May 02, 2010

Dear Catalog CEOs: Crazy

Dear Catalog CEOs:

Last week, I presented an idea to an Executive. I gave the Executive three options.
  • Option #1 = Run a $100,000,000 catalog business, and generate $3,000,000 of pre-tax profit in 2010.
  • Option #2 = Cut catalog circulation in half, run a $90,000,000 business, and generate $5,500,000.
  • Option #3 = Drop the catalog, run a $60,000,000 online business, and generate $5,000,000 pre-tax profit in 2010.
The Executive chose Option #1.

I asked why the Executive chose the less profitable option. Here is his response:
  • Shrinking the business would require the loss of numerous jobs.
  • Shrinking the business would require a significant restructuring process.
  • Shrinking the business would cause a loss of market share, and you never want to lose market share.
  • The catalog has an intangible brand value that cannot be measured via profit dollars.
This Executive looked at me, and said, "if you endorse option #2 or option #3, you are crazy".

What do you think? If an individual offers an unpopular idea, is the individual crazy? Is it worth it to pay a $2,000,000 profit tax, per year, in order to prevent the loss of jobs, maintain market share, and perpetuate intangible brand value that cannot easily be measured? Discuss your thoughts in the comments, please!

9 comments:

  1. Kevin - The tradeoff is not just what the business looks like in 2010, but 2011 and beyond. If Option 1 maintains a flat business, while option 2 decreases the business 10% next year as well, a short term profit gain doesn't pay out over the long term.

    ReplyDelete
  2. Anonymous5:40 AM

    This is a tough one, and a scenario that many catalogers have had to think about over the last 2 years. It all comes down to ownership and what their goals and core values are. However, the company is not in jeopardy in your example. How is management being judged by ownership? Is this a publicly traded company? If so, then #2 or #3 may win. If it is privately held then #1 may be the leader in the clubhouse.

    ReplyDelete
  3. Kevin

    It also involves future corporate value and the owner's "end game." If the catalog and online business has greater strategic value at the point of the owner's exit, that has to be considered. Every $1 gained or lost in earnings can be worth $6 to $9 in transaction value. A five-year track record of option #1 may actually be more attractive to a buyer than a two-year record of options #2 or #3. Buyers also look for management talent as a part of the transaction value. If letting talented staff go as a part of options #2 and #3 causes a void in talent valuation, that will be reflected in a lower multiple of earnings in the sale value.

    This decision is exceptionally fragile. As one who has represented many owners of direct marketing businesses in sales, I would be hard-pressed to advise change of that degree without an evaluation of future corporate valuation for each option.

    Sometimes catalogs have significant value for other reasons, and one of those is the end-game value of the overall company.

    Best regards,

    Don Libey
    www.libey.com

    ReplyDelete
  4. An example I found interesting is that it's certainly possible to lower sales in the short term, to increase both sales and profit in the long term.

    I believe J. Crew did this at one point-they realized that by producing all the merchandise they could and selling it all, they were training their customers to wait for discounts. By producing less merchandise and marking it up, they trained customers to realize that the merchandise could sell out at any time-causing customers to buy more quickly, and at full price.

    It's impossible to tell without more information, but I wouldn't write off option 2 or even option 3.

    ReplyDelete
  5. I think I'm going to have to side with you on this one Kevin... sort of. Let me exaplain.

    What you've basically got here is a $60,000,000 e-com business that generates $5,000,000 and a 40,000,000 catalog business that loses $2,000,000. Looking at it as a strict numbers game, dumping the catalog and going e-com is a slam dunk. But the Executive has some validity to his point, namely the market share argument. If he has a plan to transition (encourage) catalog customers to become e-com customers then spending $2,000,000 in 2010 to shift them to the web and kill (cut) the catalog makes sense. I think the imporance is to understand what you are spending (losing) with the catalog and figure out a way to not lose (much) market share while transitioning out of the catalog portion of the business since you are losing money.

    Option #2 is probably the right step.

    ReplyDelete
  6. Thank you for your comments, everybody.

    I purposely left out my response to the individual. I recommended going with a smaller business as long as there was an opportunity to re-invest the catalog dollars that were losing money via online marketing or other tactics that lost less money.

    I was still told that I was crazy!

    ReplyDelete
  7. I agree with Kevin - it's all about posturing yourself for the future. I believe if you can maintain business/profit/market share in these unstable times it will lend to more prosperity in the future. (All that being said is based on the company's balance sheet as being stable and not in lean strategy)

    Based on the the conversation provided, it sounds like this Executive is keen on the Cost-Benefit approach. Questioning the value of $2M - $2.5M of "Pre-Tax" profits (essentially doubling your gains, but giving up more than half your total business, employees, and possible market share in the future).

    The two most important business concepts are Cost-Benefit and Opportunity-Costs. If there is no plan for the increased capital other than increasing-the-capital (ie. diversification), then maintaining the current structure, saving jobs, and stabilizing market share (posturing) is my vote.

    ReplyDelete
  8. Anonymous10:06 AM

    I wonder if those were the reasons he gave, in that order?

    People often say "You're crazy" when what they mean is "You don't understand how the world works." by which they really mean "You're starting from a different set of assumptions than I am, and we're not going to arrive at the same conclusion."

    If his assumptions are:
    * I don't want to lay people off.
    * I am a cataloger.

    Then option #1 makes the most sense.

    If his assumptions are:
    * I need more pre-tax profit.

    Then nothing but option #2 makes any sense.

    ReplyDelete
  9. Anonymous7:37 AM

    I'm in this scenario now, and clearly would side with the executive. Your customers are being peppred with google ads, banners, and so many emails that they can't even read them all. Dropping circ on older/marginal customers will remove your brand from their consideration set, and you'll have t be extrem to regain their favor by hunting them down online. The catalog allows you to connect with your customer outside of a screen - a unique and differentiated experience these days. You might not see response, but you are remaining in their consideration set. This will lead to future sales, no decline in market share, and a catalog that will be on the coffee table to reinforce the brand.

    ReplyDelete

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