What Actions Will I Be Able To Take?

I shared a small amount about the simulation I'll host on March 30 (click here for details - please join us by the way).

What are the decisions you get to make?

• You get to decide how much of your cash to invest in offline marketing.
• You get to decide how much of your cash to invest in online marketing.
• You get to allocate headcount (10 staffers) into offline strategy, online strategy, and mobile/social strategy.
• You get to determine the price of "Widgets" based on a cost of goods of $30.
• You get to determine the price of "Bidgets" based on a cost of goods of $20.
• You get to determine the price of "Tidgets" based on a cost of goods of $10.
• You get to determine the discounting strategy (0% off, 10% off, 20% off, 50% off - have at it).
• You get to determine if you charge $12 for shipping, if you offer free shipping with a hurdle, or you offer free shipping 24/7/365.

Each of those decisions impact Widgets / Bidgets / Tidgets differently, and as a result, impact net sales and company profit differently.

The room will be divided into twenty teams.

Your team will have to agree upon the eight strategy points above. Do you sell Widgets at $60 with 20% off or at $48 and call $48 full price? It's on you. You decide. And everybody else decides simultaneously - you'll get to see their decisions after the "year" is complete. You'll know why you succeeded or failed.

Then you get to make new decisions in year two. And as you make your decisions, all other teams act independently as well, making their decisions. Their decisions impact your decisions, and vice versa.

After five years, one team will maximize the mix between sales growth and profit dollars better than everybody else. That team will be declared "the winner".

More on the topic tomorrow. Please click here to register for the conference.

I Can't Take Action ...

There's nothing like telling the audience I am speaking at a conference or I am publishing a new booklet to drive increased unsubscribes.

Given that I'm going to spend this entire week talking about the VT/NH event on March 30, you might not like the content ... if it really bothers you, please unsubscribe right now. It's ok, no worries.

Here's a link to the event (click here). Please join us! It costs you next to nothing and the VT/NH do a great job and you won't be swarmed by a 60/40 vendor mix when you walk down the hall. It's you and your peers.

Ok, why am I hosting a business simulation instead of giving a two hour talk about metrics or customer acquisition or merchandise productivity?

Well, Bill runs a conference where you don't have to pay $20,000 to sell a message to the audience and appreciates honest perspectives (even if everybody in the audience is not going to agree) and that is greatly appreciated. So that's a big part of it. It's terribly hard in our modern world to not get trapped by a conference that has "scale" ... you get seduced into bringing an NFL quarterback into the fold or an NBA legend or you host a nighttime event with a popular band from the 1990s ... and you get seduced into vendor nonsense. Yes, you have a large audience and you have money ... but what good is that if you are conference organizer? You have to help people perform better, don't you?

So that's one reason I am running a business simulation - to help you perform better at work.

Here's the other reason I am running a simulation instead of offering 188 slides about metrics or customer acquisition or merchandise productivity. The reason = Action + Accountability.

When you present a couple hundred slides to fifty or three-hundred or fifteen hundred people, you get a lot of feedback. In the past two years, here's the number one comment I received as feedback:

• "This is great, but I can't take action because of ...."

"I can't take action."

When you can't take action, you look for metrics and/or facts that will convince somebody else to take action. Now, I could craft a 200 page presentation with the metrics that I recommend you use - but your situation is "local" and my metrics are "global" and so the presentation would end up a failure, because the presentation doesn't address the core issue. The core issue, of course, is "why" you cannot take action.

I've learned that there are three reasons people don't take action.

1. Leadership wants to "control" things.
2. People know what to do but are afraid of the consequences of being wrong.
3. People don't know what to do.

So if I remove Leadership/Control from the equation ... and if I remove the consequence of being wrong ... and if people who don't know what to do get to see what people who know what to do actually do ... then I've removed "why" from the equation. And if the "why" has been removed from the equation, then we should be in a fun situation, a learning situation, where Action + Accountability is rewarded ... and if the participant doesn't perform well it's ok because the participant gets to see the actions that led to a positive outcome.

Hence - I'm presenting a five-year business simulation on March 30.

There will be 20 teams.

Each team will make their own decisions.

Each team will get to see the decisions made by other teams.

Everybody learns.

Nobody is put in a "bad situation".

What's not to like about this?

How about joining me on March 30? Click here for details. More on the topic tomorrow.

A Month Before The Simulation

Sure, you could spend a thousand dollars attending a big conference and be entertained by a Sports Legend ... but what would you actually learn if you did that? Is that the best use of company resources?

Or you could join me on March 30 (click here for details). You could compete against other attendees - 20 teams in total - trying your hardest to grow a business from scratch.

You will get to make the decisions.

• How much should I invest in offline marketing?
• How much should I invest in online marketing?
• How many people should I hire of offline, online, and mobile/social activities?
• How much should I charge for each of three product categories?
• Should I employ free shipping, shipping with a hurdle, or ask the customer to pay for shipping?

Once you make the decisions, the simulation worksheet produces outcomes. You'll get to see how your team performed. You'll also get to see how the other teams performed. You will get to see the investment/staffing/pricing strategy for each team.

Then, you'll get an opportunity to make changes to your strategy for year two. So will everybody else.

We'll repeat the process for five years. At the end of five years, the team with the best combination of sales growth and profitability will "win" - and earn a coveted MineThatData Pick Axe!

What will you learn?

• You will learn how having access to the same metrics as everybody else yields wildly different strategies.
• You will learn that success comes from the strategies you employ as a result of the metrics you analyze - you will learn that metrics do not yield success - you create your own success.
• You will learn that there are many different "winning strategies" built into the simulation ... you will learn how important your own decisions are.

What would stop you from joining me, from participating in a day-long extravaganza of learning?

Click here for more details.

Real Estate / Analytics / Finance Models and Store Closures

Most large retail brands have a Real Estate department. This department finds the best places to build new stores, and works with Finance and Strategy to determine markets to move in/out of.

In recent years, Real Estate departments have partnered with Analytics departments to understand the impact of online sales on existing / new store locations. The Finance folks appreciate this partnership, because it is becoming harder to justify keeping open B/C locations.

Let's review (at a very high level) the factors that come into play when determining if a store should be closed.

First, most large retailers maintain a "strategy worksheet" for each existing store and each potential new location. The strategy worksheet lists a series of metrics about each store (demographic metrics, performance metrics, competitive metrics, and channel-centric metrics). When evaluating new locations, each new location is compared against existing locations - finding "comps" where applicable.

Second, forecasts for each of the next five years are produced for existing stores. The forecasts take into account trends across the customer base (i.e. 40% of 12-month buyers will purchase again next year, spending $200 each, while the store will attract "x" new customers spending $130 each - yielding a forecast). The forecasts take into account online cannibalization (i.e. as the web grows, the web pushes customers into stores - and as the web grows, the stores push customers online at a faster rate). The forecasts account for competitive issues. If Macy's is closing at a location, then future forecasts are adjusted by "y" percent. When I worked at Nordstrom, we loved it when Neiman Marcus moved into a market because existing Nordstrom stores performed better due to Neiman Marcus traffic. This kind of adjustment is baked into the forecast.

Third, profit-and-loss statements are run for each store for each of the next five years. The p&ls are run for each store, and more often these days are run for the "trade area" where a store exists, including online sales.

Fourth, profit-and-loss "what if" statements are run assuming a store is closed. Large retailers know what happens in a trade area if a store is closed. If a store generated $2,000,000 in annual sales and the store is closed, it is common to see 15% of sales move online ($300,000) and 15% of sales move into nearby stores ($300,000) and 70% of sales to simply disappear. Based on historical store closures, "what if" scenarios are run. Between Real Estate / Finance / Analytics, a list of future "unprofitable" trade areas are published. C-Level Executives and Board Members then determine what to do with "unprofitable" trade areas.

How about we work through an example?

Let's assume that we own one store in Portland, Oregon. The store generates $1,500,000 in annual sales, with 25% of sales flowing through to profit, and $150,000 in fixed costs associated with the store. In addition, the online channel in the trade area generates $300,000 in sales, with 25% of sales flowing through to profit and $30,000 of advertising costs (10% of sales) to generate online sales and $30,000 of fixed costs allocated to the online brand in the trade area.

• Store Profit = $1,500,000 * 0.25 - $150,000 = $225,000.
• Online Profit = $300,000 * 0.25 - $30,000 - $30,000 = $15,000.

Again, we'll walk through stuff at a very high level. There is a lot more detail that goes into this stuff than I am sharing here.

Forecasts are produced for this store - the models use customer repurchase rates, new customer acquisition count assumptions, and channel crossover assumptions (among other attributes). In our example, let's assume that the store will weaken because sales move online over time.

• Year 1 Store Sales = $1,500,000 * 0.98 = $1,470,000.
• Year 2 Store Sales = $1,470,000 * 0.98 = $1,440,600.
• Year 3 Store Sales = $1,440,600 * 0.98 = $1,411,788.
• Year 4 Store Sales = $1,411,788 * 0.98 = $1,383,552.
• Year 5 Store Sales = $1,383,552 * 0.98 = $1,355,881.

Similarly, those sales will move online - and better yet, two things happen. First, online sales will grow at an organic rate and second, online marketing expense will increase as online sales are associated with Facebook Advertising and Paid Search and Affiliates and Regargeting. Let's assume that online sales will grow by the amount that in-store sales decline, and let's assume that online sales grow by 5% organically above-and-beyond current rates. Here's the online forecast for the trade area.

• Year 1 Online Sales = $300,000 * 1.05 + $30,000 = $345,000.
• Year 2 Online Sales = $300,000 * 1.10 + $29,400 = $359,400.
• Year 3 Online Sales = $300,000 * 1.15 + $28,812 = $373,812.
• Year 4 Online Sales = $300,000 * 1.20 + $28,236 = $388,236.
• Year 5 Online Sales = $300,000 * 1.25 + $27,671 = $402,671.

Ok, this is where things get interesting. Your Real Estate team and Analytics team will measure the impact of, say, Macy's closing a store in this mall. When Macy's closes, let's assume that sales drop by 3%. And let's assume that other stores will close in future years, hurting retail sales by 3% in the first three years, and then by 5% in years four and five.

• Year 1 Store Sales = $1,500,000 * 0.98 * 0.97 = $1,425,900.
• Year 2 Store Sales = $1,425,900 * 0.98 * 0.97 = $1,355,461.
• Year 3 Store Sales = $1,355,461 * 0.98 * 0.97 = $1,288,501.
• Year 4 Store Sales = $1,288,501 * 0.98 * 0.95 = $1,199,594.
• Year 5 Store Sales = $1,199,594 * 0.98 * 0.95 = $1,116,822.

Technically, we need to adjust online sales growth because we have less retail sales, but we'll skip that step for now, as it won't fundamentally change our story.

Make sense so far? Good!

Let's run a profit and loss statement for each of the next five years. We will assume that retail fixed costs and online fixed costs will increase by 3% per year. Ready?

Yup, this market is dying. The store is losing sales to the online channel, and the store suffered because of other store closures in the mall. As a result, profit is in decline.

What does the forecast look like if we close the store? Let's assume that 15% of sales move online, 15% of sales move to other nearby stores, online marketing costs increase as sales move online, and retail fixed costs disappear without the store. What happens?

Look at that! If we close the store, the trade area / market is less profitable. So we're stuck, aren't we? The store is going to perform worse and worse - and yet, profitability is still there, so we have to keep the store open.

This is the process that retailers go through to determine when a store should be closed.

Are there factors that change the relationship I illustrated above, causing stores to close faster or slower? You bet there are!

• Retail Fixed Costs:  Retail brands that are "debt heavy" have greater fixed costs, however, if the store closes, the fixed costs don't go away - they simply hang there and drag on profitability. If a company has minimal debt, then fixed costs disappear, causing the p&l to look better when a store closes, accelerating store closures.
• Online Marketing Costs:  If a retail store closes and sales shift online, and if those sales are then tied to Paid Search and/or Facebook and/or Affiliates and/or Retargeting, then there are added costs that result in a better situation by keeping the store open.
• Online Fulfillment Costs:  Free shipping causes an odd dynamic - variable costs per order increase and as a result the existing store (without the variable cost) becomes more profitable by comparison. In other words, free shipping accelerates customer shifts to the online channel while causing the online channel to appear less profitable and therefore causing Management to keep the existing store open longer.
• Shift To Online Channel:  The faster sales shift to the online channel, the faster you'll close stores. The issue isn't the percentage of sales that are generated online, but instead the rate that sales shift online.
• New Customer Generation:  If the retail store can generate new customers faster than the online channel can generate new customers, then the math will dictate that the store must stay open longer so that the store can fuel online sales growth. This is a little-understood dynamic that only the smartest retail brands take advantage of.
• Flow-Through to Profit:  When a store can generate 40% to 50% flow-through to profit (on a variable basis), the store can stay open longer even when sales shift online quickly. When a store has to discount heavily and can only generate 20% flow-through to profit, then fixed costs quickly overwhelm the p&l causing more profit to be generated by closing the store.
• Market Cannibalization:  The rate that sales move to other stores and/or the online channel dictate whether a store should be closed or not. In a saturated market, it is common for 70% of the sales to remain after a store closes ... half moving to other stores and 20% moving online. Brands that are closing stores (Macy's, JCP, many others) frequently close stores where market saturation is high. When there is only one store in the market, it is common for 15% of the sales to move online and 15% of the sales to move to other stores. Traditional Retail is closing stores because of the interaction between online sales shift and market cannibalization.
• Product Mix:  Certain product lines sell better online than in stores, and vice versa. If the product mix yields comparable rates of sales online vs. in stores, stores are going to close faster. If the product mix skews so that some items sell online better and some items sell in stores better, then there is a place for stores and closing the store will result in the death of product lines, causing long-term online sales to decelerate.
• In-Store Experience:  When you have a Bass Pro Shops or Cabelas, you have an in-store experience that is fundamentally different than walking into a J. Crew. This means it is easier to close a J. Crew store and not lose sales - whereas Bass Pro Shops will get killed when they close a store because those sales are not moving online. If you want to keep your stores open, you need a better-than-average in-store experience.

There are so many other factors as well - factors dependent upon each individual brand. Closing a Nordstrom Rack store cuts off new customers for Nordstrom Full Line stores, which then cuts off Online growth, so you have to put that information into your model, right? Each individual company deals with their own individual challenges.

Does the explanation make sense?

Do you have any questions?

And sure, I do this kind of work, so if you need help give me a holler (kevinh@minethatdata.com).

Sales Down 7%

Some catalog advocates will look to Victoria's Secret ... see a 7% drop ... and then raise a champagne glass in celebration (click here).

• "See, that proves the POWER of putting paper in the mailbox."

Think about it for a moment. You pull tens of millions of dollars of catalog marketing out of the ecosystem and sales only drop 7%.

Again ... SALES ONLY DROPPED 7% AFTER REMOVING A FULLY-BAKED CATALOG MARKETING PLAN.

If sales dropped by 7% and the ad-to-sales ratio dropped by 10% ... the business is WILDLY more profitable. Now, I have no idea how much paper was buried in the ad-to-sales ratio, but simple math suggests profit had to increase. A 7% sales drop and a 4% ad-to-sales ratio drop would yield an increase in profit.

Please - measure your organic percentage.

Please learn what your business could look like if you changed marketing strategies.

You run these scenarios, right?

Hiding In Plain Sight

In recent years my business shifted ... I used to spend a lot of time analyzing marketing data. These days, I spend a lot of time analyzing the impact of merchandising decisions on business performance.

Why?

I think it comes down to the tools you use to analyze your business.

1. Your merchandising team typically uses 1980s technology to make decisions (unless you are at H&M or Zara, of course). Even if you have new systems, you are using new systems to produce old metrics.
2. Your marketing team is obsessed with response/conversion to marketing tactics. The craft has been devalued by Google Analytics - you either pay Adobe or IBM a hundred thousand for advanced analytics or you use Google for free analytics - but make no mistake, none of the tools are designed to help you understand how merchandise performs. If you want to see how 29 Pinterest referrals converted, slice and dice it a thousand ways. If you want to see how 29 new items progressed to winning status? God help you!

We end up looking for solutions in the wrong places. Sales down 5%? Figure out what is wrong with the conversion funnel.

Meanwhile, I'm analyzing merchandising data and the answer is hiding in plain sight.

Do me a favor. It's Friday, and you don't have anything better to do. Here's the query I'm asking for.

Step 1: Identify the year an item was "born".

Step 2: Create variables for each year - sum demand for the item by year. Use 2/24 - 2/23 as your "year", or use calendar year, or use fiscal year, the definition of year isn't that important.

Step 3: Segment items based on the year the item was "born". Count how many items were introduced by year. Then sum demand by year for items "born" in a certain year. If you have five years of data available, you will have five rows in your dataset, and you will have five columns summarizing annual sales totals for each year (row).

Take a look at your table.

You should see what the "life of an item" looks like.

Companies that are struggling discontinue items too quickly, or fail to introduce enough new items, or introduce too many new items that fail to perform well. You'll be able to see the impact of bad decisions over time.

Ok - go run the query. It's easy to run, and many of the issues with your business will be hiding in plain sight. 

Starting A New Product Line

There are more options than I am going to provide here, ok?

When launching a new product line, most of us would likely take one of two approaches.

1. Encourage our existing customer base to purchase from the new product line.
2. Start a new business, and find new customers to purchase the new product line.

Either strategy can work, no doubt about it.

When we encourage our existing customer base to purchase from the new product line, there are a handful of choices we make.

1. The new product line can integrate with the existing product line. Think about getting oil changes from the dealership you purchased your car from - the oil change product line does not cannibalize purchasing of the car. Here, the existing customer base is the target audience, and the goal is to get customers to maintain spend in one category while adding spend in the other category.
2. The new product line can complement the existing product line. In this case, we might offer a more expensive version of an existing item (or cheaper). This is a classic Foxes/Rabbits scenario ... the new product line is a Fox, and it requires a healthy supply of Rabbits to survive.
3. The new product line is designed to kill off the existing product line. This is not technically a Foxes/Rabbits scenario, it's more of a Rabbits/Rabbits scenario. Think of Windows 10 killing off Windows 8 as an example.
4. The new product line can be completely independent of the existing product line. This would be like Best Buy selling washing machines - in theory, washing machines should not interfere with the purchase of a 65" television, right?

In my experience, most of us try to implement a version of (2). We want it both ways. We want the existing product line to succeed, and we want the new product line to succeed, so we market the new product line to the customer base purchasing the existing product line.

This is where we get ourselves into trouble.

We need to do everything possible to protect the existing product line in the short-term, until the new product line can survive independent of the existing product line (or until it can replace the existing product line). This means that we need to provide a ton of Rabbit Food (marketing) to grow the existing product line so that there are a ton of customers who might consider the new product line.

Of course, we don't always do this, do we?

So give your existing product lines some thought when introducing new merchandise - we need to protect (and grow) the old assortment so that the new assortment has a chance of being successful.

Agree or disagree?

How To Deal With Merchandise Categories That Act Like Foxes

Here's a common mistake identified in many of my projects.

A business is struggling, so a new Management Team is hired. The new Management Team is full of new ideas, untested ideas. And because the existing business is not healthy, there is a "mandate" to do something different.

Within a few months, the Management Team shuts down a series of merchandise categories ... suggesting that the categories do not "reflect the future of the brand". Then, the Management Team brings in a fresh batch of new items. Two things happen.

1. Customers generally reject the new merchandise assortment.
2. Sales drop because the customer misses the discontinued merchandise assortment and wishes they could buy from the product line.

Sometimes the Management Team becomes pig-headed. Their time is limited.

Sometimes the Management Team listens to the customer and backtracks.

What did the Management Team miss?

The new product line represent Foxes.

The existing product line represent Rabbits.

Marketing represents Rabbit Food.

In other words, the Management Team fails to understand the role that Rabbit Food and Rabbits play in the health of the Fox population. By removing Rabbits (old product categories), Foxes have less to eat and consequently Foxes do not achieve their potential.

In my project work, it is typical to grow the Fox population (new product line) by having a healthy Rabbit population (existing product line). You grow the new product line by getting customers to cross-over from old product lines and purchase from the new product line ... you need both to be successful.

What we typically do (instead) is we kill off the Rabbits and then we try to build a healthy population of Foxes.

Tomorrow, I'll talk a bit about growing a new product line.

Identifying Merchandise Categories That Act Like Foxes

Every merchandise category plays a role in the health of your business. There are categories that act like "food" for other categories ... take the category away, and you lose the sales from the category you removed and you lose sales because other categories depend upon the category.

In my projects, I typically find that marketing is not the problem. Most companies do a semi-competent job of applying basic marketing tactics ... their tactics represent a "C-" on a grading scale. Could they do better? Sure. Are the tactics the reason the business is struggling? Usually not.

Often, the problem is a merchandising problem ... and more specifically, the problem is one of taking rabbit food away from the rest of the business.

Recall yesterday's query? No? I asked you to calculate the share of last year's demand for each merchandise category  - where did the demand come from?

Categories That Act Like Rabbits:

• They have above-average appeal to new-to-file customers.
• They rank in the top third of share of demand from prior twelve-month category buyers.
• Customers cross-over and buy from other merchandise categories.

Categories That Act Like Foxes:

• They have below-average appeal to new-to-file customers.
• They rank in the bottom third of share of demand from prior twelve-month category buyers.
• They rank in the top-third of share of demand from non-category buyers crossing over and buying from the category in question.

Tomorrow, I'll talk about why this distinction is important.

Do You Have Foxes And Rabbits Within Your Business?

Ten years ago, we measured the dismantling of the catalog industry ... foxes (digital) stole demand from catalogs (rabbits). It took from 1995 to 2010 for this to play out ... fifteen years of foxes eating rabbits until one of two things happened.

1. The cataloger became an online marketer catering to most age demographics.
2. The cataloger remained a cataloger, but catered to a 60+ age customer offering merchandise that 60+ year old customers prefer.

Today, we're witnessing the dismantling of the traditional retail industry ... foxes (digital) stealing demand from traditional retail stores (rabbits). We're about five years into what might be a fifteen year transition. And just like catalogers responded by mailing far fewer catalogs, retailers are responding by closing stores. And as catalogers learned, when you don't give the rabbits food, rabbits die and the foxes go hungry.

Those dynamics are at play within your business as well.

You've got nothing better to do today - so how about having your analytics team run a query for me.

For every Merchandise Category you carry, compute the following metrics.

• % of last year's demand from customers who previously bought from that merchandise category in the past twelve months.
• % of last year's demand from customers who previously bought from that merchandise category 13-48 months ago.
• % of last year's demand from customers who had not bought from the merchandise category in the past 48 months, but have purchased from the brand in the past year.
• % of last year's demand from customers who had not bought from the merchandise category in the pat 48 months, but have purchased from the brand 13-48 months ago.
• % of last year's demand from customers who are new to the brand or are reactivated beyond 48 months.

I'll tell you what to do with the query tomorrow.

Wal-Mart / Moosejaw

You probably heard about the acquisition a day or two ago (click here).

There are three things happening, all simultaneously.

First - classic e-commerce is cannibalizing the living daylights out of traditional retail. This is the Rabbits/Foxes analogy I've spent a month talking about. You need a ton of rabbit food to generate enough rabbits to feed the foxes. Instead, we're starving the rabbits, which will eventually starve the foxes. I'm asking readers/clients to rebuild their in-store / retail experience, which will benefit both stores and will feed digital. I realize some of you disagree with me on this one - that's fine. Write some code and then come back and have a discussion about this one after you see what your coding tells you.

Second - growth is ending. This is a separate issue. Ultimately for Traditional Retailers, this is an acknowledgement of the failure of the omnichannel thesis. Aligning channels and products and marketing strategy and customer service into a "one brand" thesis did not work. Customers chose Amazon instead. Younger customers chose non-traditional retail brands. So as the omnichannel thesis crumbles into a smoldering pile of waste, Traditional Retailers are acknowledging that growth is ending and the path to growth did not work.

Third - marketing changed. While Traditional Retailers explored, implemented, and then watched in horror as the omnichannel thesis crumbled, Non-Traditional Retailers took a different path, be it e-commerce (Moosejaw / Jet) or fast fashion or mobile strategies or sales fueled by influencer marketing programs - any of a thousand different examples (as illustrated in my customer acquisition presentation from 2015). Honestly, e-commerce marketing skills acquired from 1995 - 2010 are important but skills acquired outside of traditional e-commerce / traditional retail from 2011 - 2017 are more important. You cannot just hire a handful of gurus with modern skills and expect them to "change the culture". So - you are seeing acquisitions like Wal-Mart / Moosejaw.

All three issues are blending together right now. I'm asking you to focus on the first issue, because you can do something about it RIGHT NOW!! It will take us five years to pull out of the rubble of the second issue, and there will be a ton of store closures as a consequence. And we all will have different takes on the third issue and the industry is fully focused on the third issue, so no need for help from me on that front, right?

Make sense?

Why Closing Stores "Works"

All of the best retail brands actively measure what happens when a store is closed. When you close a store in 2015, you create an artificial laboratory where you can see how customers respond in 2016. It's like forcing an A/B test on a market!

Many retailers observe dynamics directionally similar to this:

• Close a $1,000,000 store, and the store generates $0.
• However, $150,000 of sales from that store move to other retail stores in that market.
• And, another $150,000 of sales migrate online.
• In other words, 30% of the sales still happen when the store closes.

The 30% of sales that still happen ... $300,000 in our example above, happen without the fixed costs associated with the dying store. As a result, these sales are MUCH MORE PROFITABLE than the sales left behind by the dying store.

If you are a Chief Financial Officer and can overcome the cost of servicing the debt on the dying store, closing stores makes sense.

If you are a Chief Executive Officer tasked with growing a brand, closing stores makes no sense whatsoever but generating less and less profit makes even less sense!

As long as customers keep migrating online and as long as Traditional Retailers do not reinvest in stores to grow merchandise productivity, we're going to see a massive amount of store closures.

Worse, as one mall-based brand closes a store, foot traffic for other mall-based brands declines, creating a self-fulfilling prophesy - a feedback loop of sales declines that require more store closures.

The smartest retailers are going to close a ton of B/C locations, and they will then reinvest considerable money improving the customer experience in A locations. Not-so-smart retailers will simply close B/C locations and hope the sales move online. Those retailers will be disappointed, because the sales never move online at sufficient rates.

Digital First

Alright my friends, here is what I wrote yesterday ... click right here please.

None of the responses were positive.

The most common response was this:

• "If anything, retailers should invest more in digital and simply abandon bad stores - digital is the future and you have to be digital first or you are dead. Your recommendation to focus on improving stores & merchandise is fundamentally flawed. It's all about digital, Kevin."

If you have written computer code to analyze longitudinal customer behavior via in-store retail purchases and online purchases via integrating online advertising strategy and website visitation behavior, you are likely to come to a different conclusion.

Two weeks ago, I analyzed two markets ... one where the brand opened a new store ... one where the brand closed a poorly performing store.

When the brand opened a new store - digital transactions stalled briefly as customers who might have shopped online switched to the store. Then, after about six months, the new store began to thrive - and routinely fed the online/digital channel new customers who had just shopped in the store. Retail (rabbits) fed Online/Digital (foxes).

When the brand closed a store - digital transactions increased briefly as the store was no longer there to generate demand. But then, after about six months, online sales in the market abandoned by retail began to falter. Website visits were down, and online sales declined. Without Retail (rabbits) providing food for Online/Digital (foxes), the digital side of the equation suffered.

I'm not saying you shouldn't focus on being "digital". Please, have at it.

But I am asking you to understand the factors that "feed" digital. Until you understand that a healthy retail environment does as much for digital health as having a strong digital strategy (and a healthy retail strategy yields retail health as well as digital health) you'll close stores and wonder why your online presence isn't performing well.

Please measure how your channels fit together. Analyze customer behavior across 3-4 years. You will observe a story that is different than the industry narrative. Please write the code yourself, and tell me what you observe.

Target Cannibalizing Itself - How Do You Fix The Problem?

A long-time reader forwarded this article three weeks ago (click here) about Target moving sales from in-stores to the online channel ... and hurting profit in the process. #Omnichannel!!

These days, it's almost like the worse the news gets, the louder omnichannel advocates yell to become even more digital and even more omnichannel. Those who manage the profit and loss statement don't seem to be cheering as loudly.

Let's really simplify the math here, so that you can see what is going on. Let's look at a sample trade area with $2,000,000 in sales ... $1,600,000 in a store and $400,000 online. Here is the trend.

• Next year, the "brand" will further digitize the business, causing a 5% drop in stores ($80,000) and yielding an $80,000 gain online ... the net impact on topline sales is $0.
• Next year, then, retail will be at $1,520,000 and online will be $480,000.
• The year after, the same dynamic happens, yielding $1,440,000 in stores and $560,000 online.

The industry response has been to "accelerate" this trend ... and by accelerating it, we push stores closer and closer to being unprofitable ... which is why you see so many stores being closed.

Let's pretend that "digital" didn't exist. What would you do to drive traffic in a store?

• You'd increase your marketing budget.
• You'd find merchandise that customers wanted to buy more frequently.
• You'd present the merchandise in a manner that causes it to sell better.
• You'd remodel a store so that it yielded a more modern experience (and sales would increase 20%, by the way).

So let's say that we execute the magic above, and retail sales increase by 5% in each of the next two years as a consequence. What happens?

• Retail stays flat.
• Online grows - potentially faster as there is a bigger retail base to convert to "digital".

In other words, we have to grow merchandise productivity at a rate faster than the loss of sales to the online channel. We'd have to invest in retail - at the very time the vendor industry is telling us to invest in digital.

Think of it this way ... in a field with rabbits and foxes, if foxes are eating all of the rabbits, what is needed to grow the population of rabbits?

• Fewer foxes.
• More food for rabbits.

It's time to provide more food for rabbits (retail). And here's the fun part - because customers move from retail to digital, digital benefits when retail is healthier! In our field, foxes would love it if there were more rabbits to eat. In commerce, foxes (digital) love it when there is retail to be cannibalized.

We're doing everything backwards. Truly, we are. We need to invest more in retail, grow our retail channel, and then retail will be healthier and digital will benefit because retail customers will cannibalize themselves over into the online/digital channel.

Invest in retail.

That's what we need to do.

Show of hands - how many of you think that is what will happen?

Another Example of Measuring Why A Retail Store Is Struggling

Here's another store trade area (zip codes ranked most sales to least sales, take zips that account for 70% of total sales).

Tell me what you observe?

First of all, the fox/rabbit issue is at play here, to some extent. Online is growing as a share to total spend. Customers are migrating from retail to the online channel. The foxes are eating the rabbits.

Second, there's a Unique Point of View issue at play. Look at new + reactivated customers by year ... 26,000 to 26,000 to 23,000. More than 10% of the new + reactivated customers dried up ... and the ones that are being acquired are starting to skew more and more to the online channel.

This store cratered by about 10% over a two year period of time. It cratered because the foxes (online) are eating the rabbits (retail). It cratered because the brand does not have a Unique Point of View.

Do you perform these analyses, so that you know why your business is succeeding or failing? Run the query!!

Measuring Retail Challenges

This is a table I enjoy producing for my retail client base.

The table tells us why a retail store is struggling.

I segment customers based on last year's behavior. Then, I measure where customers spend money in the next year.

If we have a fox / rabbit issue (digital eating retail), then we'll see that retail customers are spending less and less in retail by year and more and more online by year.

If we have a Unique Point of View issue, then we will see that there are fewer new + reactivated customers by year.

What do you see, in the case of this store?

You see a Unique Point of View issue. New customers are constantly on the decline.

In this example, the store is slowly dying (2% per year), and the store is slowly dying because the store is being starved of new + reactivated customers. This store has a Unique Point of View issue.

There is a reason I harp on this topic (Unique Point of View). I know you don't like hearing about it, because you send me emails telling me I'm wrong! Unfortunately, I have a ton of data from e-commerce brands, retail brands, and old-school catalog brands that explains just how important a Unique Point of View is.

The trade area around this store (rank-order zip codes until we get 70% of sales for the store) is being starved of new customers. That's the problem (in this case).


P.S.: Take a look at this image.

Yup, those are online orders literally "hanging around" an upscale store, waiting to be picked up. That's the fox ... invading square footage previously reserved for selling. Now, I get it - you can credit the store with those sales and not the online channel. It doesn't change the story - if somebody told you ten years ago that an "A" shopping center would sacrifice selling square footage to become a nimble distribution center, retail experts would have vomited into a dumpster.

This use of square footage drives the declines in the table above - leading us toward this dynamic.

1. Retail Works.
2. Digital Invades.
3. Retail Serves Digital.
4. Retail Suffers.
5. Stores Close.
6. Digital Suffers.

We need to measure the dynamic - and we need to do something to stop (4) from becoming (5) and then (6).

Podcast Week: Crybabies

Our fifth and final featured podcast is Crybabies (click here). The hosts invite guests and then talk about the stuff that makes them cry ... be it Spock's death in Star Trek 2 or The Carpenters or when Prince died. You've gotta be in the right mood to enjoy this series, of course, but when you are in the right mood, this is a good one!

What does this have to do with low cost / no cost customer acquisition programs fueled by having a unique point of view?

Take Ross-Simons for instance (click here). Valentine's Day is just around the corner. Why not produce a show where the host of the show covers all of the lovely Valentine's Day deliveries - sharing customer stories that would make anybody with a modicum of a soul cry? A weekly show featuring engagements, make-ups, and surprises.

I know, I know, you can't do that.

But think about this for a moment.

I'll bet the folks at the Seincast Podcast told them they were nuts to invest 180 hours of broadcast time reviewing television shows that folks have witnessed hundreds of times.

I'll bet the Men in Blazers are told daily that they are nuts to focus on a verbal narrative of a Crystal Palace / Swansea City match that nobody cares about.

I'll bet the folks behind Welcome to Night Vale are told daily that they are crazy for drafting a 2x-per-month narrative about a fictional desert town where paranormal activities happen every minute. Who'd listen to that?

I'll bet folks criticized Starlee Kine for creating Mystery Show - who'd want to listen to a mystery about a belt buckle? And then her show was cancelled - proving the naysayers right. And yet, Gimlet keeps her show up and makes money off of it regardless, right?

And who in their right mind would say it is a best practice to create a podcast about things that make you cry?

There are a million reasons why you shouldn't take a risk - why you shouldn't seek a unique point of view. It might not work - imagine how miserable you'd feel while being criticized by co-workers and the public alike?

But what happens if your idea does work?

The digital revolution - we're now at least twenty years into this thing - stripped so much creativity out of our business models. That's what happens when you solve for short-term return-on-investment - the video of a person getting a Valentine's Day gift from Ross-Simons only gets 194 views and is quickly forgotten and therefore didn't deliver short-term ROI and therefore we should never try again, should we? So we don't try again.

It's time to start trying again.

Right?