August 28, 2014

Think About The Future

Take a look at this, folks (if the image doesn't render in your email client or RSS reader, then click here).



This is one of those metrics that is likely close to accurate, and of virtually no meaning to any business. Visits do not equal transactions. And data skews wildly by demographic cohort.

I have clients that generate 15% of their volume by sending a check in an envelope. For these folks, mobile is < 10% of all traffic.

I have clients where mobile represents 20% of e-commerce transactions ... heavily (HEAVILY) skewed to tablets (that's not mobile, and you know that's not mobile).


I have clients where true mobile (phones) represents 15% of e-commerce transactions. When you see transactions, yes, transactions, happening on phones, then you've got something special going on. And your customer is young.

Our worldview is biased by the customers we attract. Think about Forrester Research, for example. They tell you that you must navigate the "mobile mindshift". But then you visit their website, and you see the desktop version of the site emulate on the phone ... and you read their SEC filings and you learn that they generate business via direct mail ... DIRECT MAIL folks! Well, think about it! How old is the average Executive leveraging Forrester data? Older than 29, right? So Forrester is 100% right to target their customers using the techniques that cause their customers to respond ... even if they offer advice that is 100% contrary to how they choose to market to customers.

Be wary of global metrics about "the customer". "Your customer" is not "the customer". Your customer behaves different than the average.


August 27, 2014

Nordstrom Omnichannel Expenditures And What It Means For Your Business

One of our loyal readers forwarded this gem about Nordstrom (click here to read it).

It's unlikely that Nordstrom signed its own death certificate because it is going to spend billions improving online infrastructure, especially as it relates to Nordstrom Rack. These article headlines are written to get folks to click on the article (worked on me), which makes money for the website hosting the article.

For those playing along at home, Nordstrom has spent the past decade growing primarily through two channels.
  1. Online.
  2. Nordstrom Rack.
In fact, Nordstrom Rack stores easily outnumber full-line Nordstrom stores - growth in Rack stores has been dramatic ... in 2011 there were 108 Rack stores ... in 2013 there were 143 Rack stores ... while full-line stores (the ones you are familiar with) stayed flat at 111 for each of the past three years.

Interpreted differently, Nordstrom is targeting two customers ... the affluent one it has always targeted (and not by offering additional square footage, which tells you something, but instead by improving the online experience) ... and a more modest customer (with a 40% growth in stores in two years, which tells you something), by improving the in-store experience for non-high-end customers (Rack). Where appropriate, Nordstrom buys businesses that cater to younger customers.

The online spin in the article sounds an awful lot like things I've been saying for the past year, but with a twist.

When I worked at Nordstrom, way back in 2006, my team ran an analysis for me. We knew, way back then, that there was a "3-2-1 Rule". Specifically, good customers visited the website three times a month, visited our stores two times a month, and purchased one time a month, with 85% of those purchases happening in stores.

Knowing that ratio is the secret to retail success. If the ratio gets unbalanced in either direction, interesting things start to happen.

Let's analyze two different types of retail businesses.

I recently analyzed a retail business where four years ago, a pure in-store buyer spent 85% of future dollars in-store and 15% online. Today, that same pure in-store buyer spends 75% of future dollars in-store and 25% online, but customer productivity has not changed. For this business, omnichannel investments are likely to keep customer productivity constant, but are not likely to improve the ratio of retail sales to online sales. In other words, the trend for this business is for pure retail customers to increasingly sit at home and shop online. This will lead to negative comp store sales, positive sales outcomes for the online channel and total business, and an eventual rationalization of the retail store portfolio - the bottom 25% of the store portfolio will not be profitable enough, the middle 25% of the store portfolio will likely need less square footage to be profitable. This will likely lead to a sales decline, once stores are closed and square footage is reduced. I want for you to think carefully about this ... the omnichannel/online investment is right for the customer, is right to support the online business, but shifts customers online (slowly), ultimately resulting in marginal stores being unprofitable and ultimately closed, thereby reducing sales. That wasn't the desired outcome as prescribed by the omnichannel thought leadership community. We can already see it happening, folks - just read the financial filings from your favorite retail brand - tepid comps and robust online growth.

A second retail business I analyzed is a lot like Apple, in that the in-store experience is "active", whereas the in-store experience in the example above is "passive". In this case, online sales as a percentage of total are low. All of the data shows that online research on Wednesday leads to an in-store purchase on Saturday (whereas in the example above, online research on Wednesday increasingly leads to an online purchase on Saturday). Here, omnichannel investments are going to help both channels.

The key, then, is to identify if your retail business is "active" or "passive".
  • Passive = Low paid employees, merchandise available online via numerous competitors, no thrill or excitement. Not much sound. Not much for the senses, in total. Lots of %-off sale signs. You go to the store to try clothes on, or to buy stuff that you don't want to wait 2-3 days to receive.
  • Active = Music, scent, better-paid employees, trying and/or playing with merchandise, food, video, senses are thrilled, large assortment, merchandise not readily available at Amazon, full price merchandise.
The passive retailer has to make an omnichannel investment to keep up, but will likely lead to poor in-store performance at marginal stores, which will result in store closures and ultimately, a drop in sales (though there will probably be more profit, and that's not a bad thing).

The active retailer has to make an omnichannel investment, but the investment causes additional customer research that yields increased foot traffic in stores and more e-commerce purchases.

The omnichannel community is telling everybody that they are active retailers. That's not the case. Most are passive retailers.

The investment community doesn't appreciate a healthy investment in the online infrastructure, because they understand the repercussions associated with dying malls and store closures.

Not all businesses are the same. Each possesses interesting dynamics, merchandise, and demographics. The combination of dynamics, merchandise, and demographics dictates your omnichannel future.

My homework assignment for you, then, is simple.
  1. Identify if you are an active retailer (think Apple or Cabelas or Nordstrom or that kind of store), or a passive retailer (think Ann Taylor or J. Crew or Gap, not high on the in-store experience/excitement factor).
  2. Measure how web visitors convert in-stores, and measure this by store distance, and measure this monthly, not on an individual visit basis. Does your website serve as a research tool for store purchases, or does your website cut off store purchases by pushing the customer into an online purchase today?
  3. Measure if your pure in-store buyers are slowly leaking into e-commerce. If so, is customer productivity increasing, flat, or decreasing? If flat or decreasing, think carefully about what it means for the future of the bottom half of your store portfolio.

August 26, 2014

Google, Facebook, Twitter, and Merchandise Forensics

Think about how differently retailers, e-commerce folks, and catalogers are asked to view their business from Google, Facebook, and Twitter.

The retail brand is told that they must be "omnichannel", or they are "dead". Sounds fun. They're told that they must invest in back-end solutions that improve the supply chain and communicate to the customer that a dress is not available at Southcenter, but can be shipped from Northgate and be at the shopper's home in forty-eight hours. The focus is on channels and operations.

Google, Facebook, and Twitter have two audiences.
  • Audience #1 = You. You are the merchandise. Make no mistake about it.
  • Audience #2 = Advertisers. These folks are the customer.
Now, it is the job of Google, Facebook, and Twitter to make sure that their merchandise is as valuable as possible. When the merchandise is amazingly valuable, then advertisers (their customers) pay them for the merchandise.

What do Google, Facebook, and Twitter do well?
  • They constantly find new merchandise (that's you).
  • They constantly develop "winners", merchandise that performs really well. This may be the shopper who clicks on different links on Google, for instance, or the demographic that enables Twitter to slip a Miller Lite ad into the timeline. Either way, Google, Facebook, and Twitter all work to cultivate great merchandise (that's you), so that their customers (advertisers) have a lot of great merchandise (that's you) to choose from.
Keep this in mind the next time you are told that you must focus on channels and back-end operations. The focus in retail and e-commerce is backwards, and makes no sense whatsoever. Focus on your customer, and the merchandise that customers love.

August 25, 2014

Is My Store Losing New Customers?

This is one of the biggest challenges retailers face in 2014 - few people want to talk about it.

When retailer e-commerce websites became competent enough to deliver the goods, and when Amazon became large enough to have a minor impact on retail sales, new customer counts changed.

Here's what I frequently observe:



You can see the big bump in retail in 2008, it happened to most folks. But then business kind of returned to a "new normal", if you will.

But look at what happened in 2012. New retail customers stumbled.

And in 2013, new retail customers fell.

And in 2014, new retail customers collapsed.

When you see this trend, and the trend is independent of the online trend, then you know you have an in-store problem.

This is where things get interesting, folks. The experts are demanding that the in-store experience be digitized ... that's their solution.

What if the solution is the opposite? What if digitization causes potential new customers to instead stay home and conduct research online? If that is the case, then you have a whole different set of challenges, don't you? You have to create a reason for the customer to visit the store, don't you? That reason won't be inventory alignment, supply chain investments, or equal discounts across channels, will it?

Please be honest. What would cause you to shop in a J. Crew store in 2014 instead of shopping online? What would cause you to get in a car, drive to a store, and buy something in a store?

Leave a comment ... under what circumstances would you visit a store? Most people still visit stores ... but any small drop causes a drop in comps and that's what we're talking about here. Why visit a store in 2014? Leave a comment.

August 24, 2014

Is My Store Losing Sales To My Website?

This one is fairly easy to answer.

Here's what you do. Run a comp-segment analysis on retail-only customers from last year. In other words, identify customers who, from 8/26/2012 to 8/25/2013 purchased exactly two times from retail and exactly zero times via e-commerce. Then measure how much these customers spent in e-commerce and in stores between 8/26/2013 and 8/25/2014.

Then slide your dates back one year, and repeat.

Then slide your dates back yet another year, and repeat.

One more time!

Take a look at this table.



What do you observe? Remember, these customers only purchased from retail stores in the past year.

Clearly, customers are shifting online (slooooooowwwwwwwly). Total demand is flat. This tells you that customers are leaving the in-store experience, and prefer to shop online. This should cause you to think carefully about the omnichannel strategies that the experts are telling you to implement.
  1. If your customer increasingly prefers the website, what does it mean to the future of your in-store experience if you consistently have fewer and fewer people in the store?
  2. How many square feet do you truly need, if you increasingly have fewer and fewer people in your store because your website is increasingly preferred by your customer base?
  3. Why are you trying digital strategies to get customers back into your stores when your customers are leveraging your most important digital strategy (your website and/or phone) to increasingly avoid your store?
  4. What is the merchandise assortment purchased online? What is the merchandise assortment purchased in-store? Are they different (the answer is almost always yes)? If the assortments are different, how does this conflict with the thought leadership community's demand that you do everything the same in every channel?

August 21, 2014

E-Commerce Is Bleeding Out Into Mobile

Yesterday, I talked about how retail is bleeding out into e-commerce. I see it in so many projects. I observe customers who are pure retail customers who spend increasing amounts within e-commerce in the next year ... when measured over time, you can clearly see why retail comps are struggling. And did you read this article (click here) about Dick's Sporting Goods? Read the comments about profitability. Think carefully about what that means for the in-store experience.

Well, the same thing is happening as a customer shifts from using a desktop/laptop to using tablets, then from using tablets to mobile devices, then from mobile devices to apps. When you unbundle e-commerce (and you need to unbundle it, folks, or you are like the catalogers of 2003 who thought that their business was multi-channel and that you analyzed it as one unit), you quickly see that the tablet is the gateway to a mobile phone, that the mobile phone is the gateway to an app, and once the customer is using the app, the customer begins to pull away from the desktop/laptop experience.

There are three cases where you'll never observe this phenomenon.
  1. You won't see this if you measure conversion rates - you will be blind to ecosystem changes.
  2. You won't see this if your customer is older than 45 years old.
  3. You won't see this if you believe that e-commerce is a sum of old-school e-commerce and modern smart phones using apps as the portal to your business.
Analyze customers longitudinally. You'll see that e-commerce is gaining sales from old-school channels (catalog, retail, mostly retail these days), and that e-commerce is bleeding out into mobile. In other words, e-commerce is being torn in half. And when mobile (smart phones, not tablets, tablets behave too much like desktop/laptop) and younger customers take over, look out, folks.

The data I see in mobile looks the same as the data I saw 10+ years ago when analyzing the transition from catalogs to e-commerce. Study what happened during that era of channel shift, if you want a preview of what mobile is going to do to e-commerce.

August 20, 2014

Retail Is Bleeding Out Into E-Commerce

I keep seeing this, folks.
  • 2005 = Pure Retail Customer Spends $200 Next Year:  $185 In Stores, $15 In E-Commerce
  • 2013 = Pure Retail Customer Spends $200 Next Year:  $160 In Stores, $40 In E-Commerce
Retail is bleeding out into e-commerce. Slowly. Terribly, terribly slowly. The impact on comp store sales might be between 1% and 2% a year - for some, higher, for others, 0% to 1%.

But make no mistake, it keeps happening. Eventually, there won't be enough traffic in the bottom 25% of stores to justify keeping lousy stores, regardless of the fact that customers are spending the same amount of $ in total. That's when the bottom 25% of stores close, and then customer spending decreases because e-commerce won't recapture the sales lost by the store closing. And imagine what happens to the mall that contains a disproportionate number of stores in the bottom 25% of a retail portfolio?

Please, please, think carefully about this dynamic. 

Omnichannel isn't going to save retail. If anything, the digitization of the business will eat retail ... why go into a store at all if the store is nothing more than a digital distribution center for stuff that can be analyzed online? And I use the word "analyzed" on purpose, because that's what we've trained people to do. Customers are not browsing, that's a quaint notion from last decade. Customers are analyzing:
  • Do I have time to drive 18 minutes to the store and try on the item, then drive 18 minutes back home?
  • If the item isn't available in the store and can be shipped from another store, why bother going at all when I can just get the item online and have it shipped to me?
  • Is the item cheaper somewhere else? I'd hate to get burned in the store.
  • Why should I buy the item in the store and pay 6% sales tax when I can get the same item online somewhere else?
  • Is somebody running a 20% off promotion online? Because if they are, the item is a lot cheaper than it is in the store.
  • Why do I know more about merchandise than the employees in the store? Is it because the retailer pays employees $11 an hour? I want to talk to somebody smart and passionate, and it's really hard to be passionate about the merchandise I want to buy when the employee is poor and is worried about eating.
  • Why go to a boring retail store when I can watch any program ever created on television, or digest any piece of information ever digitized online?
  • Do I buy something I don't really need in a store, or do I add 2gig a month on my mobile line for an additional $10?
  • Why don't I just wait for my favorite brand to offer 30% off in an email campaign? Why drive to the store when a favorable email offer is likely to arrive in the next few weeks?
That's a customer analyzing, folks. Be honest, you do it. Omnichannel cannot fix this, if anything, omnichannel accelerates this problem.

There has to be an entertainment component to retail - a reason for a customer to drive to a store to buy something. Without the entertainment component to retail, we're stuck with a situation where low-performing stores are going to close at accelerated rates, and mid-performing stores are going to be forced into smaller footprints. Both dynamics will reduce sales, opposite of the desired outcome of omnichannel.

Thoughts?

August 19, 2014

Demographics and Feedback Loops

Always overlay demographic data, when trying to understand whether a feedback loop might be damaging to the long-term health of your business.

Catalogers know this all too well. Here's what they observed:
  • 1999 Catalog-Centric Customers = 49 years old.
  • 1999 Online-Centric Customers = 44 years old.
You can see that the online customer is younger. Ok, no worries.
  • 2004 Catalog-Centric Customers = 54 years old.
  • 2004 Online-Centric Customers = 49 years old.
Oh oh. Both customers age five years. This is bad. A healthy business can cater to a cohort over time ... but there's a limit to that trajectory (retirement). Many healthy businesses are able to recycle into younger customers, and do so via new channels.
  • 2009 Catalog-Centric Customers = 59 years old.
  • 2009 Online-Centric Customers = 53 years old.
At this point, the catalog industry should have noticed something, and should have taken action. That didn't happen. Now, the trend looks like this:
  • 2014 Catalog-Centric Customers = 64 years old.
  • 2014 Online-Centric Customers = 57 years old.
When you look at the trend from 1999 to 2014, it's obvious what is happening. One barely needs to project into the future to understand that this feedback loop is going to end in an ugly fashion.

It is very common for businesses to refresh the customer file through newer channels. For most of us, the channel that can refresh the customer file is mobile.

Measure the average age of customers who shop old-school channels, across time.

Measure the average age of customers who shop online, across time.

Measure the average age of customers who heavily invest in mobile.

If you can demonstrate that the mobile customer is younger than average, and that this cohort is growing faster (in counts, not percentages) than old-school channels, then you are avoiding the future impact of a feedback loop.

August 18, 2014

How Can I See A Feedback Loop Forming?

Let's take a simple example. I've witnessed this one in retail.

Take a customer who purchased exactly two times in the past year. Segment that customer based on channels purchased from in the past year. Then, measure spend in the next twelve months. Repeat the analysis for each of the past five years (projecting 2014 to conclusion). Your analysis will look something like this:

From 2010 to 2011, you'll see that retail performance improved, while online performance largely held steady.

But take a look at 2012. There is a subtle shift. Customer value remains constant, while share of dollars shift from retail to online. From 2012 to 2013, the shift accelerates. From 2013 to 2014, the shift continues.

This is the start of a feedback loop. Next, you'd analyze new customers by channel. If new customers are growing in e-commerce, and are in decline in retail, you've got a feedback loop developing. Your customers are shifting from retail to e-commerce, and the shift in behavior is accelerating.

Now, you have a responsibility. You have a responsibility to forecast where this trend is headed, over the next five years. If this continues, what does your business look like in 2019? And if you don't like what retail looks like in 2019, well, you've got five years to either change the trajectory, or to adjust to the inevitable.

This style of thought is missing. You cannot simply say that you'll fix everything by becoming "omnichannel". Let's say you become more omnichannel, and by doing so, you accelerate the trends you observe above. Now what? Your CFO wants to shut down 200 stores because there's no traffic left in those stores. What has been accomplished?

It's time to start thinking about what feedback loops are doing to the businesses we manage. We have to get out from under the weight of conversion rate and response rate measurement. It's time to take insights a step further.

August 17, 2014

My Hypothesis

These days, we're told what we must think. I'd prefer if we viewed the evolution of business in a way that was supported by data.

I tend to support three client bases.
  • Traditional Catalog Businesses.
  • Billion Dollar Plus Retail Companies You Know And Actively Shop At.
  • E-Commerce Businesses, Usually Smaller E-Commerce Businesses.
Within each business model, I've analyze a lot of data. Hundreds of billions of dollars of transactions. I get to see how customers migrate across channels. I get to see how different age cohorts change behavior over time.

Each business model has different challenges. For each business model, I create a hypothesis that guides the project work I perform. The hypotheses are grounded in customer performance data.

Catalog Hypothesis:
  • The Multi-Channel movement of the 2000s caused catalogers to align the online channel in an effort to support the catalog - catalogers were told that the customer wanted this to happen.
  • When the online channel is aligned to support the catalog, customer acquisition efforts within the online channel suffer, because the website is leveraged to capture orders from co-op customers, not leveraged to acquire online customers via online marketing channels.
  • When online customer acquisition efforts suffer, new names must be found, using the catalog as the primary marketing vehicle. 
  • Catalogers love this dynamic.
  • Catalog names can easily and cheaply be acquired via the co-ops.
  • Co-ops spin the most responsive names to catalogers.
  • Co-ops spun 55+ rural customers to catalogers.
  • Catalogers altered the merchandise assortment to appeal to 55+ rural customers - not consciously, I suspect.
  • The catalog merchandise assortment is no longer appealing to an under 40 customer base.
  • As a consequence, catalogers will ride the Baby Boomer generation through retirement. It will become harder and harder to acquire customers via the co-ops, resulting in business challenges that won't be fully apparent for another five years, but are already manifesting themselves via lowered co-op response rates.
  • Co-op response will be the canary in the coal mine. From what you are all telling me, it already is the canary in the coal mine.
Retail Hypothesis:
  • Retail is not suffering from a lack of digitization, contrary to what you read.
  • Retail is suffering from not being entertaining enough to pull a customer off of a comfortable seat to get into a car and drive to a store.
  • Retail brands were terrible, absolutely terrible, at direct marketing, from 1995 - 2009. 
  • As a result, e-commerce lagged in retail.
  • Retailers became competent at e-commerce sometime around 2010.
  • When retailers became competent at e-commerce, customers no longer had a need to get in a car and drive to a store - the retail website was sufficient to satisfy customer research needs.
  • When traffic faded in stores (often caused by retailers with newly competent websites), retail brands responded by offering deep discounts and promotions.
  • Retailers trained customers to expect deep discounts and promotions, further driving down traffic during full-price time periods, requiring more discounts and promotions to drive traffic, eroding profit and customer trust.
  • Our industry mistakenly interpreted the drop in traffic as a competitive issue - we mistakenly assumed that in-store traffic was struggling because the store was not "digital enough" to compete with e-commerce. 
  • Turns out that the opposite is true - retail lost traffic because the customer didn't have to go to a mall to perform research and/or discovery because of the digitization of the business - retail lost traffic because the e-commerce website was too effective - causing customers to not have to bother to drive to a store.
  • In the next five years, retailers will invest billions to overhaul the supply chain, to integrate all channels, and to make shopping seamless.
  • Retailers will not pay attention to what happened to catalogers when catalogers did the exact same thing 10 years ago.
  • Retailers should pay close attention to what happened to catalogers when catalogers integrated the whole mess 10 years ago.
  • In five years, shopping across channels will be easier, more convenient, and more seamless than ever before.
  • In five years, comp store sales will continue to slide, because the retail industry will not address the root problem with retail.
  • In five years, a handful of retail businesses will figure out that that there are three things that make retail fun - great merchandise - affordable prices - and an entertaining in-store experience.
  • In other words, retailers will figure out that retail must be entertaining.
  • Retail is going through the same transition that professional / college sports are going through. Professional / college sports can be experienced at home in front of a large TV with five or seven or nine speakers and a subwoofer. To get a customer to go to a stadium, the in-stadium experience must be exceptional. 
  • To make the in-stadium experience exceptional, sports teams got taxpayers to subsidize their efforts - new stadiums!
  • Retailers will not get taxpayers to subsidize their efforts.
  • Retailers will figure out that a full digitization of the business (omnichannel) does not improve the "entertainment factor". Retailers will respond by making retail entertaining. This, not omnichannel, will be the fundamental change that kick-starts retail from the current "funk" it resides in.
E-Commerce Hypothesis:
  • E-commerce-only brands benefited from twenty years of cannibalization - catalogers and retailers created demand that e-commerce-only brands fulfilled, via significant help from Google.
  • The days of e-commerce cannibalizing catalogs ended with The Great Recession.
  • Much of e-commerce growth in the past half-decade came from large retail brands that figured out how to sell directly to customers.
  • In other words, most of the easy ways to grow via e-commerce have been exhausted.
  • The internet has become an advertising platform controlled by a small number of entities.
  • One of the ways to become both an advertising platform and to control e-commerce is to become a marketplace. Think eBay. Think Amazon. Then think of copycats like Sears, who essentially sell goods from other folks as a way to advertise Sears.
  • Customers do not inherently like advertising.
  • Let me take that back. Customers love advertising if it means they can watch the NY Giants for free, or The Big Bang Theory for free. Customers do not love advertising if it means that an ad telling you that you left a pair of socks in a shopping cart follow you around the web for the next week.
  • Customers escaped Web 1.0 via Facebook and Twitter.
  • As Facebook and Twitter further embrace advertising, customers will flee to yet-to-be-created platforms, which are always free at first.
  • Commerce is usually one step ahead of advertising.
  • As mobile grows, commerce will get figured out. When commerce is figured out, advertising will move in.
  • In other words, e-commerce will be gutted from the inside, first by ads, then by mobile ... much in the same way that Yahoo! was gutted from the inside by Google, and then Facebook/Twitter.
  • I'm saying that e-commerce growth will stall ... the very tactics that caused e-commerce to grow will manifest via mobile and will eat e-commerce.
  • E-commerce folks will miss this trend, in the same way catalogers missed the first trend ten years ago.
  • Hologram marketing will obliterate mobile, causing a subsequent shift from mobile to holograms (or whatever comes next). It's the way business works.
  • E-commerce mavens will cling to their business model ... "customers who shop via both e-commerce and mobile are worth 11 times as much, proof that e-commerce works."
My Main Point:
  • Regardless of channel or customer, the most important element of commerce is merchandise - having merchandise that customers love, at prices customers are willing to pay, sold via an entertaining environment that satisfies the customer. 
You're likely to disagree with me - so use your platform to argue for/against, leave a comment, or send me an email message (kevinh@minethatdata.com) outlining your hypothesis.