Back in 2001, I was part of a new management team recruited by the esteemed Michael Smith (of Lands' End, Classmates.com and Bag, Borrow Or Steal fame). Our job was to fix Nordstrom.com, a division of Nordstrom that was posting hideous double-digit negative EBIT, year-after-year.
In our first four months, we experienced something that tests professionals who think they're brilliant. A business that was failing mightily began to miss expectations by more than twenty percent. In fact, one series of catalogs missed plan by forty-five percent. That means customers liked the catalog so little that they spent almost half of what they spent in a comparable catalog the year prior --- a year where double-digit negative EBIT occurred.
Here is what the results looked like, with numbers altered to protect the innocent:
|Analysis Of Catalog Results |
|Rates ||Plan ||Actual |
|Circulation ||4,000,000 ||4,000,000 |
|Demand ||$35,000,000 ||$19,250,000 |
|Net Sales ||71.0% ||$24,850,000 ||$13,667,500 |
|Gross Margin ||52.0% ||$12,922,000 ||$7,107,100 |
|Less Book Cost ||$5,000,000 ||$5,000,000 |
|Less Var. Op Expense ||11.0% ||$2,733,500 ||$1,503,425 |
|Var. Op. Profit ||$5,188,500 ||$603,675 |
When your catalog misses expectations by nearly five million dollars profit (remember, numbers have been doctored a bit, to protect the innocent), folks begin pointing fingers at each other ... quickly! Your new merchandising expert blames the old administration. The old administration blames the new team. Your President suggests you don't know a thing about circulating catalogs.
After the finger pointing subsides, you have to get down to the hard work of planning next year's catalog. You use the catalog that completely failed as your planning base. Your circulation plan for the next year might look as follows:
|Next Year's Plan |
|Rates ||This Year ||Next Year |
|Circulation ||4,000,000 ||1,600,000 |
|Demand ||$19,250,000 ||$10,900,000 |
|Net Sales ||71.0% ||$13,667,500 ||$7,739,000 |
|Gross Margin ||52.0% ||$7,107,100 ||$4,024,280 |
|Less Book Cost ||$5,000,000 ||$2,479,000 |
|Less Var. Op Expense ||11.0% ||$1,503,425 ||$851,290 |
|Var. Op. Profit ||$603,675 ||$693,990 |
This is called "thinking inside the box". And it is damaging. You end up trimming circulation by more than half, to get rid of unprofitable names. By doing so, you only increase profit by about a hundred thousand dollars. And, you've made the business much, much smaller.
Actually, your customers are making your business much, much smaller, because they're voting with their pocketbook that they don't like you.
But this is where you get yourself in trouble, if you continue to "follow the rules". In other words, if you continue to circulate to a certain cutoff level, you are "certain" to run yourself out of business. You cut marginal names, the very names that will pay the freight in a year or two.
Missing plan by 45% requires you to re-think your business model.
In our case, many more members of the management team "left to pursue other interests, we wish them the best in their future endeavors".
A stable team of leaders "gelled". We "rightsized" the catalog business (fewer titles, fewer pages, fewer in-home dates, capitalize on e-mail and online marketing) A hideous profit and loss statement became one that any leader could be proud of.
You don't learn a lot when your channel is constantly growing by twenty percent, or thirty percent. You learn a lot about business, and about people, when your channel fails to meet plan by forty-five percent.
It will be very interesting to see what happens to today's online business leaders when the online channel begins to decline, an inevitability in the evolution of business channels.