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Chico’s Meltdown Shows Perils of Dumping Older Customers for Younger Ones

November 28, 2018, 9:26 PM UTC

Chico’s FAS (CHS) has become the latest retailer to learn the hard lesson that you shouldn’t fire your loyal customers as you chase new ones, even if they’re young.

The retailer’s shares on Wednesday fell 35%, their worst drop in 25 years according to Bloomberg News, after it reported that it was replacing the head of the Chico’s brand after a sharp sales decline brought on by a major merchandise miscalculation. Chico’s FAS CEO Shelley Broader told analysts that the namesake brand’s efforts to appeal to new customers with so-called “boho” styles, or clothes with bolder color and prints had gone too far and alienated its long-time core customer: older women.

“We did not have the appropriate balance in clean, classic, polished silhouettes or depth in the key basic items that appeal to our polished and our traditional customer,” Broader, CEO since 2015, told Wall Street analysts. Comparable sales at Chico’s fell 10.2% in the third quarter, on top of a 5.8% decline in the same quarter in 2017. It was the thirteenth straight decline in comparable sales for the brand, a dismal performance in a strong consumer environment, and one that looks even worse in comparison to those of White House Black Market and Soma, its sister brands. And it slammed overall company profit which fell by more than half. Broader warned investors the hit to company performance to last into the spring.

So not only did the new merchandise miss the mark in attracting new customers, but it deprived Chico’s of sales to existing customers. As Broader put it: “We lacked the inventory to fully capitalize on demand.” That includes Chico’s classics like its Juliet pants and its no-iron shirts. Part of the correction will include marketing “more inclusive of all of our target customers,” she said.

It is a classic mistake we see time and time again in retail. An established retailer with an aging clientele goes after younger shoppers, believing it can instantly change its image in those customers’ minds and neglect its core shopper. The most drastic example of that was J.C. Penney’s (JCP)ill-fate, ill-conceived and ill-executed reinvention in 2012, when it basically rejected its longtime customers hoping to quickly replace them with hipper shoppers less interested in discounts. Penney made a similar mistake again two years ago when it decided to go after “millennials,” only to course correct again earlier this year back to its core customers.

J.Crew is another chain that became too fashion forward, not realizing its basics were the foundation of its appeal. Even Tiffany & Co (TIF) struggled a few years ago with hipper fashion jewelry. And the list goes on and on.

Retailers are right to want to recruit new shoppers. But they need to do it gradually over time, without veering left, right and center constantly, confusing customers who may not even care anymore. You can’t just fire your customers betting new ones are waiting in the wings right away. After all, younger women have a panoply of choices and have not exactly been waiting around for Chico’s fashions. A deliberate approach like Kohl’s is taking is more likely to succeed. That department store has updated its private brands gently and is testing a partnership with Amazon. Macy’s has streamlined brands but also bringing more tech into its shopping experience.

Broader, previously the CEO of Walmart Canada, will lead the Chico’s brand while it looks for a new president. She was the one who chose Diane Ellis, a former The Limited CEO, in 2016 so ultimately Chico’s problems are hers to fix. (Ellis left The Limited just months before it filed for bankruptcy protection.)

“We have a very loyal customer base,” Broader told the Wall Street analysts. But loyalty runs both ways. And those bread-and-butter customers need to be treated as such, rather than a clientele to phase out.