Channel Shift Through History

Back in 2005, my company, Nordstrom, decided to eliminate the catalog business model from their arsenal.

The pundits really, really didn't like that decision.

Trade journalists called me - I recall being heckled on the phone by folks who hated the decision but loved the page views it would generate ... "you're so stupid, catalogs are part of a multichannel strategy, you'll be back in catalogs in twelve months, you have to have catalogs, don't you know that?".

Nordstrom never looked back. For the past decade, they've printed money. And don't call what they do now "catalogs". Those are magazines. Be honest. A catalog business model includes catalogs as the primary marketing vehicle on an every-three-week basis paid for by company money (not co-op dollars), along with the buying and selling of names/addresses. That business model left the building in 2005, and never came back.

Channels are not channels. Channels are the manifestation of changes in customer behavior.

Want proof? Take a look at this table, for a cataloger:

Yes, I plugged results for 2019 (in green).

What do you see, when you look at total demand, adjusted for inflation?

You see that total demand is unchanged, over time. Customers slowly move from mail to phone to online to mobile over time (and will move to what comes after mobile ... what I call "Hologram Marketing"). The underlying behavior isn't fundamentally different.

However, the marketing used to drive the behavior changes, significantly. In the 1990s, you had no choice but to market to customers to get them to do stuff (in the direct channel). Starting around 2005, customer behavior in the online world solidified enough so that purchases happened without the need for marketing - much as has been the case in retail since the dawn of time.

When customers purchased online, without needing catalogs, the profitability of the catalog declined - significantly. Each square inch continued to increase in cost, but the ability of each square inch to produce sales declined. That's a recipe for disaster. Since 2007, catalog circulation is down 40%. I'd bet pages circulated are down even more, as catalog page counts continue to decrease.

This brings me to retail.

In retail, each square foot has the same impact on sales that each square inch has in a catalog.

In catalog, when customers became trained to shop online, catalog square inches (circulation * size of catalog) declined, dramatically.

In retail, it is alleged that foot traffic is down 50% in the past three years during the Christmas season (click here).

I want you to spend a few minutes thinking about the repercussions of that concept.

Go ahead ... I'll wait for you.

Ok, welcome back. Your first question is, of course, "why haven't sales declined by 50%?" Well, either the study is flawed, or foot traffic is not highly correlated with net sales. Both are likely to be true.

There are customers who go to the store to buy stuff, period. Their traffic is unaffected.

There are customers who go to the store for entertainment, or to do research. Their traffic is likely to be highly impacted.

E-commerce ate catalogs.

E-commerce impacted retail.

Mobile is going to eat retail.

Mobile is going to eat e-commerce.

All will be impacted by Hologram Marketing.

The challenge, of course, is "what do we do with this information"?

We can say, with reasonable confidence, that omnichannel strategies won't work. Their predecessor, called "multi-channel", didn't work for Borders, or Circuit City, or CompUSA, or JCP, or Sears, or Coldwater Creek, and it certainly didn't work for catalogers. Heck, go look at Gap's comp store sales trend over the past decade --- they're down something like 20% over that time, a time when inflation is +30%. Was Gap not "multi-channel", and are they not heading toward being "omnichannel" today? How did multichannel work for them?

No, you don't fix a structural change in retail by turning a store into a digital distribution center. When is the last time you heard a customer get excited about going to J. Crew because the customer might be able to get something shipped to her home from a nearby store? When is the last time you heard a customer get excited about J. Crew's merchandising and creative strategies? Hint - the latter comes up more often.

Retail is all about experiences. The more we digitize it, the more we facilitate the very channel shift that buries the existing retail channel.

More thoughts tomorrow.

Important Trends In Retail: Nordstrom Closing Stores In Portland

Give this little ditty about Nordstrom closing stores in the Portland market a read, my loyal subscribers (click here).

Instead of getting knee-deep in the #omnichannel weeds, let's get the plane up to a comfortable cruising altitude, and look at the Portland market from 30,000 feet in the sky.

• A thriving e-commerce business at Nordstrom (#digital #mobile #ecommerce).
• A growing Nordstrom Rack off-price business (#discounting).
• A shrinking full-line store presence (five down to three) (#ohboy).
• Current/Future renovations at the 3 full-line stores (#omnichannel).
• The stores that are being closed were opened in the 1960s and 1970s.

The story goes beyond Portland.

• Full-Line full-price stores have grown from 109 in 2008 to 117 today (1.3 per year).
• Off-price Nordstrom Rack stores (which are not integrated with Full-Line stores or the website, dear omnichannel advocates) have grown from 60 in 2008 to 140 today (13 per year).
• E-commerce has grown from $700 million in 2008 to at least $1.3 billion today.

What does that tell you about the future? What is growing?

• Online - sales growth doubled in the past five years.
• Low-Price - Nordstrom is increasing the Rack store count 10 times faster than the Full-Line store count, with store counts more than doubling in the past five years.

What is not growing?

• Full-Line Store Square Footage.

Mind you, Nordstrom is a successful business.

What do you think will happen to a retail business that is less successful than Nordstrom, a business that crumbles under the weight of debt when sales drop by 5%?

The next ten years in retail are likely to mirror the last ten years in catalog marketing.

What happened in catalog marketing?

• We were told that catalog had to be "multi-channel", that the catalog had to be integrated into the online experience, causing both channels to fuel each other.
• This concept didn't work. It appealed to the "core customer", who is now 55+ and rural. Everybody else just disappeared, they walked their business over to Amazon and to large retailers who grew their own, underutilized e-commerce channels.
• The reduction in customer productivity caused catalogers to pull 40% of their paper-focused square inches out of the mail. Forty percent!
• Catalogers doubled-down on "best customers", squeezing every bit of profit out of them possible.
• In cataloging, the costs are "variable", which is an advantage. When the paper is pulled from the mail, it's gone - no worries, no debt, no empty floor space.

What will happen in retail?

• We are being told that retail has to be "omni-channel", that the retail store must be digitized and fully integrated into the online/mobile experience, causing all channels to fuel each other.
• This won't work (my guess, I could be wrong). It probably will appeal to the "core customer", the 5% of the baby-boomer centric customer file who loves the in-store shopping experience and actually wants stores to become digital distribution centers.
• Everybody else (especially customers age 18-44) will focus on inventing the future. When is the last time you heard a 21 year old say "I just wish that Forever 21 would have better digital distribution centers in the malls I frequent?"
• Existing stores will experience productivity declines (ask Nordstrom about the two older stores in the Portland market). It doesn't matter that online and stores are working together - at all - your retail CFO is going to look at that whopping fixed cost associated with a store, and will question why it should remain open?
• The reduction in customer productivity will cause retailers to close older stores.
• The reduction in customer productivity will cause retailers to invest in "the best opportunities". These may be low-price branded concepts (i.e. Nordstrom opening a Rack store at West Town Mall in Madison, WI - a former higher-end mall that is adjusting to modern economics), these may be remodels of good locations, these may be build-outs in new concepts (new concepts are not mall-based, are they?).
• In other words, weak stores will disappear - while strong stores may even get stronger.
• Retail stores represent fixed expenses. Unlike catalogs, you cannot simply remove them from the ecosystem. When closed, they sit there, collecting dust.
• We're going to have a lot of closed stores, sitting there, collecting dust. In catalog, 40% of the square inches simply "went away". In retail, will 40% of the square footage "be abandoned"? What are the consequences of empty square footage on our communities? And maybe more interesting ... especially if you market to an 18-44 year old customer, what replaces a Sears when a Sears store shuts down?

This will result in a fundamental transformation of retail. The baby boomer version of retail will die over the next ten years, unable to be saved by omnichannel strategies. Retail won't go away, but it is conceivable that 40% of the square footage will be "emptied", rendered useless by the impact of e-commerce on Jennifer and mobile on Jasmine. It will be interesting to see what (if anything) replaces what is lost.

Think about what happened to Borders and now to Barnes and Noble - especially the latter, they did everything the omnichannel folks love to see executed, and none of it worked. None of it. When mobile impacts everything else the way Amazon (e-commerce) and Amazon Kindle (digital/mobile) impacted bookstores, use Borders / Barnes and Noble as your cautionary case study of the future of retail.

Thoughts?

I'll offer an essay a day on retail for the remainder of the week. Could write a booklet about it. Hmmmmmm.

Monday Mailbag

We have one question this week, and it's a good one - it comes from Charles:  Your quote from last week makes a lot of sense to me ... "The future is proprietary merchandise that customers love, sold at a fair price with amazing customer service and a compelling story, yielding healthy gross margins that enable enough profit to pay employees well and allow the business to invest in the future." But how do you get the word out? What is the optimal customer acquisition strategy for 2014/2015? Sure, every brand is different and unique, but if you were launching an outerwear brand today, how would you do it? Clean slate.

In the context of outerwear, competition is fierce. Here's The North Face, for instance:

Look at what is communicated here. We have free ground shipping, we have a cause that customers can support, we have easy navigation (including featured products below the fold).

Each of the tabs takes us to a different story.

Now let's look at the other side of the coin - Amazon.

Notice the difference in selling technique? More on that in a moment.

First, I'm going to decide who my target audience is.

• June - age 77.
• Judy - age 61.
• Jennifer - age 45.
• Jasmine - age 29.
• Jadyn - age 13.

Now that I know my audience, I'm going to decide where I stand on the pricing/fashion continuum. Am I fashion-centric, charging expensive prices with fat gross margins? Or am I battling everybody else in a race to see who is last to lose to Amazon?

Finally, I'm going to decide on my selling "style". Do I tell a story like The North Face? Or do I use Amazon's style of selling?

Of course, you can pay to get your message out there ... June / Judy / Jennifer / Jasmine / Jadyn all have channels that they prefer, so if I want to get my message out there to Jennifer, I might invest wisely in search to get my first $3,000,000 of sales in the bank. If my customer is Jasmine, I'm all over social/mobile as my way to get my first $3,000,000 in the bank. If my customer is Judy - I'm creating a catalog and I'm renting names from my competitors via co-ops like there is no tomorrow. The audience determines how I invest my money.

But most importantly, my story must be worthy of word of mouth. I know, this sounds pithy, but if I'm not doing anything that is worthy of getting customer to talk, then why I am even in business? What is the story I'm going to tell? Why would my customers share my story with their friends?

The storytelling aspect of marketing is seriously underrated. If I'm a reasonably new business, I need a story, a point of view, something that differentiates me from everybody else. Visit Mizzen and Main (click here). Do you see a point of view, a story, that differentiates them from everybody else?  This story, this point of view, is completely missing from marketing. It's the point of view that gets people to talk about you and to share your story early in your development. That's where I'd invest the majority of my time.

Ok, time for your thoughts. How would you "get the word out"?

Last Chance - I Am In London This Coming Week

If you want to see me speak about the value of social media communities (the title of the session is "A Cold Hard Dose Of Reality), click here for more details.

I will have some time available to meet with you about your projects ... I should be available the afternoon of Thursday, February 20 ... and the morning of Friday, February 21. Contact me (kevinh@minethatdata.com) for details.

Stitch Fix

I know, the USPS is going to make life hard for you in the future. And I know, you put all your chips in the co-op basket, and now you don't like it that your co-op segment productivity is down 11% vs. last year and nobody in the co-op profession can explain to you why that is happening.

Maybe it is time to experiment with different concepts? I'm not saying you throw away what you are doing - but might it be time to experiment?

Today, I'm sharing Stitch Fix with you (click here to visit their website).

You fill out a brief survey.

Stitch Fix gives you five hand-picked items.

You keep what you want, send back the rest.

I'm continually amazed at how catalogers eschew the old-school "continuity program" business model. Granted, these startups (who aren't using catalogs, by the way) may fail, but at least they'll go down swinging while applying a new twist on the old-school continuity strategy.

We can keep whining about where the catalog business model is headed.

Or we can get busy inventing the future.

Do we have the courage to get busy inventing the future?

Discuss.

Frank and Oak

It's a frequent set of complaints from catalogers who have a customer base age 55+:

• "How will anybody find our website without a catalog?"
• "The USPS is going to run us out of business."

Well, if you've trained a 55+ year old customer for thirty consecutive years to only respond when a catalog is sent, then, well, yes, you're stuck with an ever-decreasing level of marketing productivity.

Here's one for you - Frank and Oak (click here please). It's mens apparel - online - that's not an easy category to make hay in, is it?

They don't use catalogs - but they do promote their story via magazines (click here).

Did you notice? They have 1.1 million registered users. When you visit for the first time, you'll give your email address (catalogers, do you demand this after paying the co-ops a fortune to drive traffic to your site), you'll list your merchandising preferences, and then you're on your way with a customized merchandise offering (catalogers, do you personalize your home page based on a quick survey filled out by your customers).

The company is two years old. 1.1 million registered users. Two years old.

The company ships 35,000 orders a month ... if we assume a $100 AOV, that's nearly $40,000,000 a year ... if we assume a $150 AOV, that's nearly $60,000,000 a year.

Again, two years old, folks. Did your co-op add $40,000,000 in annual sales to your business in the past two years?

By the way, when you're filling out their survey, they ask for your age range. They lump everybody age 41+ into one bucket. This tells you something, don't you think?

We need to shop whining.

We complain that our $50,000,000 business might deal with jacked-up levels of postage costs, putting us out of business.

No, we're putting ourselves out of business. Old, stale merchandise, targeted to baby boomers.

New companies are born, without catalogs, with magazines only circulating to 50,000ish folks a few times a year - they capture data up-front (email address and user preferences), they offer a personalized assortment. 

We're whining about the wrong issues.

We can build a business without a catalog.

We can build a big business without a catalog (ask Amazon).

Maybe, just maybe, we all have to change.

Are we willing to change?

Discuss.

A Frequent Root Cause Of Problems

 You see some quirky stuff when you work on a Merchandise Forensics project:

For instance, it is very common to observe businesses that stopped investing in new products, coming out of the recession around 2010. I get it, I do. The world was coming to an end, and you didn't want to invest, you wanted to conserve cash.

This is what it looks like when we don't invest in new products. This is a "comp segment" analysis, where we focus on customers who purchased exactly two times in the past year, measuring subsequent year spend:

This is what I see - all the time. We're doing this to ourselves. Look at the "New Item Spend" column. Comp customers really started tanking on new items, beginning in 2010. New item spend dropped from $20.50 to $19 to $17 to $15 to $13. For a period of time, the drop in new item productivity was offset by existing items ... as the businesses offered fewer and fewer new items, customers shifted more and more into existing items, driving up existing item productivity.

On the surface, Management sees this as a good thing. "Our best items continue to carry the business, we need to focus on them". So Management cuts back even further on new items.

That strategy works until existing items outlive their usefulness, which always happens. Always. It's the law of merchandising, it is unavoidable. At that point, what are the new items that replace existing items? Oh, there aren't any!

This is when productivity begins to tank. This business, featured above, is on the verge of collapse - you just can't see it yet if you look at normal business metrics.

You can see it if you run a merchandising forensics analysis.

You run the comp segment analysis, and you count the number of new items that generate at least "$x" in the first year (I usually pick a 45th to 55th percentile for all items as the cutoff).

• 2013 = 174 new items.
• 2012 = 196 new items.
• 2011 = 219 new items.
• 2010 = 233 new items.
• 2009 = 241 new items.
• 2008 = 254 new items.
• 2007 = 266 new items.
• 2006 = 255 new items.
• 2005 = 250 new items.

Yup, we've got a collapse in new items, which yields a collapse in new item productivity, which yields a customer switch to existing items, items that eventually outlive their usefulness, yielding a business that is about to collapse.

Happens every day.

And we're doing it to ourselves.