Picking The Wrong Side Of A Fight

Yesterday, I wrote about the two topics that are buzzing around the catalog vendor community this week (click here to read the blog post).

1. Possible USPS postage increases.
2. Possible requirement to collect sales tax.

Feedback on this article was distributed as follows:

1. 100% of the feedback came from vendors in the catalog industry, and it was largely opposite of my point of view.
2. 0% of the feedback came from actual catalogers.

Let's address the feedback I received, in the Frequently Asked Questions (FAQ) format.

If catalogers are required to collect sales tax, annual sales will be hurt, that's a no-brainer, correct?

• Maybe.  Maybe not.  Time will tell.  I have measured the phenomenon for many retailers.  Retail brands open new stores in new markets all the time.  They will open a store in Omaha, and as a result, be forced to collect sales tax in all of Nebraska.  In the vast majority of cases (in fact, I cannot remember a case where this didn't happen), the e-commerce side of the business takes a brief sales hit, then sales recover within a short period of time (often 60-90 days), and return to prior levels.  In other words, there is no long-term impact on e-commerce sales.  Your mileage may vary.
• Remember, 85% of most sales still happen in stores ... where customers willing pay sales tax.  Please keep that fact in mind - we're in a world where you can get free shipping and no sales tax, and yet, 85% of sales still happen in retail stores, where you have to pay for gas, invest time, and then pay sales tax.
• Did you stop purchasing MP3s from the iTunes store when Apple opened a store in your market?  Did you switch to Amazon, who offered the same item at the same price with no sales tax, or did you continue to purchase music through the iTunes store?  Be honest!

But if catalogers have to collect sales tax, at scale (i.e. everybody), then the result is different, correct?  When everybody has to do it, won't annual sales take a 5% or 10% hit?

• Maybe, maybe not.  When the depression started, back in Q4-2007, weak businesses were literally pushed out of business, while strong businesses (hint, Amazon) steamrolled along.  Issues do not hit all companies evenly.  If we assume that collecting sales tax will result in a dire outcome (retailers have suggesting the result is not dire), why will it happen evenly, across the board?  Might the issue push a weak business into the ground, re-distributing the demand from the weak business among strong business, thereby having no impact on strong businesses?  That's what happened during the depression of late 2007 - mid 2009, right?  Weak businesses ceased to exist, strong businesses re-calibrated and moved on.

But sales tax collection is currently illegal, we can't just let our laws change, we'll damage society and hurt the consumer, right?

• It used to be illegal for women to vote.  
• Our response to change is more important than the change itself.
• What will your response be?
• Remember, you have a control group ... states like Oregon that you'll be able to measure results against.

If the USPS raises rates, won't that cause catalogers to go out of business?

• The USPS raised rates in the past, correct?  How did that impact your business?  Did prior rate increases cripple your business?

I don't think you understand, Kevin.  The combination of sales tax and catalog rate increases is like an additional 25% tax on catalogers.  The impact will be fatal.

• Is that a question?
• This will not be fatal to catalogers.
• This might be fatal to weak catalog businesses that sell merchandise that customers largely ignore.
• Focus on merchandise excellence.
• Identify channels that your target customer shops in, and take advantage of those channels.

Your blog is widely read, and you're spreading misinformation out there to a large audience.  Why?

• I am sharing actual project findings, based on actual customer behavior.  I have mail/holdout tests on my side.  I have e-commerce results from retail store brands forced to collect sales tax in markets where they previously did not have to collect sales tax.  I participated in the shut-down of a catalog division among a Jennifer-focused customer audience, and watched annual net sales increase on a $36,000,000 catalog ad cost reduction - think about what that does to the profit and loss statement?
• I care deeply about my clients, and the catalog industry.  That's why I share actual facts, not memes.
• Let's bring facts, based on actual purchase data from retailers, e-commerce brands, and catalogs, to the table.

Logically, it makes sense that these forces are going to destroy catalog marketers, right?

• Since many of you are from New England, go talk to your friends at L.L. Bean (they are not a client of mine).
• Ask L.L. Bean if their catalog business was crippled when they were forced to collect sales tax when they opened stores in new markets?
• Ask L.L. Bean what impact the 294 prior USPS price hikes had on their catalog business?
• Use L.L. Bean as a case study for how catalogers might respond to drastic changes.  They were not pushed out of business.  Give L.L. Bean Management a call, and have a discussion with them.  Get facts from somebody who has lived with the consequences of a sales tax burden.

Doesn't the customer need catalogs to shop?  Sales Tax + Postage Increases = Fewer Catalogs and Fewer Shoppers, Right?

• Ask Amazon if their customer (hint - that's everybody) needs a catalog to shop?
• Does Amazon's customer in Washington State, where Amazon must collect sales tax, spend so little that it devastates Amazon's profit and loss statement?
• If your customer is June / Judy (age = 69-85, 52-69), yes, mail/holdout tests prove that this customer will shop less if you stop mailing her catalogs.  For this customer, sales tax increases and USPS postage increases could cause problems.
• If your customer is June/Judy, ask yourself why you aren't supporting the ACMA?
• If your customer is Jennifer / Jasmine (age = 36-51, 20-35), mail/holdout tests prove that this customer will continue shopping with your brand, but at lower rates (Jennifer) or will be barely impacted at all (Jasmine) if you stop sending catalogs to her.  If your customer is Jennifer / Jasmine, go tell the USPS what to do with proposed rate increases ... tell them you'll stop spending money with them and you'll reinvest your marketing dollars in the channels that Jennifer / Jasmine use.
• If your customer is Jennifer / Jasmine, you are in a position of power with the USPS.
• We need to stop acting out of fear.  We need to use the power we have to make a statement.  If the customer is Jennifer or Jasmine, we don't have to send catalogs to her.

I thought you were a defender of the ACMA?

• I am!
• If you are a cataloger who caters to June / Judy, I don't like the fact that you don't support the ACMA!!!!!
• But if you are a cataloger who caters to Jennifer / Jasmine, the world has changed, and your customer changed.  Print is no longer the driving force for Jennifer, and is close to irrelevant to Jasmine.  And I have data to prove it, via mail/holdout tests.

I know, some of you think I picked the wrong side of a fight.

I picked the right side of the fight.  I chose data, facts, analyses, and mail/holdout tests, to determine my position.

Ask yourself what happens to the co-ops if fewer catalogs are mailed, thanks to the USPS, thanks to having fewer current buyers due to sales tax increases?

Ask yourself what happens to printers if fewer catalogs are mailed, thanks to the USPS?

Ask yourself what happens to whatever is left of the list industry if fewer catalogs are mailed, thanks to the USPS and sales tax changes?

Now ask yourself how you will respond?  You won't go out of business.  You will make strategic changes.  If your customer is June / Judy, you'll make one set of changes.  If your customer is Jennifer / Jasmine, you are already making changes that the catalog vendor community is not thrilled about.

I'm just asking you to use data and facts to see issues more clearly.

Retail Is Struggling

J.C. Penney merges marketing and merchandising functions across online/retail channels, then cuts 100 - 200 jobs. I'll bet that the 100 - 200 people who lost their jobs aren't big fans of multichannel integration.

Ann Taylor lets go of 13% of their corporate staff, 180 jobs amid a tepid retail environment. In addition, 117 stores will be closed.

Talbots to shut down 78 kids and mens stores. Sure this is old news, but it is reflective of what could be a widespread problem in 2008. This economic downturn could weed-out a lot of over-assorted retail square footage.

Eddie Bauer cuts 16% of its corporate staff, even as sales improved in Q4.

Home Depot cuts 500 corporate jobs, 10% of the corporate staff. Assume these are $75,000 a year jobs (including benefits). Take the $210,000,000 that former CEO Robert Nardelli garnered as part of his golden parachute, divide it by $75,000, and you are able to keep these 500 folks gainfully employed for another five years.

Dell plans to close 140 shopping mall kiosks.

Starbucks will close 100 underperforming stores.

If you are a retail real estate executive, you have to be wondering who the retailers are that will line up for the store locations made available by the great recession of 2008?

Old Navy updates their logo, and elects to move away from families, now focusing on a fashion-based twenty-something target audience.

Trees rejoice as USPS volume drops by 3% in Q1-2008.

Major Pain Points In Catalog/Online Multichannel Marketing

Having just spent three days with 400+ top online and catalog marketers, there are a few things that really stand out from my conversations with these folks. Here are the major topics in catalog/online multichannel marketing, based on discussions folks had with me at the conference.


Topic #1 = Colliding Forces. There was a lot of discussion about the USPS increase, set for May 14. For many smaller online and catalog businesses, this results in an approximate 25% increase in postage. This force will cause many small businesses to reduce circulation, especially among marginal housefile and prospect names. This force will eventually collide with the inevitability of online marketing. Customers under the age of forty-five are shifting their behavior away from traditional media (television, radio, catalogs too) to online media. The colliding force of the USPS increases and customer transfer from traditional media to online media will require a change in mindset and skillset among those in attendance.

Topic #2 = Allocation Of Advertising Dollars. Those in attendance are frustrated with our new marketing world. We have more metrics than ever to measure performance with. Almost none of the metrics are relevant in telling the overall story about what caused a customer to purchase something. Ten years ago, we argued about how to allocate those pesky fifteen percent of orders that came into the telephone channel without a valid source code. Today, we realize we have no idea how to properly allocate orders, when a combination of three catalogs, six e-mails, and two Google searches and one price comparison on mySimon truly caused the customer to order. Seriously, how do you allocate this order across these twelve advertising vehicles? It was obvious that the attendees did not trust Abacus to do this for them, as some badgered the company during a presentation (I would say that Abacus has better thought leadership on this than most). This is going to have to become an organic field of experimentation --- I strongly advise non-competitive catalogers and online marketers to work together on knowledge exchange, in order to come up with allocation methods that make sense for our industry. Heck, give me a call, I'm very willing to help out on this topic!!!! Getting even more theoretical, some of the big companies are struggling with allocating orders, when not all catalog advertising produces incremental sales (i.e. a customer spends just as much online when receiving seven catalogs as when receiving ten catalogs). That's a really enjoyable, really theoretical project to tackle.

Topic #3 = Strategy: I saw this repeatedly at the conference. Attendees were asking so many questions about the first two topics that true business strategy was rarely, if ever, discussed. I heard several CEOs discuss the problem of having a unique merchandise assortment --- that as soon as a unique and creative product is created and marketed, folks like Target (and even small competitors) can create their own product, with equal quality, at a lower price. Since there aren't a whole bunch of new, original ideas just laying around out there, it makes "staying alive" very challenging for the smaller online/catalog business. This is one place where online marketing and catalog marketing can make a significant difference. E-commerce is a TERRIBLE storytelling platform. However, blogging and cataloging are BRILLIANT storytelling platforms. There is a lot of opportunity to morph the catalog into the primary storytelling vehicle, as a way to keep paper viable.

Topic #4 = What Happens When A Catalog No Longer Exists? This was the question I was asked the most, during the conference. Folks wanted to learn, in detail, what happens to the online channel, and to catalog customers, when paper is taken out of the mail. Having lived through the experience during the past three years at Nordstrom, I have a unique perspective on the topic. Obviously, I can't be liberal in my discussion of those events. That being said, folks were VERY interested in hearing what happened to employees who spent their lives growing the catalog business at Nordstrom. Attendees wanted to know if these people were able to move into online marketing, if they were laid-off, if they became disgruntled and quit, or if they happily made the transition. Obviously, all of those things happened. It was the most fascinating and painful experience of my professional career, I wouldn't trade it for anything. The experience will allow me to help others as they go through this process.

Topic #5 = Google Is Getting Too Much Credit For Online Orders: This came up over and over again, and is closely tied to Topic #2. In an instance where a customer receives three catalogs, six e-mails, conducts two Google searches, and does one shopping comparison on mySimon, why should I pay Google twice for sending the traffic to my site? There's no doubt that Google and mySimon are partners in this process. However, the catalog/online marketer is now forced to pay for three catalogs, six e-mails, two paid searches and one shopping comparison affiliate commission. Ten years ago, three catalogs would have sufficed. In the next ten years, you will see an evolution in how Google and affiliates get paid. Search and affiliate marketers have taken advantage of the ignorance of all of us who have a catalog heritage. It's time to make things more equitable, and this can only begin to happen if non-competitive catalog/online marketers band together as a unified force.

Topic #6 = "Multichannel" Doesn't Mean Executing The Same Across All Channels: The vendor-speak and pundit-speak of the past eight years (all channels should execute the same) has been rejected by those actually practicing multichannel retail. While everybody generally agreed that items should be the same price across all channels, the attendees generally agreed that the strengths of each channel should be readily exploited. If one wants to do free shipping in an e-mail and not in catalog, then by all means, do so --- but be willing to honor the promotion in other channels. If one wants to keep clearance items off the internet, go right ahead! If a brand wants to have a different look and feel in advertising, creative execution, merchandise assortment, you name it, go right ahead and do so. There was an absolute groundswell of consensus on using each channel appropriately, so that the customer ultimately chooses our brand over somebody else's brand.

Topic #7 = E-Commerce Is "Cold", Catalog And Retail Are "Warm": This was the first time I've heard multiple people tell me that they are frustrated with the lack of warmth in E-Commerce websites. Many felt that the E-Commerce experience lacks humanity, is clumsy, and often breaks down from a technological standpoint. Marketers must take their most important marketing vehicle, a website, from the information technology folks that currently dictate what gets done in online development, and dictate when things get done. If you are a fan of the catalog advertising channel, this is your chance to create great creative execution via print --- your chance to show others how to market with warmth, and in the process, win over some of your marginal customers.

Under Pressure

Profit is being squeezed out of our multichannel businesses, especially in the online and catalog channels.

This is an example of what a reasonably healthy online/catalog profit and loss statement might look like today.

Demand	$50,000,000
Merchandise Fulfilled	$45,000,000
Returns	$11,250,000
Net Sales	$33,750,000
Gross Margin	$16,875,000
Less Catalog Marketing	$4,000,000
Less Online Marketing	$2,000,000
Less Pick/Pack/Ship	$4,050,000
Variable Operating Profit	$6,825,000
Less Fixed Costs	$4,050,000
Earnings Before Taxes	$2,775,000
EBT As A % Of Net Sales	8.2%

This business generates $2.8 million profit on $33.4 million net sales, yielding a healthy EBT of 8.2%.

Then, the USPS elects to make mailing catalogs more expensive. If you simply absorb the cost of this increase, your profit and loss statement might look like this:

Demand	$50,000,000
Merchandise Fulfilled	$45,000,000
Returns	$11,250,000
Net Sales	$33,750,000
Gross Margin	$16,875,000
Less Catalog Marketing	$4,360,000
Less Online Marketing	$2,000,000
Less Pick/Pack/Ship	$4,050,000
Variable Operating Profit	$6,465,000
Less Fixed Costs	$4,050,000
Earnings Before Taxes	$2,415,000
EBT As A % Of Net Sales	7.2%

The USPS increase takes a full percent of your Earnings Before Taxes.

Even more interesting, however, is the looming trend toward free shipping and free returns. Long-term, I don't think we can escape this trend. The customer will demand we provide this service for free. A customer will gladly pay $3.00 for a $0.60 cup of coffee at Starbucks, but she won't pay to have a dress shipped from Columbus, OH to her home in Portland, OR.

Free shipping and free returns will put a lot of pressure on the profit and loss statement. If free shipping and free returns drove enough top-line sales to offset the expense, every multichannel retailer would already be offering free shipping and free returns. Let's take a look at the future p&l, after absorbing the expense of free shipping and free returns.

Demand	$55,000,000
Merchandise Fulfilled	$49,500,000
Returns	$14,850,000
Net Sales	$34,650,000
Gross Margin	$17,325,000
Less Catalog Marketing	$4,360,000
Less Online Marketing	$2,000,000
Less Pick/Pack/Ship	$5,890,500
Variable Operating Profit	$5,074,500
Less Fixed Costs	$4,050,000
Earnings Before Taxes	$1,024,500
EBT As A % Of Net Sales	3.0%

Ooops.

Free shipping and free returns are likely to increase the overall return rate, and reduce shipping and handling income, costing our business another $1.4 million of Earnings Before Taxes.

Remember, our business was generating $2.8 million in profit before the USPS increases, $2.4 million after, and maybe $1.0 million after having to move to free shipping and free returns.

Business leaders will be put in a difficult situation. Expenses will have to be cut, in order to maintain a healthy level of profit. I see two areas where this is likely to happen.

First, catalog circulation will be dramatically cut, mostly in low-productivity areas like prospecting. This is why you see our vendor community so up in arms.

The second area will impact the customer. Items with high return rates will not be featured in advertising, and may not even be offered at all, in an effort to lower the overall return rate. Free shipping and free returns will encourage customers to take more risks, but it will encourage businesses to take fewer risks to make the p&l work. Ultimately, the customer is going to lose the breadth of merchandise assortment she has grown used to.

Multichannel CEOs and CMOs: Start planning today for the pending pressure our profit and loss statements will face in the future. This is a good time to test free shipping and free returns (for an extended period of time, not just a few weeks in December), and project the financial impact this will have.

Victoria's Secret --- Free Shipping And Free Returns On Pants

Varien.com talks about Victoria's Secret, and their free shipping and free returns promotion on pants. Kudos to Victoria's Secret for trying an interesting promotion that can benefit customers. It takes courage to incur an average expense of around $10 per order, without $13.95 from the customer to offset the expected expense.

Many multichannel retailers make money on shipping and handling. Zappos, Endless.com and Piperlime are essentially applying enormous price pressure on all multichannel businesses.

This long-term pricing pressure will cause multichannel retailers to reduce expenses elsewhere.

The very same vendor community that is unified in its fight against the USPS will fall victim to the eventual cost-cutting that free-shipping/free-returns is guaranteed to bring to multichannel retailing.

Google, Online Vendors, and Accountability

For all of the e-commerce and multichannel executives who follow my commentary, I am curious what you think of Google.

For those of you who spent your formative years in the catalog industry, you know the vital importance of a partnership with the USPS, with your merge/purge house, and with your printer. Without these partners, your catalogs didn't get delivered to the homes of your loyal customers. If the catalogs didn't arrive, you didn't generate sales.

Today, the e-commerce ecosystem has replaced the USPS, Experian and Quad Graphics with your ISP, a myriad of e-mail vendors, and Google.

Do you view your ISP, e-mail vendors and Google as strategic partners? Do you apply the same level of pressure on them that you applied to Quad Graphics about image quality, Experian about duplicate names, or the USPS about delivering your catalog two days late?

Can you prove that 194,381 valid customers clicked on your sponsored link on Google? How do you hold Google accountable? How could you ever hold Google accountable?

Does the Direct Marketing Association lobby as hard for your online issues as they lobbied for postal reform?

What are your thoughts? Are you letting Google and others off the hook, compared with the other vendors you work with?