Customer service is battleground in highly competitive market

By Thomas Heath
Monday, June 21, 2010; A13

A few days ago, I sat down for a video interview with Tony Hsieh, the 35-year-old chief executive of and author of the new book "Delivering Happiness," to get his take on how he made his Las Vegas-based online shoe company into a customer- service juggernaut.

What came through in the interview is how much customer service is part of the culture, in which employees stay on phone calls for up to an hour, talking customers through their purchases or returns. Everyone, from executives on down, spends half of the company's four-week training program taking customer calls.

"We believe that customer service shouldn't just be a department; it should be the entire company and ingrained in our culture," said Hsieh (pronounced "shay"), who sold to for $1.2 billion last year.

Two days after visiting with Hsieh, I was interviewing Tom and John Hughes, two Louisiana-born brothers who run a chainlet of six Haagen-Dazs ice cream shops around Washington.

We were barely into the interview, when the Hugheses (Tom is 37; John is 40) emphasized how service is the battleground where they win or lose customers in the highly competitive dessert market.

"It's about knowing how to make ice cream sodas. Knowing how to scoop. Letting people sample as much as they want. Greeting them as soon as they walk into the store," said Tom. "Customers are coming in to treat themselves. You want to make them happy. Getting the product into their mouth is key."

The Hughes brothers better be good. There's a Starbucks next door, a Ben & Jerry's across the street and Baked & Wired bakery down the street.

When I caught up with them, they were clad in black Haagen-Dazs T-shirts and bemoaning a new, unprofitable Annapolis store that needed fixing. They are determined not to lose what they have worked hard to earn: ownership of a profitable business.

They started in New Orleans, where their mom bartends at Louis Armstrong New Orleans International Airport, their brother cleans jets and their sister works at one of the airport's Haagen-Dazs stores. Their dad was a painter for Shell Oil.

John and Tom started in 1989 at the airport Haagen-Dazs as well, earning about $3.50 an hour scooping ice cream. They worked their way up to store managers, earning the trust and respect of the owners -- Jerry and Francine Siegel -- who owned eight Haagen-Dazs stores before Hurricane Katrina hit.

After an associate urged the Siegels to start a Haagen-Dazs at Union Station in Washington, they asked the brothers if they would be interested in running it. They arrived in October 1994, motoring to work in their U-Haul rental and living for a couple of weeks in a Southeast Washington motel before finding more permanent accommodations in Northern Virginia.

The Siegels agreed to pay the capital costs to open the store; they also gave the Hughes brothers 49 percent ownership in return for running the Union Station store for six years. The brothers each were paid a salary of $25,000 a year.

"We figured we would be back in Louisiana in six months," said John.

The Union Station site succeeded because of its location and lack of competition. It was on Metro's Red Line and easily accessible. It had several movie theaters, which drew customers at night and on the weekends. The Union Station store thrived for a decade, grossing up to $700,000 some years and throwing off enough cash for the Hugheses to open more Haagen-Dazs stores.

With the Siegels backing them, Tom and John looked toward Georgetown. They began walking up and down P and M streets, talking to retail owners and counting foot traffic. One candy store owner they approached suggested that a shoe store near the corner of M and Wisconsin was about to close.

Because ice cream is an impulsive purchase and stores that sell it need lots of foot traffic, they studied the flow on M Street. They would sit for hours in a Starbucks, counting the customers that entered. They paid someone to do the same around Ben & Jerry's across the street.

"We did it on Monday, Wednesday and on the weekend," said John. "We found our side of the street had twice the foot traffic [as Ben & Jerry's]. We figured Ben & Jerry's were doing around $6,000 on a Saturday."

The Hughes brothers now own Haagen-Dazs stores in Union Station, Georgetown, Chinatown, Bethesda, Pentagon City and Annapolis. Pentagon City grosses the most revenue, but Chinatown has the best return because the brothers have been able to hold down rent and other fixed costs. Only one store loses money.

The Union Station store's rent soared from $10,000 to $15,000 a month, so the Hugheses moved to a food court downstairs. Traffic at Union Station slowed after the development of Bethesda and Chinatown in the late 1990s.

On average, the Hugheses want their stores to gross $450,000 to $500,000. Their net profit after food, personnel and rent is usually around 20 to 24 percent of the gross. They pay Haagen-Dazs an initial $25,000 franchise fee for each store, plus 5 percent of the gross.

They do some catering, mostly for office parties at law firms and small businesses.

To keep costs down, the Hughes brothers visit Costco (in a company car) twice a week to buy supplies, from milk to bananas to whipped cream to Deer Park bottled water. The water is a big profit center; a bottle costs them 25 cents and sells for $2.

Last year, the six stores grossed about $3 million, spinning out around $600,000 in profit. The Hughes brothers split that with the Siegels in New Orleans, so Tom and John each got about $150,000. They also pay themselves a $25,000 salary. They have used some of the profits to diversify, buying three Smoothie King shops in the region. The Smoothie Kings gross $1 million or so, but their margins are less than those of the ice cream stores.

Mistakes? They passed on a prime Bethesda location next to a movie theater because it did not have through traffic. Gifford's Ice Cream grabbed the spot, and they ended up with a competitor one block away.

The Hughes brothers said they are looking at expansion but are apprehensive after Annapolis. One possibility is Dupont Circle, if they can swing a good location with reasonable rent.

But Dupont Circle is very competitive. So good customer service is a must.

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