September 20, 2006

Pier 1: A Multichannel Mess

The Motley Fool wrote about Pier 1 on Tuesday. Pier 1 has not performed well over the past several years, and a 14.8% decrease in comp store sales during the second quarter is almost unfathomable to imagine (unless you are like me, and you worked at Eddie Bauer at a time when that company posted twenty percent drops in comp store sales). In the second quarter, Pier 1 lost $73 million dollars on $373 million in net sales.

In 2001, Pier 1 earned $160 million pre-tax profit.

In 2002, Pier 1 earned $206 million pre-tax profit.

In 2003, Pier 1 earned $187 million pre-tax profit.

In 2004, Pier 1 earned $99 million pre-tax profit.

In 2005, Pier 1 lost $42 million, pre-tax.

In 2006, Pier 1 has lost nearly $100 million, pre-tax, through six months.

Wow.

The two articles paint a grim story for this business. Back in the first quarter SEC filing, management issues several interesting statements. Because Pier 1 is being attacked on the low end by brands like Target and Wal-Mart, and is being attacked on the high-end by brands like Williams Sonoma, management elected to try to move the brand out of the mid-market area, electing to compete with higher-end retailers.

Management invested a lot of money attempting to reposition Pier 1. After seeing the initial response to this repositioning, management quickly changed course, publicly stating it was retreating back to the mid-market niche it owned just five years ago. Management noted that traffic suffered, and that they alienated their core customer by attempting to attract younger customers during the summer months.

So all of the "brand building", advertising, prospecting, repositioning, change in merchandise assortment, and whatever else management tried was thrown out after a quarter of very poor results.

There are many lessons embedded in this sad story.

First, I question whether management had the right data to make the decisions they made. Marketing pundits and consultants will provide compelling arguments to management to make significant changes in marketing strategy and target audience, using competitive research, focus groups, and surveys to chart a future course of action. Pundits frequently fail to analyze internal customer data, data that would indicate how terribly hard it is to flip a brand in a short period of time.

Database Marketers know that existing customers significantly outspend new customers. Let's assume that Pier 1 had 4,000,000 twelve-month buyers in 2005, generating $1.78 billion in net sales. Let's also assume the following:
  • Half of these customers will normally repurchase in the next twelve months, spending $600 per repurchaser.
  • Pier 1 acquires or reactivates 2,021,053 customers per year, each one spending $285.
Obviously, I don't know if these numbers are even close to accurate, but they will illustrate my point.

If marketing pundits and consultants suggest that Pier 1 move up-market, in order to avoid competition with Target and Wal-Mart, then it is likely that Pier 1 will alienate some of its core customers. If core customers are alienated, then in order to increase total sales, Pier 1 must greatly accelerate customer acquisition to make up for the loss of existing customers.

Assume that the annual repurchase rate decreases from fifty percent to forty-five percent, due to the change in market positioning. In other words, ten percent of Pier 1 customers will be alienated by the change in merchandising strategy.
  • 4,000,000 customers * 45% repurchase rate * $600 per repurchaser = $1,080,000,000 net sales.
In order to make up for core customers who did not repurchase due to the market positioning strategy, Pier 1 has to significantly ramp-up customer acquisition. At an average spend of $285, Pier 1 must acquire 2,442,105 new/reactivated customers, a twenty-one percent increase over the 2,021,053 customers in the base case. Did that make sense? If you alienate your core customer by ten percent, then you have to ramp-up new customer acquisition by twenty-one percent, in this example, just to maintain flat comp store sales.

This is the piece of the puzzle that marketing pundits and consultants so often miss. No focus group of nine individuals can possibly help you understand that you must ramp-up customer acquisition by this magnitude, just to keep sales flat. No amount of management consultant marketing-speak can ready management for the challenging reality they face.

It is the responsibility of Database Marketers to develop simulations, and effectively communicate the results of the simulations to management, so that management can make educated decisions about the strategic direction of their business. I am willing to bet that Pier 1 management did not have access to the simple math illustrated in this article.

In no way am I advocating that Pier 1 should have stayed the course. I am advocating that Pier 1 should have utilized customer purchase information and simulations to make educated decisions. Had they utilized customer data correctly, they may have realized how challenging their turnaround would truly be, and may not have elected to immediately retreat back to a mid-market strategy.

From this point forward, Pier 1 must execute a brilliant merchandising strategy that brings customers back into the store, or heavily invest in acquiring new customers who accept the merchandise Pier 1 offers. The latter is very difficult to pull off.

I hope this helps explain why customer analysis, database marketing, and simulations are such an important part of the strategic decision-making process.

2 comments:

  1. Anonymous4:24 AM

    Hallelujah! Concise and clear -- I remember a number of years back when J. Crew did something similar, a number of catalogs that suddenly seemed to be focused on moody trendy teenagers. Surprise, I -- as a previously loyal, high order frequency, high average order customer -- attrited, and I later read that they, too, reversed course when their sales cratered.

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  2. Kevin Hillstrom6:43 AM

    It's darn hard to change course, and then use direct mail to "fill the funnel" with new customers. Admittedly, Pier 1 talked about other forms of advertising to get new customers.

    Think about core customers and younger customers like you might think about the family television. If you continually have 60 Minutes or "ER" on television, and then you want to cater to the young crowd to attract them into the living room, you need to turn on a different channel, like maybe MTV. And the change in programming may alienate Dad, who liked to watch Morely Safer, and now is frustrated with some guy named "Sway".

    I think you're better off, where possible, to try new "brands" that speak to a younger crowd, than to attempt to shift an existing "brand" to a different audience.

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