December 08, 2013

Dear Catalog CEOs: What Is Happening? Ten Major Issues

Dear Catalog CEOs:

We read that Black Friday - Sunday was not good, in spite of the deepest discounts we've ever seen (70% off nearly the entire store at JCP on Black Friday, for instance), and in spite of opening on Thanksgiving night instead of Friday morning.

Then we read that Cyber Monday hit an "all time record" (like that's hard to do).

We read that omnichannel is the secret to great retail performance, and yet, we seldom if ever see retailers posting great performance anymore. Don't you think that if omnichannel was so darn powerful that we'd combine omnichannel with deep discounts and see the greatest performance in the history of retail?

We read that mobile is the future, and when we look around, it's easy to see proof that mobile is the future.

What is happening?

Let's tie stuff together.

Issue #1: E-commerce is about to be "cut off from the bottom". In other words, as Jasmine earns buying power, she's going to pick mobile-enabled businesses that fit her lifestyle. E-commerce folks will tell you that mobile and e-commerce are the same thing. They are not. Mobile is all about limiting the assortment for your specific needs at a specific point in time ... e-commerce is all about a large assortment that the customer searches through.

Issue #2: E-commerce is about to be "cut off by Amazon". Do you realize that 25%+ of e-commerce funnels through Amazon? As Amazon mulched e-commerce, e-commerce mulched catalogs, with the net being a gain for both Amazon and e-commerce. The mulching of catalogers is over. E-commerce, to grow, must either mulch retail, or must mulch Amazon. Which outcome is more likely to happen? We're essentially in a zero-sum environment, so demand gains have to come at the expense of others.

Issue #3: Retail (branded product available anywhere/everywhere) is about to be "cut off by Amazon", and to be "impacted by mobile". If you have proprietary product, Amazon isn't as big a deal. If you sell what Amazon sells, God help you. In response, retailers are going "omnichannel". Good luck. The solution to selling the same stuff Amazon sells is not to sell it at comparable or more expensive prices in any channel. We all know this. But since we don't have an answer, we leverage omnichannel as our version of hope. Hope is not a strategy. And by the way, if you are Orange Julius or any other mall-based business that is essentially the parasite on a mall-based host (like Macy's), how excited are you about mall-based stores promoting online business over in-store traffic? A mall-based digital distribution center solution doesn't solve problems for in-store businesses that require mall-based traffic. Amazon, and the predictable omnichannel response, do not help most of the stores in a mall. Think about what happens to a mall in five years with a subsequent 20% traffic hit?

Issue #4: Given how serious the retail condition is, given how critical in-store traffic is to cover debt loads, retail will continue to discount heavily. This will cause all sorts of short-term benefits and long-term problems. If you're a 5% pre-tax profit retailer or worse, God help you. Weak retailers without 20% e-commerce year-over-year infusions will really, really suffer as the discounting accelerates. The discounts represent a thinning of the retail herd.

Issue #5: Demographics are reshaping commerce. Nobody talks about it. Everybody should talk about it. Demographics manifest themselves via channels ... catalogs are owned by Judy ... e-commerce and Amazon are the realm of Jennifer ... and mobile is owned by Jasmine. Yes, I get it, your Grandmother plays Candy Crush on a tablet, fine. I'm more interested in how Jasmine and Forever 21 interact on a phone, because that's the future, folks. And in ten years, a decade of mobile, retail and Jennifer will yield a version of retail we cannot envision today. Business is going to be transformed by a morphing of demographics and technology.

Issue #6: Service. Are you a rural customer ordering from your favorite "brand" after using a free shipping promotion? My condolences, because your product will arrive in ten days. Meanwhile, if you live in an urban area, the trend is moving to same-day (and eventually, same-hour) shipping. Urban Jasmine is going to be fundamentally transformed by this level of service, all available on her phone. Look out. Meanwhile, the rural customer with 3mbps internet access is basically living in the 1990s.

Issue #7: Vendors. They're trying to survive, just like you. Ask the USPS - they're going to extract as many pennies from catalogers as possible, to stay alive, while stabbing you in the back by giving Amazon exclusive Sunday product delivery. You fund the present so that the USPS can find their future. The co-ops are integrating your offline transactions with social media to yield "big data". You are going to be used your vendors in an effort to fund their future. They realize that cataloging is not the future, they just don't want to tell you what they think, they'd rather you fund their future. Pay attention to vendors who "have your back".

Issue #8: Real Estate. In 1974, catalogers issued 600 page catalogs. In 1994, targeted 124 page catalogs were the norm. In 2014, e-commerce and unlimited assortments rule. Mobile is going to take us back to 1994. There's simply no real estate available in mobile. This will cause there to be merchandise winners and merchandise losers. Somehow, e-commerce folks who have been trained to "make everything available" to the customer must learn how to "make only that which is relevant to each individual customer" - personalized, targeted, relevant. It will take five years for folks to get to a reasonable outcome - a lot of trial, error, and lost profit. Almost nobody wants to talk about this, by the way, because it is truly problematic from a selling standpoint - check your mobile conversion rates for confirmation.

Issue #9: Distractions. Big Data. Social Media. Omnichannel. All of this is a distraction. Now, is Big Data real? Maybe. But so what? Of what possible good is it to target the right customer with the right promotion at the right time if what you are selling is available on Amazon at the same price and they're going to deliver it free within 48 hours and you can't do that? And trust me, customers don't want to "engage" with brands, they don't want to have "conversations" with brands. Customers want what they want, and if a conversation is part of getting what they want, they'll tolerate it. Every one of us has to filter out noise, and focus on what matters. For so many of us, we have 40% annual repurchase rates, and if the customer repurchases, they buy 2 times a year. These metrics improve when customers like our merchandise, they sink when customers don't like our merchandise. It's that simple. We're going to have to get much, much better at filtering out the noise.

Issue #10: Merchandise. If there's ever been a #fail in marketing, it's the trend in merchandising in the past five years. Go spend a half-hour with your marketing team, and find out just how bankrupt they are when it comes to understanding merchandising strategies. Marketing productivity stinks, for the most part, because the merchandising team is messing up. And then, our friends, the marketers, compound the problem. They send customers to landing pages with clearance product, and then brag when conversion rates increase (not my fault, I'm driving traffic to the site). In fact, ask anybody in your company how many new items were introduced in 2013, and how that number compares to the past five years?! You're lucky if 1 in 100 can provide you with an answer to this most basic of questions. Your marketing team should be beating the living daylights out of your merchandising team. They should demand highly productive items to feature in email, on landing pages, in the first twenty pages of a catalog, in social media (instead of engaging customers, why not sell customers something). In 2014, demand that 20% of the time your marketing team spends working on issues is spent working on understanding what sells, and what does not sell.

All businesses are dealing with the ten issues above - acting chaotically in the short term. Remember the internet bubble? That era represented smart people acting chaotically. Here we go again. All of this will make sense in five years, when Jasmine becomes the customer and mobile is the delivery mechanism.

2014 is the year you get to start choosing your future. Prior to 2014, catalogers were told to be "multi-channel". And we listened. Big mistake. Starting in 2014, we get to evaluate the seven issues outlined above, charting our own course.

In early 2014, you'll have Executive planning meetings. These eight issues should be discussed, by you, and by your Executive Team. Let me know if you need help.