Hot Topic: Small Companies, Big Returns

By David F. Carr  |  Posted 2003-10-01 Print this article Print

Installing a wide-area communications network let workers and managers easily talk about the latest styles, keeping the hip retailer in a groove.

At least once a year, Hot Topic Vice President of Technology John Horwath spends a day working at one of the chain's stores, selling body jewelry, spiked chokers, and other current emblems of "alternative" youth culture.

At 44, Horwath is old enough to be the target of youth rebellion, with a daughter starting college and a son in high school. In a company where purple hair and pierced tongues are part of the corporate culture, he hasn't taken the plunge for anything more radical than a diamond stud earring. He professes a sincere affection for the music of Kid Rock and Linkin Park, but also enjoys country artists like Kenny "No Shoes, No Shirt, No Problems" Chesney.

Of course, what matters to Hot Topic is not so much Horwath's musical tastes as his ability to help the retailer stay in tune with its customers' needs—which is why he considers the creation of a wide area network one of his greatest hits. To Horwath, it's not about the technology: It's about giving the stores' staff the means to be the company's eyes and ears for new selling opportunities. Moving fast on that personal market research is critical in the youth fashion business.

Hot Topic made a $1.5 million capital investment in the network in 2002. Keeping more than 500 stores connected will add more than $1 million to the chain's operating expenses this year. Those expenditures can be partly justified by shorter lines at cash registers thanks to faster credit-card verification, and by savings on supplies made obsolete by Web applications, such as paper forms and printed reference materials.

But the big hidden benefit is the new hot line connecting the store employees to marketing and other managers at the company's offices in City of Industry, Calif.

After all, who's in a better position to know what music the customers are listening to and what clothes and accessories they're wearing than the employees who see them every day?

It's a natural extension of a broader program encouraging suggestions from the field. By longstanding policy, Hot Topic translates its "All About the Music" slogan into action by reimbursing store employees for concert tickets if they write up a report on the fashions they saw at the show. The network encourages store employees to share style tips and suggestions by dashing off a quick e-mail from the same personal computer that powers the cash register. Alternatively, they can pick up a Cisco IP (Internet Protocol) phone and make a toll-free call to headquarters to tip off buyers for the chain on a trendlet that might be forming.

"If a local band is doing really well, our store people can e-mail the music buyers and the rock T [shirt] buyers so they know to stock that product in that particular store," Horwath says. Before the WAN, the stores didn't make much use of e-mail because messages could be sent only at the beginning or end of the day, when the modem lines were no longer needed for credit-card transactions.

Justine Schunick, 23, who manages a Hot Topic in Mentor, Ohio, says all-hours e-mail helps because she is often too busy to pick up the phone when she has an idea she wants to share. She describes herself as "like the more freaky customer we have—color hair dye all the time, lots of piercing. Anything that's big, black and scary is what I buy." Still, what she wants for her store is what the customers want to find there, whether it's her style or not, and she has lots of suggestions for the buyers at headquarters. She can tell headquarters is listening. "A hundred times I've hit 'Send' on an e-mail, and the phone has rung," Schunick says. "Or someone will e-mail me right back, and in five minutes we'll have had a whole conversation."

That tighter connection with store employees is proving to be one of the main benefits of the network, says president Jerry Cook, who championed the project. "They're like a cubicle away" from headquarters, Cook says. "That real-time linkup of all the store associates just aids the store communication process that's already in place at Hot Topic."

Since opening its first store in 1989, Hot Topic has used its knowledge of alternative styles to build a business projected to reach $550 million in sales this year. Many merchandising ideas, like a reversible plaid skirt that's a current hot seller, came from store employee suggestions. The number of stores in the chain has more than doubled in the past three years, to over 500, and Hot Topic has added a second brand, Torrid, that sells to girls size 12-26.

The network speeds sales more from the always-on connection than the increased bandwidth. Although some stores are getting further bandwidth upgrades, Hot Topic began by ordering 64-kilobit-per-second fractional T1 circuits, with a committed information rate of 32 Kbps. That means only half the total bandwidth is guaranteed. Credit-card authorization doesn't require a lot of bandwidth, but it works faster when there's instant network access. Over dial-up, the process took about 20to 30 seconds—longer if the modem failed to connect or if employees at different registers were trying to put through transactions at the same time. Over the WAN, credit-card authorization takes 2 to 3 seconds, and multiple transactions can go through simultaneously. In a busy season such as back-to-school or Christmas, that can make the difference between long lines or short ones, lessening the risk that frustrated customers will walk away without making a purchase.

Hot Topic started connecting stores in summer 2002, after a 15-store test in the spring. About 40 stores were not connected in time for the holidays, so Hot Topic was able to contrast their sales performance with that of the wired stores. While the company will not disclose the details, it does say that an 11% increase in the number of checkout transactions, based on stores open a year or more, proved critical at the end of 2002, given that the dollar amount per transaction declined slightly, from $22.50 to $22. The net result was a 9.7% improvement in same-store sales. Sales reached $148 million during that period, bringing the total for 2002 to $443 million.

Some of that increase in transactions was a matter of marketing and merchandising—getting the right products and the right customers into the stores. Cook notes that the number of transactions has remained higher in 2003, up 7% in the most recent quarter, and the speed of credit-card processing is less of a factor after the holidays. But even if the WAN were only credited with boosting transactions by 1% during the holiday quarter, that translates into about $1 million in sales.

Kimberly Greenberger, a Lehman Brothers stock analyst, says few other youth retailers have made a similar investment, but for Hot Topic the network linking its stores makes sense. Hot Topic enjoyed sales per square foot of $619 last year, higher than any other youth apparel retailer. By Greenberger's calculations, among apparel retailers as a whole, Hot Topic's performance is second only to Chico's FAS, which sells trendy women's clothes. Faster checkout processing "means they can raise the ceiling on store productivity (another term for sales per square foot)," she writes by e-mail. She also calls the network's role in getting store employees to suggest products, bands and trends, "a real competitive advantage."

A WAN investment is still exotic among operators of mall boutiques, and malls typically are not wired to make hookup easy. Hot Topic contracts for WAN service from AT&T, which in turn works with local phone companies to secure the connection to each location. But then Hot Topic finds itself dealing with phone company technicians who don't necessarily bring the connection all the way to the store. Instead, they may switch on service at the phone network access panel that's easiest for them to reach, even if it's on the other side of the mall from the Hot Topic store. In one case, it was literally a mile away, Horwath says, and he had to get that one moved.

More often, the answer has been to hire electrical contractors to worm their way through ceiling crawlspaces and snake a network cable over to the store. These setbacks typically added days or weeks to the process. In one case, because of particularly bad mall wiring, Hot Topic was billed for 10 months' worth of access to a WAN circuit before the store there could be connected.

"We'd be trying to turn on 25 stores a week, and we'd hit almost none," Horwath says. "Do I sound bitter?" He can't seem to get the local phone companies to pay attention to his complaints because he had to work through AT&T as an intermediary, and so far he hasn't been convinced any other long distance carrier would do better.

The only solution he has found is perseverance. As the process moves from connecting existing stores to wiring new ones, Hot Topic's construction managers have learned to order the lines early and leave plenty of time for troubleshooting before the opening.

For all these frustrations, Horwath, who joined the company in 2001, finds other things to like about the job. He recalls that during his job interview Chief Executive Officer Betsy McLaughlin passed him a laminated card outlining the company's values and made sure he read it. Prominent among them was "a passion for music." Store employees are expected to be able to talk knowledgeably with customers about current music and the related fashions. The same ethos is drilled into the heads of everyone at headquarters, where TV monitors hanging from the rafters play music videos all day long, and the walls are plastered with concert posters.

Horwath reinforces the message with a standard "what are you listening to right now?" ice-breaker at department planning sessions. "Somebody volunteers every week to play a track or two off their CDs and talk about why they're listening to that and what it means to them," he says. It might not be the way some other 40-somethings want to spend their day, but Horwath enjoys it. Besides, it's a lot more fun than figuring out how to stretch a network connection from one end of a mall to another.

David F. Carr David F. Carr is the Technology Editor for Baseline Magazine, a Ziff Davis publication focused on information technology and its management, with an emphasis on measurable, bottom-line results. He wrote two of Baseline's cover stories focused on the role of technology in disaster recovery, one focused on the response to the tsunami in Indonesia and another on the City of New Orleans after Hurricane Katrina.David has been the author or co-author of many Baseline Case Dissections on corporate technology successes and failures (such as the role of Kmart's inept supply chain implementation in its decline versus Wal-Mart or the successful use of technology to create new market opportunities for office furniture maker Herman Miller). He has also written about the FAA's halting attempts to modernize air traffic control, and in 2003 he traveled to Sierra Leone and Liberia to report on the role of technology in United Nations peacekeeping.David joined Baseline prior to the launch of the magazine in 2001 and helped define popular elements of the magazine such as Gotcha!, which offers cautionary tales about technology pitfalls and how to avoid them.

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