September 01, 2014

Forecasting Annual Sales

I've told you this story before. 1998, Eddie Bauer. I'm the new Circulation Director, which in the old days, was a pretty important job, pre-internet.

When you become a Director, you had better have a system in place. You know, a way of doing things that differentiates you from everybody else. And your system had better generate a sales increase and a profit increase ... or if you can only do one, it must be a profit increase.

Eddie Bauer had a common sales forecasting process. Their system required analysts to analyze every single customer segment in the database, within every single catalog, within every single timeframe. Toss in e-commerce, and you had a cumbersome, horrific, tedious system. It took a week to forecast the future of the business. This forecasting process was repeated, a week at a time, eight to twelve times per year.

My system was different. I developed it at Lands' End, in 1995. Any one of a dozen folks at Lands' End had similar systems, so I wasn't special by any stretch of the imagination. But at Eddie Bauer, a much bigger company, nobody had a comparable system.

The system?
  • Forecast annual (or seasonal) sales within just three segments ... twelve-month buyers ... reactivated buyers ... and first-time buyers. We forecast the repurchase rate, we forecast customer counts, and we forecast spend per buyer. Multiply it all out, and you have annual sales. Move the buyer counts a year forward, and you can replicate the process year after year after year, into the future.
At one point, my team was behaving in a somewhat prickly manner. The told me it would take a week to produce a forecast. Having all my department heads in my office, all staring at me earnestly, strongly suggesting that I was crazy, I made a decision. I typed six numbers into my "system", produced a forecast in a few minutes, printed the forecast, stuffed the forecast into an envelope, and then sealed the envelope.  I told my team to leverage all ten staff members for a full week, at forty hours per person, four hundred hours of labor at an average of about $27.50 per hour ($11,000), to produce the best forecast they could. They had to give me a six-month total demand number for the catalog division.

Forty hours later, the two forecasts were revealed.
  • My Forecast = $180 million in demand.
  • Their Forecast = $181 million in demand.
I remember my team, staring at me, obviously disappointed. It's not a pleasant experience to have somebody spend five minutes to obtain the same precision obtained via four hundred hours of work.

Now, did my team still have to forecast at a segment level? Yes. But not eight to twelve times per year. Just two times per year. We'd use my forecasting system to get all Executives aligned on the future of the business. Once everybody was aligned, we'd perform the segment-level work. Make sense?

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.


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.