An Example Of Channel / Demographic Issues

I realize this article is more than six months old - but you're sitting at work, waiting for your omnichannel integration meeting ("all hands on deck, all channels matter"), so give it a quick read (click here).

Most important? The average age of the person watching cable news is usually > 60 years old, and is, in the case of Fox News, frequently older than 70 years old.

Think about the demographic disconnect between the cable news audience and the general population. You're not likely to get the average view to tweet a lot, are you? And how likely is this 70 year old person to pull out the iPhone and engage with mobile information?

You end up with a nasty problem, don't you?

• If you abandon your core audience, you don't have an audience, and your business suffers greatly.
• If you stay with your core audience, nothing "new" works, and your business is destined to fail in the future. You cannot do any of the new stuff, because it won't resonate with younger folks, and it will be ignored by the core audience.

What would you do if you were Fox News? Discuss the strategies you'd employ to protect the long-term future of your business. Or do you even care?

These issues map perfectly to catalog marketing, as we all know. And these issues are going to eat up the customer base at traditional retail businesses. Demographics, Channels, and Merchandise all interact with each other. And when your business gets pinned into a demographic corner, it is terribly, terribly hard to get out.

All Sorts Of Retail Trouble - What Is Your Solution?

On Thursday, I visited Alderwood Mall, north of Seattle.

#OhBoy.

"Up to 70% off the Entire Store" would have been shocking just two years ago ... had it been offered the week/month after Christmas. We've come to expect deep discounts right after Christmas.

As you can see, the mall wasn't exactly stuffed full with shoppers carrying branded credit cards capable of earning quadruple points.

Those who were in the mall were treated to a veritable plethora of assorted discounts and promotions.

And Macy's was not shy about their weekend plans:

Here's something for you to consider ... if your business is healthy, you do not sell everything in the store at 50% to 75% off on the first weekend of December. This only happens during a retail meltdown. And remember, many of you love Macy's, many of you love their omnichannel strategy. If the omnichannel strategy was so effective, as most of you suggest, then why take 50% to 75% off? Do you take 50% to 75% off when your business is succeeding? Ask Apple.

And what about gas prices? You're paying a $1 a gallon less for gas. Retail sales are horrible, and customers have more money to spend than last year. Where are those dollars going?

#Omnichannel!!

Think this mall is suffering? Well, it depends where you shop. Here's the view from my table at P.F. Chang's ... and guess what? No discounting. You don't need to discount when the place is nearly full. Lots and lots of profit to be had. And they were turning tables at a blistering pace.

Meanwhile, back in retail, inventory is not turning, though some stores were not completely desperate ... this store had a sale banner way in the back (and by the way, this brand grew to billions in US retail sales without so much as an e-commerce website until mid-2013 ... supporting a branding/merchandising thesis as the secret to success).

How did we get here?

• We told the customer for a decade, for a decade, to not drive to a store, but to instead sit at home and click. The customer listened. Click click click click while sitting in a chair. Hundreds of thousands of messages, folks. We needed to tell the customer to get in the car and drive to the store. This is the outcome of letting the digital folks control the message.
• Today, we tell the customer to click on multiple devices. The customer listened. More clicking, less action.
• We broke pricing integrity during The Great Recession, and have accelerated the catastrophe ever since. Market share now trumps profit (and cash).
• We taught the customer to not purchase in October/November - through hundreds of thousands of messages, we taught the customer to wait until Black Friday / Cyber Monday.
• Then, we broke the "big weekend" promise, by offering great deals after Cyber Monday, thereby destroying whatever integrity existed in a fake holiday created by a trade organization that seems to be doing their best to bankrupt their members.
• For the customers who were trained to sit at home, we further accelerated our demise by promising to ship merchandise on orders right up until a few days before Christmas. From a customer service standpoint, this is fantastic. From a customer behavioral standpoint, this is a catastrophe.
• In other words, we trained the customer to sit at home and wait for the best deal - even if it comes on December 20. The customer trusts that merchandise will arrive in a few days, and holds $$ until December 20. The money that used to go to retail stores now goes to Verizon, Apple, Samsung, and Comcast.
• We respond by offering bigger discounts earlier ... November 1 in many cases in 2014 ... in an effort to "lure" the customer back into a store before Black Friday. This trains the customer to wait even longer, thinking that bigger discounts will be coming on Black Friday / Cyber Monday (and they did), thereby destroying gross margins in early November, margins that would have been harvested at full price in prior years.
• By mis-managing inventory levels, we had to more heavily clear merchandise in the December 26 - January 15 timeframe (through 2013). This created even bigger discounts after Christmas.
• We pushed gift cards upon the customer. Good idea from a customer service standpoint. A catastrophic idea from a customer behavior standpoint.
• Now, the customer buys a gift card on December 20 ... gives it to a customer on December 25 ... and that customer uses the gift card to purchase merchandise at deep clearance-centric discounts. We pushed profitable demand out of pre-Christmas into liquidation demand post-Christmas.
• By focusing the business so heavily on December, we moved demand out of all other months, into December. What used to be highly profitable demand all year becomes margin-less demand in December, hurting the profit and loss statement.
• As we all know, December customers typically have lower lifetime value than everybody else. So, we transitioned our customer base into December activity that assures lower future value, assuring bigger discounts the following year when customers do not shop at the rates we anticipated, accelerating the discounting problem even more.

This never-ending cycle will manifest itself via the closing of the bottom third of the retail portfolio. Profit is being crushed, and when that happens, the weakest stores will become so unprofitable that they will be closed.

Worse, we've trained the customer to never enter a store. We trained the customer to sit at home and click right up to December 20 (unless we demand that the customer shop via a discount after abandoning a shopping cart - that happen online, not helpful to in-store traffic). Those who did act in-store were treated to between 25% and 70% off. Why would these customers ever pay full price again?

That's what the data tells me. I get to analyze a lot of data. Not survey data of 3,398 likely shoppers who are "confident" that they would spend more with omnichannel business models, but data from billions of purchase transactions from real customers at real companies. I have proof that we've done this to ourselves ... a hundred best practices all interacting with each other, yielding bad practices now labeled "omnichannel".

Maybe you disagree with me. 

If you disagree, send me an email (kevinh@minethatdata.com) or leave a comment. Offer your hypothesis. Show all of us the data that gives your hypothesis credibility. Offer your solution (my solution is pricing integrity, fair inventory buys, great merchandise, and great service, retraining a customer to get into a vehicle and visit a store ... I know ... terribly boring). 

I will publish the best responses.

Here's your chance to offer folks a path out of the woods. Leave a comment / send an email message to me. How would you fix the spiral we're in?

Two Types of Companies

There are two types of companies I run into.

The first type of company spends a lot of money on marketing. I see catalogers spending 40% of net sales on marketing. I see e-commerce businesses spending 25% of net sales on a dizzying array of a thousand online marketing channels.

If you are an employee at this company, marketing is part of your DNA. You cannot generate orders without marketing. Anytime you have success, your success happened because of the marketing campaigns you executed. And you are right. Because your sales are generated from marketing, your success came from marketing. When the merchandising team fails, of course, and customers choose to not buy merchandise, marketing gets blamed - even though business failure has nothing to do with marketing - you DNA dictates who gets blamed. Is it any wonder, then, that CMOs get fired every two or three years?

The second type of company sells merchandise. Merchandise is in the DNA of the company. This company strongly believes that without great merchandise, customers will not purchase. Marketing is viewed in the same way that a call center is viewed in a direct business, or the point-of-sale system is viewed in retail - it is part of the process of a customer buying merchandise.

The first type of company gets the customer in the Upper Right segment.

The second type of company gets the customer in the Lower Right segment.

Both companies believe they are right.

The first type of company grows faster, experiences more stress, and generates less profit as a percentage of sales.

The second type of company grows slower, experiences less stress, and generates more profit as a percentage of sales.

Neither strategy is right or wrong, both strategies can be highly successful. But as a business leader, vendor, or consultant, how you deal with each company is fundamentally different.

Why I Harp On Merchandise Productivity

There's a recurring theme in my projects, during the past two years.

1. The business is not meeting expectations.
2. Merchandise productivity - the amount of $ comparable customers spend on merchandise, is not improving.
3. The marketing team is blamed for the inability to sell merchandise.

When you don't have merchandise productivity analyzed, isolated, and quantified, then your marketing team is going to get picked on.

Look at the example here. Today, the search marketing team is perceived as "doing a good job". They are generating profit on the average $0.50 cost per click. Good job, well done, these folks know how to optimize the business. Time to write a white paper about best practices, don't you think?

A year later, merchandise productivity drops 20%. But if nobody bothers to quantify that merchandise productivity dropped 20%, then the search folks are going to get blamed. Look at their performance! They used to generate $5.50 profit per order ... now they are losing $4.50 per order. Idiots! It's time to fire the vendor, first and foremost, it's the fault of the vendor. When a new vendor fails to fix the problem, then it's time to go read a white paper about best practices - maybe the very paper written a year ago! And when that doesn't work, then it's time to fire somebody in the marketing department.

Marketers - please analyze merchandise productivity. It's a pretty important topic, don't you think?

L Brands

One of our loyal readers forwarded this video about L Brands (of which, Victoria's Secret accounts for 60% of volume) - click here.

The video highlights tactics at Victoria's Secret that apply to your business as well.

Here are the trends.

1. In-Store Best Sellers. Over time, we're going to see the bottom 30% of the store portfolio be at risk. The best retail locations will continue to perform really well. The worst locations are going to change - they will become smaller, or they will disappear. If they become smaller, they're only going to feature the best-selling items. And if they only feature the best-selling items, then it will be important for the store to have a digital alternative - average/poor selling items will be available online and can be shipped to the customer. This is, quite honestly, a simple extension of the old-school "extended size" strategy that apparel retailers used to have in the 90s and 00s ... key sizes were stocked in stores, your 2XL-Talls were only available via catalog or online.
2. Shift To Digital / Mobile:  This is a shift that is much more strategic that it sounds, and that is really saying something. What you are seeing here is not so much a shift to Digital / Mobile, but instead, a shift AWAY from Baby Boomers. That's what this is about. Companies going all-in on mobile are telling the public that they are shifting away from Baby Boomers, and are transitioning to Millenials.
3. Product Shift:  In the article, you learn that Victoria's Secret is shifting away from Dresses and Ugg Boots. This is all code for "Shifting Away From Baby Boomers".

Across my retail client base, these three trends continue to surface. The industry labels this as "omnchannel". The data suggests that this is something far more fundamental, strategic, and important. The data suggests that this is a generational shift, away from Baby Boomers. 

For a company like Victoria's Secret, the shift is necessary, and shifts in demographics are part of the company DNA.

For most other retailers, the shift is necessary in the long term, but can be very painful in the short term.

Cyber Monday Math

One of the things I'm told is that everybody must discount on Cyber Monday in an effort to "remain competitive".

I'm told that by being competitive, sales increase. And I believe that sales do increase. Tests clearly indicate that sales increase.

In fact, by offering 40% off instead of selling at full price, it is possible to increase sales considerably. Some folks double sales. Some obtain less optimistic outcomes.

So let's run a pair of simulations. In the first simulation (attached here), I demonstrate the gross margin dollars generated on an order at full price, at 20% off, at 40% off, and at 60% off (assuming a 40% cost of goods sold - which is common in cataloging and e-commerce but uncommon in retail, meaning the result in retail would be much worse than this).

As you can see, if you take 40% off, you generate $20 of gross margin ... if you sell at full price, you generate $60 of gross margin.

In other words, you need to sell 3x as much as normal, at 40% off, in order to generate the same amount of gross margin dollars.

So, if you were discounting like there was no tomorrow over the weekend ... consider this ... your sales could have dropped by 60% by selling at full price, and you would have made more money.

In the bottom half of the table, we see the problem ... if discounting gets us a 2x lift ... if it doubles sales over where they would otherwise be, gross margin dollars are cut by 33%. Yes, you double sales, and you cut profit by 33%.

It is becoming obvious that some business leaders would rather listen to members of the media than to their own Chief Financial Officer ... or to Shareholders.

In your Christmas 2014 post-mortem, have your CFO run simulations of what would have happened if you had sold at full price, and had your sales cut by between 25% and 50%. What would have happened to profitability?

At least run the simulation. Let me know what you learn. Maybe I am wrong.

Urban Outfitters

Let's make an assumption. 

In an omnichannel world, the umbrella company that owns multiple brands is able to employ omnichannel solutions somewhat equally across brands, and therefore, if omnichannel "worked", it would greatly lift performance across all brands. Right?

Here's Urban Outfitters Q3 comp store sales performance (which includes online, which by definition, artificially inflates retail comps). Click here for the press release.

• Free People = +15%.
• Anthropologie = +2%.
• Urban Outfitters = -7%.

From a logic standpoint, this puts omnichannel advocates in a difficult situation.

• If they believe that Urban Outfitters (as a collection of brands) does a poor job at omnichannel, then why did two of the three brands post sales increases?
• If they believe that Urban Outfitters (as a collection of brands) does an exemplary job at omnichannel, then why did one of the brands struggle so bad that is posted negative comps and had inventory problems resulting in more than a two point drop in gross margins?

Simply put, you can do omnichannel really well, and it's a +/- 2% proposition.

You can do merchandise+service+story really well, and within a portfolio of brands within a company, it can yield a 22% swing in volume.

Am I saying that omnichannel isn't real?

• No.

Am I saying that you can get away with not aligning your channels?

• Probably Not.

Am I saying that you don't have to digitize your business?

• No.

Am I saying that omnichannel is going to be the key factor that allows your business to outperform the competition?

• Absolutely Not.

Am I saying that merchandise+service+story is much, much, much more important?

• YES!!!

So why are so few people focusing on merchandise+service+story when it is so clearly obvious that the secret to business success is embedded there?