July 11, 2011

The Nordstrom Catalog Experiment of 2004 - 2006: An FAQ

Many of you ask me about the experience I had at Nordstrom, from 2004 - 2006, when we shut down a traditional catalog channel.  I thought I'd aggregate many of your questions here as part of an FAQ.

Question:  Who wanted catalogs killed, and who championed catalogs?  From what I remember, it wasn't so much an issue of killing catalogs as it was an issue of aligning merchandise across channels.  If you truly let a catalog evolve based on merchandise productivity, the catalog will become populated by items that rural women age 55+ love.  Eventually, you run into a bit of a bind ... do you maximize catalog productivity, or do you sacrifice productivity to truly reflect all aspects of the brand?  Ultimately, the retail and marketing teams supported killing the catalog, while the catalog team (not surprisingly) championed catalog marketing.

Question:  What side were you on?  A tough question.  Strategically, I was on the side of marketing and merchandising.  Personally, I was on the side of the catalog team, because my entire career had been aligned with catalogs.  Heck, what job would I do, or would I even have a job, if the catalog didn't exist?  Honestly, I probably aligned with the catalog folks too much, in an effort to preserve my job as I knew it.

Question:  How do you shut down a catalog division?  It's a complex issue.  You need plenty of lead time in order to burn through 6-9 months of inventory you've already committed to.  You have jobs that have catalog/online alignment, jobs that are generally protected.  You clearly have jobs that are aligned with the catalog, those jobs are absorbed, or they simply go away.  You tell your key vendors months in advance that you are making significant changes.  And if you run an analytics team (like I did) you prepare a TON of project work in advance, so that you can measure the impact the decision had as fast as possible.

Question:  What happened to your division, Kevin?  My team included twenty-four analysts, managers, and directors.  Within fourteen months of the decision, my team was down to sixteen analysts, managers, and directors.  Anytime a member of my team quit, I simply didn't keep the position, I shuffled responsibilities accordingly.  A couple of individuals were not carried forward into the new organization.  Of maybe five individuals with the strongest catalog experience, only one remained ... two left for online marketing positions, two left the company after seeing how everything would shake out.  The loss of talent was stunning.  The impact of this talent loss on the department and business results was negligible.  Ultimately, catalog talent was reallocated to e-mail marketing where possible, given the obvious synergies between the two marketing channels.

Question:  How did you forecast what impact this decision would have on the business?  We executed countless mail/holdout tests.  These tests told us that our vendor-based matchback analytics routine was overstating the importance of the catalog by an order of magnitude that would scare you!  We "knew" the impact would not be as severe as, say, our Inventory Executive believed the impact would be.  I would sit in meetings with the inventory team as they beat me over the head with real-time KPIs that predicted the implosion of the website when catalogs no longer existed.  Amazingly, our prediction for annual demand in the online channel, without the aid of catalog marketing, was off by just 5%, dumb luck more than anything else, but dumb luck that was strongly informed by accurate mail/holdout results.  You create your own luck!

Question:  What happened to the Management team that led the catalog division?  This team imploded.  The President left, the online marketing exec left, the inventory executive left, the operations executive was sent packing, and many others headed for the exits as well.  Many folks stayed, those folks worked with a new Management team that, without any of the experience of the old Management team, produced stunning business results.

Question:  What happened to the Online channel once the catalog was gone?  The online channel thrived!  Every pundit on the planet told us we were morons, citing research reports sourced from surveys of 824 likely shoppers that suggested that all channels work together to create a succulent multichannel cioppino.  Every pundit was wrong.  The online channel grew at an unprecedented rate, growing so fast that every penny lost by the absence of a catalog was made up for, and then some, by the website.  Online marketing metrics suddenly looked better, not hobbled by matchback programs that mistakenly gave credit for online orders to catalogs, causing a dramatic increase in the search marketing budget.  $36,000,000 of catalog marketing were pulled out of the ecosystem, and phone+online sales increased?

Question:  What happened to Retail sales once the catalog was gone?  Comp store sales grew at a faster rate than the prior year, in spite of $36,000,000 of catalog marketing being pulled from the the ecosystem, proving that the mail/holdout results were right ... catalogs were not driving sales in the way that the pundits suggested they were.

Question:  What happened to customers who used to shop the catalogs?  Well, the majority of them stopped shopping altogether, truly, they did.  We got angry postcards (and yes, MySpace and Blogs existed then), strongly telling us that the customers who were angry were older Americans.  Those customers did not come back.  But a funny thing did happen.  The website, fueled by search, attracted a different set of customers, a suburban/urban customer, one that was more likely to cross-over and shop in retail stores.  And when the customer switched to the store channel, the customer became much more valuable.  The end result was that we lost valuable catalog customers, but we gained marginal online customers that became valuable retail buyers.  In other words, the composition of the customer file fundamentally changed without catalogs to fuel the ecosystem.

Question:  Don't you think this type of result is only possible in a retail brand with the kind of brand recognition that Nordstrom possesses?  No.  I detest this question.  This question suggests that the results are not repeatable.  If you have executed mail/holdout tests, then you know the answer to your question ... if the mail/holdout tests show a high organic percentage, then you don't need catalog marketing to fuel your ecosystem.  I've worked with catalogers that have a 60% organic percentage ... these businesses are self-sufficient, not needing catalogs to fuel growth.  Your mail/holdout tests tell you what is possible.  No, this is not a retail/Nordstrom issue.

Question:  How did you acquire new customers without new names from the co-ops?  Search, portal advertising, and a stronger website experience coupled with a merchandise assortment that was more appealing to the core Nordstrom customer than the female, 55+ rural customer merchandise assortment that the catalog evolved to.  We also moved from expensive shipping/handling to $5 shipping/handling, in large part to better compete with Zappos, that sure didn't hurt.

Question:  What happened to your job, Kevin?  My job eventually changed, becoming more research oriented.  Clearly, I'm not a qualitative researcher, my job is to analyze actual customer behavior via an integrated database featuring transactions across all channels.  The retail channel requires much more qualitative research than is required by the catalog channel.  So, eventually, my job evolved into something that was not the same as the job I signed up for in 2001 when the catalog/website division generated $350,000,000 in annual sales and an annual loss of $34,000,000.  I voluntarily left in March, 2007, starting MineThatData.

Question:  How have you applied the learnings of 2004-2006 with your client base?  More than anything, I try to teach that, for some/many customers, catalog are simply not needed, or far fewer catalogs are needed.  My analytics evolved significantly, and are far more sophisticated today than what I used in 2004-2006 to understand this issue at Nordstrom, in fact, they are far more sophisticated than when Don Libey released Multichannel Forensics for me in the Fall of 2007.  These days, my projects usually lead to a recommendation to mail a fraction of the customer file more often (something I never imagined I'd say in 2007), coupled with a significant reduction in mailing frequency to at least two-thirds of the customer file, leading to about $1,000,000 in annual profit for a $100,000,000 catalog brand.

Question:  What is the number one thing you learned about closing down a catalog division?  There's probably two things I learned.  First, you can have the most talented group of people imaginable, and they can have minimal impact on business results.  Most of the folks managing the catalog team were brilliant, and were responsible for turning around a -10% pre-tax business in twenty-four months.  This same team was detonated, replaced by considerably less experienced individuals, and the business improved!!  What a humbling lesson.  Second, I learned first-hand just how wrong the pundits were/are.  I received countless phone calls from people you know and respect ... these folks predicted gloom and doom ... tossing around obtuse metrics from Forrester Research and McKinsey Research and printer case studies and antiquated stats from Lands' End in 1999 to mock our decision.  The trade journal mudheads wrote scathing stories about our stupidity, about our inability to understand the subtleties of multichannel marketing.  I recall co-op staffers predicting we'd come crawling back to catalogs within a year.  The pundits were really, really wrong.  By and large, they continue to be wrong today as well.

Ok, your turn, what additional questions do you have?