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A Tough Sell for Smithsonian's Stores
In Wake of Critical Report, Institution Is Considering Outside Vendor

By James V. Grimaldi and Jacqueline Trescott
Washington Post Staff Writers
Wednesday, July 25, 2007

Smithsonian museum stores are lackluster, underperforming and poorly organized, and the business unit that oversees the retail division is in "substantial turmoil," outside consultants told the museums' managers in a confidential report.

Though the Smithsonian created a freestanding business unit to boost profits from the stores and other operations eight years ago, the shops are now so poorly run that the Smithsonian said this week it is considering hiring an outside vendor to run the museum stores.

The 80-page PowerPoint report obtained by The Washington Post says the retail unit suffers from bloated staffing and lack of experience.

The retail division should be overhauled, the management restructured and the items for sale revamped to better mirror the mission and experience of the Smithsonian's museums, according to New York management consultants BerglassGrayson, hired by the Smithsonian to evaluate the idea of replacing the managers of gallery shops with an outside vendor. "It is mandatory for Smithsonian to explore outsourcing," the March report concludes.

To evaluate outsourcing, a request for bids to run the institution's roughly 30 museum stores will be released by mid-August and proposals are due in late September, spokeswoman Linda St. Thomas said.

The consultants say weak marketing, dull presentation and the absence of in-store events plagued the shops. The retailers poorly stocked hot-selling items, such as $60 orange NASA flight suits at the National Air and Space Museum store and $30 crystal-growing geode kits at the National Museum of Natural History. Popular tribal-crafted $14 dream catchers are displayed in a second-floor store at the National Museum of the American Indian, while the museum's more accessible first-floor store showcases pottery, jewelry and tapestries priced at hundreds of dollars.

Smithsonian visitors over the weekend echoed many of the report's findings. After spending $40 at the Indian Museum, Jessica Molina of New York said Saturday, "I thought they had a lot of nice things, but a tiny bit expensive -- too much for my pocket."

Yet the 20-year-old student spent $180 at the National Air and Space Museum next door, where she found more value when shopping for family and friends. "Air and Space had a lot of variety of things at reasonable prices," she said.

The study found the Smithsonian shops' 2006 operating profit of 15.3 percent from sales of about $42 million fell far short of the industry standard for similar specialty stores. Profits could jump to 30 percent "with an extraordinary amount of improvement," the report says. That would require cuts in overhead and changes in store design, inventory, purchasing and management.

Income from business ventures is crucial for the cash-strapped Smithsonian, which receives only part of its funds from the federal government and does not charge admission to its museums or the National Zoo. The report paints a picture of poor management that is at odds with the image of a business culture promoted by former banker Lawrence M. Small, who was forced to retire as secretary of the institution in March over reports of lavish spending.

Smithsonian Business Ventures chief executive Gary M. Beer has criticized key parts of the consultants' report. The firm was selected from two finalists by officials from the business unit and the museums. In a 23-page reply, Beer said the consultants misapplied the way the Smithsonian accounts for overhead when comparing the museum shops' operating profit with other major retail companies. He also said it was unfair to compare the Smithsonian's shops to larger retailers, such as Urban Outfitters.

St. Thomas concurs. "The industry standards they used are public companies which are 10 to 60 times the size of SBV revenues," she said. St. Thomas said a comparison of museum stores done last year by the Museum Store Association suggests the Smithsonian's gross profits are better than average. "It shows we are doing something right in the Smithsonian stores," she said.

The BerglassGrayson report says the shops have important built-in advantages: They are in buildings frequented by millions of visitors -- museums, airports and the landmark Smithsonian Castle on the Mall. The mostly rent-free outlets sell some exclusive merchandise. And the millions of people who visit the museums pay no admission or sales tax, and therefore are more willing to spend more money in the shops.

Shopping is important to museum-goers, according to a 2004 survey. When asked what contributes to a satisfying museum experience, Smithsonian visitors ranked "museum stores" second only to "personal enjoyment." Most customers interviewed on a recent visit praised the stores, even when they emerged empty-handed. "I think they're very nice shops," said Donna Adams of Ohio. She visited the Air and Space Museum last weekend looking for T-shirts or toys, but departed with a signed book by a former White House chef.

The BerglassGrayson report, originally submitted March 26 and updated a month later, rebukes Smithsonian Business Ventures as acting Secretary Cristián Samper is considering an overhaul of the business unit and is expected to name an in-house task force to review the division before the end of the month. It is a signal of his intent to rein in some aspects of the private-sector culture installed to make the institution more profitable.

The business division and its leader have been the subject of internal scrutiny for 15 months, as well as the focus of congressional investigations and hearings.

Beer and Sheila Burke, Smithsonian deputy secretary and chief operating officer, have blamed poor earnings by the business unit on a variety of problems, particularly sagging museum attendance. New Smithsonian figures show that as visitation improves, so does spending in the stores. In recent months, both visitors and revenues are up.

Two months ago, Beer said he would leave in September, and in June, Burke announced she would leave in the fall. In an unreported finding last month, an independent review committee reported "significant failures of internal controls and inappropriate conduct at SBV" and "inadequate oversight" by Smithsonian officials, including Burke and Chief Financial Officer Alice Maroni.

Smithsonian Business Ventures, known internally as SBV, took over the institution's shops, restaurants, theaters, publications and the Smithsonian magazine in 1999. At the time, outside consultants predicted the stores would make twice as much money. But SBV profits fell 14 percent, from $27.9 million in 1999 to $23.9 million in 2006.

Beer said in a letter to Samper that he had accomplished a lot given economic problems, including the downturn in tourism after Sept. 11, 2001. Beer also has come under congressional scrutiny for his compensation, which includes $350,000 a year plus $800,000 in bonuses over the past six years. Newly obtained records show he is eligible for a $500,000 bonus this year if he meets an earnings growth target. Beer's salary is set by a compensation committee that includes a friend, Don Steiner, who co-owned a leisure sailboat with Beer for 18 months. "In all cases relating to Beer," Steiner, a Boston businessman, said Monday, "I gave an opinion to the compensation committee members, but recused myself from any vote."

In a memo to his staff in April, Beer blamed the shops' problems on the collision of cultures of the business world and the museum directors, who, he said, were not always "motivated for success."

BerglassGrayson's finding that "the SBV organization appears to be experiencing substantial turmoil" comes after years of internal friction between Smithsonian business executives and museum directors. Conflict emerged from the "revenue sharing" formula that allotted a portion of the revenue from the shops to Smithsonian managers for overhead and divided the rest among the museums. "SBV inherited the revenue sharing quagmire -- we did not invent it," Beer wrote to staff in April.

The consultants laid some blame for the poisonous relationship on retail executives who have a "negative attitude toward museums" and whose "buy-in to the mission of the individual museums is incomplete." Smithsonian retailers "see themselves as victims, rather than possessing an extraordinary opportunity to positively exploit a stable of superior brands," according to the report.

Merchandising and store presentation were being overseen by people with good skills but not the experience needed for a museum store, the consultants say. The report says the SBV operation "appears to be overstaffed and overspending."

Some stores were "overbuilt but not to any effective advantage," the report said. The store at the reopened Smithsonian American Art Museum and National Portrait Gallery cost more than $450 per square foot. It "could have been built more effectively for half the cost," the report said.

The report found that the "location of almost every museum shop is undesirable," with the exception of the Air and Space store, which, "not surprisingly, is the most successful." Walking out of Air and Space, Christopher Bilby said he had allowed his three children -- ages 1, 3 and 9 -- to pick out items at the Smithsonian. They purchased a packet of "space ice cream" ($4), a plastic grabber claw ($8) and a jar of synthetic slime called "Mars mud" ($4).

The report said says store size often don't reflect sales potential. For example, the "planetarium shop is impossibly small for its volume," the report states, noting it brings in $850,000 a year.

At the two largest museums on the Mall, Natural History and Air and Space, the inventories of top-selling items often lag. Presentation was also a concern for the report, which pointed out that none of the American Indian Museum shop's best-selling items were displayed in the front 10 feet of the store.

Not all museum stores are run by SBV. Among the report's disputed findings is that non-SBV stores -- such as those at the Freer-Sackler galleries and the Cooper-Hewitt Design Museum -- outperformed the Business Ventures outlets.

However, stores at the National Zoo, run by the independent nonprofit Friends of the National Zoo, were criticized as "an embarrassment to the National Zoo itself, to the Smithsonian, to Washington, D.C., and to the country," the first version of the report says. (The final version says only that the stores "reflect negatively" on the Smithsonian.)

"We obviously didn't agree with that," said Robert J. Lamb, executive director of Friends of the National Zoo. "We thought their language was inflammatory, inappropriate and inaccurate."

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