May 12, 2010

Fetzer's Footwear: Returns and Allocation

Today I am meeting Lauren Fetzer, CEO of Fetzer's Footwear, at Dale's, a local tavern in the village of Coho Bay. Coho Bay is the primary port on Madrona Island.

Dale's was recently remodeled, though it appears that the remodeling project suffered from many rough Friday and Saturday evenings. It doesn't quite smell right when you enter the tavern ... let's just say that the tavern hasn't been disinfected as often as the tavern should be disinfected.

Lauen is sitting at a table in the middle of the tavern. In front of her are two red, plastic baskets, each has a hot dog in a bun with onion straws and ranch dip. Lauren's earbuds fit perfectly in her ears. Her head sways back and forth.

Kevin (yelling): "What are you listening to?"

Lauren (pulling the earbuds out): "Shawn Mullins, Lullaby."

Kevin (not yelling): "Ah. You know, I didn't order a hot dog."

Lauren: "Just sit down and eat. It's the best hot dog in all of Coho Bay. Make sure you dip the onion straws in the ranch dressing."

Kevin: "I just set an onion straw on a napkin, and the napkin absorbed a pint of vegetable oil."

Lauren: "Are you going to eat the meal, or are you going to grumble?"

Kevin: "Why am I here today?"

Lauren: "A customer visits our website, and buys two pair of Mid Light Hiking Boots with GORE-TEX membranes, size ten and size ten-and-a-half." Two weeks later, the customer visits our store in Downtown Seattle, and returns one pair."

Kevin: "Ok."

Lauren: "My store manager hates this."

Kevin: "Really, why? Isn't that the perfect multi-channel customer experience that the pundits talk about?"

Lauren: "It's a good experience for the customer. My store manager hates it because it kills his comp store sales performance. In April, he did $180,000 in net sales, but he lost $20,000 because of direct channel returns to stores, for a net of $160,000. Last April, he did $175,000 in net sales, but he lost $8,000 because of direct channel returns to stores, for a net of $167,000."

Kevin: "So in his eyes, he posted a +3% comp, but his performance is evaluated as a -4% comp because website customers returned merchandise to his store?"

Lauren: "Exactly."

Kevin: "So, what is the problem?"

Lauren: "My store manager says that he shouldn't be penalized because of the problems that the website cause his business."

Kevin: "Maybe your store manager shouldn't be credited for orders that the website creates for his business?"

Lauren: "Here's the problem with that line of thinking. In any company, the reporting that is available to folks clearly shows sales and returns. So everybody can see that his performance is at the bottom of the ladder. We don't have reporting that shows the sales that are caused by the website, and quite honestly, you could never prove that the website caused an order, right?"

Kevin: "A lot of vendors try to accomplish that for you. They'll say that you sent an e-mail on April 15, and then the customer visited the website on April 17, and then ordered shoes in the store on April 19. These vendors have solutions that will allocate the order on April 19 in a store back to the website, or in this case, back to the e-mail campaign that drove the order."

Lauren: "But how does the algorithm know that the e-mail or the website caused the order to happen? I mean, what if that customer was going hiking on April 20, and was simply doing research? That customer wasn't influenced by marketing or by the website, the customer was simply going to buy hiking boots. So how the heck does the algorithm know how to parse out customer intent?"

Kevin: "It doesn't know customer intent. It can't know. Folks will use mathematical algorithms and they compare correlations and r-squared statistics and regression analysis, they do t-tests and they use neural networks and genetic algorithms. So they do have a lot of science that provides directional evidence."

Lauren: "None of that helps me. I need a report tomorrow morning that tells me what the website drove to a store yesterday, and the number must be rock solid, it can't be a guess made by a computer algorithm. My store managers won't trust mumbo-jumbo created by a computer algorithm. My store managers believe the daily net sales report, a report that clearly ties out returned shoes with what is piled-up back in the stock room."

Kevin: "What you have identified is the gulf between the 'quants' and business leaders. The quants, folks like me, we have all of this alleged science to prove or disprove what is happening. And we can't ever be sure that what we are measuring is what is reality. Meanwhile, you have business leaders who are skeptical about reporting that doesn't easily tie out to something that is readily observable."

Lauren: "The bonus plan that my store managers are compensated from doesn't count direct channel returns to stores. They are given credit for store purchases and store returns, and they get credit for converting a direct channel return into a store purchase. For the most part, that keeps them happy. But our daily net sales reporting, that really sticks in the craw of my Downtown Seattle store manager, because his performance is good, but the reporting suggests his performance stinks."

Kevin: "Change the reporting."

Lauren: "I wish it were that easy. That type of reporting must be based on facts, it can't be based on an algorithm."

Kevin: "And yet, your store manager benefits when the customer searches on Google and then buys something in the store ... the search algorithm drove the sale, right?"

Lauren: "Again, the store manager sees the purchase, he sells the shoes, so he doesn't care that an algorithm helped him. He cares when he can't prove that sales allocation from an algorithm helped or hurt him."

Kevin: "Five years from now, folks will probably be more accepting of reporting that has uncertainty."

Lauren: "Until then, we have to figure out the returns problem, too."

Kevin: "What do you mean?"

Lauren: "Well, the items that are returned to a store are not necessarily the items that sell in the store. In stores, we have a limited assortment. You have the 20% of shoes that drive 80% of sales. You simply cannot have a broad assortment in a store, or you will be killed. So we use our stores to sell winners, and we sell odd sizes and less popular styles online. The customer buys less popular styles online, then returns them to a store, and the store manager cannot resell the items. This works against the store manager, of course. He wants to resell the items, because that helps improve comp store sales. These are merchandise alignment issues that real Executives deal with every day."

Kevin: "So the optimal assortment isn't a multi-channel assortment that works best in both channels, huh?"

Lauren: "It can't be. I'd lose 20% of retail sales if I moved my online assortment into stores. And I'd lose 20% of my conversion rate if I only sold my store assortment online. Each channel has strengths, and each channel has weaknesses. Returns across channels are a weakness for both channels. We have to move merchandise between stores, and we have to move a lot of returned merchandise back to our direct channel distribution center. It's one of the hidden costs of running a multi-channel brand. Do you have any solutions for this problem?"

Kevin: "No."

Lauren: "I buy you lunch, and you don't have any solutions?"

Kevin: "Each brand has to find the right mix of online and offline assortment. Don't listen to the experts, how's that for a solution? Experts communicate multi-channel theory, you work in multi-channel reality. Now I will say this. You don't need to market to customers who return merchandise. Pay close attention to customers who have purchased three times, and returned merchandise each time. Three purchases and three returns represent a habit. Obviously, these customers can buy online or in stores, you're not going to prevent them from buying something. But there is no law that says you have to send e-mail campaigns to them. Only market to customers who provide positive, profitable outcomes."

Lauren: "Three purchases represents a habit, huh? Ok, I'll take that one back to the marketing team. That's worth lunch. How were those onion straws?"

Kevin: "I think I need a hot towel to blot my face with."

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