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Build-A-Bear: Build-A-Memory

In the late 1990s, it was all about the dot-coms. While venture capital poured into the high-tech sector and the stock prices of dot-com startups rose rapidly, the performance of traditional companies paled in comparison. This era seemed like a very bad time to start a chain of brick-and- mortar mall stores selling stuffed animals. Indeed, when Maxine Clark founded Build-A-Bear Workshop in 1996, many critics thought that she was making a very poor business decision.

But as the company nears the end of its first decade, it has more cheerleaders than naysayers. In 2005, one retail consultancy named Build-A-Bear one of the five hottest retailers. The company hit number 25 on BusinessWeek's Hot Growth list of fast-expanding small companies. And founder and CEO Maxine Clark won Fast Company's CustomerCentered Leader Award. How does a small startup company achieve such accolades?

THE PRODUCT

On paper, it all looks simple. Maxine Clark opened the first company store in 1996. Since then, the company has opened more than 200 stores and has custom-made more than 30 million teddy bears and other stuffed animals. Annual revenues reached $359 million for 2005 and are growing at a steady and predictable 20 percent annually. Annual sales per square foot are $600, roughly double the average for U.S. mall stores. The company plans to open approximately 30 new stores each year in the United States and Canada and to franchise an additional 20 stores per year internationally. The company's stock price has soared 56 percent since it went public in November of 2004. On top of all this, the company's Internet sales are exploding.

What all these numbers don't illustrate is how the company is achieving such success. That success comes not from the tangible object that children clutch as they leave a store. It comes from what Build-A-Bear is really selling: the experience of participating in the creation of personalized entertainment.

When children enter a Build-A-Bear store, they step into a cartoon land, a genuine fantasy world organized around a child-friendly assembly line comprised of clearly labeled work stations. The process begins at the "Choose Me" station where customers select an unstuffed animal from a bin. At the "Stuff Me" station, the animal literally comes to life. A friendly employee inserts a metal tube into the animal, extending from a large tumbler full of "fluff." The child operates a foot pedal that blows in the stuffing. She or he (25 percent of Build-A-Bear customers are boys) decides just how full the animal should be. Other stations include "Hear Me" (where customers decide whether or not to include a "voice box"), "Stitch Me" (where the child stitches the animal shut), "Fluff Me" (where the child can give the animal a blow-dry spa treatment), "Dress Me" (filled with accessories galore), and "Name Me" (where a birth certificate is created with the child-selected name).

Unlike most retail stores, waiting in line behind other customers is not an unpleasant activity. In fact, because the process is much of the fun, waiting actually enhances the expe-

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rience. By the time children leave the store, they have a product unlike any they've ever bought or received. They have a product that they have created. More than just a stuffed animal that they can have and hold, it's entrenched with the memory created on their visit to the store.

Obviously, kids love Build-A-Bear. But parents love it too. The cost of the experience starts as low as $10. And although options and accessories can push that price up, the average bear leaves the store costing around $25. Many parents consider this a bargain when they see how each of those dollars translates into their child's delight.

WHY THE CONCEPT WORKS

The outside observer might assume that Build-A-Bear is competing with other toy companies, or with other makers of stuffed animals, such as the Vermont Teddy Bear Company. Touting its product as the only bear made in America and guaranteed for life, Vermont Teddy Bear handmakes all of its bears at a central factory in Vermont. Quality is the key selling point. Vermont Teddy Bear sells direct to the consumer through catalogues and its Internet site. Although it does offer customization options, most of its sales come from off-the-shelf bears in a variety of preestablished costumes and outfits. Whether choosing a customized or a premade bear, the customer receives the bear in the mail, in a box, without the experience of seeing the bear being made or taking part in the creation process. Vermont Teddy Bears start at $50 and can top $90, a price range that reinforces the brand's high-quality position.

Although Vermont Teddy Bear has achieved great success since it sold its first bear in 1981, Maxine Clark does not consider it to be a serious Build-A-Bear competitor. "Our concept is based on customization," says Clark. "Most things today are high-tech and hard-touch. We are softtouch. We don't think of ourselves as a toy store—we think of ourselves as an experience." As evidence, Clark points out that, unlike the rest of the toy industry, Build-A-Bear sales do not peak during the holiday season, but are evenly distributed throughout the year.

Product personalization has long been popular in many industries. Harley-Davidson has developed a very strong brand and intense customer loyalty by allowing each customer to personalize his or her own motorcycle. Dell has achieved industry leadership by doing the same. Even in the fashion sector, mass-producers such as Nike and Levi's have joined the trend by allowing customers to customize products through their Web site. Jaison Blair, research analyst for Rochdale Securities, has stated that the customization feature is so satisfying, it "builds fiercely loyal customers."

Although not very common in the toy industry, Maxine Clark asserts that personalization is emerging because it lets customers be creative and express themselves. It provides far more value for the customer than they receive from massproduced products. "It's em- powerment—it lets the customer do something in their control," she adds. Build-A-Bear has capitalized on this concept by not just allowing for customization, but by making it a

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key driver of customer value. The extensive customer involvement in the personalization process is more of the "product" than the resulting item.

Although Build-A-Bear has performed impressively, some analysts question whether or not it is just another toy industry fad, comparing the brand to Beanie Babies and Cabbage Patch Kids. Maxine Clark has considered this, and she is confident that the Build-A-Bear product and experience will evolve as quickly as the fickle tastes of children. Although some outfits and accessories might be trendy (the company added Spiderman costumes to the bear-size clothing line at the peak of the movie's popularity), accessories assortments are changed 11 times each year.

KNOWING THE CUSTOMER

Maxine Clark has been viewed as the strategic visionary— and even the genius—who has made the Build-A-Bear concept work. But her success as CEO derives from more than just business skills relating to strategy development and implementation. Clark attributes her success to "never forgetting what it's like to be a customer." Given that Clark has no children of her own, this is an amazing feat indeed. Understanding customers is certainly not a new concept, and Clark has employed both low-tech and high-tech methods for making Build-A-Bear a truly customer-centric organization.

To put herself in the customer's shoes, Clark walks where they walk. Every week, she visits two or three of the more than 200 Build-A-Bear stores. She doesn't do this just to see how the stores are running operationally. She takes the opportunity to interact with her customer base by chatting with preteens and parents. She actually puts herself on the front line, assisting employees in serving customers. She even hands out business cards.

As a result, Clark receives thousands of e-mails each week, and she's added to the buddy lists of preteens all over the world. Clark doesn't take this honor lightly, and she tries to respond to as many of those messages as possible via her BlackBerry. Also, to capitalize on these customer communications, she has created what she calls the "Virtual Cub Advisory Council," a panel of children on her e-mail list. And what does Clark get in return from all this hightech communication? "Ideas," she says. "I used to feel like I had to come up with all the ideas myself, but it's so much easier relying on my customers for help."

From the location of stores to accessories that could be added to the Build-A-Bear line, Build-A-Bear actually puts customer ideas into practice. As the ideas come in, Clark polls the Cub Council to get real-time feedback from customers throughout the areas where the company does business. Miniscooters, mascot bears at professional sports venues, and sequined purses are all ideas generated by customers that have become very successful additions.

The future holds great potential as more ideas are being considered and implemented. Soon, Build-A-Bear Workshops will house in-store galleries of bear-sized furniture designed by kids for kids. The company will add NASCAR to the sports licensing agreements that it currently has with the NBA, MLB, NHL, and NFL. And Clark will give

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much more attention to a new line of stores called "Friends 2B Made," a concept built around the personalization of dolls rather than stuffed animals.

Although Maxine Clark may communicate with only a fraction of her customers, she sees this as the basis for a personal connection with all customers. "With each child that enters our store, we have an opportunity to build a lasting memory," she says. "Any business can think that way, whether you're selling a screw, a bar of soap, or a bear."

Questions for Discussion

1.Give examples of needs, wants, and demands that Build-A-Bear customers demonstrate, differentiating each of these three concepts. What are the implications of each on Build- A-Bear's actions?

2.In detail, describe all facets of Build-A-Bear's product. What is being exchanged in a Build-A-Bear transaction?

3.Which of the five marketing management concepts best describes Build-A-Bear Workshop?

4.Discuss in detail the value that Build-A-Bear creates for its customers.

5.Is Build-A-Bear likely to be successful in continuing to build customer relationships? Why or why not?

Sources: Parija Bhatnagar, "The Next Hot Retailers?" CNNMoney.com, January 9, 2006; Lucas Conley, "CustomerCentered Leader: Maxine Clark," Fast Company, October 2005, p. 54; Ray Allegrezza, "Kids Today," Kids Today, April 1, 2006, p. 10; "The Mini-Me School of Marketing," Brand Strategy, November 2, 2005, p. 12; Michael O'Rourke, "Build-a-Bear Assembles Dreams," San Antonio Express-News, February 4, 2006, p. IE; Dody Tsiantar, "Not Your Average Bear," Time, July 3, 2005; Roger Crockett, "Build-A-Bear Workshop: Retailing Gets Interactive with Toys Designed by Tots," BusinessWeek, June 6, 2005, p. 77; and "Build-A-Bear Workshop, Inc. Reports Strong Sales and Net Income Growth in Fiscal 2005 Fourth Quarter and Full Year," press release through Business Wire, February 16, 2006.

Prius: Leading a Wave of Hybrids

Americans love their cars. In a country where SUVs sell briskly and the biggest sport is stockcar racing, you wouldn't expect a small, hybrid, sluggish vehicle to sell well. Despite such expectations, Honda successfully introduced the Insight in 1999 as a 2000 model. Toyota closely followed Honda's lead, bringing the 2001 Prius to market one year later. Introducing a fuel sipper in a market where vehicle size and horsepower reigned led one Toyota executive to profess, "Frankly, it was one of the biggest crapshoots I've ever been involved in." Considering these issues, it is nothing short of amazing that a mere five years later, the Prius is such a runaway success that Toyota Motor Sales U.S.A. President Jim Press has dubbed it "the hottest car we've ever had."

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THE NUTS AND BOLTS OF THE PRIUS

Like other hybrids currently available or in development, the Prius (pronounced PREE-us, not PRY-us) combines a gas engine with an electric motor. Different hybrid vehicles employ this combination of power sources in different ways to boost both fuel efficiency and power. The Prius runs on only the electric motor when starting up and under initial acceleration. At roughly 15 mph, the gas engine kicks in. This means that the auto gets power from only the battery at low speeds, and from both the gas engine and electric motor during heavy acceleration. Once up to speed, the gas engine sends power directly to the wheels and, through the generator, to the electric motor or battery. When braking, energy from the slowing wheels—energy that is wasted in a conventional car—is sent back through the electric motor to charge the battery. At a stop, the gas engine shuts off, saving fuel. When starting up and operating at low speeds, the auto does not make noise, which seems eerie to some drivers and to pedestrians who don't hear it coming!

The original Prius was a small, cramped compact with a dull design. It had a total of 114 horsepower—70 from its fourcylinder gas engine and 44 from the electric motor. It went from 0 to 60 in a woeful 14.5 seconds. But it got 42 miles per gallon. Although the second-generation Prius, introduced as a 2004 model, benefited from a modest power increase, the car was still hardly a muscle car. But there were countless other improvements. The sleek, Asian-inspired design was much better looking than the first-generation Prius and came in seven colors. The interior was roomy and practical, with plenty of rear legroom and gobs of storage space.

The new Prius also provided expensive touches typically found only in luxury vehicles. A single push button brought the car to life. A seven-inch energy monitor touch screen displayed fuel consumption, outside temperature, and battery charge level. It also indicated when the car was running on gas, electricity, regenerated energy, or a combination of these. Multiple screens within the monitor also provided controls for air conditioning, audio, and a satellite navigation system. But perhaps the most important improvement was an increase in fuel efficiency to a claimed 60 miles per gallon in city driving.

A RUNAWAY SUCCESS

Apparently, consumers liked the improvements. In its inaugural year, the Prius saw moderate sales of just over 15,000 units—not bad considering Toyota put minimal promotional effort into the new vehicle. But for 2005, more than 107,000 Priuses were sold in the United States alone, making it Toyota's third-best-selling passenger car following the Camry and Corolla. Perhaps more significantly, Toyota announced that as of April, 2006, the Prius had achieved a major milestone, having sold over 500,000 units worldwide.

The rapid increase in demand for the Prius has created a rare automotive phenomenon. During a time period when most automotive companies have offered substantial incentives in order to move vehicles, many Toyota dealers have had no problem getting premiums of up to $5,000 over sticker price for the Prius. By June 2004, waiting lists for the Prius stretched to six months or more. At one point, spots on dealers' waiting lists were being

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auctioned on eBay for $500. By 2006, the Prius had become the "hottest" car in the United States, based on industry metrics of time spent on dealer lots, sales incentives, and average sale price relative to sticker price. In fact, demand for new Priuses is currently so strong, that Kelley Blue Book puts the price of a used 2005 Prius with 20,000 miles at $25,970, more than $4,500 higher than the original sticker price.

There are many reasons for the success of the Prius. For starters, Toyota's targeting strategy has been spot-on from the beginning. It focused first on early adopters, techies who were attracted by the car's advanced technology. Such buyers not only bought the car, but found ways to modify it by hacking into the Prius's computer system. Soon, owners were sharing their hacking secrets through chat rooms such as Priusenvy.com, boasting such modifications as using the dashboard display screen to play video games, show files from a laptop, watch TV, and look at images taken by a rearview camera. One savvy owner found a way to plug the Prius into a wall socket and boost fuel efficiency to as much as 100 miles per gallon.

By 2004, Toyota had skimmed off the market of techies and adopters. It knew that the second-generation Prius needed to appeal to a wider market. Toyota anticipated that environmentally conscious consumers as well as those desiring more fuel efficiency would be drawn to the vehicle. To launch the new Prius, Toyota spent more than $40 million spread over media in consumer-oriented magazines and TV. With the accuracy of a fortune teller, Toyota hit the nail right on the head. In the summer of 2004, gasoline prices began to rise—going to over $2 a gallon in some locations. By the summer of 2005, gas prices had skyrocketed to over $3 a gallon. As a result, buyers moved toward smaller SUVs, cars, and hybrids while sales of full-sized SUVs such as the Ford Expedition, Chevy Tahoe, and Hummer H2 fell significantly.

In addition to Toyota's effective targeting tactics, various external incentives have helped to spur Prius sales. For example, some states allow single-occupant hybrids in HOV (High Occupancy Vehicle) lanes. Some cities, including Albuquerque, Los Angeles, San Jose, and New Haven, provide free parking for hybrids. But the biggest incentives contribute real dollars toward the price of the Prius, making it more affordable. Currently, the federal government gives a tax break of up to $3,150. This tax break will expire under the current rules in 2007, but there are various efforts to extend tax incentives for the Prius and other hybrid vehicles.

Some state governments are also getting in the game. West Virginia, New York, and various other states are offering tax breaks over and above any IRS kickbacks. The most generous is Colorado, giving a tax credit of up to $3,434. And if a chunk of money from these two sources isn't enough, employees of certain companies can cash in for even more. A select few companies are anteing up in order to do their bit for the environment. Ecofriendly Timberland contributes $3,000 as well as preferred parking spaces. Google and Hyperion Solutions, the California-based software company, each give employees a whopping $5,000 toward hybrids such as the Prius.

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FUELING THE HYBRID CRAZE

Although Honda's Insight was the first to market in the United States, its sales have been miniscule compared to the Prius. Thus, after the 2006 model year, Honda will drop the Insight. And although Toyota's Japanese rival has had much better results with its Civic hybrid, its sales goal of 25,000 units for 2006 is less than one-fourth of the Prius's anticipated sales. The overall category of gas-electric vehicles in the United States appears to be hotter than ever, with unit sales up 140 percent from 2004 to 2005, to a total of 205,749 units. The Prius alone commands over 50 percent of the market and is largely responsible for category growth.

It appears that consumers like their green cars very green. Whereas sales of the ultra- high-mileage Prius and Civic have grown significantly each year since their introductions, less efficient (and more expensive) hybrid models such as the Honda Accord, Toyota Highlander, Ford Escape, and Mercury Mariner have had flat or even declining sales. Some analysts believe it is because consumers are doing the math and realizing that even with better fuel efficiency, they may not save money with a hybrid. In fact, a widely publicized report by Consumer Reports revealed that of six hybrid models studied, the Prius and the Civic were the only two to recover the price premium and save consumers money after five years and 75,000 miles.

However, although car makers are scaling back on some models, almost every automotive nameplate wants a piece of the growing pie. Ford blames the lack of success with the Escape and Mariner on a boggled promotional effort. With a lofty goal of producing 250,000 hybrids per year by 2010, it plans to put more money into campaigns for its existing models as well as introduce new models. General Motors also has big plans, beginning with the Saturn Vue Greenline, which will have the advantage of a low $2,000 price tag for the hybrid option. GM plans to extend the Saturn hybrid line to almost every vehicle in the lineup. It also plans to introduce hybrids in other divisions, including full -size trucks and SUVs. And while Subaru, Nissan, Hyundai, and Honda are all promoting upcoming hybrid models, Audi, BMW, and numerous others are busy developing hybrid vehicles of their own.

Even with all the activity from these automotive brands, Toyota is currently the clear leader in hybrid sales and will likely be for some time to come. 2006 Prius sales have actually dropped, but only because the company has dedicated production capacity to the 2006 Camry hybrid. The supply limitation has made demand for the Prius stronger than ever. In the past, Toyota Vice Chairman Fujio Cho had asserted that the company would not open a second plant for the production of hybrids, but he has quickly changed his tune. "[Given] the way American consumers have snapped up the [Prius]," he says, "I have been urging the company, almost as a matter of strategy, to produce [it] in the U.S." Given that Toyota plans to offer hybrid versions for all vehicle classes and quadruple worldwide hybrid sales to one million vehicles by 2012, it would seem that Mr. Cho's statement is conservative.

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Questions for Discussion

1.What microenvironmental factors affected the introduction and relaunch of the Toyota Prius? How well has Toyota dealt with these factors?

2.Outline the major macroenvironmental factors— demographic, economic, natural, technological, political and cultural—that affected the introduction and relaunch of the Toyota Prius. How well has Toyota dealt with each of these factors?

3.Evaluate Toyota's marketing strategy so far. What has Toyota done well? How might it improve its strategy?

4.GM's marketing director for new ventures, Ken Stewart, says, "If you want to get a lot of hybrids on the road, you put them in vehicles that people are buying now." This tends to summarize the U.S. automakers' approach to hybrids. Would you agree with Mr. Stewart? Why or why not?

Sources: David Kushner, "How to Hack a Hybrid," Business 2.0 Magazine, July 13, 2006; "Toyota Prius Reaches Sales Milestone," Car and Driver, June 9, 2006, accessed online at www.caranddriver.com; Thane Peterson, "Harnessing Hybrid Tax Credits," Business Week, June 8, 2006, accessed at www.businessweek.com; Norihiko Shirouzu, "Toyota Seeks to Improve Prius and Plans to Produce Car in U.S.," Wall Street Journal, May 22, 2006, p. A2; Peter Valdes-Dapena, "Mad Market for Used Fuel Sippers," CNNMoney.com, May 18, 2006; John D. Stoll and Gina Chon, "Consumer Drive for Hybrid Autos Is Slowing Down," Wall Street Journal, April 7, 2006, p. A2; Matt Nauman, "Hybrid Sales Growth Slowing, "San Jose Mercury News, April 14, 2006; "Toyota to Offer Hybrids for All Vehicle Classes by 2012," The Wall Street Journal, April 1, 2006, accessed at www.wsj.com; Peter Valdes-Dapena, "Toyota Tops Hottest Cars in America," CNNMoney.com, March 18, 2006; David Kiley and David Welch, "Invasion of the Hybrids," Business Week, January 10, 2006, accessed at www.businessweek.com; "Testing Toyota's Hybrid Car," GP, June 7, 2004; Gary S. Vasilash, "Is Toyota Prius the Most Important 2004 Model?" Motor Trend, November 11, 2003, accessed online at www.motortrend.com.

Victoria’s Secret Pink: Keeping the Brand Hot

When most people think of Victoria's Secret, they think of lingerie. Indeed, the Limited Brands division has done a very good job of developing this association by placing images of supermodels donning its signature bras, panties, and "sleepwear" in everything from standard broadcast and print advertising to the controversial prime-time television fashion shows that the company airs each year. Such promotional tactics have paid off for Victoria's Secret, a subsidiary of Limited Brands, which continues to achieve healthy sales and profit growth.

How does a successful company ensure that its hot sales don't cool off? One approach is to sell more to existing customers. Another is to find new customers. Victoria's Secret is doing plenty of both. One key component in its quest to find new customers is the launch and growth of its new brand, Pink.

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