Think About The Future

Take a look at this, folks (if the image doesn't render in your email client or RSS reader, then click here).

For the first time in history more people are shopping on mobile devices than on desktops » http://t.co/dvCwfx0kdf pic.twitter.com/vcLi11zA3x
— Shopify (@Shopify) August 26, 2014

This is one of those metrics that is likely close to accurate, and of virtually no meaning to any business. Visits do not equal transactions. And data skews wildly by demographic cohort.

I have clients that generate 15% of their volume by sending a check in an envelope. For these folks, mobile is < 10% of all traffic.

I have clients where mobile represents 20% of e-commerce transactions ... heavily (HEAVILY) skewed to tablets (that's not mobile, and you know that's not mobile).

I have clients where true mobile (phones) represents 15% of e-commerce transactions. When you see transactions, yes, transactions, happening on phones, then you've got something special going on. And your customer is young.

Our worldview is biased by the customers we attract. Think about Forrester Research, for example. They tell you that you must navigate the "mobile mindshift". But then you visit their website, and you see the desktop version of the site emulate on the phone ... and you read their SEC filings and you learn that they generate business via direct mail ... DIRECT MAIL folks! Well, think about it! How old is the average Executive leveraging Forrester data? Older than 29, right? So Forrester is 100% right to target their customers using the techniques that cause their customers to respond ... even if they offer advice that is 100% contrary to how they choose to market to customers.

Be wary of global metrics about "the customer". "Your customer" is not "the customer". Your customer behaves different than the average.

Nordstrom Omnichannel Expenditures And What It Means For Your Business

One of our loyal readers forwarded this gem about Nordstrom (click here to read it).

It's unlikely that Nordstrom signed its own death certificate because it is going to spend billions improving online infrastructure, especially as it relates to Nordstrom Rack. These article headlines are written to get folks to click on the article (worked on me), which makes money for the website hosting the article.

For those playing along at home, Nordstrom has spent the past decade growing primarily through two channels.

1. Online.
2. Nordstrom Rack.

In fact, Nordstrom Rack stores easily outnumber full-line Nordstrom stores - growth in Rack stores has been dramatic ... in 2011 there were 108 Rack stores ... in 2013 there were 143 Rack stores ... while full-line stores (the ones you are familiar with) stayed flat at 111 for each of the past three years.

Interpreted differently, Nordstrom is targeting two customers ... the affluent one it has always targeted (and not by offering additional square footage, which tells you something, but instead by improving the online experience) ... and a more modest customer (with a 40% growth in stores in two years, which tells you something), by improving the in-store experience for non-high-end customers (Rack). Where appropriate, Nordstrom buys businesses that cater to younger customers.

The online spin in the article sounds an awful lot like things I've been saying for the past year, but with a twist.

When I worked at Nordstrom, way back in 2006, my team ran an analysis for me. We knew, way back then, that there was a "3-2-1 Rule". Specifically, good customers visited the website three times a month, visited our stores two times a month, and purchased one time a month, with 85% of those purchases happening in stores.

Knowing that ratio is the secret to retail success. If the ratio gets unbalanced in either direction, interesting things start to happen.

Let's analyze two different types of retail businesses.

I recently analyzed a retail business where four years ago, a pure in-store buyer spent 85% of future dollars in-store and 15% online. Today, that same pure in-store buyer spends 75% of future dollars in-store and 25% online, but customer productivity has not changed. For this business, omnichannel investments are likely to keep customer productivity constant, but are not likely to improve the ratio of retail sales to online sales. In other words, the trend for this business is for pure retail customers to increasingly sit at home and shop online. This will lead to negative comp store sales, positive sales outcomes for the online channel and total business, and an eventual rationalization of the retail store portfolio - the bottom 25% of the store portfolio will not be profitable enough, the middle 25% of the store portfolio will likely need less square footage to be profitable. This will likely lead to a sales decline, once stores are closed and square footage is reduced. I want for you to think carefully about this ... the omnichannel/online investment is right for the customer, is right to support the online business, but shifts customers online (slowly), ultimately resulting in marginal stores being unprofitable and ultimately closed, thereby reducing sales. That wasn't the desired outcome as prescribed by the omnichannel thought leadership community. We can already see it happening, folks - just read the financial filings from your favorite retail brand - tepid comps and robust online growth.

A second retail business I analyzed is a lot like Apple, in that the in-store experience is "active", whereas the in-store experience in the example above is "passive". In this case, online sales as a percentage of total are low. All of the data shows that online research on Wednesday leads to an in-store purchase on Saturday (whereas in the example above, online research on Wednesday increasingly leads to an online purchase on Saturday). Here, omnichannel investments are going to help both channels.

The key, then, is to identify if your retail business is "active" or "passive".

• Passive = Low paid employees, merchandise available online via numerous competitors, no thrill or excitement. Not much sound. Not much for the senses, in total. Lots of %-off sale signs. You go to the store to try clothes on, or to buy stuff that you don't want to wait 2-3 days to receive.
• Active = Music, scent, better-paid employees, trying and/or playing with merchandise, food, video, senses are thrilled, large assortment, merchandise not readily available at Amazon, full price merchandise.

The passive retailer has to make an omnichannel investment to keep up, but will likely lead to poor in-store performance at marginal stores, which will result in store closures and ultimately, a drop in sales (though there will probably be more profit, and that's not a bad thing).

The active retailer has to make an omnichannel investment, but the investment causes additional customer research that yields increased foot traffic in stores and more e-commerce purchases.

The omnichannel community is telling everybody that they are active retailers. That's not the case. Most are passive retailers.

The investment community doesn't appreciate a healthy investment in the online infrastructure, because they understand the repercussions associated with dying malls and store closures.

Not all businesses are the same. Each possesses interesting dynamics, merchandise, and demographics. The combination of dynamics, merchandise, and demographics dictates your omnichannel future.

My homework assignment for you, then, is simple.

1. Identify if you are an active retailer (think Apple or Cabelas or Nordstrom or that kind of store), or a passive retailer (think Ann Taylor or J. Crew or Gap, not high on the in-store experience/excitement factor).
2. Measure how web visitors convert in-stores, and measure this by store distance, and measure this monthly, not on an individual visit basis. Does your website serve as a research tool for store purchases, or does your website cut off store purchases by pushing the customer into an online purchase today?
3. Measure if your pure in-store buyers are slowly leaking into e-commerce. If so, is customer productivity increasing, flat, or decreasing? If flat or decreasing, think carefully about what it means for the future of the bottom half of your store portfolio.

Google, Facebook, Twitter, and Merchandise Forensics

Think about how differently retailers, e-commerce folks, and catalogers are asked to view their business from Google, Facebook, and Twitter.

The retail brand is told that they must be "omnichannel", or they are "dead". Sounds fun. They're told that they must invest in back-end solutions that improve the supply chain and communicate to the customer that a dress is not available at Southcenter, but can be shipped from Northgate and be at the shopper's home in forty-eight hours. The focus is on channels and operations.

Google, Facebook, and Twitter have two audiences.

• Audience #1 = You. You are the merchandise. Make no mistake about it.
• Audience #2 = Advertisers. These folks are the customer.

Now, it is the job of Google, Facebook, and Twitter to make sure that their merchandise is as valuable as possible. When the merchandise is amazingly valuable, then advertisers (their customers) pay them for the merchandise.

What do Google, Facebook, and Twitter do well?

• They constantly find new merchandise (that's you).
• They constantly develop "winners", merchandise that performs really well. This may be the shopper who clicks on different links on Google, for instance, or the demographic that enables Twitter to slip a Miller Lite ad into the timeline. Either way, Google, Facebook, and Twitter all work to cultivate great merchandise (that's you), so that their customers (advertisers) have a lot of great merchandise (that's you) to choose from.

Keep this in mind the next time you are told that you must focus on channels and back-end operations. The focus in retail and e-commerce is backwards, and makes no sense whatsoever. Focus on your customer, and the merchandise that customers love.

Is My Store Losing New Customers?

This is one of the biggest challenges retailers face in 2014 - few people want to talk about it.

When retailer e-commerce websites became competent enough to deliver the goods, and when Amazon became large enough to have a minor impact on retail sales, new customer counts changed.

Here's what I frequently observe:

You can see the big bump in retail in 2008, it happened to most folks. But then business kind of returned to a "new normal", if you will.

But look at what happened in 2012. New retail customers stumbled.

And in 2013, new retail customers fell.

And in 2014, new retail customers collapsed.

When you see this trend, and the trend is independent of the online trend, then you know you have an in-store problem.

This is where things get interesting, folks. The experts are demanding that the in-store experience be digitized ... that's their solution.

What if the solution is the opposite? What if digitization causes potential new customers to instead stay home and conduct research online? If that is the case, then you have a whole different set of challenges, don't you? You have to create a reason for the customer to visit the store, don't you? That reason won't be inventory alignment, supply chain investments, or equal discounts across channels, will it?

Please be honest. What would cause you to shop in a J. Crew store in 2014 instead of shopping online? What would cause you to get in a car, drive to a store, and buy something in a store?

Leave a comment ... under what circumstances would you visit a store? Most people still visit stores ... but any small drop causes a drop in comps and that's what we're talking about here. Why visit a store in 2014? Leave a comment.

Is My Store Losing Sales To My Website?

This one is fairly easy to answer.

Here's what you do. Run a comp-segment analysis on retail-only customers from last year. In other words, identify customers who, from 8/26/2012 to 8/25/2013 purchased exactly two times from retail and exactly zero times via e-commerce. Then measure how much these customers spent in e-commerce and in stores between 8/26/2013 and 8/25/2014.

Then slide your dates back one year, and repeat.

Then slide your dates back yet another year, and repeat.

One more time!

Take a look at this table.

What do you observe? Remember, these customers only purchased from retail stores in the past year.

Clearly, customers are shifting online (slooooooowwwwwwwly). Total demand is flat. This tells you that customers are leaving the in-store experience, and prefer to shop online. This should cause you to think carefully about the omnichannel strategies that the experts are telling you to implement.

1. If your customer increasingly prefers the website, what does it mean to the future of your in-store experience if you consistently have fewer and fewer people in the store?
2. How many square feet do you truly need, if you increasingly have fewer and fewer people in your store because your website is increasingly preferred by your customer base?
3. Why are you trying digital strategies to get customers back into your stores when your customers are leveraging your most important digital strategy (your website and/or phone) to increasingly avoid your store?
4. What is the merchandise assortment purchased online? What is the merchandise assortment purchased in-store? Are they different (the answer is almost always yes)? If the assortments are different, how does this conflict with the thought leadership community's demand that you do everything the same in every channel?

E-Commerce Is Bleeding Out Into Mobile

Yesterday, I talked about how retail is bleeding out into e-commerce. I see it in so many projects. I observe customers who are pure retail customers who spend increasing amounts within e-commerce in the next year ... when measured over time, you can clearly see why retail comps are struggling. And did you read this article (click here) about Dick's Sporting Goods? Read the comments about profitability. Think carefully about what that means for the in-store experience.

Well, the same thing is happening as a customer shifts from using a desktop/laptop to using tablets, then from using tablets to mobile devices, then from mobile devices to apps. When you unbundle e-commerce (and you need to unbundle it, folks, or you are like the catalogers of 2003 who thought that their business was multi-channel and that you analyzed it as one unit), you quickly see that the tablet is the gateway to a mobile phone, that the mobile phone is the gateway to an app, and once the customer is using the app, the customer begins to pull away from the desktop/laptop experience.

There are three cases where you'll never observe this phenomenon.

1. You won't see this if you measure conversion rates - you will be blind to ecosystem changes.
2. You won't see this if your customer is older than 45 years old.
3. You won't see this if you believe that e-commerce is a sum of old-school e-commerce and modern smart phones using apps as the portal to your business.

Analyze customers longitudinally. You'll see that e-commerce is gaining sales from old-school channels (catalog, retail, mostly retail these days), and that e-commerce is bleeding out into mobile. In other words, e-commerce is being torn in half. And when mobile (smart phones, not tablets, tablets behave too much like desktop/laptop) and younger customers take over, look out, folks.

The data I see in mobile looks the same as the data I saw 10+ years ago when analyzing the transition from catalogs to e-commerce. Study what happened during that era of channel shift, if you want a preview of what mobile is going to do to e-commerce.

Retail Is Bleeding Out Into E-Commerce

I keep seeing this, folks.

• 2005 = Pure Retail Customer Spends $200 Next Year:  $185 In Stores, $15 In E-Commerce
• 2013 = Pure Retail Customer Spends $200 Next Year:  $160 In Stores, $40 In E-Commerce

Retail is bleeding out into e-commerce. Slowly. Terribly, terribly slowly. The impact on comp store sales might be between 1% and 2% a year - for some, higher, for others, 0% to 1%.

But make no mistake, it keeps happening. Eventually, there won't be enough traffic in the bottom 25% of stores to justify keeping lousy stores, regardless of the fact that customers are spending the same amount of $ in total. That's when the bottom 25% of stores close, and then customer spending decreases because e-commerce won't recapture the sales lost by the store closing. And imagine what happens to the mall that contains a disproportionate number of stores in the bottom 25% of a retail portfolio?

Please, please, think carefully about this dynamic. 

Omnichannel isn't going to save retail. If anything, the digitization of the business will eat retail ... why go into a store at all if the store is nothing more than a digital distribution center for stuff that can be analyzed online? And I use the word "analyzed" on purpose, because that's what we've trained people to do. Customers are not browsing, that's a quaint notion from last decade. Customers are analyzing:

• Do I have time to drive 18 minutes to the store and try on the item, then drive 18 minutes back home?
• If the item isn't available in the store and can be shipped from another store, why bother going at all when I can just get the item online and have it shipped to me?
• Is the item cheaper somewhere else? I'd hate to get burned in the store.
• Why should I buy the item in the store and pay 6% sales tax when I can get the same item online somewhere else?
• Is somebody running a 20% off promotion online? Because if they are, the item is a lot cheaper than it is in the store.
• Why do I know more about merchandise than the employees in the store? Is it because the retailer pays employees $11 an hour? I want to talk to somebody smart and passionate, and it's really hard to be passionate about the merchandise I want to buy when the employee is poor and is worried about eating.
• Why go to a boring retail store when I can watch any program ever created on television, or digest any piece of information ever digitized online?
• Do I buy something I don't really need in a store, or do I add 2gig a month on my mobile line for an additional $10?
• Why don't I just wait for my favorite brand to offer 30% off in an email campaign? Why drive to the store when a favorable email offer is likely to arrive in the next few weeks?

That's a customer analyzing, folks. Be honest, you do it. Omnichannel cannot fix this, if anything, omnichannel accelerates this problem.

There has to be an entertainment component to retail - a reason for a customer to drive to a store to buy something. Without the entertainment component to retail, we're stuck with a situation where low-performing stores are going to close at accelerated rates, and mid-performing stores are going to be forced into smaller footprints. Both dynamics will reduce sales, opposite of the desired outcome of omnichannel.

Thoughts?

Demographics and Feedback Loops

Always overlay demographic data, when trying to understand whether a feedback loop might be damaging to the long-term health of your business.

Catalogers know this all too well. Here's what they observed:

• 1999 Catalog-Centric Customers = 49 years old.
• 1999 Online-Centric Customers = 44 years old.

You can see that the online customer is younger. Ok, no worries.

• 2004 Catalog-Centric Customers = 54 years old.
• 2004 Online-Centric Customers = 49 years old.

Oh oh. Both customers age five years. This is bad. A healthy business can cater to a cohort over time ... but there's a limit to that trajectory (retirement). Many healthy businesses are able to recycle into younger customers, and do so via new channels.

• 2009 Catalog-Centric Customers = 59 years old.
• 2009 Online-Centric Customers = 53 years old.

At this point, the catalog industry should have noticed something, and should have taken action. That didn't happen. Now, the trend looks like this:

• 2014 Catalog-Centric Customers = 64 years old.
• 2014 Online-Centric Customers = 57 years old.

When you look at the trend from 1999 to 2014, it's obvious what is happening. One barely needs to project into the future to understand that this feedback loop is going to end in an ugly fashion.

It is very common for businesses to refresh the customer file through newer channels. For most of us, the channel that can refresh the customer file is mobile.

Measure the average age of customers who shop old-school channels, across time.

Measure the average age of customers who shop online, across time.

Measure the average age of customers who heavily invest in mobile.

If you can demonstrate that the mobile customer is younger than average, and that this cohort is growing faster (in counts, not percentages) than old-school channels, then you are avoiding the future impact of a feedback loop.

How Can I See A Feedback Loop Forming?

Let's take a simple example. I've witnessed this one in retail.

Take a customer who purchased exactly two times in the past year. Segment that customer based on channels purchased from in the past year. Then, measure spend in the next twelve months. Repeat the analysis for each of the past five years (projecting 2014 to conclusion). Your analysis will look something like this:

From 2010 to 2011, you'll see that retail performance improved, while online performance largely held steady.

But take a look at 2012. There is a subtle shift. Customer value remains constant, while share of dollars shift from retail to online. From 2012 to 2013, the shift accelerates. From 2013 to 2014, the shift continues.

This is the start of a feedback loop. Next, you'd analyze new customers by channel. If new customers are growing in e-commerce, and are in decline in retail, you've got a feedback loop developing. Your customers are shifting from retail to e-commerce, and the shift in behavior is accelerating.

Now, you have a responsibility. You have a responsibility to forecast where this trend is headed, over the next five years. If this continues, what does your business look like in 2019? And if you don't like what retail looks like in 2019, well, you've got five years to either change the trajectory, or to adjust to the inevitable.

This style of thought is missing. You cannot simply say that you'll fix everything by becoming "omnichannel". Let's say you become more omnichannel, and by doing so, you accelerate the trends you observe above. Now what? Your CFO wants to shut down 200 stores because there's no traffic left in those stores. What has been accomplished?

It's time to start thinking about what feedback loops are doing to the businesses we manage. We have to get out from under the weight of conversion rate and response rate measurement. It's time to take insights a step further.

My Hypothesis

These days, we're told what we must think. I'd prefer if we viewed the evolution of business in a way that was supported by data.

I tend to support three client bases.

• Traditional Catalog Businesses.
• Billion Dollar Plus Retail Companies You Know And Actively Shop At.
• E-Commerce Businesses, Usually Smaller E-Commerce Businesses.

Within each business model, I've analyze a lot of data. Hundreds of billions of dollars of transactions. I get to see how customers migrate across channels. I get to see how different age cohorts change behavior over time.

Each business model has different challenges. For each business model, I create a hypothesis that guides the project work I perform. The hypotheses are grounded in customer performance data.

Catalog Hypothesis:

• The Multi-Channel movement of the 2000s caused catalogers to align the online channel in an effort to support the catalog - catalogers were told that the customer wanted this to happen.
• When the online channel is aligned to support the catalog, customer acquisition efforts within the online channel suffer, because the website is leveraged to capture orders from co-op customers, not leveraged to acquire online customers via online marketing channels.
• When online customer acquisition efforts suffer, new names must be found, using the catalog as the primary marketing vehicle. 
• Catalogers love this dynamic.
• Catalog names can easily and cheaply be acquired via the co-ops.
• Co-ops spin the most responsive names to catalogers.
• Co-ops spun 55+ rural customers to catalogers.
• Catalogers altered the merchandise assortment to appeal to 55+ rural customers - not consciously, I suspect.
• The catalog merchandise assortment is no longer appealing to an under 40 customer base.
• As a consequence, catalogers will ride the Baby Boomer generation through retirement. It will become harder and harder to acquire customers via the co-ops, resulting in business challenges that won't be fully apparent for another five years, but are already manifesting themselves via lowered co-op response rates.
• Co-op response will be the canary in the coal mine. From what you are all telling me, it already is the canary in the coal mine.

Retail Hypothesis:

• Retail is not suffering from a lack of digitization, contrary to what you read.
• Retail is suffering from not being entertaining enough to pull a customer off of a comfortable seat to get into a car and drive to a store.
• Retail brands were terrible, absolutely terrible, at direct marketing, from 1995 - 2009. 
• As a result, e-commerce lagged in retail.
• Retailers became competent at e-commerce sometime around 2010.
• When retailers became competent at e-commerce, customers no longer had a need to get in a car and drive to a store - the retail website was sufficient to satisfy customer research needs.
• When traffic faded in stores (often caused by retailers with newly competent websites), retail brands responded by offering deep discounts and promotions.
• Retailers trained customers to expect deep discounts and promotions, further driving down traffic during full-price time periods, requiring more discounts and promotions to drive traffic, eroding profit and customer trust.
• Our industry mistakenly interpreted the drop in traffic as a competitive issue - we mistakenly assumed that in-store traffic was struggling because the store was not "digital enough" to compete with e-commerce. 
• Turns out that the opposite is true - retail lost traffic because the customer didn't have to go to a mall to perform research and/or discovery because of the digitization of the business - retail lost traffic because the e-commerce website was too effective - causing customers to not have to bother to drive to a store.
• In the next five years, retailers will invest billions to overhaul the supply chain, to integrate all channels, and to make shopping seamless.
• Retailers will not pay attention to what happened to catalogers when catalogers did the exact same thing 10 years ago.
• Retailers should pay close attention to what happened to catalogers when catalogers integrated the whole mess 10 years ago.
• In five years, shopping across channels will be easier, more convenient, and more seamless than ever before.
• In five years, comp store sales will continue to slide, because the retail industry will not address the root problem with retail.
• In five years, a handful of retail businesses will figure out that that there are three things that make retail fun - great merchandise - affordable prices - and an entertaining in-store experience.
• In other words, retailers will figure out that retail must be entertaining.
• Retail is going through the same transition that professional / college sports are going through. Professional / college sports can be experienced at home in front of a large TV with five or seven or nine speakers and a subwoofer. To get a customer to go to a stadium, the in-stadium experience must be exceptional. 
• To make the in-stadium experience exceptional, sports teams got taxpayers to subsidize their efforts - new stadiums!
• Retailers will not get taxpayers to subsidize their efforts.
• Retailers will figure out that a full digitization of the business (omnichannel) does not improve the "entertainment factor". Retailers will respond by making retail entertaining. This, not omnichannel, will be the fundamental change that kick-starts retail from the current "funk" it resides in.

E-Commerce Hypothesis:

• E-commerce-only brands benefited from twenty years of cannibalization - catalogers and retailers created demand that e-commerce-only brands fulfilled, via significant help from Google.
• The days of e-commerce cannibalizing catalogs ended with The Great Recession.
• Much of e-commerce growth in the past half-decade came from large retail brands that figured out how to sell directly to customers.
• In other words, most of the easy ways to grow via e-commerce have been exhausted.
• The internet has become an advertising platform controlled by a small number of entities.
• One of the ways to become both an advertising platform and to control e-commerce is to become a marketplace. Think eBay. Think Amazon. Then think of copycats like Sears, who essentially sell goods from other folks as a way to advertise Sears.
• Customers do not inherently like advertising.
• Let me take that back. Customers love advertising if it means they can watch the NY Giants for free, or The Big Bang Theory for free. Customers do not love advertising if it means that an ad telling you that you left a pair of socks in a shopping cart follow you around the web for the next week.
• Customers escaped Web 1.0 via Facebook and Twitter.
• As Facebook and Twitter further embrace advertising, customers will flee to yet-to-be-created platforms, which are always free at first.
• Commerce is usually one step ahead of advertising.
• As mobile grows, commerce will get figured out. When commerce is figured out, advertising will move in.
• In other words, e-commerce will be gutted from the inside, first by ads, then by mobile ... much in the same way that Yahoo! was gutted from the inside by Google, and then Facebook/Twitter.
• I'm saying that e-commerce growth will stall ... the very tactics that caused e-commerce to grow will manifest via mobile and will eat e-commerce.
• E-commerce folks will miss this trend, in the same way catalogers missed the first trend ten years ago.
• Hologram marketing will obliterate mobile, causing a subsequent shift from mobile to holograms (or whatever comes next). It's the way business works.
• E-commerce mavens will cling to their business model ... "customers who shop via both e-commerce and mobile are worth 11 times as much, proof that e-commerce works."

My Main Point:

• Regardless of channel or customer, the most important element of commerce is merchandise - having merchandise that customers love, at prices customers are willing to pay, sold via an entertaining environment that satisfies the customer. 

You're likely to disagree with me - so use your platform to argue for/against, leave a comment, or send me an email message (kevinh@minethatdata.com) outlining your hypothesis.

Best Buy

One of the ways to understand what is happening to retail is to compare what I call "Indexed Sales" to sales gained under normal inflationary conditions.

Let's use Best Buy as an example. Their fiscal year, like many retailers, runs through the end of January. In other words, Fiscal 2014 concludes at the end of January 2014.

So, at the end of fiscal 2008 (through January 2008), Best Buy experienced seven consecutive years of comp store sales increases. That's hard to do, folks!

But the economy collapsed in Fiscal 2009 (year ending January 2009). Best Buy never recovered.

Now, when you look at small negative comps, you are lulled into a false sense of peace. "Our comps are averaging -2% over the past two years, that's not terrible".

I compare comps over time with what should have happened assuming 2.5% annual inflation. At the end of Fiscal 2008, Best Buy experienced Indexed Sales that were up 32.1% over the end of Fiscal 2001. Six years later, Best Buy has Indexed Sales that are up 21.0% over the end of Fiscal 2001. Meanwhile, had Best Buy posted comps roughly at the rate of inflation (2.5%) over the past six years, Indexed Sales would be 53.2% greater than at the end of Fiscal 2001.

In other words, the cumulative impact of six tepid years is a significant reduction in in-store demand ... 1.21/1.53 = a true 21% drop in sales vs. average inflation rates.

In six years, Best Buy dropped 21% vs. inflation.

Think what that means, in terms of the in-store experience. It means that there used to be 20 customers in the store at any one time ... now, there are 16 customers in the store.

Now, this isn't a Best Buy challenge ... this is an industry-wide challenge. Sales are tepid, but when compared against inflation, sales are awful. Yes, there are many retailers performing well. Pay attention to what those folks are doing.

We're getting close to Q4-2014. It's my opinion that retailers became proficient at e-commerce 3-4 years ago. Once retailers became proficient at e-commerce, the reasons to physically spend time going to a store disappeared. I don't think we're going to fix this problem by making stores more "digital" - we digitized the business and drove customers out of stores in the first place. Maybe the answer is to do the opposite ... to make the in-store experience so fantastic that the customer feels compelled to drive to the store.

Feedback Loops

You cannot observe a feedback loop when measuring conversion rates.

We continue to hear how foot traffic is down in retail stores.

Here's the challenge, folks. Something changed in the 2010 - 2011 timeframe. Industry experts might posit that the Great Recession "changed everything". I don't subscribe to that theory.

If you worked in retail from 2000 - 2009, you know that retailers did not have direct response smarts. Nope. Well, I take that back. If you were a J. Crew and you possessed strong catalog marketing skills and possessed a direct marketing infrastructure, you had smarts. Everybody else? Not so much.

In the 2010 - 2011 timeframe, that flipped. Retailers, through a decade of trial and error, "figured it out". They learned how to sell online.

When retailers figured out how to sell online, things changed.

What changed?

Well, a subset of customers didn't have to get in a car, drive to a store, and conduct research. That was over. The website became a priority. And with every other business just a click away, a subset of the customers changed behavior. Not all customers. Not a majority of customers. Just enough customers to reduce in-store foot traffic.

Do you see how this feedback loop formed?

1. Retailers were told they had to be "multi-channel" to be successful.
2. Retailers built credible e-commerce sites.
3. Some customers chose to use the sites and not visit stores.
4. Store traffic dropped, and sales stalled.
5. Retailers are now being told they fix this problem by being "omnichannel" - by being even more digital - a solution that might just reinforce the very feedback loop that created the problem in the first place.

You can't see this feedback loop forming when you're measuring conversion - or when you are performing "attribution" work. All you see is a bunch of digital channels that result in a purchase, so your worldview is that you have to "do everything", because that's what conversion data tells you.

You will miss the feedback loop by looking at retail comps and online conversion rates.

And as a result, you miss out on what just might be destroying your business, while at the same time your measurement techniques tell you that you are successful.

Hmmmm. 

P.S.: Give this a read, if you want to see what feedback loops can do (click here).

Incremental Value Of Email Marketing

It's pretty common, folks ... you take a look at email marketing performance, and let's be honest ... it's tepid:

• Average = 5 Campaigns Per Week.
• Average Demand per Email Delivered = $0.08.

On an annual basis, you multiply the $0.08 by 5 Campaigns Per Week by 52 Weeks to get $20.80 of annual value.

Well, that's not too bad, is it? Let's pretend that the metrics above are for a 12-month buyer. Now we'll look at the 12-month buyer in total ... a 40% annual repurchase rate and 2 annual purchases and an AOV of $100 ... yielding $80 of future demand per 12 month buyer.

All of a sudden, email marketing is responsible for more than 25% of future value. Not too shabby.

Unfortunately, email marketing is measured via opens/clicks/conversions. There are two better methods for measuring email marketing performance.

1. Holdout Tests. Don't mail a random sample of email subscribers for "x" weeks. You'll learn, immediately, if email marketing has true incremental value, or if email marketing is just cannibalizing the rest of the business.
2. Modeling. I frequently create logistic regression models for annual email response, and regression models for spend. Here, you see all sorts of interesting trends. If you find that email subscribers are worth $10 and your opens/clicks/conversions suggest the email subscriber is worth $20, then you know that about 50% of email marketing is incremental, while 50% is cannibalized from online orders that would have happened anyway. If you learn that email subscribers are worth $30 and your opens/clicks/conversions suggest the email subscriber is worth $20, then you know that you are under-estimating the importance of email marketing!

Either way, it's pretty darn important to measure the incremental value of email marketing. Go do it!!

E-Commerce As A Percentage Of Total Retail Sales

When working on retail projects, I repeatedly see three trends.

1. E-Commerce is 30% to 40% of total sales (J. Crew).
2. E-Commerce is 7% to 17% of total sales (Nordstrom).
3. E-Commerce is 7% to 17% of total sales because the e-commerce experience isn't very good.

Both J. Crew and Nordstrom have credible e-commerce efforts.

Why the difference in performance?

The answer becomes obvious when you look at share of sales by store distance.

Go into your database, and look at % of sales derived via e-commerce, by store distance. Your trend might look like this:

• 0 to 5 miles = 10% via e-commerce.
• 6 to 25 miles = 30% via e-commerce.
• 26 to 99 miles = 50% via e-commerce.
• 100+ miles = 80% via e-commerce.

Or your trend might look like this:

• 0 to 5 miles = 3% via e-commerce.
• 6 to 25 miles = 7% via e-commerce.
• 26 to 99 miles = 15% via e-commerce.
• 100+ miles = 68% via e-commerce.

The in-store experience is key, folks. If customers love the in-store experience, then two things happen. First, customers who live near the store almost exclusively shop in the store. Second, customers who live an hour from a store are very likely to make the hour-long drive to a store. When you see this happening, you know your in-store experience is very, very credible!

If you have a good (not great) in-store experience, and you have a very credible online experience, then the trend looks like the first example. Near a store, you have a huge share of business happening in-store. But as soon as you get a few miles from the store, the customer shifts over to e-commerce - online convenience outweighs driving to the in-store experience.

Retailers that have a high percentage of e-commerce within five miles of a store (30% or more) have an opportunity to look carefully at the in-store experience. Here, customers like the brand, but not the in-store experience. Retailers really, really want to have customers in the store, right? Well, if the customer lives 1 miles from the store and won't go to the store, that means something.

I get tired of hearing folks beat retailers up about e-commerce penetration. The best retailers have such a sensational in-store experience that the customer actually wants to get in a car, drive to a store, and experience the buzz. Imagine that?

Quantity vs. Quality

When running a Merchandise Forensics analysis, pay attention to new items.

Yup, new items are the lifeblood of your business, it's as simple as that. And I'm not talking about adding a button to a shirt, I'm talking about genuinely new products.

Some of my clients set new product goals.

• Exceeds Expectations = Offer At Least 500 New Items And At Least 100 Achieve A/B/C (high sales level) Status.
• Meets Expectations = Offer At Least 400 New Items And At Least 70 Achieve A/B/C Status.
• Missed Expectations = Any Other Outcome.

Why both quantity and quality?

It's really hard to identify high-selling new items. Really, really hard. If you think you can do it, try being a merchant.

Take a look at how well you historically identified successful new items as a function of the total number of new items offered. If that rate is, say, 17%, then you have the target you need for a "Meets Expectations" objective. And if your analysis demonstrates that you need 400 new items in order to maintain sales growth, well, you've got the second piece needed to set a "Meets Expectations" goal.

Your "Exceeds Expectations" goal should both stretch your merchandising team while offering the potential for real sales growth.

New item goals require both quantity and quality. It's terribly hard to identify winning items prior to sharing them with the customer.

Michaels, E-Commerce, and Sales Growth

Yup - Michaels finally dove into e-commerce in 2014.

But have you looked at their business performance, from 2009 - 2013 (click here)?

• Compound annual growth rate of 4% per year.
• Sales per square foot increases every single year.
• Comp store sales increases every year.

Michaels is growing at the rate of Macy's, and yet, Michaels completely ignored e-commerce during a timeframe when Macy's thoroughly explored the omnichannel movement.

There are two trends. We're paying attention to the first trend.

1. Growth by aligning channels.
2. Growth by offering merchandise customers want at a price customers want to pay.

Gap, Tiffany, Wal-Mart, and Amazon

Give this well-written article a read (click here). The supporting video (click here) is done extremely well. Lots of metrics, woven into a very easy-to-understand story. The story makes one want to go out and spend $35,000,000 improving back-end systems. 

The authoring organization praises Gap and rips on Tiffany. But what about five-year sales trends?

• Gap's Compound Annual Growth Rate, 2009 - 2013 = 3%.
• Tiffany's Compound Annual Growth Rate, 2009 - 2013 = 10%.

Tiffany, doing a bad omnichannel job, is growing 3x faster than Gap, a brand lauded as an omnichannel success story.

The authoring organization praises Wal-Mart, comparing it favorably to Amazon in e-commerce growth. But what about five-year sales trends?

• Wal-Mart = +4%.
• Amazon = +32%.

Both metrics can easily be calculated after reading annual reports.

There are two trends. We're ignoring the second trend.

1. Growth via channel alignment.
2. Growth via merchandise customers want at a price customers want to pay.

What About T.J. Maxx?

You saw this one last month, didn't you (click here)?

Some argue that this is one of the most successful retailers of the past five years.

Of course, they didn't even bother to sell via e-commerce until last year (though they own brands that did).

Go do a Google search for T.J. Maxx and Omnichannel. You won't find much.

Go read their 2013 Annual Report (click here). 

• 8% compound annual growth over the past four years.
• Macy's went from $23.5 billion to $27.9 billion over this timeframe.
• T.J. Maxx went from $20.3 billion to $27.4 billion over this timeframe.

Please pay attention to facts.

There are two trends. Both can yield success. But we seem to ignore the second trend, which seems to generate a far greater level of success.

1. Those who seek excellence via digitization and channel alignment.
2. Those who seek excellence via appropriately priced merchandise that customers want.

J. Crew - A Point Of View

Omnichannel ... I get it, you have to somehow coordinate all this different content across all these different platforms. It's not easy. Take a look at J. Crew.

That's a lot of social platforms to create content for, don't you think?

You have to admit, J. Crew seems to do a very credible job of creating interesting content, of interacting with customers, don't you think? More than "content", J. Crew has what I call a "point of view". That's important. The "point of view" supports the merchandise they sell, and differentiates J. Crew from comparable businesses.

Two good lessons here, folks.

1. It is very important to have a point of view. It's more important than a "content strategy".
2. Having a strong point of view may result in positive business results.

In the first quarter of 2014, J. Crew posted a -2% comp store sales change (click here to see), coupled with a total sales increase of 5% and a net loss. Gross margins declined from 44% to 38%, suggesting that customers did not want to purchase the merchandise, so J. Crew had to heavily discount products to move through unwanted inventory.

I understand why the focus of retail has shifted so significantly, to the full digitization of the business. We all get it. But there is an elephant in the room. That elephant, of course, is that all this content and social stuff and mobile stuff and aligning channels and improving supply chains results in almost no incremental increase in total sales. 

Increasingly, we're seeing two types of retailers.

1. Those who focus on marketing, channel alignment, content, social, mobile, and supply chain (omnichannel).
2. Those who focus on merchandise.

The customer will pick the path that makes the most sense to the customer. It's sure going to be an interesting next five years, don't you think?

Peak Merchandise

This booklet (5 star rating across two reviews on Amazon - you can't beat that) has been responsible for two big outcomes.

1. It's the second-most popular consulting project I've ever offered.
2. Companies actually implement the results!

One of the things I don't talk about in the book, but have identified through performing a lot of these projects, is the concept of "peak merchandise".

Most items follow a traditional sales curve. The curve looks something like this.

• Intro Year = $50,000.
• 1st Full Year = $100,000.
• 2nd Full Year = $110,000.
• 3rd Full Year = $80,000.
• 4th Full Year = $55,000.
• 5th Full Year = $25,000.
• 6th Year = Discontinued.

So "peak merchandise" is defined as the first year where an item experiences year-over-year declines. Once that item passes peak, it's on the way down.

Take a look at your A/B/C items. What percentage of them are past "peak merchandise"? If this percentage is growing over time, and you are not introducing enough new items, you've got a problem.