Calculated Chaos: Examining the Brilliant Strategy Behind Bed Bath & Beyond

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Of course, Klar, who is holding three massive shopping bags full of kitchenware, knows exactly how it happened. Weaving through Bed Bath’s aisles to get to the shower curtain, he was forced to walk past pretty much everything else in the store. Suddenly lost in a sea of fluffy towels, immersion blenders, and chip bag clips, Klar found everything he needed and plenty he didn't, walking out with a new frying pan, some wine glasses, a corkscrew, K-cups, steak knives, a Brita, and hangers. Oh, and that shower curtain.

The store thrives off this retail strategy: sensory overload, in seemingly the worst way possible. But there’s more to it than meets the eye. With the company's considered real estate decisions, dogged merchandising approach, and unprecedented customer care policies, it’s no wonder Bed Bath is ahead of every other retailer in the home goods space.

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Bed Bath & Beyond was started in 1971 by founders Warren Eisenberg and Leonard Feinstein, who originally called it Bed 'n Bath and opened the first store in New Jersey. As per the name, it initially only sold items for the bedroom and bathroom. By 1985, it had expanded to 17 locations. Two years after that, the name was changed to Bed Bath & Beyond to reflect its full range of "domestic merchandise and home furnishing," as the company puts it. By 1991, it hit $134 million in sales, going public on the NASDAQ stock exchange one year later.

The company’s portfolio grew in other ways when the new millennium hit. It bought health and beauty retailer Harmon’s in 2002, and the nothing-but-tchotchkes Christmas Tree Shops the year after. In 2007, it acquired Buy Buy Baby, and in 2012, both Linen Holdings, LLC and Cost Plus World Market. Currently operating six different businesses, Bed Bath & Beyond, Inc. now owns a total of 1,512 stores, according to its most recent earnings call; Bed Bath is its largest subsidiary with 1,020, or 67%, of its total stores.

Photo: Getty Images

Bed Bath’s merchandising concept—a massive space offering a plethora of products—is known in the retail world as "big box." It’s the opposite approach of carefully curated home stores like Williams-Sonoma and Crate & Barrel, but was widely popular when Bed Bath first hit the market.

Toys "R" Us was the first retailer to adopt this "category killer strategy," explains retail analyst Warren Shoulberg. In the pre-e-commerce era, retailers wanted to keep shoppers in stores by offering them anything and everything. The model worked across all retail areas, from home goods (Bed Bath) to electronics (Best Buy) to groceries (Costco).

But over the years, cross-category big-box retailers Wal-Mart and Target have cornered the market and hurt competitors. Add to that the dominance of online shopping, and Amazon in particular, and the landscape has gotten exceptionally bleak. One by one, stores like Caldor, Ames, Service Merchandise, Linens & Things, Circuit City, Gimbel’s, Mervyn's, and Alexander's have either shifted all operations to e-commerce or shuttered completely.

While other surviving big-box retailers are trying to navigate the troubled waters with mergers or makeovers, Bed Bath manages to operate successfully and profitably. In 2013, it reported net sales of $11.5 billion, according to its annual report. The company's sales jumped from $1.9 billion in 1999 to $5.1 billion in 2004; even during the recession, they climbed from $7 billion in 2007 to $9.5 billion in 2011.

Motley Fool retail analyst Andres Cardenal points to the Bed Bath's conservative fiscal strategy as one reason it has been able to remain successful. Aside from borrowing $1.5 billion to finance a $2 billion stock buyback program (due to complete during fiscal year 2016), it operates with almost no debt.

Photo: Getty Images

"Low debt has important advantages in terms of flexibility and ability to sail through difficult times," says Cardenal. "This is a key benefit, especially in such a cyclical and competitive industry. Bed Bath & Beyond has traditionally been one of the most financially conservative retailers."

And while stores like Caldor and Circuit City reportedly went under because of poor management, the people running Bed Bath appear to have it figured out, having inhabited their roles for decades. CEO Steven Temares has been with the company since 1992; President and CMO Arthur Stark since 1977. Even its founders, Eisenberg and Feinstein, are still involved with the business to some extent, operating as board chairmen.

"This is a big plus when it comes to evaluating a company’s culture and long-term leadership," adds Cardenal. "There is a lot of industry experience and company-specific knowledge in the top management team."

Since its inception, Bed Bath has also prided itself on outstanding customer service. Part of that promise includes its ubiquitous coupons, which can be found in its promotional mailers (sent via both email and snail mail), as well as magazines. The coupons—which come in a several variations, like 20 percent off one item or $5 off an entire purchase—have expiration dates on them, but frequent Bed Bath shoppers know those dates don’t really apply.

"It feels like I've won the lottery!" Adina, a shopper visiting from Ohio tells me about her beloved coupons. "I would have bought all that stuff anyway, so now I feel like I've earned money."

Photo: Getty Images

"These coupons add an element of intrigue and excitement to the shopping experience," adds Antonia Mantonakis, a consumer psychologist and professor at Brock University’s Goodman School of Business. "Customers are habitual, so if they are in the habit of looking for Bed Bath coupons, saving them, and shopping there, the coupons will keep them coming back. Coupons are also a motivator. Sometimes shopping is a utilitarian function, but other times consumers want a hedonic experience where they can spend an afternoon browsing. For those shoppers, coupons are key."

Shoulberg notes that Bed Bath factors these coupons into its pricing structure so the company doesn’t actually lose money on them. While couponing isn’t unique to Bed Bath, Shoulberg notes that it is "among the best retailers getting the formula right, and they also count on a certain number of shoppers to shop at full price—that’s where they are making margins."

Another key customer service factor that keeps shoppers loyal is Bed Bath's incredibly lenient return policy. The company's website states that they "gladly accept returns or exchanges at any of our store locations nationwide. Please remember to bring the original packing invoice and the credit card used for purchase. Without the original packing invoice and your credit card, you may receive an exchange or merchandise credit."

In simpler terms? You can return anything, used or not, to any Bed Bath at any time for store credit. As Elizabeth Barnett, a former Bed Bath employee, puts it on her blog, "You could buy a bath robe there, wear it for a decade, and if they are still in business, you can return it and they will give you money back."

The ultimate motive behind the company's policy is to keep customers happy, one Bed Bath sales associate (who asked that his name not be printed) tells Racked. That thought process is also what fuels its wedding registry system: some store locations even give registered couples cash back for returned items.

Photo: Getty Images

"Yes, we have outrageous returns," the employee explains. "But Bed Bath shoppers know we are going to take care of them. Plus, they take care of us, perhaps without realizing. Even if we get them store credit for their returns, there is an assumption that they are going to spend at least another $25 to $30 in the store because that store credit stimulates them to purchase more costly items."

One would assume that the extent to which Bed Bath goes out of its way to please customers would leave a significant dent in the company’s bottom line. Competitor Costco had to tighten its return policy of giving shoppers unlimited time to send back electronics because some abused the system. But the Bed Bath associate says that for "every abusive shopper Bed Bath has, there are six that aren't. Instead of giving back old, broken merchandise, they just purchase something new."

Plus, the money lost on returned items doesn't entirely come out of Bed Bath’s pocket. The notoriously tight-lipped company, which would not provide comment for this story, is also notoriously aggressive when it comes to inking deals with suppliers. Shoulberg even refers to Bed Bath as a "bully," adding that it has "the toughest, most ruthless buyers in the business, negotiating hard and asking for a lot of concessions."

As the store associate explains, some of these deals allow Bed Bath to send discarded merchandise back to suppliers, who then issue either a full refund or some percentage of the sale back. In some cases, the vendor will refurbish used items and sell them at a discounted price; other times, the loss cannot be recouped, but the vendor will continue to work with the company because, as Shoulberg notes, "the suppliers can’t walk away from a retailer like Bed Bath."

This aggressive negotiation strategy is what "made them the 800-pound gorilla in their market," says Howard Feller of MMG Advisors, which has several clients that supply to Bed Bath.

Photo: Getty Images

"Bed Bath has enormous leverage over their vendors, which not only allows them to lower their price points to stay competitive in the market, but also allows them to enjoy healthier profit margins," Feller says. "They're a very demanding retailer. There’s a lot of business to do there, but it comes with significant cost to be able to service them in a way they expect. But they have enough buying power that the vendor is able to justify the investment."

Bed Bath is also persistent in its merchandizing strategy to stock anything and everything. While low-end retailers like Wal-Mart boast affordable prices and high-end home goods stores like Williams-Sonoma delight customers with $2,000 espresso machines, Bed Bath stands proudly in the middle, appealing to shoppers of all tax brackets. The store stocks all manner of things, from expensive crystal stemware to cheap toasters. While all those options—not to mention the overwhelming store layout—seem like a recipe for disaster, it works.

"Research has shown that when consumers are given too much choice, they get choice overload, so it’s better to give fewer options," says consumer psychologist Mantonakis. "Consumers will be less likely to defer the option. It’s the paradox of choice, but Bed Bath manages to do it in an organized manner. The product selection is neat and tidy. The customers feel comfortable navigating the aisles."

As Bed Bath customer Adina explains, "It makes me feel like I can get trapped in here for weeks and be totally fine. In fact, my life would drastically improve if I lived as luxuriously as Bed Bath! I know where everything is. The first time you go in, you need to devote time to orientation. Then every other time after that is a dream—everything just magically appears."

Photo: Getty Images

Then there's the real estate strategy, which Morning Star retail analyst Jaime Katz believes is what has made it one of the best operating stores in the country. Most retailers opt to open new locations in popular commercial areas or inside malls; Bed Bath is diligent to scout cheap real estate.

Frequently, its stores are standalone, not near other retail spots. Investing in these kinds of spaces keeps expenses low and allows stores to become destinations unto themselves. "Bed Bath will come in and move to places where nobody is operating and then negotiate a good price," says Katz.

This real estate model also allows individual stores to have a local flavor. Yes, a Bed Bath in rural Vermont is part of a giant corporation, but the store itself feels more location-specific than most other big-box stores. As Katz explains, Bed Bath stores are operated on a regional level, with store managers choosing inventory and working directly with suppliers, rather than having to acquiesce to a corporate, bureaucratic system.

"Most retailers don’t have a localized business model like Bed Bath," she adds. "It gets lost in a lot of other bigger chains. The key differentiator is that because they operate locally and receive shipments directly from suppliers, they cut out the middleman and operate at a lower distribution cost."

According to the company's latest earnings call on January 8, Bed Bath’s expansion plans include 30 new stores across all brand concepts, signifying its plans to continue full-steam ahead. After all, even in the age of e-comm, they offer something that Amazon does not.

"Customers want to touch, feel, and get all of the senses when they shop," Mantonakis says. "In Bed Bath, you can feel the towels and linens. Even if you do the research online, there are certain categories of items consumers will always want to check out in stores. It's a different, more engaging, more emotional, involved experience consumers enjoy."

Editor: Julia Rubin