2014 Year In Review: Lack of Strategy

This question came to me from a trade journalist.

Question: Don't you think that most retailers simply fail to have a coherent strategy? In other words, retailers are struggling because they are not strategically thinking about their omnichannel future. Why aren't retailers rapidly adopting omnichannel tactics? Isn't this the only way that retailers will survive? Where is real strategy?

When folks talk about "retailers", they're usually talking about billion dollar businesses. Those businesses possess anywhere between 5,000 employees and 200,000 employees ... or 1% of the workforce in the case of Wal-Mart.

These are big businesses. Hundreds of Vice Presidents, several hundred Directors, thousands of Managers. Every single person with their own version of the future. Every single person wanting to implement their own strategy. Every single person believing that their way is best.

When I hear criticism of large companies (I worked for Lands' End, Eddie Bauer, and Nordstrom ... those are big companies), I frequently hear the complaints from individuals who work at small companies. A trade journalist doesn't work at a company with 1,000 employees, in most cases. The trade journalist might need to please six individuals, whereas the Retail Executive may have to please six thousand individuals. It's easier to have a strategy when you have to bring six people along with you. It's hard to implement a strategy when you have to bring six thousand salaried individuals with you.

Let me give you an example. When I worked at Nordstrom, my team determined which version of ten email campaigns a customer would receive. My team owned this tactic. And then, one day, I get a call from a customer - the customer wants to know why she was mailed a campaign from an employee working in a store? Well, I'm accountable for who receives email campaigns, so I feel pretty confident that nobody in the stores are sending their own email campaigns.

Boy, was I wrong.

Not only was I wrong - not only were hundreds, maybe thousands of employees sending their own campaigns, but one of my coworkers, a technology Executive, was facilitating many of these campaigns. This person was helping send the campaigns on behalf of the employees in the store.

This went against our "multichannel email strategy".

Well, it was my job to clean this up. Did I clean it up? Heck no!

Half of the Executives I worked with thought this was a catastrophe, and demanded that I stop the practice immediately.

Half of the Executives I worked with thought this was brilliant, thought it encapsulated the Nordstrom entrepreneurial spirit. Not only did they not want the program stopped - they wanted to expand the program.

The technology Executive helped me create a process to allow store employees to send their own campaigns. I'm sure a minority of employees used it.

It was not possible, not possible to align 50,000 employees along something as simple as email marketing rules.

Retailers have strategy, trust me. Retailers have too much strategy. There are enough strategy decks (Powerpoint) at retail businesses to "fill the cloud".

I work with retailers that are highly strategic, and implement strategy in a highly successful manner.

I work with retailers that are highly strategic, but are unable to implement strategy due to employee disagreements (this would have been my Eddie Bauer experience, back in the 1990s).

I work with retailers that are highly strategic, fight the wars to get the strategy pushed through, and then fail miserably when the strategies don't work. Most outsiders love beating these companies up, don't they?

I work with retailers that are not strategic, but are so tactically superior that they enjoy high levels of profitability (this is what I would have considered Nordstrom to be, back in 2007 when I left, and this is what I considered Lands' End to be, when I worked there in the 1990s).

I work with retailers that are not strategic, and are tactically inferior. This isn't good.

But most of the time, there is a strategy. How that strategy is translated to those on the outside is unclear, and results in outsiders beating big retailers up.

2014 Year In Review: Merchandise Executives Being Fired

Here's a question I received earlier this year.

Question: My company performed a Merchandise Forensics evaluation of our business. We learned that customer productivity is not improving. Our CEO fired many members of our merchandising team as a result. Is it really the fault of the merchandising team when the business struggles, or is the marketing team failing to do their job? In other words, shouldn't the marketing team find customers who want to buy the merchandise we offer, at the price we offer it at?

In 83% of the Merchandise Forensics projects I've conducted, there are serious flaws in merchandising strategy. Expansion of unproductive categories. Failure to launch enough new products. Discontinuation of winning items. Serious discounting resulting in a reduction in gross margin dollars. All of these things impact customer productivity. When the merchandising division negatively impacts customer productivity, changes need to happen. I'm not saying folks deserve to be fired. I am just saying that changes need to happen.

The marketing / merchandising challenge is real, and it is spectacular.

In the past two years, there have been two trends that frustrate me.

1. A growing lack of merchandising discipline.
2. Marketers seeking to impress outside audiences instead of co-workers.

The latter is frustrating because it is the job of the marketer to sell merchandise, not to impress researchers, trade journalists, vendors, and consultants with mobile strategies and omnichannel tactics. The former is frustrating because the metrics are there to show that we're making myriad merchandising mistakes, but we instead choose to trust our own instincts.

In 2015, we need marketers and merchandisers, working hand-in-hand, improving customer productivity. Neither side is right, neither side is wrong. We simply need both acting in a collaborative, disciplined manner, working for each other.

2014 In Review: My Mailbag

We're going to go through my mailbag for the rest of 2014 - your questions shape what we need to focus on in 2015.

This question was asked of me in January, from a Catalog Executive.

Question: We conducted extensive holdout testing, and learned that we are overstating catalog performance by 100% - in other words, 50% of the demand attributed to a catalog happens anyway when we stop mailing catalogs. If we obey this outcome, then a series of terrible outcomes happen.

1. We will cut housefile circulation by between 40% and 45%, shrinking the customer file by between 5% and 10%.
2. We will likely eliminate 15 of the 27 in-home dates we have, because these in-home dates don't generate enough incremental volume to justify being on the mail calendar.
3. When we eliminate 60% of our catalogs, we have to eliminate many, many jobs.
4. I don't want to eliminate many, many jobs. That's too painful to go through.
5. Therefore, I don't want to adhere to what the test results suggest. It would kill my business.
6. Tell me that I'm doing the right thing, Kevin.

There isn't a right or wrong answer to the arguments above, is there?

We get to pick the business we want to manage.

If we want to manage a $60,000,000 business that generates $2,400,000 of pre-tax profit by mailing a lot of customers a lot of catalogs, and we keep people employed in the process, then that's the choice we make. 

To get to 10% pre-tax profit, however, we're going to need a monumental improvement in merchandise productivity. And that's not going to happen. Even if it happens, given current practices, you'd mail even more, causing you to never achieve 10% pre-tax profit. Geez.

If we want to manage a $50,000,000 business that generates $5,000,000 pre-tax profit by drastically reducing mailing volume, and many employees lose their job as a consequence, then we can make that choice, too. Painful. But if ownership demands $5,000,000 pre-tax profit, then this is how we get there.

Or we can pick something in-between.

In 2015, we need to make choices. We've been doing the same thing, year-after-year, expecting better results. Better results do not seem to be part of the 2015 forecast, are they? It's time to choose the path we want to take. And if we want to choose the $60,000,000 / $2,400,000 solution, then let's just publicly acknowledge what we're doing and move on, and realize that the minute merchandise productivity takes a 5% hit, we're losing money and we're letting people go and we're doing the things we'd be doing by achieving 10% pre-tax profit, just for a different reason.

Major, Major Retail Problems - Fueled By Demographics

You probably read this article in Vox ... about Abercrombie, Delia's, and Aeropostale (click here).

Do you read Vox? Or Mic? These are not traditional news organizations. They are enjoyed by younger readers - whereas Fox News and MSNBC are enjoyed by older Baby Boomers. And you can click here to read about traditional news organizations being cut off from civilization ... 2/3 of readers being age 55+.

Why bring up the news angle while discussing retail?

Because demographic changes are obliterating existing businesses, cutting existing businesses off from younger customers.

Catalogers went through this transition first, and catalogers have finished the transition. When you analyze the vast majority of pure catalog businesses, you find a customer base that is 50-90 years old, with an average typically in the low-mid 60s. Customers under age 45 are cut off from catalogers. The transition is over, and is highly unlikely to be reversed. The content / merchandise / channels used by catalogers appeal only to those age 50-90, further cutting off younger shoppers. When the transition was in-process, experts told catalogers to be "multi-channel" ... to simply move into all channels to acquire all customers. The strategy failed. Because the merchandise and content only appealed to older customers, younger customers simply abandoned catalogers. The outcome has been decided, save for a minority of companies (there are no laws, there are probabilities). Multichannel did not work for most.

Retailers, on all levels, are now going through the same process. An Abercrombie / Delia's / Aeropostale catered to a pre-mobile customer, and are now lost as Gen-X kids exhibit fundamentally different behaviors. And it doesn't matter how "mobile" these businesses become - the core issue is competition with H&M and "fast fashion" - customers moved there, and the younger segment is cut-off from Abercrombie / Delia's / Aeropostale. Now, in fashion-centric businesses, merchandise plays a greater role, it has a short half-life, so problems can be fixed. But the problems are more merchandise-centric in nature, they aren't "omnichannel". Be honest - the 17 year old H&M shopper isn't looking for a "buy online, pickup in store" solution. Be honest!

Then there's the rest of retail.

Notice that high-end fashion-centric businesses are not struggling, but the "middle" is being absolutely gutted. High-end fashion depends upon a small number of highly affluent shoppers, often older shoppers. Behaviors aren't changing as much there.

But the rest of retail, lower/middle income, is being gutted. Gutted by audience and price. Gutted by ten years of retailers teaching customers to sit at home and not visit a store.

The article cites four issues:

1. Teens spending less.
2. Spending less on apparel compared to other categories.
3. Attention turned to mobile devices.
4. Malls are dying.

If we remove the "teen" focus of the article, the 3rd/4th points become highly relevant, don't they?

We trained the customer to sit home and click - every expert in the retail industry told us this would be a good thing (multichannel / omnichannel). The exact opposite happened - it's a bad thing - customers click and don't get in a car and drive to a store. So malls are dying as a consequence ... many studies suggest that mall traffic is down by anywhere between 10% and 50%. Nobody is going to the mall.

Think about your spending habits - you have home internet, you have mobile devices and mobile internet ... you didn't have these two issues 20 years ago. Your dollars now flow in that direction, and away from malls.

We're being told that the solution is to just be "omnichannel" ... be everywhere ... digitize the entire business ... and problems will be solved.

The real issue, of course, is this ... how in the heck are we going to train the customer to get in a car and drive to a store?

Panera Bread and Chipotle figured out how to get a customer to get in a car and drive to their stores - while McDonalds failed.

The secret, then, isn't omnichannel. It's a marketing / merchandising strategy that causes a customer to get in a car and drive to a store. Too few of us are focusing on the strategy. Retail can be fixed - even though there are way, way, way too many square feet available. Courses can be reversed. Time to get busy.

When Mobile Adds Incremental Sales

When you run diagnostics (click here for the booklet) on an emerging mobile business, you usually observe one of two outcomes.

The first outcome is most common ... customers are simply shifting from old-school channels to newer channels, with no incremental increase in business.

The second outcome is illustrated here ... not as common, but an outcome we all wish would happen more often.

As you can see, total comp segment demand is increasing, annually. That's good! Now, old-school channels are declining, so channel shift is still happening. However, mobile is providing incremental value.

• 2012 = ($80 - $77) / ($5 + $1 - $2 - $0) = 3/4 = 75% of mobile demand is incremental.
• 2013 = ($84 - $80) / ($10 + $3 - $5 - $1) = 4/7 = 57% of mobile demand is incremental.
• 2014 = ($86 - $84) / ($8 + $9 - $10 - $3) = 2/4 = 50% of mobile demand is incremental.

This is a wildly favorable outcome. The analysis tells us that mobile is, on average, 60% incremental. For every $10 generated by mobile, $6 would never happen otherwise, $4 is shifting from other channels.

Run this analysis! If you obtain this outcome, you've made magic happen!

Diagnosing Customer Behavior In Mobile

In Hillstrom's Diagnostics (click here for your copy), I talk about using a comp segment analysis to measure changes in customer behavior.

In this case, I am using annual comps to understand how customers with exactly two purchases in the past year behave in the next twelve months.

The top portion of the table illustrates the comp dollar values, the bottom portion of the table illustrates comp percentages.

What do you observe?

Demand through the call center is in decline, as has been the case for nearly twenty years. But look at online demand (desktop / laptop). After peaking in 2012, demand is in decline.

Mobile site (tablet + phone) peaked in 2013, and now that, too, is in decline.

This company has a mobile app ... as you can see, demand is rapidly accelerating within this marketing channel.

What do you observe, in total?

For the past three years, productivity is flat.

If this is what you observe, then your customers are simply shifting channels. Mobile does not truly add value (from a profit and loss standpoint), though it serves the purpose of facilitating changing customer behavior, and that's important. But you cannot, in this case, come to the conclusion that mobile is causing an increase in customer spend. You can simply conclude that mobile facilitates channel shift.

Nonetheless, this analysis should raise numerous strategic questions.

1. Mobile accounted for 3% of customer demand three years ago, then 7% of customer demand two years ago, then 16% of customer demand one year ago, and 21% of customer demand today. In five years, what share of demand will be captured by mobile? 35%? 50%? 65%? What does it mean to the business if any of the three outcomes happens?
2. What is the future of the traditional desktop / laptop website?
3. What is the demographic / psychographic difference between the emerging mobile buyer, and the old-school desktop / laptop buyer?
4. What are the merchandising preferences of the desktop / laptop buyer, and the mobile buyer?

Run the analysis, if your customer is under the age of 45. What did you learn?

Tell Me What You Think Of This Omnichannel Strategy

Here's what one of our loyal readers told me:

1. She wanted to buy an item.
2. She visited the store. Item was available.
3. She takes item to cash register.
4. Sales Associate says "Double points begins tomorrow ... do you want to delay your purchase by a day to earn double points?"
5. She says "no".
6. Sales Associate says "If you are willing to receive the item at home, I'll ring it up for you tomorrow, and deliver it to you next-day. You'll get double-points and have the item in 36 hours."
7. Loyal reader says "ok".

Do you understand what just happened here?

The omnichannel solution, being celebrated by raised glasses of champagne among omnichannel advocates, resulted in three key outcomes.

1. The customer got the item 36 hours later instead of immediately.
2. The customer earned double points, which means the customer will pay less for merchandise in the future, lowering company profit in the future.
3. The company generated less profit because it had to spend $5 +/- to next-day the item to the customer.

#Omnichannel!!

I'm not sure how we, as an industry, got to this point in our evolution. This is what happens when trade journalists, researchers, vendors, and consultants are influencing those driving the bus.

Does anybody measure profit anymore?

Or am I missing something? If I'm missing something strategic that results in greatly increased profit, please let me know.