The Nordstrom Catalog Experiment of 2004 - 2006: An FAQ

Many of you ask me about the experience I had at Nordstrom, from 2004 - 2006, when we shut down a traditional catalog channel.  I thought I'd aggregate many of your questions here as part of an FAQ.

Question:  Who wanted catalogs killed, and who championed catalogs?  From what I remember, it wasn't so much an issue of killing catalogs as it was an issue of aligning merchandise across channels.  If you truly let a catalog evolve based on merchandise productivity, the catalog will become populated by items that rural women age 55+ love.  Eventually, you run into a bit of a bind ... do you maximize catalog productivity, or do you sacrifice productivity to truly reflect all aspects of the brand?  Ultimately, the retail and marketing teams supported killing the catalog, while the catalog team (not surprisingly) championed catalog marketing.

Question:  What side were you on?  A tough question.  Strategically, I was on the side of marketing and merchandising.  Personally, I was on the side of the catalog team, because my entire career had been aligned with catalogs.  Heck, what job would I do, or would I even have a job, if the catalog didn't exist?  Honestly, I probably aligned with the catalog folks too much, in an effort to preserve my job as I knew it.

Question:  How do you shut down a catalog division?  It's a complex issue.  You need plenty of lead time in order to burn through 6-9 months of inventory you've already committed to.  You have jobs that have catalog/online alignment, jobs that are generally protected.  You clearly have jobs that are aligned with the catalog, those jobs are absorbed, or they simply go away.  You tell your key vendors months in advance that you are making significant changes.  And if you run an analytics team (like I did) you prepare a TON of project work in advance, so that you can measure the impact the decision had as fast as possible.


Question:  What happened to your division, Kevin?  My team included twenty-four analysts, managers, and directors.  Within fourteen months of the decision, my team was down to sixteen analysts, managers, and directors.  Anytime a member of my team quit, I simply didn't keep the position, I shuffled responsibilities accordingly.  A couple of individuals were not carried forward into the new organization.  Of maybe five individuals with the strongest catalog experience, only one remained ... two left for online marketing positions, two left the company after seeing how everything would shake out.  The loss of talent was stunning.  The impact of this talent loss on the department and business results was negligible.  Ultimately, catalog talent was reallocated to e-mail marketing where possible, given the obvious synergies between the two marketing channels.


Question:  How did you forecast what impact this decision would have on the business?  We executed countless mail/holdout tests.  These tests told us that our vendor-based matchback analytics routine was overstating the importance of the catalog by an order of magnitude that would scare you!  We "knew" the impact would not be as severe as, say, our Inventory Executive believed the impact would be.  I would sit in meetings with the inventory team as they beat me over the head with real-time KPIs that predicted the implosion of the website when catalogs no longer existed.  Amazingly, our prediction for annual demand in the online channel, without the aid of catalog marketing, was off by just 5%, dumb luck more than anything else, but dumb luck that was strongly informed by accurate mail/holdout results.  You create your own luck!


Question:  What happened to the Management team that led the catalog division?  This team imploded.  The President left, the online marketing exec left, the inventory executive left, the operations executive was sent packing, and many others headed for the exits as well.  Many folks stayed, those folks worked with a new Management team that, without any of the experience of the old Management team, produced stunning business results.


Question:  What happened to the Online channel once the catalog was gone?  The online channel thrived!  Every pundit on the planet told us we were morons, citing research reports sourced from surveys of 824 likely shoppers that suggested that all channels work together to create a succulent multichannel cioppino.  Every pundit was wrong.  The online channel grew at an unprecedented rate, growing so fast that every penny lost by the absence of a catalog was made up for, and then some, by the website.  Online marketing metrics suddenly looked better, not hobbled by matchback programs that mistakenly gave credit for online orders to catalogs, causing a dramatic increase in the search marketing budget.  $36,000,000 of catalog marketing were pulled out of the ecosystem, and phone+online sales increased?


Question:  What happened to Retail sales once the catalog was gone?  Comp store sales grew at a faster rate than the prior year, in spite of $36,000,000 of catalog marketing being pulled from the the ecosystem, proving that the mail/holdout results were right ... catalogs were not driving sales in the way that the pundits suggested they were.


Question:  What happened to customers who used to shop the catalogs?  Well, the majority of them stopped shopping altogether, truly, they did.  We got angry postcards (and yes, MySpace and Blogs existed then), strongly telling us that the customers who were angry were older Americans.  Those customers did not come back.  But a funny thing did happen.  The website, fueled by search, attracted a different set of customers, a suburban/urban customer, one that was more likely to cross-over and shop in retail stores.  And when the customer switched to the store channel, the customer became much more valuable.  The end result was that we lost valuable catalog customers, but we gained marginal online customers that became valuable retail buyers.  In other words, the composition of the customer file fundamentally changed without catalogs to fuel the ecosystem.


Question:  Don't you think this type of result is only possible in a retail brand with the kind of brand recognition that Nordstrom possesses?  No.  I detest this question.  This question suggests that the results are not repeatable.  If you have executed mail/holdout tests, then you know the answer to your question ... if the mail/holdout tests show a high organic percentage, then you don't need catalog marketing to fuel your ecosystem.  I've worked with catalogers that have a 60% organic percentage ... these businesses are self-sufficient, not needing catalogs to fuel growth.  Your mail/holdout tests tell you what is possible.  No, this is not a retail/Nordstrom issue.


Question:  How did you acquire new customers without new names from the co-ops?  Search, portal advertising, and a stronger website experience coupled with a merchandise assortment that was more appealing to the core Nordstrom customer than the female, 55+ rural customer merchandise assortment that the catalog evolved to.  We also moved from expensive shipping/handling to $5 shipping/handling, in large part to better compete with Zappos, that sure didn't hurt.


Question:  What happened to your job, Kevin?  My job eventually changed, becoming more research oriented.  Clearly, I'm not a qualitative researcher, my job is to analyze actual customer behavior via an integrated database featuring transactions across all channels.  The retail channel requires much more qualitative research than is required by the catalog channel.  So, eventually, my job evolved into something that was not the same as the job I signed up for in 2001 when the catalog/website division generated $350,000,000 in annual sales and an annual loss of $34,000,000.  I voluntarily left in March, 2007, starting MineThatData.


Question:  How have you applied the learnings of 2004-2006 with your client base?  More than anything, I try to teach that, for some/many customers, catalog are simply not needed, or far fewer catalogs are needed.  My analytics evolved significantly, and are far more sophisticated today than what I used in 2004-2006 to understand this issue at Nordstrom, in fact, they are far more sophisticated than when Don Libey released Multichannel Forensics for me in the Fall of 2007.  These days, my projects usually lead to a recommendation to mail a fraction of the customer file more often (something I never imagined I'd say in 2007), coupled with a significant reduction in mailing frequency to at least two-thirds of the customer file, leading to about $1,000,000 in annual profit for a $100,000,000 catalog brand.


Question:  What is the number one thing you learned about closing down a catalog division?  There's probably two things I learned.  First, you can have the most talented group of people imaginable, and they can have minimal impact on business results.  Most of the folks managing the catalog team were brilliant, and were responsible for turning around a -10% pre-tax business in twenty-four months.  This same team was detonated, replaced by considerably less experienced individuals, and the business improved!!  What a humbling lesson.  Second, I learned first-hand just how wrong the pundits were/are.  I received countless phone calls from people you know and respect ... these folks predicted gloom and doom ... tossing around obtuse metrics from Forrester Research and McKinsey Research and printer case studies and antiquated stats from Lands' End in 1999 to mock our decision.  The trade journal mudheads wrote scathing stories about our stupidity, about our inability to understand the subtleties of multichannel marketing.  I recall co-op staffers predicting we'd come crawling back to catalogs within a year.  The pundits were really, really wrong.  By and large, they continue to be wrong today as well.


Ok, your turn, what additional questions do you have?

Dear Catalog CEOs: Vendors and Trust

Dear Catalog CEOs:

You've already read about the National Catalog Forum.  Most likely, you didn't participate, did you?  The article suggests that almost nobody attended (less than 100).  The good folks at the ACMA work their rear ends off to make your life easier (or even possible), charging almost nothing in exchange for their exhaustive work.  Heck, you could cut your advertising spend by 0.1% and never miss it, reallocating the revenue to the ACMA.  Why not do that?

Trust?


Over and over, I run into issues of trust when interacting with the vendor community.  Too often, folks are trying to "win accounts", if you will.  In the past year, I watched as a vendor privately slamed in-house staff in an effort to increase vendor revenue and utility.  

I, too, hear stories about me, stories about vendors that all of you work with (you know them by name), stories about the many ways they tell you not to work with me.

I realize it's tough out there, and that our vendor community is fighting to survive.

I also realize that trust is a currency far more valuable than money.  The more desperate our vendor community becomes to maintain revenues, the harder it becomes for all of us to trust each other.


Why not take the first step in improving trust by tossing a few pennies toward the folks at the ACMA?  At least in their case, you know that somebody is truly looking out for your best interests.

Events

My former employer (Nordstrom) seldom held promotional events.  Yes, I know, the best practice pundits will tell you all about the benefits of well-timed discounts and promotions, good for them.

Over in the real world, Nordstrom was(is) not a promotional company ... hosting only three sale periods during the year.  One of those is called the "Anniversary Sale" ... held roughly from mid-July through the end of July.

Fall merchandise is offered to the customer, at a discount (yes, I know, the best practice pundits will tell you that you never discount new merchandise ... just bear with me, given that Nordstrom has been in business for a century, there might be something credible to what they do).

The event generated as much business in the last two weeks of July (a period of complete death in apparel retailing) as is generated during the Holiday season.

Go check out your local store next weekend and see what all of the buzz is about.

Anyway, that's not what this post is all about.  This post is about you.  You manage a reasonably-sized business, right?  So what is the event that you hold each year, an event that is so grand, so amazing, providing so much value to your customers, that your customer cannot help but open her handbag and hand you her credit card?


You have an event like this, an event that you've turned into an annual tradition, right?

Right? 


We just went through the July 4th holiday weekend (or Canada Day for those of you reading this north of the border).  This event is loaded with traditions that have nothing to do with the actual meaning of July 4th ... municipalities create blindfolded dingy races and parades and hot dog eating contests, annual traditions that you feel compelled to participate in.  Events also play a significant role in our businesses ... and I'm not talking about a random 20% off plus free shipping event in early August ... I'm talking about an actual tradition that customers cannot wait for!


Instead of focusing on f-commerce, or on selling via Twitter, or on making sure that you have large orange buttons instead of small green buttons on your website, why not simply focus on "commerce"?  Create an event, a tradition, something for your customers to look forward to.


Use the comments section to describe events that businesses hold, traditions that you simply cannot wait for.

Co-Op Dollars

I seldom talk about this, though maybe I should be talking about it more often.

Let's go back in the time machine, way back to 2005.  Do you remember 2005?  You should.   Your home was worth 70% more than it is now.  You could get a home equity line of credit on your home at an amazingly low interest rate without documentation of income.  Gas cost about $2.70 per gallon.  MySpace dominated Social Media.  Mobile was an oil company, merged with Exxon, not an Android device you held in your hand.  A tablet was something you wrote on with a pen, not a device that allowed you to play Angry Birds in high-definition.

I worked at Nordstrom in 2005.  It was in 2005 that we killed our catalog division, and still generated sales increases in direct-to-consumer and retail channels with a corresponding increase in profitability.

Now, I can hear the blowhards already ... "Yabut, Nordstrom is a retail brand, so you had all of that brand equity that allowed you to kill your catalog, your strategy couldn't possibly work for us."  It's amazing how people who never worked at Nordstrom are always smarter than the folks who did work at Nordstrom, when it comes to catalog marketing (or any kind of marketing).

Regardless, the catalog division was killed.  Instead, a "brand book strategy" was employed.  Some called this a "catalog", but honestly, it wasn't a catalog.  Vendors paid a fee to have their products advertised on each page (a practice called "co-op dollars").  The catalog featured cobbled together images from various brands, low density, high fashion, you get the picture.

Well, the performance of this fashion catalog wasn't "all that and a bag of chips" as some say.


But the revenue associated with this advertising concept is worth pondering.


Let's say that you have a 96 page catalog.  If your product isn't proprietary, why not ask your supplier for a few pennies to help advertise their products (this works for e-mail, and it works for your landing pages ... and if you really want to get your suppliers to hyperventilate, ask them for a few bucks to give them added exposure on your mobile website)?


Or you could remove eight pages of crummy-performing merchandise with ads, sort of like a magazine.  Oh, I know, you don't want to "destroy the brand" ... but that's an opinion ... you already rent your very best customers to your competitors, and somehow that doesn't destroy your brand, so maybe the situation isn't as dire as perceived.


Anyway, I'm not asking you to do this ... I'm asking you to think.  How can you generate revenue from your advertising, revenue that allows you to mail deeper and reactivate more names or allows you to acquire more new customers?

Dear Catalog CEOs: Market Share

Dear Catalog CEOs:

Let me ask you a question ... and I ask this because you pummel me with this issue all of the time (as do the experts out on Twitter):

Which of these two businesses would you rather own?

1. A $30,000,000 annual net sales business that generates $3,000,000 of annual profit?
2. A $50,000,000 annual net sales business that generates $2,000,000 of annual profit?

On Twitter, folks overwhelmingly support the $50,000,000 business that generates $2,000,000 of annual profit.  They tell me that it is critically important to capture "market share", they tell me that if you aren't taking market share from competitors, you're dead.

I'm not a fan of market share arguments ... they represent MBA-style theory reserved for the battle between Google and Facebook or Wal-Mart and Target or McDonalds and Burger King.

When you own 0.03% of the market, stealing market share is irrelevant.

Instead of stealing market share, think what you could do with a million additional dollars of profit each year?

Kevin Hillstrom on YouTube: A Presentation At A Recent Listrak Event

Here's a brief presentation I gave at a recent Listrak event ... give it a view if you want to hear a few comments about modern email marketing and segmentation.

• YouTube Video.
• Listrak Blog Post about the presentation.

At the end of the presentation, you'll see a brief panel discussion with venerable experts Anne Holland (WhichTestWon) and Sucharita Mulpuru (Forrester).

Youth and Catalogs and Brands

By some accounts, there are more than 22,000 catalog companies in the United States.

Yup, you won't hear that stat bantered on Twitter.

What's interesting is who shops these brands.

Many of you are contacting me now, pointing out how a half-dozen brands are using catalogs to attract 18-29 year old customers.

I've never said that catalogs can't work among younger customers.

I repeatedly say that catalog brands that targeted a 25-54 year old audience in 1995 kept targeting the same audience, and are now left with a 40-69 year old audience with an average customer age of 55 years old, +/-.

This is the problem.

If you create a catalog for an 18-29 year old customer, and you combine that with a brand experience for the 18-29 year old customer, then that can work.

If you've followed the Baby Boomer generation for the past two decades, then you have a very different set of decisions to make.  This is the business that I tend to work with, one that is having a very hard time acquiring customers, one that is having a hard time growing, one that can achieve profit optimization by reducing catalogs to customers with a high organic percentage.  This type of catalog brand has not, over the past fifteen years, demonstrated the ability to acquire younger customers.  

This isn't good or bad, it just "is".



Catalogers take a very different approach to target markets than do online pure plays.  I frequently meet with online business leaders.  These folks will craft four online brands, one targeted to older customers, one to younger customers, one to full-price customers, one to discount buyers ... all fulfilled out of the same distribution center, all with different search and e-mail strategies.  Each brand attracts a different audience.

Catalogers try this, but are less successful ... creating different titles, then using similar tactics that result in each title having a similar demographic composition.

We need to strategically think about titles, brands, and demographics.  We need to think less about channels.