March 13, 2008

Struggling Business Models

Sour business results are on the minds of the executives I speak with. And we're talking sour business, folks.

Let's review some of the issues.

At the end of 2006, many businesses were plodding along, generating profit.

Business Results: End Of 2006













Ph/Mail Cat/Web Web Mkt WebOrg Totals
Demand
$20.0 $14.0 $8.0 $5.0 $47.0
Net Sales 80.0% $16.0 $11.2 $6.4 $4.0 $37.6
Gross Margin 55.0% $8.8 $6.2 $3.5 $2.2 $20.7
Less Marketing Cost
$3.2 $2.2 $0.8 $0.0 $6.2
Less Pick/Pack/Ship 11.5% $1.8 $1.3 $0.7 $0.5 $4.3
Variable Operating Profit
$3.8 $2.6 $2.0 $1.7 $10.1
Less General/Admin.




$8.0
Earnings Before Taxes




$2.1
EBT as a % of Net Sales




5.6%

Basically, there are four components to any catalog business. There's demand captured over the phone/mail, generated by catalogs. There's demand captured online, generated by catalogs. There's online demand generated by online marketing and e-mail marketing. And finally, there's demand generated online that is organic, not attributed to any marketing strategy.

So, this business has, at best, average health. Then the postage increase happens. Now look at the profit and loss statement.

Business Results: Impact Of Postage Increase












Ph/Mail Cat/Web Web Mkt Web Org Totals
Demand
$20.0 $14.0 $8.0 $5.0 $47.0
Net Sales 80.0% $16.0 $11.2 $6.4 $4.0 $37.6
Gross Margin 55.0% $8.8 $6.2 $3.5 $2.2 $20.7
Less Marketing Cost
$3.7 $2.6 $0.8 $0.0 $7.1
Less Pick/Pack/Ship 11.5% $1.8 $1.3 $0.7 $0.5 $4.3
Variable Operating Profit
$3.3 $2.3 $2.0 $1.7 $9.3
Less General/Admin.




$8.0
Earnings Before Taxes




$1.3
EBT as a % of Net Sales




3.5%

Here, the USPS takes a nice, big, $800,000 chunk of profit from the business. It hurts, bad. But the business is still profitable, though marginally healthy.

All it takes to knock this business down is a slight drop in productivity. Let's assume the decrease in productivity is 10%, similar to what a lot of folks are seeing. Now look at the profit and loss statement.

Business Results: Postage + 10% Drop In Productivity











Ph/Mail Cat/Web Web Mkt WebOrg Totals
Demand
$18.0 $12.6 $7.2 $4.5 $42.3
Net Sales 80.0% $14.4 $10.1 $5.8 $3.6 $33.8
Gross Margin 55.0% $7.9 $5.5 $3.2 $2.0 $18.6
Less Marketing Cost
$3.7 $2.6 $0.7 $0.0 $7.0
Less Pick/Pack/Ship 11.5% $1.7 $1.2 $0.7 $0.4 $3.9
Variable Operating Profit
$2.6 $1.8 $1.8 $1.6 $7.7
Less General/Admin.




$8.0
Earnings Before Taxes




($0.3)
EBT as a % of Net Sales




-0.8%

Ok, you can see the double whammy caused by the postage increase and our floundering economy.

This causes the executive team to fret. A natural reaction is to cut circulation. So, circulation is cut by 30%, almost entirely in the customer acquisition segment of the business. Here's the way the profit and loss statement looks:

Business Results: Postage - 10% Productivity - 30% Circ Cut










Ph/Mail Cat/Web Web Mkt Web Org Totals
Demand
$15.3 $10.7 $7.2 $4.5 $37.7
Net Sales 80.0% $12.2 $8.6 $5.8 $3.6 $30.2
Gross Margin 55.0% $6.7 $4.7 $3.2 $2.0 $16.6
Less Marketing Cost
$2.6 $1.8 $0.7 $0.0 $5.1
Less Pick/Pack/Ship 11.5% $1.4 $1.0 $0.7 $0.4 $3.5
Variable Operating Profit
$2.7 $1.9 $1.8 $1.6 $8.0
Less General/Admin.




$8.0
Earnings Before Taxes




$0.0
EBT as a % of Net Sales




0.1%

Nobody is cheering. We chop circulation by 30%, crippling the catalog-side of the business. The online segment of the business stays afloat, resulting in a 10% drop in sales. The business is now at break-even.

Of course, break-even doesn't work, does it? So the executive team cut out a half-million in salaries, bonuses and health care costs. Layoff happen, tears are shed. How does the profit and loss statement look?

Business Results: Postage - 10% Productivity - 30% Circ Cut - Layoffs









Ph/Mail Cat/Web Web Mkt Web Org Totals
Demand
$15.3 $10.7 $7.2 $4.5 $37.7
Net Sales 80.0% $12.2 $8.6 $5.8 $3.6 $30.2
Gross Margin 55.0% $6.7 $4.7 $3.2 $2.0 $16.6
Less Marketing Cost
$2.6 $1.8 $0.7 $0.0 $5.1
Less Pick/Pack/Ship 11.5% $1.4 $1.0 $0.7 $0.4 $3.5
Variable Operating Profit
$2.7 $1.9 $1.8 $1.6 $8.0
Less General/Admin.




$7.5
Earnings Before Taxes




$0.5
EBT as a % of Net Sales




1.7%

And there you have it.

This is a business that can continue during 2008, assuming that productivity does not improve, assuming no dramatic increase in postage.

This theme is being repeated across the multichannel industry. Multichannel brands with catalog and retail channels are dying right now.

In each profit and loss statement, notice the web/org column, representing organic web demand, demand not attributed to any marketing activity. This is demand that is not subject to the whims of the USPS, or to inflationary keyword challenges. It's simply demand that happens because customers love your brand.

While this sounds overly simplistic, we multichannel marketers must focus on organic web demand in 2008. Natural search is a must. Anything that generates word of mouth is a must. We must either improve merchandise productivity (really hard to do in a down economy, but possible), or figure out how to get business without marketing expense. The multichannel marketer must focus on the latter.