April 09, 2014

The Missing Middle

I get to analyze a lot of businesses. Some businesses cater to the quality/service/margin audience (i.e. Apple or Nordstrom). Some businesses cater to the lowest common denominator customer (low price, discounts, promotions, gimmicks).

Many (most) businesses are stuck in-between.

When you're stuck in the middle, you see a few things, disconcerting things. These things became easy to see in Q4-2013.
  1. Retention rates among best customers were not much different than in past year.
  2. Retention rates among marginal customers were down 20%.
  3. New customer acquisition counts were down 20%.
This is a sure sign that a business is caught "in the middle".

Many retail businesses are caught "in the middle", not selling high quality, high margin merchandise with outstanding service ... and not selling lowest cost, cheap merchandise via discounts and promotions. In Q4-2013, loyal customers, a small number, kept coming into the store. But traffic dropped, by most accounts, reflected via low retention rates among marginal customers, and via horrific new customer acquisition counts.

Classic cataloging / direct marketing has been going through this transition for nearly a decade, courtesy of Amazon and commodity-centric big box retailers.

Retail is going to go through this transition, thanks to a combination of boredom, Amazon (to a much, much lesser degree), and too much square footage. If you notice 1/2/3 above, it's a good indicator that you are "caught in the middle". Nobody should be caught in the middle. It's time to pick a path.