How Philly-Based Five Below Became a Billion-Dollar Company
Twenty minutes to go until a brand-new Five Below is scheduled to open its doors, and the line is already 30 people deep.
It’s a cold Friday morning at the beginning of November, and on the drive to the Roosevelt Boulevard shopping center where this grand opening is scheduled, I have a pretty clear picture of what the store is going to look like. I’ve been to a handful of these stores in the past few weeks, and I know the new one will be rectangular and fluorescent and packed with merchandise, like the chamber of one of those claw-machine games at the bowling alley.
An employee is waiting to hand me a scratch-off ticket as I take my place in a line that looks to be made up mostly of women in their 30s and 40s, with a handful of kids. The ticket could get me up to $100 in store credit, but I scratch mine off to reveal $2. So does the woman in front of me. We look at each other, roll our eyes and quietly grouse. But $2 will do the trick. Because while I hadn’t planned on buying anything, now I definitely will, and what are the chances it will only cost $2?
The line gets moving about 10 minutes before the store is supposed to open, and we enter to familiar sights: Christmas decorations to the right, checkout counters to the left, and, in between, thousands of toys, gags, gifts, t-shirts, key chains, posters, phone accessories and candy, all priced at $5 or less. My mission here is strictly journalistic, but after anxiously waffling over whether to buy the FART ZONE: Enter at Your Own Risk door placard, I walk out with a birthday card for my niece, some sunflower seeds for the drive home, and a four-pack of AA batteries.
If you think a place like this has a hard time turning a steady profit — overflowing as it is with items of dubious value, vacant of basic necessities — you’re magnificently wrong. Center City-headquartered Five Below has grown every year since it was founded in 2002. Today it has more than 500 stores and is on track to hit a billion dollars in sales for 2016. Just as significantly, in September the company announced that in early 2018 it will move its corporate headquarters to the Lits Building at 7th and Market and construct its largest store to date there, giving the company a literal and symbolic place in Philadelphia’s historic shopping mecca.
Five Below has accomplished all of this at a time when the rise of e-commerce has brought other retail giants to heel. It’s done so with not just a unique concept and solid business smarts, but also a super-keen understanding of why people, teen and preteen people in particular, want to go shopping in the first place.
“WE’VE HAD A great run,” says Joel Anderson, the 51-year-old president and CEO of Five Below, tapping his knuckle on the table.
We’re speaking in a conference room at the company’s current headquarters in the skyscrapers-and-boardrooms part of Center City. Anderson is the former CEO of Walmart.com, and he’s still got the offhand look of a business-school student out on the weekend. The first time I visited Five Below’s corporate office (coincidentally, it’s just down the elevator shaft from Philly Mag), it was around lunchtime, and there were hot-dog carts in the elevator lobby. The offices are decorated with the same slogan-y wallpaper — Give Cheap a Chance, It’s All About the Washingtons — as the stores. It’s the kind of atmosphere you might describe as “mandatory casual.”
“I think you’ve got to go back to the start,” says Anderson. “Our two founders, David Schlessinger and Tom Vellios, created a great concept. It was, and remains today, unduplicated. And it’s a concept that while it targets teens and tweens is universally appealing.”
At the time of Five Below’s launch, Schlessinger was best known as the founder of two other businesses: Encore Books, a discount bookstore chain he started at the age of 18 when he took over an old space near the corner of 13th and Pine, and Zany Brainy, the educational toy-store chain he launched in the 1990s. When Five Below began, he and Vellios, who had served as Zany Brainy’s CEO, each had a pair of preteen boys. The duo wanted to create a store where kids that age could go and spend their allowance on stuff they might want — a place that felt a little more grown-up than a toy store. Importantly, they also realized that discretionary spending by that age cohort — and parental spending that was more or less dictated by that age cohort — represented a $200 billion market.
So they started with one store, in Wayne in 2002, and immediately set their eyes on growth. By May of 2005, they had 300 employees, but they hadn’t yet become profitable. They got investments from friends and family and then started soliciting
private-equity money, all the while building more stores. Since 2008, the growth has been self-funded — and steady. In the spring of 2012, just before Five Below made its initial public offering, the company had 192 stores in 16 states. Since that time, it’s nearly tripled in size. Today the company has 523 stores in 31 states, with 1,500 full-time employees (including 200 at its corporate headquarters in Philly) and 6,100 part-time employees.
Currently, the westernmost Five Below store is in Texas. Next year, Anderson says, the company will expand to California and then work its way back. It’s announced to analysts that it plans to expand both gross sales and bottom-line profits by 20 percent in the next five years. Eventually, the company believes, there’s room enough for 2,000 Five Below stores, in all 50 states.
But dwell with me, for a moment, on how odd the idea of an “allowance store” is. Can you think of any other business that targets a specific type of income? Is there anything you could call the paycheck store, or the birthday-money store, or the tax-return store?
“It wasn’t about items,” Schlessinger, now 61, tells me over the phone one afternoon, shortly after his return from a long weekend in Europe. “It was really more about having a place so kids could graduate from the toy store to the next type of store, where they could afford everything.”
In that sense — the sense in which the founders conceptualized it — Five Below functions as a kind of practice arena for young consumers in the making, kids who are fortunate enough to have allowances in the first place and who, through trial and error, are sorting out the most gratifying ways of getting rid of them. Five Below doesn’t necessarily find new stuff to offer for sale to kids, nor offer at lower prices the same stuff that other stores have. What it’s done more than anything is “edit the entire universe of stuff aimed at teens and preteens,” as Tom Vellios once told a Texas reporter, and gather in one place every trendy thing that can be sold for five bucks or less.
To that end, the stores are organized into what the company calls “eight worlds,” which I will list here without further editorial comment: Style, Room, Sports, Tech, Crafts, Party, Candy, Now. The “Now” world is usually at the front of the store to the right, with the seasonal items like Halloween or Christmas decorations. The “Room” world is where you can find posters, incense, lamp shades and FART ZONE door placards.
“Style” has become one of my favorite Five Below worlds because of the expressive t-shirts the store carries, which the company refers to as “attitude” shirts. They say things like It’s funny how you think I’m listening. Or I’m not lazy, I’m physically conservative. Or Fart Ninjas: Silent but Deadly. Or Behold Fartacus. Or Who farted? Oh wait, it was me.
“You know, those are tried-and-true jokes,” CEO Anderson says. “We’re a PG-13 store.”
There’s also a wide range of gag items that don’t fall cleanly into any of the eight worlds. To give you a sense of what I’m talking about, the following is the transcript of a voice memo I recorded at Five Below’s bilevel store on Chestnut Street in Center City: “Fake dog poop. Bag of poop. Trick snot. Squirt lighter. Pet puke. Doggy poop. Fart powder. Bloody soap. Fart candy. Booger nose. Chewed-up gum. Nail through finger. Cracked-screen temporary decal. Magic poop. Running rat. Puke pile.”
It’s not that there’s nothing useful at Five Below. A woman coming out of the new store in Northeast Philly told me she was a teacher at Cheltenham Elementary and was there picking up items for the classroom. And the store’s Tech-world offerings are pretty remarkable. There’s a broad selection of ear buds and headphones. I got a tape adapter and an iPhone charger for the car for five bucks apiece. Selfie sticks are just $3.99 and are created specifically for the company by an overseas manufacturer.
“There’s a thousand items I’d love to carry that you just can’t get for less than five dollars,” Anderson says. “But we try. If it can get in that range, we’ll try and carry it, whether we have to pick it up in a closeout or whether we can only buy so many, a limited assortment. But that’s what the concept’s about. If you see something in our store and you love it, you better take it, because you don’t know if it’s gonna be there three months later.”
This is where growth helps, too: The more Five Below can buy at once, the less it has to pay per unit. And it’s found other creative ways to get cheap goods, like importing truckloads of basketballs unpackaged and uninflated. It’s a store of wants, not needs, the founders say.
I’ve come to think that shoppers probably approach Five Below the way amateur gamblers approach a casino. You don’t go into the store knowing you want a selfie stick, a mug in the shape of the smiling turd emoji and lip gloss. You go in telling yourself it’s cool to spend 10 or 20 bucks. In a way, you’re not really shopping so much as paying a nominal price to have a shopping experience. And Five Below knows this. One reason the company has been so successful is that instead of trying to address a consumer need, it has simply positioned itself to capture a well-established consumer behavior.
“Today in retail, in the physical store space specifically, it’s got to be about the experience and not about the race to the bottom on price,” says Linda Shein, of the Baker Retailing Center at Wharton. “And they offer that price anyway.”
“PART OF THE THRILL of shopping is, of course, the product somebody’s acquiring,” says Kit Yarrow, a consumer psychologist and author based in San Francisco. “But a healthy proportion of the thrill of purchasing something new is the price. It sort of makes [consumers] feel like they have shopping prowess, that they’re winning the competition against other shoppers to get more for less.”
Yarrow, who is co-author with journalist Jayne O’Donnell of the book Gen BuY: How Tweens, Teens, and Twenty-Somethings Are Revolutionizing Retail, says that the 2008 recession locked in a certain level of bargain-mindedness for the American consumer. Shoppers feel less threatened going into a store where they know everything is inexpensive, which helps explain the appeal of Five Below. But it’s not the whole appeal.
“Teens have the psychological imperative of learning who they are, and they have, for a long time, done that through shopping and buying,” Yarrow says. For decades, young shoppers wanted to buy items that were more or less the same as what their peers were buying. And while that’s still true, there’s a growing sense among young people that in order to fit in, you have to stand out. “What we’ve seen is that belonging kind of comes through being individualistic,” says Yarrow. “So if you’re wearing, buying, having the same things that everybody else has, then you’re sort of describing yourself as less imaginative.”
When I was a very young teenager, I went through a not-short phase as what you would call a mall rat. I spent many weekend nights at the Montgomery Mall, hanging out with a couple friends, eating Dairy Queen Blizzards and testing out whether I was the kind of person who smoked cigarettes. We became friendly with a rent-a-cop named Dave, a fact that now presents itself to me as marvelously uncool for all involved but at the time felt like evidence that we had some special access to the place. Often I would try to see whether I could get something going with a girl who had more social capital than me. Occasionally, I would buy something.
This was an era when Hot Topic was in ascendance, and at that time the store specialized in things like black lipstick and Marilyn Manson ephemera. It was the first place I can remember seeing t-shirts with little phrases on them — Chicks dig scrawny pale guys; It’s all fun and games till the flying monkeys attack — that were supposed to tell you something about the quirkiness of the wearer. Even then, this struck me as paradoxical: What kind of self are you expressing when you buy an item that’s been mass-produced for self-expression?
Still, you can’t completely opt out of the consumption-as-identity paradigm. (I tried, during parts of middle school and high school, by wearing the same clothes every day. Still kind of trying, come to think of it.) Your peers make important decisions about you based on how you dress and the stuff you carry around. When you’re a young person, those decisions carry extra weight. So what a store like Five Below does is give young people a bunch of ways to try on different identities at breakneck speed. This process can be demoralizing, depending on how well equipped you are to participate in it, financially and constitutionally, but for some people it can be empowering. A t-shirt here, a poster there, and suddenly you’re that charming fart guy.
AT THE END of 2015, Five Below announced that David Schlessinger was stepping down from the board of directors. Schlessinger says the time seemed right to move on and leave Five Below in capable hands. He and everyone else — including co-founder Vellios, who’s still chairman of the board — seem secure in the company’s future. Still, one can’t help but note that Schlessinger’s previous businesses, Encore Books and Zany Brainy, both folded after his departure. (Schlessinger maintains that Zany Brainy, at least, should still be around today as “a nice little billion-dollar company.”)
For Five Below, there are risks, of course. Some of them — political instability, consolidation of commercial real estate, nasty weather — are laid out in the company’s annual reports. Others are unspoken. Namely, unless the country faces some level of sustained deflation, five dollars is going to be worth significantly less a decade from now. That means either the company evolves — $7.50 Below, perhaps? — or it finds ever-wilder ways of keeping costs low, or it carries items of steadily diminishing value. Anderson, for one, seems confident inflation won’t be a problem in the “realistic future” and says it’s thoroughly possible the concept will evolve in the next few years.
Can other stores imitate the qualities — a targeted demographic, an understanding of that demographic’s psychology — that have made Five Below a success? On the west end of the Market East corridor is Macy’s, the once great, now struggling department store that helped create modern retail culture. At the other end is the Lits Building, where once upon a time you could get “Hats Trimmed Free of Charge” and where soon you’ll be able to buy selfie sticks and fake barf. In recent years, the space in between has been filled with discount retailers like Century 21; the Gallery mall is being revamped with outlet versions of designer brands. Mass retailers are focusing ever less on high-quality goods — you can buy those cheaper online — and ever more on creating faster, cheaper ways to provide a satisfying shopping experience.
Market East is just a half-mile stretch of cityscape, but it’s where dozens of the most important retail ventures in Philadelphia have played out. Five Below can now be counted among them.
Published as “Tweenage Wasteland” in the January 2017 issue of Philadelphia magazine.