November 25, 2014

Modern Retail Comp Store Sales Calculations

In the old days, when retail comps were acceptable, companies broke out direct channel sales and retail sales - separately.

In the modern era, with retail comps tepid at best, companies add total direct-channel sales to the comp store sales measure, and for good reason.

Here's an example of how this works.
  • E-Commerce Last Year = $1 Million.
  • E-Commerce This Year = $1.2 Million.
  • E-Commerce Comp = +20%.
  • Retail Last Year = $10 Million.
  • Retail This Year = $10 Million.
  • Retail Comp = 0%.
  • Total Business Last Year = $11 Million.
  • Total Business This Year = $11.2 Million.
  • Reported Comp = +1.8%.
See how that works?

I know, I know, the experts will tell you that, in an omnichannel world, you have to add the two metrics together. Fine.

But the modern metric hides retail weakness. So if you're going to do this, you must find a way to clearly articulate the weakness evident in in-store retail performance.

Think carefully about the future, a future where e-commerce performance increases, but increasingly, there's fewer and fewer people shopping in a physical store. I'm not talking about a store going from $1.5 million in annual sales to $0.5 million, that won't happen. All it takes is the store going from $1.5 million to $1.3 million for all sorts of interesting dynamics to happen - just ask your CFO.

November 24, 2014

Warby Parker: $3,000 Per Square Foot

Another breathless article suggests that this e-commerce business is moving into retail, and is doing amazingly well (they are). Click here to enjoy.

The vast majority of retailers would love to enjoy the luxury of $3,000 per square foot.

Catalogers know how this process works. If a cataloger only mailed a November catalog, that catalog would generate $15 per book. But when a cataloger adds the 28th catalog to the calendar, it generates $3 per book. The law of diminishing returns is alive and well.

Catalogers know the square footage game as well ... in catalogs, it's square inches. Have a 64 page catalog, and you get $60 demand per thousand pages circulated. Have a 128 page catalog, and you get $40 demand per thousand pages circulated. The law of diminishing returns is alive and well.

Established retailers know how this process works. Your first store in the New York City market generates $500 per square foot ... your tenth store in the New York City market generates $250 per square foot. The law of diminishing returns is alive and well.

Warby Parker deserves praise for earning $3,000 per square foot - you go and try to achieve that level of productivity - it's not easy. The challenge for Management, of course, is to forecast what happens if the size of a store were to increase (this store is less than 1,600 square feet - very, very small), and as the number of stores within / across markets increase. That's hard work, because with one data point, you can draw a line from the data point to anywhere.

Major, major props for good performance. Major challenges forecasting what happens next. And your mileage will vary.

Your thoughts?

November 23, 2014

Catalogers: Please Preview This Draft Of A Presentation

If you are in the catalog world, you know that I will be participating in a day long presentation about the future of catalogers / e-commerce businesses and those who look out for your interests (in Concord, NH, on February 19, 2015 - click here for preliminary details). The day-long event is hosted by Datamann - it's a non-selling event, for those of you who are interested.

I assembled a series of notes that may or may not be used during my presentation, the slides represent my initial thoughts. I'd like for Catalog Executives and Catalog / E-Commerce / Retail Employees to click here and thumb through the notes. Please give me some feedback - what do I need to cover that you think is missing from the notes - where do you think I'm aligned with your thoughts - where do you think I am completely missing the boat? What would you like for me to share about the future of our industry? What are the business challenges you want for me to address?

Again, this is not the presentation ... these are the notes that will form what ultimately becomes the presentation. As I learn more, and receive your feedback, I'll modify the content.

Click here to download the presentation.

Then send me an email ( with your feedback, suggestions, and thoughts.

November 20, 2014

More Channels, Same Purchase Frequency

We hear a lot about income inequality, don't we?

Often, among the retail, e-commerce, and catalog businesses I analyze, I also observe interesting dynamics that have parallels to what is happening out in the real world.

Back in the 1990s, I worked at Lands' End and Eddie Bauer. Both businesses generated disproportionate profit from what I would call "middle class buyers". My definition is not based on income, it's based on annual purchase frequency.

All businesses have elite customers ... those who purchase 5+ times a year. A nice chunk of profit comes from this small group of customers.

All businesses have a glut of unproductive customers ... those who purchased one time in the past twelve months. The secret here is to be able to generate profit on just the one transaction ... something that catalogers find increasingly difficult ... something that e-commerce brands are easily able to accomplish.

The middle class, then, are customers who purchased 2-4 times in the past year. These folks contribute above-average levels of profitability. We all need a healthy middle class, in order to achieve 10% pre-tax profit.

In recent years, the middle class is shrinking.

Here's a common outcome, when I run a query on percentage of buyers by purchase frequency, across the past decade.


1x buyers are increasing in share.

5x+ buyers are increasing in share.

2x - 4x buyers are decreasing in share.

This is a logical outcome of a multi-channel / omni-channel strategy. What happens, of course, is that all the attention is centered around the "best" customers, so long as the best customers shop multiple channels. The strategy appeals to this small subset of the population.

Unfortunately, the strategy does not appeal to the "middle class" ... customers who are merchandise-centric, and not channel-centric. These customers, over time, become less and less thrilled with the direction of the business (especially as retail begins to limit the assortment - focusing only on best sellers in stores), and purchase less often, falling into 1x status (per year) at greater rates.

The net of all of this activity is often nothing ... you lose sales from the middle class, you gain sales among hyper-loyal omnichannel buyers, yielding the same financial outcome.

Eventually, though, these business models are starved from the outside ... too few new buyers ... too few reactivated buyers ... and when new/reactivated buyers purchase, they are 1x buyers with lower long-term value.

Run the query - see if this is happening to your business.

It's my opinion that while a majority of businesses chase omnichannel endeavors, a minority of businesses will figure out the merchandising reasons the "middle class" buy from a business, and will thrive.

November 19, 2014

Slowly Leaking Out Into E-Commerce

I've talked about this before, but it is important to share with you once again.

Catalogers went through this change, from 1995 - 2005. The majority of sales happened in the call center. And then, over a ten year period of time, sales leaked out. Slowly. Customers shifted online. By the time The Great Recession arrived, the customers who were inclined to shift online had done so, leaving the call centers "as is", serving a different customer demographic.

This same dynamic is happening in retail, albeit much slower, and with very different consequences.

Run this query. Identify all customers who bought in a retail store in 2013 (year ending November 19, 2013). Then, among all customers in this segment who purchased in 2014 (year ending November 19, 2014), calculate the percentage that also purchased via e-commerce. Re-run this query for the past decade.

Your results might look something like this:
  • 2014 = 29%.
  • 2013 = 27%.
  • 2012 = 26%.
  • 2011 = 24%.
  • 2010 = 19%.
  • 2009 = 17%.
  • 2008 = 14%.
  • 2007 = 10%.
  • 2006 =   9%.
  • 2005 =   8%.
Now, the omnichannel community loves seeing metrics like this. To them, it's proof that omnichannel works ... customers are migrating online, and that has to be a good thing.

Well, there's nothing wrong with channel shift. Customers should do whatever they want.

The problem, of course, is that when you review your customer file in total, you notice that annual purchase frequency is not increasing. By and large, we're just moving customers back and forth across channels, spending more money to do so. Worse, we're driving less traffic into stores, meaning that long-term, the stores are going to appear to be unprofitable.

Run the query. Tomorrow, we'll talk about another query you should run. Combined, the two queries help us understand whether our omnichannel efforts resonate with the customer, or with vendors.

November 18, 2014

Catalog Marketing: Best Practices Yield Clutter

I'm not a catalog shopper, folks. I was, back in 1999. For me, e-commerce became the primary way to purchase merchandise, and then, Amazon. I doubt I'm alone, among those under the age of 50.

So here I was, this afternoon, exactly nine days prior to Thanksgiving, walking to my mailbox. I remembered the twenty years I spent measuring in-home date effectiveness ... "don't be in-home the week of Thanksgiving" ... "Monday-Wednesday is a better in-home window than Wednesday-Friday" ... blah blah blah blah blah.

Of course, it's 2014 now, not 1999. You have choices. The omnichannel folks will tell you that you have infinite choices. And they expect you to utilize the veritable buffet of choices at your disposal. It's how they get paid.

So why, when I go to the mailbox today, do I obtain a fistful of catalogs, all mailed on November 18, in observance of all established catalog best practices? 

My goodness, how many catalogs do you think the 68 year old retired school teacher living just south of Buffalo received today (assuming that the customer could get to the mailbox amid 70 inches of snow - click here)?

Two problems here.

  1. I'm not a catalog shopper, and yet, catalogers are pummeling me. I can fix that problem among housefile buyers ( if you're interested). Only co-ops can fix the problem among prospects, and there's a financial disincentive for them to fix the problem.
  2. Creativity and Original Thought: Best practices are not best practices - they're lazy tactics that eliminate creativity. I realize that you've mailed a catalog for thirty years nine days prior to Thanksgiving. I realize that it's easy to pencil in this in-home date when creating your 2015 plans. Why not try to demonstrate some creativity? At minimum, why not extensively test different ideas? If you test, and you find that being in-home nine days prior to Thanksgiving is best, then you're well ahead of the curve.

November 17, 2014

E-Commerce Moving Into Retail

Seldom do you read anything practical. But then you find this article (click here) from The Economist.

An e-commerce brand moving into retail is not proof that retail is the right move. It is, however, a blatant acknowledgement that growing the customer base via an e-commerce-only business model is really, really hard, and has a ceiling for most.

I've mentioned, on numerous occasions, that The Story Of The Fall is the inability of businesses to reactivate lapsed buyers, or to acquire new buyers. Nowhere is this more acute than in e-commerce. Remember this graph?

When comparing catalog and e-commerce business models, I usually observe that the e-commerce business model struggles to convert the first time buyer to a second purchase. Worse, with a low annual repurchase rate (from 1st to 2nd purchase), e-commerce business models churn through customers at a much faster rate than catalog (and retail) business models.

This makes it very hard for most e-commerce businesses to blast through the $100,000,000 hurdle. Ask any cataloger how hard it is to blast through $100,000,000! Now try doing it with 2/3rd the repurchase rate for 1st-to-2nd time buyers.

E-commerce growth is easy up to $10,000,000 ... you can use social and SEO and viral marketing and you can get there. Then you need a diversified merchandise assortment to grow to $30,000,000 ... each new customer you get has a lower repurchase rate than customers acquired in the $0 to $10,000,000 range, so you almost have to bump the repurchase rate via a broader assortment. From $30,000,000 to $100,000,000, you move into a marketing realm where you have to start spending money. As you spend money, you cannot afford to churn customers with low repurchase rates - the math simply doesn't work.

In other words, you run your five year forecast, and you quickly learn you're going to hit a ceiling.

And you run out of easy answers to grow.

And retail is about 85%, +/-, of total sales.

And you start thinking that retail is a good thing.

Conversely, retailers are going to be closing stores right and left in the next five years. Old school retail slowly dies as it is cut off from a younger demographic - while online businesses catering to a younger demographic move into retail. It's retail Darwinism.

Retail is going to look very different a decade from now. Get out in front of the trends, friends.

November 16, 2014

Speaking Of Breathless Omnichannel Exuberance ...

... this one is about Domino's, courtesy of NPR (click here).

Here's the best part ... the story is a glowing omnichannel festival of tech love ... but when the NPR reporter orders a pizza using fancy omnichannel technology, guess what happens (not listed in the text of the article)?

  • The order arrives, and the toppings are wrong!
The toppings are wrong!

Merchandise and Service are being forgotten. We're constantly being told by folks with a vested interest in technology that customers demand flawless technology across channels. The the folks with a vested interest in technology get paid.

Customers also demand that the darn pizza arrives as ordered. In fact, that's more important. Much, much more important.

There is a lot of room for businesses to simply get the basics right. And customers seem to like it when the basics are executed properly.

Why don't the omnichannel advocates talk about getting the basics right?

Macy's: A Sales Decrease Is Proof That Omnichannel Works

Read the headline, and read the story (click here).

The author cheerleads "omnichannel". Of course, the author mentions and then completely ignores the fact that comp store sales decreased in Q3.


Sales decreased.

What happens to us when sales decrease on our watch? We get fired. We've all been there.

But in the world of omnichannel, a sales decrease is celebrated.

Something is really, really wrong, folks.

The breathless praise continues ... here's one for Nordstrom (click here), a company where inventory levels are outpacing sales increases (hint - that's bad news, it means customers aren't buying at company expectations).

Our industry picks and chooses the arguments that fit the industry narrative. Dig through the narrative, and look at facts.

November 13, 2014

Competing With Zulily

A fellow consultant called me - asking why catalogers are so "pig-headed" when it comes to testing? This individual was frustrated, because the catalogers the person works with will not test pagination, will not execute holdout tests, will not serve up different versions of the website to different customers, will not test personalization, simply "will not" experiment.

"Why is this the case" ... this person asked? Maybe you can answer the question.

Contrast the point of view above with what Zulily is trying to accomplish ... a different version of the website for every single customer (click here).

Now, the conclusions in the article are completely bogus (tenure on the website drives increased purchases - no - the best customers do everything, and have been around the longest, and therefore, they evolve to high-frequency segments much faster than everybody else - and this happens at companies who never change the website too, and maybe the firm helping Zulily wanted that tidbit put in the article for unknown reasons, that's a topic for another day). But the concept of testing, of trying things, of doing something different for every customer, that's going to pay off, and is valid to discuss.

The marketing world is moving in several different directions, simultaneously.
  1. Catalogers are largely "doubling down" - focusing on the 60-75 year old core customer. Here, you do not need to be a sophisticated marketer and you don't need to compete with Zulily - you simply need to offer products that cater to a 60-75 year old customer. Lots of short-term profit to be had here, with undeniable long-term consequences.
  2. E-commerce businesses are heading down the Zulily path - an algorithmic version of marketing. Just ask Amazon. You don't do retargeting because it works, you do it because of the data you collect. E-commerce and Artificial Intelligence are going to become the same thing. Here's the danger - algorithms work really well on commodity items at low prices. Algorithms struggle with fashion-centric and excitement-centric business models.
  3. Retailers will not focus as heavily on algorithmic solutions - they will lag behind e-commerce folks because of all the compromises they have to make to drive customers into stores. Retailers will have bigger issues - in-store fixed costs are going to demand attention. But retailers will be pulled into tech AI solutions ... there's a reason why Google and Macy's tout online search that drives in-store purchases ... Google wants the searches for $$, they want the mobile searches and online visits to fuel their AI engine. Retailers will be pawns, offline inputs for data-starved AI engines (Google, Facebook, Twitter, IBM, Microsoft, and many others).
  4. Mobile will evolve differently than e-commerce - much more of an AI / algorithmic solution that yields convenience, one that yields hyper-personalization among folks under the age of 35. Just use Google Maps for travel, and you'll see where all this is headed.

November 12, 2014

This Is Why Digital Vendors Demand Retailers Become "Omnichannel".

Here's the link to the infographic on the right (click here).

Look at the four circles at the bottom of the graph.
  • $13 Billion in Mobile Sales.
  • $190 Billion in Online Sales.
  • $1,100 Billion ($1.1 Trillion) in retail sales allegedly influenced by online research.
  • $1,700 Billion ($1.7 Trillion) in retail sales not influenced by online research.
That $203 Billion that is Online + Mobile ... let's say that grows at +12% per year for ten years ... compounded ... that gets us to $630 Billion.

If the $2.8 Trillion grows at +2% per year for ten years ... compounded ... that gets us to $3.4 Trillion.

In other words, Online is constantly dwarfed by Retail ... for a decent amount of time, going forward.

This means that vendors looking to make $$$ on digital have their eyes a gigantic amount of Retail volume. If they can convince you that Online/Mobile cause Retail to happen, then they can get paid for the paltry Online portion of the total, and they can get paid for the gigantic Retail portion of the table above.

Just something for you to think about. There's no doubt Online+Mobile influence Retail. There is minimal proof, if any, that Online+Mobile cause Retail sales to increase ... there's plenty of proof that Online+Mobile divert sales away from Retail, at slow rates.