Starbucks: Is A Five Cent Increase Necessary?

Based on the reaction of the blogosphere (216 unique posts about Starbucks in the past twelve hours according to Google Blog Search), many folks find the decision to increase the price of drinks by five cents to be conversation-worthy.

Whether you think that price hikes are silly for a company that has already earned $705,000,000 pre-tax profit in the first thirty-nine weeks of the year, or you think that rising energy costs and employee benefits are the reason that this increase occurred, it is interesting to convert the price increase into something we can all relate to.

Based on nine months of results, it looks like Starbucks will sell about $6,500,000,000 of coffee-related products that will have the five cent increase. Based on stats in their annual statement, the price change represents a 1.9% increase. On an annual basis, this should drive $123,500,000 of additional revenue.

Approximately fifty-nine percent of sales are converted to gross margin, yielding $72,865,000 profit.

Starbucks has about 115,000 employees. If we assume this money is earmarked to offset rising energy expenses and employee benefits, then the average employee will benefit to the tune of $633.61 of pre-tax salary per year, or $1.74 per day.

As you make your pilgrimage to Starbucks on Monday morning, look the employee who serves your beverage in they eye, and decide for yourself if the price increase is worth $1.74 to the person you are receiving your beverage from??

Business Predictions and Pundits

I want for all of you to offer me a gentle warning when I become preachy, and worse yet, start irresponsibly predicting what might happen to companies in the future (like for instance, in this article).

If you read blogs, then you've already digested Thursday's commentary from Seth Godin about pundits predicting the demise of Apple in the mid-1990s. While his article talked more about reinventing a brand verses hard-working your way out of a hole, the fact that all of those pundits "knew" what Apple had to do, and were proved utterly wrong, is enlightening.

It's even more enlightening when you realize you are sometimes guilty of the same behavior!

Pier 1: A Multichannel Mess

The Motley Fool wrote about Pier 1 on Tuesday. Pier 1 has not performed well over the past several years, and a 14.8% decrease in comp store sales during the second quarter is almost unfathomable to imagine (unless you are like me, and you worked at Eddie Bauer at a time when that company posted twenty percent drops in comp store sales). In the second quarter, Pier 1 lost $73 million dollars on $373 million in net sales.

In 2001, Pier 1 earned $160 million pre-tax profit.

In 2002, Pier 1 earned $206 million pre-tax profit.

In 2003, Pier 1 earned $187 million pre-tax profit.

In 2004, Pier 1 earned $99 million pre-tax profit.

In 2005, Pier 1 lost $42 million, pre-tax.

In 2006, Pier 1 has lost nearly $100 million, pre-tax, through six months.

Wow.

The two articles paint a grim story for this business. Back in the first quarter SEC filing, management issues several interesting statements. Because Pier 1 is being attacked on the low end by brands like Target and Wal-Mart, and is being attacked on the high-end by brands like Williams Sonoma, management elected to try to move the brand out of the mid-market area, electing to compete with higher-end retailers.

Management invested a lot of money attempting to reposition Pier 1. After seeing the initial response to this repositioning, management quickly changed course, publicly stating it was retreating back to the mid-market niche it owned just five years ago. Management noted that traffic suffered, and that they alienated their core customer by attempting to attract younger customers during the summer months.

So all of the "brand building", advertising, prospecting, repositioning, change in merchandise assortment, and whatever else management tried was thrown out after a quarter of very poor results.

There are many lessons embedded in this sad story.

First, I question whether management had the right data to make the decisions they made. Marketing pundits and consultants will provide compelling arguments to management to make significant changes in marketing strategy and target audience, using competitive research, focus groups, and surveys to chart a future course of action. Pundits frequently fail to analyze internal customer data, data that would indicate how terribly hard it is to flip a brand in a short period of time.

Database Marketers know that existing customers significantly outspend new customers. Let's assume that Pier 1 had 4,000,000 twelve-month buyers in 2005, generating $1.78 billion in net sales. Let's also assume the following:

• Half of these customers will normally repurchase in the next twelve months, spending $600 per repurchaser.
• Pier 1 acquires or reactivates 2,021,053 customers per year, each one spending $285.

Obviously, I don't know if these numbers are even close to accurate, but they will illustrate my point.

If marketing pundits and consultants suggest that Pier 1 move up-market, in order to avoid competition with Target and Wal-Mart, then it is likely that Pier 1 will alienate some of its core customers. If core customers are alienated, then in order to increase total sales, Pier 1 must greatly accelerate customer acquisition to make up for the loss of existing customers.

Assume that the annual repurchase rate decreases from fifty percent to forty-five percent, due to the change in market positioning. In other words, ten percent of Pier 1 customers will be alienated by the change in merchandising strategy.

• 4,000,000 customers * 45% repurchase rate * $600 per repurchaser = $1,080,000,000 net sales.

In order to make up for core customers who did not repurchase due to the market positioning strategy, Pier 1 has to significantly ramp-up customer acquisition. At an average spend of $285, Pier 1 must acquire 2,442,105 new/reactivated customers, a twenty-one percent increase over the 2,021,053 customers in the base case. Did that make sense? If you alienate your core customer by ten percent, then you have to ramp-up new customer acquisition by twenty-one percent, in this example, just to maintain flat comp store sales.

This is the piece of the puzzle that marketing pundits and consultants so often miss. No focus group of nine individuals can possibly help you understand that you must ramp-up customer acquisition by this magnitude, just to keep sales flat. No amount of management consultant marketing-speak can ready management for the challenging reality they face.

It is the responsibility of Database Marketers to develop simulations, and effectively communicate the results of the simulations to management, so that management can make educated decisions about the strategic direction of their business. I am willing to bet that Pier 1 management did not have access to the simple math illustrated in this article.

In no way am I advocating that Pier 1 should have stayed the course. I am advocating that Pier 1 should have utilized customer purchase information and simulations to make educated decisions. Had they utilized customer data correctly, they may have realized how challenging their turnaround would truly be, and may not have elected to immediately retreat back to a mid-market strategy.

From this point forward, Pier 1 must execute a brilliant merchandising strategy that brings customers back into the store, or heavily invest in acquiring new customers who accept the merchandise Pier 1 offers. The latter is very difficult to pull off.

I hope this helps explain why customer analysis, database marketing, and simulations are such an important part of the strategic decision-making process.

Four Ways An Information Technology Employee Can Get Ideas Heard

There are many departments in your company that face unique challenges. In my profession, Database Marketing, I am sometimes given assignments that don't make a lot of business sense. But for the most part, the projects I have worked on in my career align with the initiatives my company believes to be important. And because almost nobody knows how to match the science of querying a database with the art of business intelligence and analysis, I have always enjoyed autonomy on my projects. Furthermore, because I have the key to the customer database, I have always been able to influence leaders and decision makers. Database Marketers can wield disproportionate influence.

During my tenure at Eddie Bauer, I frequently talked with a friend who worked in Information Technology at Microsoft. This person was full of ideas, bursting at the seam with ways for Eddie Bauer to make more money. I frequently heard comments like "If you just stopped mailing those expensive catalogs, you would save the planet, and save expense at the same time. I bet your customers would migrate to the internet, and you wouldn't lose any sales at all. Why don't you try that?"

His comments were based on how he chose to shop. He didn't think about how the fifty-eight year old woman in Topeka liked to shop. We knew, from tests and analyses, that while his idea sounded good, we could never practically implement the idea.

But I always felt sorry for this individual. Bursting with ideas, he seldom had a forum to present his thoughts. Worse yet, he was asked to write code to implement somebody else's strategy. In other words, he had to implement ideas he felt weren't always great, yet, his ideas had no opportunity to be developed. I doubt he was highly motivated by such a situation.

Some information technology departments make project implementation difficult. When their voice isn't heard, they can push back with the only leverage they have, the ability to say "no". I have always been amazed how quickly the IT folks rally around a cause when they agree with it, and how quickly the IT folks have "priorities" that need to be worked on if a proposed project isn't perceived to be sexy, or if the IT department does not agree with the strategy behind the project. I have to believe that if IT folks had more of a say in business strategy, they would be less push-back on other projects.

I believe there are opportunities for information technology folks to contribute in more ways than just writing code and managing projects. Here are four ways an information technology employee can get her ideas heard.

1. Identify a Marketing Mentor. If a person in IT wanted to have a weekly meeting with me to learn about my department, my projects, my priorities, and learn what ideas were percolating among my fellow executives, I'd welcome the opportunity. Not many employees are willing to take this risk. Find an executive who is willing to meet with you either weekly or monthly, and ask to have business mentoring sessions with this individual.
   
2. Listen! The friend I spoke of earlier was bursting with ideas. By listening to the needs of business leaders, he could have identified actual problems that needed to be solved, and could match his ideas to problems identified by business leaders.
   
3. Get on a Cross-Functional Team. Nothing sends chills up my spine faster than the thought of being on a cross-functional team, a collection of individuals from a diverse array of departments brought together to solve a business problem. However, there is no better way to rapidly network yourself with others in the business than to get on cross-functional teams. You will quickly get to see how politics play out. You will quickly identify the individuals who have power. You will quickly learn who the true leaders are. Armed with this knowledge, you know which individuals are most likely to be receptive to your ideas, and you will understand the politics that can kill your ideas.
   
4. Work on Side-Projects. When I was at Eddie Bauer, I made it clear that I wasn't going to work on regular projects on Friday. Friday was the day I focused on special projects, pet projects for certain business leaders I liked to partner with, or projects that I felt were important. Now, in order to make this strategy work, you have to get your work completed in a four day work week, which is a challenge. The upside is that you can identify leaders you wish to partner with, you can learn the challenges they face, and you can work on side-projects that benefit these leaders. By building relationships outside of your normal job responsibilities, you have a better chance of having your ideas heard.

Whether you work in Information Technology, Human Resources, Finance, or any other department not directly tied to corporate strategy, there are opportunities for you to get your ideas heard. Take a few risks, and try some of these ideas.

What do you think? How would you go about getting your ideas heard? What have you seen work?

Williams Sonoma, a Multichannel Monster With a Catalog Headache Looming

I like to follow the financial performance of Williams Sonoma. Few businesses provide the consumer with the multichannel opportunities that Williams Sonoma does. The business has core brands (Williams Sonoma, Pottery Barn), brand extensions (Williams Sonoma Home, PBTeen, PBKids, West Elm, the recently disbanded Hold Everything), catalogs, websites, and 573 stores. I'd relish the opportunity to illustrate how their customers interact with brands, sales channels, and advertising channels.

I'd also relish the opportunity to be a fly on the wall in their executive meetings. According to their second quarter earnings release, year-to-date retail net sales grew by 7.9% to $897,281,000. Recent softness in their Pottery Barn brand, representing 190 stores, has management cautious about the holiday season.

Online sales grew from $326,297,000 year-to-date-2005 to $414,780,000 year-to-date-2006.

Catalog sales are very interesting to monitor. Year-to-date net sales of $307,761,000 represent a significant decrease from the $339,295,000 level they were at last year. More important is that pages circulated increased by 4.2%, while catalog sales decreased by nine percent. The company does not tell the reader whether the increase in pages circulated drove enough business online to offset the drop in catalog volume.

Williams Sonoma's telephone sales peaked a few years ago. Like most mature businesses that have a catalog channel, they are experiencing a steady decline in telephone volume. At some point in the future, maybe in the next two years, Williams Sonoma will have to make hard decisions about what their catalogs truly mean to their customers.

Most likely, Williams Sonoma has outstanding quantitative individuals who have run simulations that clearly illustrate whether the catalog channel has a role in the future of their business. At some point, the volume generated over the telephone will be insignificant, compared with the expense incurred mailing the catalogs. Only well-designed simulations will help management make the right decisions about properly calibrating catalog advertising in the future.

Four Questions with Mike Faith, President and CEO, Headsets.com

Please welcome Mike Faith to our “Four Questions” segment!

Mike is the President and CEO of Headsets.com, a rapidly growing business located in San Francisco. Mike provides a unique perspective on marketing, focusing on an intense desire to please the customer. His interviews have appeared on CNN, the Wall Street Journal, DMNews, Catalog Age, Catalog Success, CBS Marketwatch, Inc. 500 Magazine, and FORTUNE Small Business. Mike hosts his own website and blog. Let’s see what Mike has to say.


Question #1: What can a company do to build a Customer file? How do you start database marketing without a database?

When we decided to get into marketing headsets, we looked around at the then ten or so companies that were doing it already, and their business models. There were two or three giants that were spending millions of dollars and man hours affecting corporate sales to large call centers – sure a $50,000 contract is nice, but there are only so many of them in the country in a given year, and with the offshore trend, these orders were only going to get scarcer and more fiercely contested on price. With eroded margins, the companies products wouldn’t develop, and their service would match.

At the other end of the scale, smaller outfits didn’t have the budget to advertise through the mail. They had to satisfy themselves with high margin niche products, or widen their offerings through line extension to the point that they became ‘me too’ telecoms resellers.

And just emerging were the Internet Retailers - all racing to the bottom to become the cheapest guys on the block. A “Never mind the profit, feel the volume!” mentality that meant so many companies never made it out of the rollercoaster nineties.

We felt there was a hole. According to the 1997 report of the U.S. Census Bureau, the nation’s 17 million small, non-farm businesses constituted 52 percent of the private workforce. These people, traditional office workers among them, all use the telephone in their daily lives, and as such are prime candidates for our product, yet no one was serving their needs. So we developed a catalog and solo mail offerings that we think filled the space.

Our intention from the start has been to grow by growing our category. Back in the nineties, no one except call center staff and receptionists used headsets. We strived then, and continue to strive today, to make people aware that if they use the telephone, a headset will save them hours a day - I’m sat on hold for a conference call while I type this for instance. So we targeted small companies. Conventional Direct Mail wisdom tells us that the person you mail, the contact is vitally important – and of course, the larger the company, the more true this becomes. The way we got started was by looking at the small companies, (<20>

It worked, we grew at an astonishing rate while our competition largely fell by the wayside. Once we had enough momentum, we started targeting the more traditional larger companies and the individual contacts within them, that would give us larger lifetime values, without the need to focus on anything other than Telephone Headsets.


Question #2: You have a single product line, that seems to have a long office life (telephone headsets). How does your Customer Contact Strategy differ from companies like say, Oriental Trading that has thousands of products and product lines?

Well, we have to work harder to keep in our Customers minds between purchases and to do that, we provide outstanding service and really look after our Customers. The best form of marketing you can possibly have is an enthusiastic Customer, and so we make sure each and every interaction with the Customer – from email queries, pre sales calls, post sales support – even collections calls – a opportunity to generate a Wow! experience in the Customer’s mind. It’s not easy and to do it, your organization has to build itself around its Customer Service Team.

Secondly, we mail frequently, and we mail to our entire house file. We’re not an old company by any means – just 9 years – and even our earliest customers still respond well to catalogs and offers. Could we save some marketing dollars by mailing less frequently? Yes, and we are starting to do just that, but getting the frequency right for a product with such a long life is hit and miss at best and we’d rather bear the cost of mailing more frequently that risk loosing our vital customers through neglect.

What we’ve found is that once one Customer in a company buys our products, they tend to spread into the entire company. So growth and lifetime value within a site make up for what can seem like limited opportunity at an individual level. Also the nature of our product means that new hires and new desks mean sales for us, and we target our prospecting accordingly.


Question #3: What is your online strategy? How does it tie in to your mailing strategy?

Despite the dot com in our name, we are a company that is primarily direct mail driven. We, of course, have a website (er, that would be headsets.com) but it’s different to most, in that its primary objective is to get a prospect to call our call center.

Companies and their web sites tend to fall into two groups. First are those that see the web, as a way to reduce costs associated with sales and service. If Customers are helping themselves, and the entire process is automated from end to end, they reason, they can scale indefinitely. An entirely hands off approach, like Amazon used to execute so flawlessly. (I say used to, have you tried to buy anything from Amazon recently? …shudder…) Secondly, there are those companies that want to price something based on the Customer need, or more generally the needs of the commission driven sales team - and they will let you do everything but actually place an order, or see a price. We think both these approaches are ludicrous from a Customer perspective and our site is aimed squarely in the middle. Our site is a mechanism to place an order, if that’s what the Customer wants to do, or to research a product independently (if that’s what they want to do) or to contact us through prominent placement of our 1-800-Headsets number, our Live Chat feature, email links that actually get answered (within two business hours) if they want to do that too. We strive to fill it with accurate, useful, useable information and let the Customer decide.

In fact, if all that our site achieved was to get people to pick up the phone to talk to our Customer Service Team, then that would be a perfect result. It’s only by talking to a knowledgeable and friendly CSR that a Customer can receive that Wow! experience and be sure that they are getting the right product tailored to their individual needs.

So, we do advertise through programs such as the ubiquitous Google AdWords and its cousins, and we do pay attention to search engine rankings and SEO principles in general. But that’s about all we do. We don’t email our Customers – Postal mail is so much more effective on a campaign by campaign basis. Sure, email is free, but it’s also generally only stimulates a few incremental sales – likely cannibalized from our mail program anyway, and the ill will it generates is not worth the trade in our minds. As for unsolicited email – we’ll leave that to our competition.


Question #4: Aside from Customer Service, what has surprised you about the evolution of your business? What challenges do you anticipate, as you try to grow your business beyond $100,000,000 in annual sales?

I guess the most surprising thing for me is that Headsets as a business tool still aren’t universally adopted by everyone. It’s a good thing in some ways because it means that we still have plenty of market to play with. Cell headsets, and now Bluetooth Wireless headsets are changing the picture slowly though. People are trying headsets as a ‘cellphone fashion accessory’ which in turn is making headsets more acceptable to people in general. Although we aren’t specifically marketing cellular and Bluetooth cellular headsets to businesses, the fact that everyone has a cell-phone, and more and more of them are Bluetooth enabled, means that at some point, pretty much everyone will have tried a headset out. In some way that helps our marketing efforts because the perception gap between ‘people who use headsets’ and ‘me’ shrinks in our prospects minds.

The largest challenge for us as we grow beyond $100M in sales is probably not going to be related to Product, Customer Service or to Marketing – I think we have those things nailed. It’s most likely going to come from growth itself. We’ve been growing at a pretty fast clip for a number of years, and although our headcount has remained small (we recently hired our 50th employee) at $32 million in revenue last year we are an extremely efficient company in terms of revenue per person. As we grow though, our challenge is to keep up this high level of personal productivity up, with more and more support functions, more people managing people managing people interacting with Customers. This is true of any business as it grows – some companies do it well and thrive, some do it poorly and strangle themselves out of business. I hope to model Headsets.com on the former. Ask me in 2008 and I’ll tell you how it went!

Multichannel Question: Zappos

Here is a question for you. Multichannel pundits extol the virtues of multichannel marketing. They tell us that our customers expect us to have retail, online and catalog channels, allowing the customer to purchase what they want, where they want, when they want.

If multichannel marketing is so essential to our toolbox, then how do we explain the rampant success of Zappos? In an October 2005 article, CEO Tony Hsieh said the following: "We focus the company on providing the absolute best service and shopping experience and let word of mouth be our marketing. By doing so, we've historically been able to more than double sales year over year for all six years of the company`s existence."

This is a business that should top one billion dollars in net sales in the next four years. In other words, this business will have gone from zero to $1,000,000,000 in annual sales in just ten years, without a catalog channel, without retail stores, without the multichannel experience we are being told we absolutely must have.

We are constantly reminded that customers purchase from brands because of merchandise, price, convenience, and customer service. How else do we explain why a customer avoids purchasing a pair of Mary-Jane shoes at a highly convenient and respected multichannel retailer like Brooks Brothers, and instead purchase the shoes at a single-channel business like Zappos?

What is your opinion on this topic?