April 23, 2014

Stirrup Pants

I've never gone into a lot of the back-story about why we killed a traditional catalog business at Nordstrom.

Rest assured, one of the main reasons the catalog was killed was a classic omnichannel merchandising challenge that few experts want to talk about.

Catalogers perform what is called a "square inch analysis". They look at all demand generated by an item, in the catalog, and a portion of the online demand, then they divide the results by the total number of square inches of merchandise put in the mail.
  • Example: 1,000,000 circulation. An item is featured on 1/4th of a page. The item generates $12,500 demand. Demand per Thousand Pages Circulated = ($12,500 * 1,000) / (1,000,000 * 0.25) = $50.00.
  • Example: 1,000,000 circulation. An item is featured on 1/10th of a page. The item generates $7,000 demand. Demand per Thousand Pages Circulated = ($7,000 * 1,000) / (1,000,000 * 0.10) = $70.00.
When you perform a square inch analysis, you quickly observe that catalogs cause customers to purchase specific items. If you are a smart merchant, you run the items that exhibit a high demand per thousand pages circulated - you'd be an idiot not do to this.

Here's where the whole omnichannel argument falls apart.
  • Stores attract a specific audience with specific needs (entertainment / social).
  • Online marketing attracts a specific audience with specific needs (merchandise needed now).
  • Email marketing attracts a specific audience with specific needs (discounts/promos).
  • Mobile marketing attracts a specific audience with specific needs (information needed now).
  • Catalog marketing attracts a specific audience with specific needs.
At Nordstrom, the catalog customer loved stirrup pants, and loved elastic waist products. At Nordstrom, the retail customer had zero interest in this merchandise.

In order to maximize the productivity of the catalog, you needed to feature more stirrup pants, and more elastic waist products - and you needed to feature that merchandise at the front of the catalog.

In order to maximize the productivity of a store, you stayed miles away from stirrup pants. Worse, the catalog customer would return the stirrup pants to the store, hurting comp store sales in the store, disappointing the customer in the process (no stirrup pants in the store).

A decision was made. Nordstrom would kill the catalog. In other words, the catalog had no place in a marketing mix where the catalog customer pushed the catalog in a direction in-congruent with the direction of the brand.

We eventually mailed catalogs, with each page featuring products chosen by retail vendors. The productivity of these catalogs was 20% of the productivity of a standalone catalog designed to drive sales. 

In a Merchandise Forensics project, you're going to run across channel conflicts. Each channel has a specific need, a purpose, and that purpose must be capitalized upon for success within that channel.

Omnichannel experts want you to homogenize each channel, so that each channel is reflective of the brand. This may be exactly what you have to do, it's what Nordstrom did and it sure worked for them. But you have to understand the tradeoffs. For too many of my clients, the tradeoffs result in a dramatic drop in profitability, especially if the catalog fostered a customer audience that is now 60+ years old.


Amazon and Retail

You can't go anywhere this morning without somebody pointing you to the analysis researchers performed on the impact of sales tax at Amazon (click here to read the article via the NY Times ... or click here to read the article yourself).

The NY Times article suggests that "at this point, there is little that will bring online shoppers back to bricks 'n mortar stores." That statement is left hanging, without any facts or data to support the hypothesis. It requires us to ask a few questions.
  • Why do 85% or more of all sales still happen in stores, given that the vast majority of customers have placed at least one online order in the past twenty years, and therefore, are considered online shoppers, and therefore become shoppers who won't go back to bricks 'n mortar stores?
  • The article suggests that Amazon is learning hard lessons about customer loyalty and price. Really? Is an increase in sales in 2013 to seventy-four billion ($74,000,000,000), a 22% increase over 2012, something that you consider a "hard lesson"? Did your business increase by anywhere near 22% last year? If so, you learned hard lessons, didn't you?!
We confuse price with utility.

Apple charges sales tax everywhere, thanks to their retail presence. And yet, you buy an iPad and you pay a 2x premium over a comparable Samsung item. Why? Why do you willingly ignore the industry narrative when buying devices from Apple?

If Amazon has an enormous advantage over retailers because of sales tax, then you have to make the same argument for catalogers ... yes CATALOGERS ... who have an enormous advantage over retailers because of sales tax. And yet, catalogers don't grow in an unfettered manner, do they? Nobody writes articles about the unfair advantages that 22,000 catalog companies have over retail brands.  Why hasn't Garnet Hill risen to lofty levels, enabling them to crush retail competition? Be honest!

I'm asking you to think about the real reasons that you, the marketing professional, shop Amazon over a retailer or anybody else for that matter. It's not a sales tax issue. Be honest with yourself.

April 22, 2014

Last Chance Email Messages

97% of the folks in the email marketing community are trying to do their best - they're limited by company strategy and customer apathy.

I know, it's hard. You have half your list who never bothers to pay attention to messages. It's easier to just get rid of them ... boom ... your metrics improve (but sales don't improve), and you can tell your boss you improved open/click/conversion rates. You get a bonus. Woo-hoo!


There's two alternate strategies we can employ.

  1. Don't anger your customer - simply reduce frequency quietly. Why publicly suggest that you no longer value the customer enough to deliver an email message that costs $0.003 apiece to send?
  2. Test your way into a 200% increase in open rates and a 100% increase in click-through rates (click here to read the article).
Try something different - be creative - test strategies among customers who never open/respond. You may just find that you were boring the customer to the point of apathy.



April 21, 2014

Gold, Green, Blue, and Red

I am always amazed at how infrequently catalogers analyze the performance of individual spreads.

Here's something I was introduced to at Lands' End, back in 1992 (yes, 1992). We calculated the profitability of every spread. If a spread performed at 30% or greater variable profit, it earned a color code of GOLD. If a spread performed at 20% to 29% variable profit, it earned a color code of GREEN. If a spread performed at 10% to 19% variable profit, it earned a color code of BLUE. Finally, if the spread performed below 10% variable profit, it earned a color code of RED.

You give the image above a quick review, and you know, immediately, what worked, and what did not work in the catalog.

  • Major success with pages 2 - 27.
  • A disaster on pages 28 - 35.
  • Another disaster on pages 46 - 55.
We learned that the first twenty pages were critical to the success of the catalog. If those pages worked (YELLOW, GREEN), then the catalog worked. Series of spreads that did not work were frequently aligned with terrible creative - inventory problems - or categories that were poorly merchandised.

This type of analysis takes all the pressure off of the circulation team. You can't argue that the circulation team "mailed the wrong customers" - that doesn't account for the reason why pages 2-27 did well while 30-35 were simply awful. We put accountability squarely on the individuals responsible for the merchandise presented, and the creative presentation of the merchandise.

Share with the audience the measurement technique you use to identify good/bad spreads. Leave a comment - or send me an email message (kevinh@minethatdata.com).

The Wall St. Journal Loves Catalogs

Of course, you've already read this - heck, you are probably one of the folks who forwarded the article to me! (click here to read the article).

Since you don't get to see many positive catalog messages, I thought I'd share this one with you. Put a smile on your face, and go generate some profit for your business!


April 20, 2014

Getting Along

Our industry is prioritizing tactical nonsense over human interactions.

Have you ever actually listened to employees? Have you ever actually listened to what they say? Sit in on an "omnichannel excellence meeting" someday, and then an hour later, interview the folks who attended. That's where truth emerges.

IT Executive: "I read an article about this big data thing, but nobody wants to invest in the infrastructure necessary for my team to glean insights from big data. And my team could easily outperform the analytics team, we know analysis and code and database structure."

Marketing Executive: "The IT Executive needs to shut up, she has no accountability for the analytics team. I will tell the analytics team what to analyze, and they will analyze billboard marketing effectiveness."

Online Executive: "Marketing wants to focus on using billboards to create awareness. Those folks are both nuts, and at least a decade behind the times. Billboards. Geez."

HR Executive: "If we could just employ org structure best practices, we could easily beat the competition. And the CEO is just plain mean, but we can't do anything about her. She yells at people for no good reason."

Creative Executive: "I'll quit if I have to report to the Merchandising Executive. The merchandise executive is a coward."

Merchandising Executive: "My product is just fine, the ineptitude of the creative team and their "lifestyle presentation initiative" is killing my business. It's also true that nobody knows how to market my merchandise. Do I have to do everything myself?"

Operations Executive: "I could run marketing better than any of these morons who want money for billboards. Our future hinges on a highly engaged social shopper. Just talk to anybody in my call center, they'll make it really clear for you."

Omnichannel Integration Executive: "I wish the operations executive would figure out how to cost effectively deliver a package in 24-48 hours instead of three to five days."

Analytics Executive: "Nobody listens to a word I say."

Inventory Executive: "I can't understand a word the Analytics Executive says. He should be fired and replaced with a competent individual who speaks the language of business."

CEO: "I yell at my employees because they are jealous, petty morons. I have to be a perpetual crab apple in order to get anything done. And my Board of Directors are jealous, petty morons, too. Why am I the only rational person working at this company?"


No org structure solves these problems. None.

Every company has these issues. While common across companies, the specific dynamics within each company are fully unique - so no solution "scales" and applies to all companies.

But this is where the magic happens.

And nobody wants to talk about it.

We're all dancing around this issue. "Omnichannel" is a code word for a mythical solution that gets people in dissimilar functions to work together. We should focus more on getting people to work well together than a mythical word designed to force people to work together.

April 17, 2014

Attracting A Younger Customer

Inside a book store, we see a nice display, don't we?

Top Teen Picks.

New Teen Fiction.

What is missing in this picture?

Teens.

It is good to offer merchandise designed to attract a younger audience.

Then, we have to find a younger audience. It's really hard to do that within a framework designed to attract the loyal, core customer.

April 16, 2014

Bed, Bath, and Beyond

I needed garbage bags ... not your ordinary garbage bags, but Simple Human garbage bags, size J.

Look at the omnichannel magic pasted all over this image. Store integration, sign up for offers, like it on Facebook. I could share the product on Twitter or Pinterest. That's a lot of social / mobile / e-commerce / in-store omnichannel goodness.

Look at the price:  $15.99. And if I only buy this item, I have to pay $5.99 standard shipping, $18.99 express shipping, or I have to spend one to two hours to drive to a store and buy the item ... my choice. Omnichannel!

Let's go do a search on Amazon - same item.

Are you kidding me? $13.99 - or, if I want to get put on a "subscription", I can get the item for $13.27. And I get free two day shipping via Amazon Prime.

Tell me how turning Bed, Bath and Beyond into a digital distribution center helps Bed, Bath and Beyond when I can get the same item, 13% cheaper and delivered faster and potentially more inexpensively via Amazon?

Describe the compelling reason why I should buy this item and pay a $2 premium at Bed, Bath, and Beyond? What are the #omnichannel reasons that trump price.

Leave a comment, and share your thoughts with us. Why would you elect to not buy this item on Amazon? Outline, specifically, the omnichannel advantage Bed, Bath and Beyond has over Amazon.

April 15, 2014

Successful E-Commerce Brands

Last month, a catalog advocate left a comment ... this smart person pointed out that there are terribly few e-commerce brands that have achieved "scale" (meaning that the business became very large and dominant).

Her point was that e-commerce needs an "assist". Amazon aside, unless the e-commerce brand has retail stores to market the website, or unless the e-commerce brand has catalogs to market the website, e-commerce is unable to achieve critical mass.

This opinion, of course, was offered as a defense of maintaining a catalog marketing strategy.

Last month, one of our long-time retail/catalog/e-commerce readers sent a very well-written article, penned in the past year, called "E-Commerce is a Bear" (click here).

That's a well written piece, don't you think? It should have, at minimum, caused you to think!

If there's one thing I've learned, it is that e-commerce fits within many different business models.

  • Judy-Centric Cataloging:  Here, the e-commerce business model is the "order form" business model. For so many catalogers, e-commerce ultimately replaced the catalog order form.
  • Jennifer-Centric Search Business: These businesses don't "scale", as the pundits say, but who cares? These are e-commerce models that are built on search, they quickly approach $10,000,000 in annual sales and $500,000 in annual profit, then stall. Businesses that "scale" require secret sauce. Search (and email) are not secret sauces, are they? Honestly, these businesses are the modern parallel to the New England based catalog business of the 1980s - New England was host to a thousand businesses that grew to a small but profitable size that printed money for the owner.
  • Jasmine-Centric Social/Mobile Business:  For Jasmine, e-commerce is the mobile/social order form. Again, it's terribly easy to build these businesses to $10,000,000 with $500,000 of annual profit, but then you need secret sauce.
Once a business hits the $10,000,000 to $30,000,000 range, secret sauce needs to be applied.

It's not much different in retail, by the way. Wal-Mart applied the secret sauce (everyday low prices), running the non-scale oriented downtown department stores out of business. Look at what Best Buy did to electronics sellers. Or what Staples did to office supplies stores.

The article speaks of a fundamental truth ... there is no longer room for "mid-sized" businesses. It's easy to get a business to $30,000,000 ... then secret sauce is needed to get a business to a billion or bigger. Secret sauce frequently requires branded merchandise sold at lowest prices or at deep discounts, allowing the billion dollar plus business to generate 3% profit.

We should probably do the opposite. We should probably sell proprietary merchandise, becoming a mid-sized business generating 10% pre-tax profit. Unfortunately, too many of us are willing to spend somebody else's money trying to figure the secret sauce out on the fly.

April 14, 2014

Hillstrom's Retail Nightmares: Storm Clouds Are Brewing

I know, I know, the experts want you to digitize your retail store. By making the store more like a website, customers will happily visit your store instead of using your website?

No?

Ok, so digitizing the store will cause the store to be integrated with the website, causing customers to use your website more often. The customer will stay at home, enjoying a fully integrated experience on a tablet, leaving the parking lot looking pretty darn empty. Who wants to visit a store when there are no cars in the parking lot?

Let's take a look inside the Office Depot store pictured above:



Yup - nobody in there. And we already knew that from looking at the parking lot.

Where is the pleasure in this shopping experience? Be honest! Where is the thrill? The excitement? The discovery?

I know, what the heck are Office Depot / Office Max & their competitor, Staples, supposed to do? I get it. Not fun.

But the pundits cannot save Office Depot / Office Max or whatever the two-headed monster will be known by in the future by recommending they create an integrated experience where 20,000 square feet are used as a digital distribution center for customers who mysteriously choose to not order via Amazon and instead order online and then drive to a store to buy a pre-ordered item coupled with an add-on calculator that could be cheaply simulated via a free app on a mobile device.

Retail seems to be moving in opposite directions ... a gigantic Cabelas store chocked full of entertainment ... or very small stores that serve a unique and entertaining purpose. Turning a retail store into a digital distribution center only pleases those who sell solutions designed to turn retail stores into digital distribution centers. I imagine it is horrible to be Office Depot / Office Max, to be caught in the middle.

Amazon: Hologram Marketing

I've been talking about Hologram Marketing for eight years. It's coming (click here).

  • Catalogs = Judy.
  • E-Commerce = Jennifer.
  • Mobile = Jasmine.
  • Hologram = Jadyn.

April 13, 2014

Hillstrom's Retail Nightmares: Coldwater Creek


Maybe you can tell - I am ANGRY about this. ANGRY!

The story of Coldwater Creek is the story of an investment-based color-by-the-numbers "multichannel / omnichannel" strategy designed to achieve "scale". Well, "scale" was achieved ... there is no shame in a business that nearly generates a billion dollars.

The sadness, of course, is that scale was achieved, but in turn, the business was destroyed. Scale without profit is pointless. We've all learned that humble profits are lasting profits.

Let's walk through a series of graphs.

Here's the first graph. This graph shows us how retail net sales and direct (online + catalog) net sales evolved over time.


We've been taught that direct grows nicely in a retail environment. 

We've been taught incorrectly.

Coldwater Creek financials show us that the catalog investment was a big, fat, juicy line on the expense statement. Over time, retail growth was fueled by debt. And, by a reduction in catalog mailing strategy.


Compare this graph to the number of stores, by year. Tell me what you observe.


I'm not saying that catalogs should be mailed in perpetuity - heck, I spend a ton of time reducing catalog mailing expense for my clients (quite profitably, I might add).

But the shift to retail brings about two pressures.

  1. Reduced catalog expense to fuel retail.
  2. Reduced gross margin percentages to gain retail market share.
Gross margin means everything. It's the foundation for business. Gross margin dollars fund marketing, they fund corporate expenses, and gross margin dollars generate the profit that allows shareholders to either increase value or realize gains via dividends. The best managed businesses find a healthy equilibrium between gross margin rates and growth.

Here's what happened to gross margin percentage at Coldwater Creek.


By the way ... do you see the gross margin bubble in 2005, 2006, and 2007?

  • Feb02 - Feb04 Total After-Tax Profit = $23 million.
  • Feb05 - Feb07 Total After-Tax Profit = $126 million.
  • Feb08 - Feb10 Total After-Tax Profit = ($84) million (loss).

Gross margin means everything.

In the 1996, Coldwater Creek was a modestly-sized catalog brand with 57% gross margins and 10% pre-tax profit.

In 2014, Coldwater Creek evolved into an "omnichannel" brand with 31% gross margins, and is bankrupt.

You cannot blame this on the economy. Gross margin percentages were in free fall from the time of the IPO (early 1997) through current - you can fit a nice regression line through the relationship in the gross margin map, don't you think?

Do you understand how critical gross margin dollars are to a business? Let's say you are a $750,000,000 business generating 31% margins - and you have a 20% ad-to-sales ratio (marketing), and 10% of sales are required to cover fixed costs and administrative costs.

  • $750,000,000 sales.
  • $232,500,000 gross margin dollars.
  • $150,000,000 marketing costs.
  • $75,000,000 fixed costs.
  • $7,500,000 profit.
Now let's look at a business with the same marketing costs, same fixed costs, but a business generating just $500,000,000 net sales at a 57% gross margin.
  • $500,000,000 sales.
  • $285,000,000 gross margin dollars.
  • $150,000,000 marketing costs.
  • $75,000,000 fixed costs.
  • $60,000,000 profit.
The first business is a 1% pre-tax profit business that will die the minute a 5% shock hits the system.

The second business is a 12% pre-tax profit business that can withstand myriad challenges.

That's the power of gross margin.

I know, I know ... "your business is different" ... or ... "your customer is different" ... or ... "your competition is different" ... or ... "your pricing strategy is different" ... or ... "your customer buying cycle is different".

Stop it.

Just stop it.

We are trading fundamentals for fantasy.

Did Coldwater Creek not follow the MBA-inspired, research-brand advocated, Wall St. enabled multichannel / omnichannel playbook to the letter? Bricks 'n clicks! Multichannel customers are worth 9 times as much as single channel customers!

Coldwater Creek followed the playbook to the letter. And if multichannel/omnichannel customers were truly worth 9 times as much as single channel customers, then Coldwater Creek should be a three billion dollar monster generating three hundred million dollars of profit.

Right?

The playbook led them to bankruptcy.

Might it make sense to sell merchandise customers love, at healthy gross margins?

April 10, 2014

Old-School Multichannel Forensics - Mobile

When I founded MineThatData more than seven years ago, folks wanted to understand how channels fit together.

Today, folks want to understand how channels fit together ... so that they can prove that retail, or catalogs, or e-commerce fits well in a mobile world.

Last week, I read an article where the author said that 2/3 of e-commerce demand will come from mobile.

And yet, I have clients who are not even close to generating 2/3 of their business online.

The story, of course, isn't the macro-level data you read about.

The story is how your customers behave.

Click here to see an old-school analysis, called a "Migration Probability Table". This technique still helps us understand how customers are evolving, how they are changing.

There are two big stories being revealed in MPT tables in 2014.
  1. The dynamic between e-commerce and mobile as transactional channels.
  2. The dynamic between e-commerce/mobile and retail as transactional channels.
If you are a retailer, the latter is really important. We're seeing two interesting dynamics. New retail customers are, in some cases, being cut off by e-commerce ... this is a new dynamic. We're also seeing retail customers becoming more willing to shop via e-commerce, this, too, is a new phenomenon, and is easily measured via the MPT.

In e-commerce, there is a transactional shift from desktop/laptop to tablet (more than desktop/laptop to phone). Use the MPT to measure this shift.

This is important, folks. If your table tells you that when customers shift from e-commerce to mobile (as a transactional channel), and then do not shift back, then your e-commerce business is about to be fundamentally transformed.

Give the MPT some love - it may just tell you when your business is about to be transformed.