Keep Your Business From Washing Out

Home goods retailer Linens 'n Things' problems can teach you valuable lessons.
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No matter how good their sheets, the management team at Linens 'n Things probably hasn't been sleeping well lately.

Today, the home-goods chain announced it's deferring a $16 million interest payment to creditors, a move that rescues the company from the brink of bankruptcy -- for now. This comes a week after main rival

Bed Bath & Beyond

(BBBY) - Get Report

announced disappointing quarterly results, with first-quarter profits falling 16%.

Clearly, this isn't the best time to be in the home-décor and kitchen supplies biz. But any small business locked in a rivalry with a direct competitor could find itself in Linens' place.

Keeping up with a rival is never enough. You've got to find a way to outshine them.

The

Reuters

/University of Michigan Surveys of Consumers, released last week, said consumer confidence is at its lowest level since 1982. With consumers spending less, bitter retail rivalries have been taking their toll on a number of well-known names.

Specialty retailers Brookstone and

Sharper Image

, both staples at malls around the country, fought it out as shoppers stopped buying cool-but-unnecessary gadgets. The loser was Sharper Image, which has filed for Chapter 11 bankruptcy protection. The bookstore chain

Borders

(BGP)

, hurting for cash in its fierce competition with

Barnes & Noble

(BKS) - Get Report

, has announced it's considering a sale.

So what happened with Linens 'n Things?

The company's problems date back a few years, says Tiffany Co, a retail analyst with Fitch Ratings in Chicago. The products it sold and the overall customer experience just couldn't compare with Bed Bath & Beyond. And just as management started to address the problems, the economy tanked.

"Home is one of the lower-performing categories right now," says Co. "It's very tough in this environment."

How can you be prepared to weather tough times? Here's what you need to beat a big rival:

1. The Right Stuff

"They didn't have the right merchandise," says Co, citing Linens 'n Things' emphasis on trendy patterns and colors for sheets and towels.

"They tended to be more fashionable, which meant the yearly inventory became stale after one season," she says. "You had a lot of unproductive inventory." Bed Bath & Beyond, by focusing more on basics, brought in a wider range of customers.

2. The Right System

Even when Linens 'n Things had products customers wanted to buy, they often weren't in stock. "It hurt the shopping experience," says Co.

When customers found what they wanted at Bed Bath & Beyond, they were more likely to keep coming back.

3. The Right Look

Even when Linens 'n Things did have products in stock, customers couldn't always find them. "The store layout wasn't very clean," says Co. "It was hard to find things, and the displays weren't always attractive."

Bed Bath & Beyond, with its warehouse-style displays, may not have won any interior-design awards. But shoppers could track down what they were looking for quickly, which won more loyal customers.

Here's the frustrating part: After being bought out by Apollo Global Management in 2006, Linens 'n Things identified these shortcomings and began implementing a multiyear turnaround plan. The merchandise mix was reduced to increase efficiency, and store layouts were being overhauled. The company was also re-evaluating its marketing to spread the news about its new look.

"Whenever you make these kinds of changes, it takes awhile for the customer to realize," Co says. "It didn't happen quick enough to make an impact."

Because whatever Linens 'n Things was doing right, it suddenly found itself operating in a dismal market for home goods. With fears about the housing market, fewer people were selling their homes, fewer people were moving and fewer people were heading to Linens 'n Things to buy new shower curtains and duvets.

In 2007, existing store sales fell 3.4%, and the company posted a net loss of $242 million.

The jittery economy didn't impact just Linens 'n Things, of course. But it had far less of a safety net than its biggest rival. While Linens 'n Things is unable to make its interest payments to creditors, Bed Bath & Beyond has $224 million of cash on hand with no long-term debt.

The coming months don't look promising for either chain. Although this week's Commerce Department retail report showed an encouraging .2% rise in retail sales, most of that increase came from a jump in gasoline sales. Sales in the furniture and home furnishings sector were down 9% from this time last year.

Which means that both Bed Bath & Beyond and Linens 'n Things will be struggling. But only one of those companies will be on life support.

Elizabeth Blackwell is a freelance writer based in Chicago. She is the author of Frommer's Chicago guidebook, and writes for the Wall Street Journal, Chicago, and other national magazines.