July 14, 2010

Fetzer's Footwear: Knockoff

Today, I am joining Lauren Fetzer, CEO of Fetzer's Footwear, at her Executive Team meeting. As always, I enter Lauren's office, where she is listening to her iPod Touch.

Kevin: "What are you listening to?"

Lauren Fetzer: "The Boy Is Mine ... it was that Brandy / Monica song from the late 1990s, don't ask. I got this song from Napster back in 2000. You might say I stole the song, lawyers would certainly feel that way. And that's our topic at our Executive meeting today."

Kevin: "Illegal file sharing?"

Lauren Fetzer: "Close. How do you deal with competitors that knock off your product."

Kevin: "Alright."

We walk into the Boardroom.

Lauren Fetzer: "Ok Penny, what did sales look like yesterday?"

Penny Parker (VP Marketing): "E-Commerce was up 3% vs. plan and up 4% vs. last year. The website was down 11%, mobile apps continue their meteoric growth. Retail comps were +5%, led by Redmond at +16. Alderwood trailed the field, at -14%."

Lauren Fetzer: "Bart, what in the name of S.S. Kresge is going on with Alderwood?"

Bart Cox (VP Stores): "Why don't you ask Penny what is going on with the website?"

Penny Parker: "We already know the answer to that one, crankasaurus, the mobile app is cannibalizing the living daylights out of the website. You know that nobody is cannibalizing the living daylights out of Alderwood."

Bart Cox: "So how, Penny, are you going to drive increased website sales? And Lauren, why don't you ride Penny like you ride the Alderwood store? And when are we going to renovate Alderwood? That store hasn't been renovated since 1998? Maybe the reason that store performs so bad is that it looks like it is preparing for Y2K."

Lauren Fetzer: "Ok Bart, you made your point."

Connie Simpson (VP Finance): "Bart, you already know that Alderwood isn't on the renovation schedule until 2012."

Bart Cox: "By then, the store will have lost 25% market share. Smart. Retail is like a zit to you folks, e-commerce is all that matters around here."

Ashley Zimmerman (VP Merchandising): "No, merchandise is what matters around here, we all know that. Here's the problem of the day. Did you see that Zappos is selling the Hi-Tec Women's V-Lite Altitude Ultra? One-hundred and twenty-four bucks. And Fred Meyer has a knockoff of that item, a store brand selling for $49.99. We invented that shoe last year, remember? It is our Womens Q-Max Mountain Climber, and we sell it for $199. It's the same shoe. We have a fully gusseted leather tongue, moisture wicking textile lining, rustproof hardware, ours is 16oz, I mean, it's a complete knock-off by Hi-Tec, and I heard that Zappos is selling a ton of the things.

Connie Simpson: "What happened to sales of our Q-Max Mountain Climber since Zappos began to sell the Hi-Tec knockoff?"

Ashley Zimmerman: "Sales are down 39% to last year."

Bart Cox: "Lauren, what are you going to do about the sales decreases in the Q-Max line of shoes?"

Bill Bledsoe (VP Logistics): "We probably need to price match here, right? Maybe we can make up margin dollars by selling more."

Ashley Zimmerman: "That's a hard one. We'll sell 500 units at $199 and our cost of goods is $85, so we make $57,000 of gross margin. Say we lower the price to $119 and we sell 50% more units. That's only $25,500 of gross margin. Say we sell 100% more units, that's only $34,000 of gross margin. In fact, let me run the numbers here ... ... ... ... ... we'd have to sell 3.4 times as many shoes in order to break-even on the gross margin line. That won't happen."

Bill Bledsoe: "But you'd have more market share, and that counts for something, right?"

Ashley Zimmerman: "Sure, it counts for a reduction in profit of $23,000."

Bill Bledsoe: "Can't we sue them? I mean, we have a patent on the Q-Max line of Mountain Climbers, right?"

Ashley Zimmerman: "No, their shoe is just different enough to make it a unique line. It's a 16oz shoe, ours is 15oz. They have the exclusive Vibram hiking outsole, too."

Connie Simpson: "Penny, what is a viable marketing strategy here? I mean, how do we communicate to the customer that this shoe at $199 is fundamentally better than the shoe they can get at Zappos for $124?"

Penny Parker: "We can do an e-mail blast with a customer testimonial. Let's see ... we have an e-mail list of 100,000, and we'd get a 20% open rate, and 35% of those would click-through to the website, and 5% of those customers would buy the shoes, so that's ... what ... maybe 100,000 * 0.20 * 0.35 * 0.05 = 350 customers purchasing the shoes, so that's something."

Bart Cox: "Are you telling me that we have an e-mail list of 100,000 names and only 350 would buy something if we send an e-mail marketing message? 350? I thought e-mail marketing had the best ROI of any marketing channel? 350? I mean, why bother?"

Ashley Zimmerman: "350 units will translate to 250 units after accounting for returns, so we'll increase sales of the item by 50% over the 500 we'll sell without e-mail marketing support."

Bart Cox: "But that's a one-time fix. We send out something like 100 e-mail campaigns a year, so we have to advertise other products as well, right? So this e-mail campaign doesn't solve the core problem, here. The core problem is that Fred Meyer stores can sell a knockoff at $50 and Zappos can sell a knockoff from Hi-Tec at $124, and both win while we lose. So, what is our strategy? How do we deal with this?"

Connie Simpson: "Locally at least, we have a multi-channel advantage, don't we? I mean, nobody shops the Fred Meyer website, and Zappos doesn't have stores, so we should be well-positioned locally. Kevin, that should work to our advantage, right?"

Kevin: "On a local level, it could help you. All of your stores are here in the Pacific Northwest, so I can take a look at customers in Northwest Washington to see if they behave differently than in the rest of the country because of the Fetzer's Footwear multi-channel presence."

Penny Parker: "And Woodside Research said that by 2015 they expect multi-channel brands to see a 4% increase in market share over online brands".

Lauren Fetzer: "Ok, team, that's wonderful, but all you discussed were tactics and analytics. That makes it sound like you are busy or strategic, but not one person mentioned a solution to our problem, not one person even offered a suggestion. Allow me to restate the problem for you. What is our response when a big brand offers a knockoff item at only 25% of the cost? What is our response when an online brand offers a branded knockoff item at 37% off? Be honest, team. What is the reason that you would buy our item at $199 instead of buying the knockoff item for $125 at Zappos? It can't be customer service, because Zappos will get it to you tomorrow while we'll take 5 days to deliver it to the customer, and we'll charge the customer $5 to ship it to her. It can't be quality, because the customer realizes that for a 37% price decrease she'll accept lower quality. And we can't price-match big brands because that will just drive us out of business. So, again, I ask all of you, what is the reason that a customer would buy our shoe for $199 over the same shoe for $125 at Zappos or $50 at Fred Meyer?"

Bill Bledsoe: "We can't ever win that battle, can we?"

Lauren Fetzer: "I guess we can't. Oh well, let's just shut down operations today and go out of business. I'm sure Nordstrom is hiring in their shoe department, so we'll all enjoy selling the Hi-Tec Women's V-Lite Altitude at $125 a pop, earning a 7% commission on every single unit we sell. Sounds good to me."

Connie Simpson: "Can't we talk up our history? I mean, Zappos is a decade old business."

Lauren Fetzer: "Customers don't care about history. If they did, we'd all be shopping in Montgomery Wards stores, and the downtown corridor of any mid-sized city would have a vibrant collection of Gimbels department stores. No, we need to offer the customer a compelling reason to shop us over our competition. What is the compelling reason for a customer to shop us and not shop the competition? I need a compelling marketing answer to this question. I need a merchandising answer to this question. I need a logistics answer to this question. I need a store answer to this question. And I need the financials to work to our advantage. I don't need one-off e-mail campaigns, I don't need product development cycles that are too long to please the modern customer, I don't need it to take 5 days to deliver a pair of shoes to a customer, I don't need multi-channel bricks 'n clicks marketing theory that only benefits consultants and bankers, no offense Kevin, and I don't need to keep seeing the Alderwood store pulling -14% comps. I'm paying all of you $200,000 a year plus a 60% bonus to provide real solutions. So let's get to work on providing real solutions."

6 comments:

  1. The difference between a $100 pair of shoes, and a $600 pair of shoes is the value demonstrated. Value is generated in the presentation, and by distinguishing yourself from the competition in showing the quality of the product/brand etc. However, the one thing you might be missing is that there's a $100 client that can't afford the higher end shoes. Not everyone can buy a Ferrari but they should at least know the value of owning one. Lets face it there's more fans than there is owners, and the opportunity cost for some might be too high.

    The traditional online buyer is looking for lower prices so instead of buying they could be doing research then either buying for the best online price or going to the store. So instead of charging the same prices online as in the store lower the online costs slightly as store front has a much higher overhead which saves both you and the customer while creating incentive for more sales. According to a study shown in "The Art of SEO" by Rand Fishkin the average business gets $6 in store for every dollar spent advertising online. Not all value can be measured with web analytics. However, it's well known that the web is used for research and bargain hunting which means if you want to increase your online sales demonstrate that it's cheaper than your stores not necessarily your competition.

    In todays market anything with upwards of 5% margin is phenomenal. Most of the largest companies today are successful due to the volume they're putting out. I'd say lower the prices online, and increase sales volume. If you have a competitor with a relatively similar item yours better entirely define why it's better with incredible branding otherwise business is indeed going to go to the competition. The one opportunity that you might not be seeing here is that as your volume of shoes produced increases your prices drop for manufacturing, and you can easily afford to ship. I recently did some research for my online store 200k items and I discovered that one could ground ship items at super low prices especially as volume increases. My point is that as you lower your prices your volume increases, overhead is lowered, and you're able to offer things that your high volume competitors are offering. It pays to reward your customers (especially online). Where's their online incentive to buy vs in store where they can try the shoes on?

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  2. Lauren is asking for a strategic answer to a strategic problem.

    My approach to such problems is systematic. I refuse to accept the tradeoffs as presented to me. It's not a question of binary '1' or '0' position statements that all result in less than optimal outcomes. All the outcomes are unacceptable.

    Here's what's salient:

    Their R&D is not producing a sustainable competitive advantage because they cannot defend their market position. (It's undercut by imitators).
    They're brand does not appear to be positioned over on top of R&D (no mention of that).
    They have a brick and click infrastructure.
    They are not investing in retail footprint.
    They are not investing in making the eCommerce presence competitive with the service innovations at Zappos.
    They have invested in mobile, but are balking at 'cannabalization'. (ecommerce might be flat).
    They're a regional player with a national eCommerce footprint.

    Laura has asked a very direct question. How do we respond to price pressure and service pressure? I think this question masks the real question: 'what is our strategy'?

    I consider the architecture of the problem:

    There's a whole bunch of choices that just don't make sense. They're investing in R&D, but the market, effectively, doesn't care. Stores rot while the eCommerce isn't competitive. Arguably they only have so much capital to turn this thing around.

    Metaphorically, they're a fickle university student that has reached their second year and needs to settle down on a major. What are they going to be when they grow up? They sure as hell can't be a national ecommerce play with a research arm with a sprawling pacific northwest retail footprint. Too much going on!

    The resolution, using that architecture, is open ended. How do they arrive at competitive advantage?

    Choice.

    True to form, my suggestion would be reasoned that they can't become Zappos (that position is taken) and they can't become foot locker (that position is taken). They do have one very good strategic pivot in a R&D differentiators. How do you guard from knockoffs? [Insert analytical competitive analysis here to support this point, which, is just a hypothesis]

    Reach for another metaphor. Bose. Branding.

    If they're going to compete on R&D, they need to take up a position similar to Bose. They do one thing incredibly well, and everybody knows it. [Insert analytical analysis of the Bose market position in the audio electronics sector, which is just a hypothesis]

    It means something has got to give. They got loads of stores in the NorthWest. That's nice. They appear to be dying and the margins are not good. They're ultimately in need of capital investment which will take away from R&D. If they're going to compete on brand and R&D, that means spinning them off. Selling them to franchise's. They should retain a flagship store in a major coastal city to generate excitement and have halo effect. Anything that looks tired and worn must go. [Insert capital investment analysis here]

    R&D should be integrated into that store.

    Next, if Zappos can deliver faster, perhaps Zappos should bear that? Maybe the company shouldn't even be involved in its own distribution. If they do, they can hold onto their mobile channel and watch it grow, if that works with their brand. [Insert channel analysis efficiency framework here]

    In effect, Laura does not make the radical decision to focus on just one aspect of the business, they will see other pureplay competitors enter into the market and kill them.

    Spanning across too many pivots is a recipe for their ongoing failure.

    There are hundreds of other strategic pivots, Kevin. There really are. That's my analysis based on the facts presented.

    Everything else becomes the 'strategy of how'. How to wind down bricks. How to wind down clicks. How to service mobile from the flagship. etc. Not trivial. From macro-strategy flows choice.

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  3. So let's take the two essays above, and have each one presented to management teams at real companies ... it would be fun to watch the interactions between presenters and the business leaders who would be asked to heed the advice of the presenter.

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  4. In SEO we can get a company to rank #1 but that doesn't necessarily mean the client's going to buy. There has to be something that distinguishes the brand. Christopher pretty much concurs with what I said about the brand and that's the missing value. Sell that sizzle! If the site is old and boring of course nobodies going to buy. Ecommerce should be updated regularly.

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  5. Sure, nobody would argue against your point of view, or against Christopher's point of view.

    These things are written to reflect the kind of discussions that happen in companies when business leaders gather for meetings. In those meetings, rational facts and MBA strategies and common sense struggle to compete against opinions, arguments, politics, tribal knowledge, scattered priorities, and general misinformation.

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  6. @Kevin

    You're right. Every day, facts, arguements, and alternate realities (which are all true to the people who hold them) collide in boardrooms.

    Analysts who go on to become leaders are indeed surprised by what goes on. They'll have to get used to it.

    And you're doing a great service here by pointing that reality out.

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