February 25, 2008

Hint To L.L. Bean: Giant Whooshing Sound In Chicago

L.L. Bean to open a store in Chicago, courtesy of DMNews.

Hint: The giant whooshing sound L.L. Bean leadership and database marketing professionals could hear is the transfer of catalog and online customers from the direct channel (online, catalog) to the retail channel.

One of my five favorite projects of all time was understanding the shift in customer behavior at Eddie Bauer when new stores were opened in new markets (the forerunner to Multichannel Forensics).

As is often the case in Multichannel Forensics, direct-to-consumer channel customers make a bold move to retail. The new retail customers are unlikely to buy online or via the catalog. This pattern happened at Nordstrom, and consistently happened in the Multichannel Forensics projects I worked on in the past year. Retail is a drug ... for customers and executive leadership.

There are exceptions to every rule, of course. Ultimately, all one really cares about is driving incremental profitable revenue, even if cannibalization of the direct channel occurs. The analytical folks at L.L. Bean have a reputation for understanding cannibalization issues. This particular challenge is tailor-made for Multichannel Forensics.

2 comments:

  1. What I would like to know is whether retail is more efficient than direct in the case of a new store launch?

    That analysis is full of interesting ideas - you are taking away contribution to fixed cost on the direct side and increasing fixed cost (physical store) at the same time!

    I hope any incremental analysis takes into account not only whether the store is "profitable", but the local losses to efficiency on the direct side.

    Additionally, what's the cost per new customer you get with a store? Does direct then get to use the credit card / new customer list to mail books to? Do they get charged an internal list rental fee?

    Lots of fun stuff...first analysis, then real strategic / operational issues to deal with.

    Would be a lot easier to just ignore all of this...which I am sure many do.

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  2. At Nordstrom, we could make the case that the incremental customers would cover the fixed cost of building out a new store within two years. We built incremental sales (total sales less cannibalization) into the pro-forma for new stores.

    Retail stores deal with the huge upfront investment, followed by a disproportionate amount of cash thereafter. That pesky direct channel (especially catalog) requires additional investment year after year after year to keep the revenue flowing.

    I may need to write a post about the math, going into a bit more detail.

    And yes, it sure is easier to ignore the whole subject!

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