to offer some value to customers in terms of pooling them together and providing them some strength. It has often been the case that businesses have been able to buy from suppliers and get quantity discounts. This is now allowing consumers to buy in groups and afford ... quantity discounts. That is fantastic. There's no reason why this notion of customers pooling interests to be able to do group buying should go away.

There is an advantage to the merchants as well. The advantage is, rather than sell one by one and customer to customer and doing the marketing effort one by one, it is really allowing businesses to be able to sell a significant amount of volume with more of it being channeled through one customer.

Knowledge@Wharton: What exactly do venture capital investors find attractive about this space?

Reibstein: Unlike the customer, the investors are attracted by the huge growth and the valuations that are going on in this industry. I firmly believe there's going to be a lot of money lost in some of these investments. What is it investors invest in? They invest in growth. They say, "Wow, this industry went from close to nothing [to] 500 suppliers." If you look at the total dollar volumes that are being passed through here, it looks like a tremendous amount -- and it is. But the question is will it continue to grow and particularly, will it continue to grow at the rate at which the number of suppliers is growing? The growth rate for [each] supplier will be negated by the number of suppliers. But investors are clearly attracted by the growth rate and the valuations.

Knowledge@Wharton: The biggest of these companies, Groupon, is estimated to post revenues exceeding $3 billion in 2011. What is it about Groupon's business model that is driving such growth?

Reibstein: The way this works is they go to merchants [and] say, "I am willing to sell some of your inventory and I am going to take a cut out of [the profit]. But you're going to have to give me a deep discount. If you don't give me a deep discount, we're not going to make it available to people." To some degree, they are operating just like a retailer. I am going to buy volume, I'm going to break that down and sell it to individual customers. And I'm going to sell it to those individual customers for more than what it cost me. That's exactly how every retailer operates. The difference is they are not buying any of the inventories. They are just a reseller.

Knowledge@Wharton: Why do you believe that business model will not support the current growth rates?

Reibstein: Let me talk about some of the fundamental weaknesses. Obviously, one is, however brilliant of an idea it is, there is also now a huge increase in competition. When Groupon had few competitors, it was more viable than it is now with 499 competitors.

But that is not the big weakness. The Groupon business model works better during a recession than it does during a vibrant economy. I will explain why, and this is where it gets intriguing. The reason some retailers might be willing to provide supply to Groupon is because they have excess inventory. That is particularly the case for services. One of the services I notice frequently [offered on group buying sites] is that of beauty salons. They have so many seats and so many beauticians. If I don't sell that 3 p.m. to 4 p.m. time slot on Thursday afternoon, I cannot carry that time slot in the inventory tomorrow. It perishes. It perishes in the same sense as an [unsold] airplane seat [once] a plane takes off down the runway. Because of the recession, there has been an abundance of people who are forgoing beauty salons and other sorts of luxury, discretionary services. Rather than let that airplane seat go [unfilled] and the beautician hour go with no revenue, [companies] would [rather] sell it for a little above whatever the incremental costs are. So there is a willingness to do deep discounting.

As the economy picks up and there is less excess inventory, the availability of supply will go down. The willingness of the merchant to offer deep discounts will go down. The business proposition to the customer will be less attractive if [the item or service being offered] doesn't have the same deep discount.

Knowledge@Wharton: A big chunk of Groupon's subscriber base is said to be made up of educated young women, and that is one reason why Groupon features many beauty and wellness offerings. How crucial is the makeup of the subscriber base for the success of the business model?

Reibstein: If you look at the nature of the customers who are buying from Groupon, they tend to be younger, more white-collar, they may be better educated and may be a similar profile to those who shop at [warehouse club chain] Costco. And so, they tend to be relatively savvy shoppers. Many of the merchants offer these deep discounts, not with the hope of perpetually offering them, but given that they have excess inventory right now, it would be nice to let people sample their product or service with the hope that they are going to like it and subsequently will come me back and buy it when it is not being offered on Groupon [and] is at its full retail price.

Unfortunately, the people Groupon is attracting are those who are referred to as "deal prone customers" -- who are, to put it differently, price-sensitive customers. These customers tend not to be the most loyal of customers. And because you have attracted them with a low price, you are more likely to lose them because somebody else offers a lower price. The merchant might say, "Well I am not making money on these customers, but hopefully I am building some future business." But there is the challenge of whether they are really building future business, because what they really getting is a fickle customer. Merchants are going to discover that the Groupon customer is not where you build your future business. Therefore, the savvy merchants are going to learn that this is not a good way for them to do business.

Knowledge@Wharton: How could this industry change customer expectations? What would that mean for retailers?

Reibstein: There is a real concern that [the model] takes regular customers and makes them more deal sensitive. Imagine the risk for a spa that has a set of customers who are willing to pay $120 each [for services]. Those customers either see or learn of a Groupon offering. It's one thing when [a Groupon deal attracts] an incremental customer who is paying $60 for what normally would have been $120, and [the business is] getting $60 it was not going to get [otherwise]. But it is disastrous when you take customers who were going to pay $120 and now you only get $60 from them.

You want [to attract] those customers who were not at all part of your existing customer base.... What would be really bad is if you make your Groupon offering frequently enough that the customer just sits around and waits, [thinking,] "Rather than getting my normal salon service, I am going to wait until they offer that 50% to 80% discount." [In that case,] the entire normal margin that the salon owner was going to make is totally gone.

Knowledge@Wharton: There have been cases where retailers have been swamped by customers with Groupon coupons and unable to cope. Also, there may be offers where Groupon does not attract the minimum required number of customers to "unlock" an offering. What are the downsides there?

Reibstein: Indeed, there have been some merchants that have been overwhelmed with the volume, and the correct solution is for retailers to be able to put a cap or a ceiling [on the discount]. That may create a little bit of frustration among customers, but that doesn't really hurt Groupon [because] it gets people to respond even quicker and buy it now before the deal closes. I think it works to Groupon's advantage to have a ceiling.

As for the floor, if you don't get a minimum number of people buying an offer, that makes sense, too. This is, again, in the same spirit of retailers buying from manufacturers; generally there is a minimum order that is required, and [group buying] is very similar to that.

Knowledge@Wharton: Wouldn't a supplier or retailer's existing client base feel shortchanged when others with coupons pay less?

Reibstein: The very loyal customer who is paying full retail price will start to resent [those who are using the Groupon discount], particularly if you go to a restaurant [and you are] willing to pay the full retail price. If everybody else who is walking in with a Groupon coupon is paying less, you will feel like an idiot. So retailers start developing some of that resentment in their best customers.

Knowledge@Wharton: How would customers paying full price respond?

Reibstein: This piggybacks on what I mentioned earlier. You could anticipate consumers will start saying, "I see you offering it to [Groupon users] at $50 off, and I expect you to give it to me. If you don't, then I am going to be more irritated." That has not happened as yet that we know of.

But I am sure there have been customers who were normally going to pay full retail price who now aren't because they were able to get a Groupon deal. A savvy customer could say, "I am not going to buy anything at Groupon that I wasn't normally going to buy. I'll just go online and look to see what is on there. If I see something that was already on my shopping list and now I can buy it at a cheaper price, then it's great."

Knowledge@Wharton: You said this model works best in a recession economy. We've heard the same thing being said about Walmart. Shouldn't group buying work just as well, or better, when the economy is stronger and people have more disposable income?

Reibstein: It is the case that Walmart's market share grew during the recession. Walmart still works well, but it works better in a recession. There's no question that during the recession, consumers were looking for bargains. Previously, they were not as inclined to look for bargains.... If the economy were to recover, then just looking for the bargain becomes not as much of a selling point. Everybody's fear is when the recession ends, that they have trained customers to be looking for bargains.

Knowledge@Wharton: The group buying market globally is largely underserved. These firms could enter huge untapped markets. Wouldn't that help them continue to grow at the current rate or even better?

Reibstein: The answer is yes. They still have opportunities to grow by going into untapped markets. But then the question is going to be, how long will their growth continue, and what's going to happen in those markets as more and more competitors enter?

Knowledge@Wharton: Groupon's valuation was last put at $6 billion. Do you see any parallels between what is happening in this industry and the dot-com boom and bust of 10 years ago?

Reibstein: That $6 billion is what Google offered them [in December 2010]. I think Google was foolish to make that offer, and the only thing worse was for Groupon to turn it down. [Groupon later raised $950 million in fresh financing, giving it a valuation of $6.4 billion.] Groupon's value will not persist if it stays in its current model. There is this wild exuberance, because of the growth, that has gotten everybody euphoric. But the question is, will it persist? Obviously, I don't believe that it will.

I see a lot of parallels with the dot-com boom, and that includes the enthusiasm of growth and everybody running to the same spot. It's like a school of kids on a soccer field ... where they are all going to where the ball is. There are too many people in one spot, but that's where the energy is....

Knowledge@Wharton: What can Groupon and the other group buying sites do to fix the flaws in their business model?

Reibstein: There are lots of things that can be done to make the model even better. Groupon just announced one, which I think is big. There is Groupon Mobile, which is really cool. Groupon Mobile knows if you are near a merchant that is on Groupon, and it will message you that the pizza shop you are walking in front of is offering a 50% coupon....

The next enhancement that would make sense is to get down to individual information and be able to know that John likes pizzas and we're going to offer that to John. Or that John bought a new sweater and maybe a blue shirt would go with that sweater. If they start customizing offerings individually, it will be all the more powerful.

Knowledge@Wharton: Could the explosive growth of group buying become too big to handle for Groupon?

Reibstein: I am not at all worried about that. When you have growth, it is hard to manage it. But when you get the kind of valuations that you have seen [for Groupon], they can afford to find people to handle that growth volume. Everybody wishes they had that problem.