Benchmarking

Here's the email:

• "Hey Kevin, question for you. Could you slice and dice all of your Elite Program data for us by industry and size of brand so that we can benchmark ourselves against similar competition? I know you've been critical of us in the past, and I just want to demonstrate that we're aligned with our competition. Thanks."

Thank you, no.

Benchmarking is one of those pointless activities that weak leaders force people to do in an effort to deflect blame for lousy performance. "It's not our fault, everybody in our vertical is within five points of rebuy rate of us."

Nonsense.

Let's assume that your "set of competitors" has a 34% rebuy rate.

Let's assume that your rebuy rate is 31%. Does that mean you are doing a bad job? Heavens no.

Let's assume that your rebuy rate is 37%. Does that mean you are doing a good job? Nope.

Your p&l tells you everything you need to know. Everything.

Are sales growing?

Are sales growing, causing profit to increase at a faster rate than normal?

Are you at 3% pre-tax profit with 65% gross margins? (hint - you are a failure).

Are you at 8% pre-tax profit with 29% gross margins? (hint - you are a success).

The vendor industry loves to prey on weak leaders who want to benchmark their brand against the "competition". Ask McKinsey how much money they've made over the years performing this task for weak leaders?

Stop benchmarking.

Start doing something.

P.S.:  When I worked at Eddie Bauer, we benchmarked ourselves against our competition (L.L. Bean, Lands' End, etc). We were a lousy company. The benchmarking exercise proved we were a lousy company. We already knew that. May as well have lit a hundred thousand dollars on fire next to the lake that Eddie himself used to fish on (a lake that is now part of the Microsoft campus, yeesh).

Loyalty Programs

There are moments, folks.

I sat in the SVPs office as the CEO walked in and handed a yellow sticky pad note to the SVP. The CEO performs the classic "back slap" or "shoulder slap" two or three times, then walks out.

The SVP looks at the note, makes a face that simulates the face one would make when smelling sulfur, then crumples the note and throws it away.

I asked.  "What did the note say?"

He responded.  "It said, 'push our customers to pay with proprietary credit to boost our loyalty program.'  Kevin, that's not gonna happen."

There are other moments. The President of a Brand is sitting at the table with me. I'm going over some of the customer reporting I generate for this business. Repurchase rates are (predictably) in the low 30% range, as they are (or are lower) for most of the e-commerce businesses I analyze.

This guy is stubborn. Really, really stubborn. He directed marketing to invest much less in customer acquisition. He directed marketing to boost rebuy rates among the most loyal buyers. Guess what? The business plummeted as it was starved from new customers ... but ... but ... rebuy rates among loyal buyers increased from about 55% to about 60%. The net of the two outcomes? A very, very unhealthy business.

The guy would just smile at me ... "Give it time, Kevin, everybody knows it costs 8 times as much to acquire a customer as it costs to keep a customer. My strategy will work as we give our loyal customers a chance to pay us back."

His strategy did not work.

One final moment. About 12 years ago an Executive asks me the following question.

• "Can you help craft a new loyalty program that makes it look like the customer is earning amazing benefits like double/triple points but the program doesn't really give anything away? We went the benefit of a loyalty program without the cost. Thanks."

Yeah, I'll be the Executive wanted the benefit of a loyalty program without the cost. Who wouldn't?

If folks want to talk to you about loyalty initiatives, don't walk away, run away.

Probabilities

On Saturday night at about 2:00am EDT the San Diego Padres eliminated the Los Angeles Dodgers.

I made a comment that with a "small sample" of a five-game series, just about anything could happen. Dodgers Twitter found the comment, and spent three days telling me how ignorant I am.

An awful lot of things in life boil down to probabilities. If we have a reasonable guess of how likely something is to happen, we can string together probabilities and determine the odds of, say, the Dodgers losing a series they are favored to win.

Let make two assumptions. These are assumptions, and your assumptions may be better, they may be worse. We cannot know the truth.

• Assumption #1 = Dodgers have a 65% chance of winning a home playoff game vs. San Diego.
• Assumption #2 = Dodgers have a 50% chance of winning a road playoff game at San Diego.

Given these assumptions, we can estimate the probability of the Dodgers winning the series.

• Win 3 games to 0 = 21%.
• Win 3 games to 1 = 22%.
• Win 3 games to 2 = 24%.
• Lose 3 games to 2 = 13%.
• Lose 3 games to 1 = 14%.
• Lose 3 games to 0 = 6%.
• Win the Series = 67%.
• Lose the Series = 33%.

So yeah, the Dodgers "should" have won the series.

But there was a 33% chance they'd lose the series. Not 5%. Not 11%. 33%.

The probabilities are based on assumptions, yes.

But there is a credible chance that an underdog will win a series.

The odds create good television.

The odds do not reward a 162 game season-long effort.

We like to view things in a binary nature ... wins or losses. Then we assign accountability to wins or losses. It's not as satisfying to suggest that we can try our hardest and do everything to the best of our ability and be better prepared and more talented and still lose a third of the time.

But that is the way life works.

It Happens Every Year Now

October is the month where some of our readers decide to offer me feedback.

• "I just got a catalog from Amazon. It's proof that an omnichannel approach works."
• "I got my Amazon catalog in the mail. It provides that 'sitting by the fireplace feeling' that customers love. Amazon is clearly trend-right when it comes to catalogs."
• "Kevin, you are such a moron. If Amazon is mailing catalogs, then catalogs work."

One of you sent me mail/holdout results measured via proprietary credit. You showed that when you mail a catalog Amazon generates more incremental sales from the mailing than you generate. Let's see if I have the logic right here:

1. Cataloger spends a million dollars mailing a catalog.
2. Amazon makes more profit from the mailing than the catalog makes.
3. This causes the cataloger to struggle.
4. Amazon uses the knowledge to mail their own catalog.
5. "Trusted partners" help Amazon (paper and packaging) while telling catalogers there is a paper shortage, hurting catalogers.
6. Catalog pundits "raise a champagne glass" to praise Amazon for adopting an omnichannel strategy.
7. Meanwhile, catalogers sell their products on Amazon and Amazon collects an approximate 15% +/- commission from everything catalogers sell.

Who is most strategic here?

1. The Catalog Brand.
2. Amazon.
3. "Trusted Partners" who support the paper industry.

Why Share The 10Q Statements?

There's a reason that the TV you want at Best Buy is never offered at 40% off (unless it is being liquidated). With a gross margin around 20%, you can't make money offering 40% off.

We review 10Q and 10K statements because the statements reveal the type of business we're evaluating. We see all of those Duluth Trading Company television commercials and we see all of their catalogs and we wonder how they can afford to do that while others don't execute old-school tactics like that? Well, their gross margins allow them to execute those tactics ... their gross margins pay for the tactics.

The danger for a high gross-margin business is that it becomes a "marketing" business. We see this happen all the time. In the early days of the brand the brand is highly profitable (think Lands' End in 1993). Then the brand wants to grow, so the brand spends more gross margin dollars executing more marketing programs ... the minute there is a merchandise productivity issue (like there was in 1995) the p&l doesn't work and people lose their jobs. This is the problem with so many businesses I analyze these days ... Leadership decides to spend ALL of the gross margin dollars on marketing instead of growing at a slower rate while being far more profitable. The minute merchandise productivity fails, the business fails.

You hear me harp on the importance of organic customer acquisition ... acquiring customers at low-cost or no-cost. You need to do this because if your business is like Best Buy, you don't have the gross margin dollars available to expand your marketing programs like you want to. You need to do this because if your business is like Duluth Trading Company, you are spending all of your gross margin dollars on physical stores, catalogs, and television and are not generating enough profit to pay for more new customers - you have to have an organic customer acquisition program to grow.

That's why we study 10Q and 10K statements. They help us understand the business model being employed, and they help us understand if there is any profit available to spend more money on marketing.

P.S.:  I didn't spend any time on a unique topic in this series ... but in these statements, take a look at interest paid on debt, especially among retail brands. It's not uncommon to see half of profit eaten way by interest payments.

Duluth Trading Company 10Q

Here's a link to the most recent Duluth Trading Company 10Q statement, representing the first six months of their fiscal year.

On page five, we observe the following for 2022.

• Net Sales of $264.4 million.
• Gross Margin of $142.7 million ... 54.0%.
• Selling, General, and Administrative Expense of $139.7 million.
• EBIT of $2.9 million ... just 1.1% of sales.
• Notice that last year EBIT was $15.0 million ... 5.3% of sales.
• Yeah, this business is STRUGGLING.

We observe a different business model here, don't we? Instead of 22% gross margins at Best Buy, we have 54% gross margins at Duluth Trading Company. This gives Duluth a lot more money to spend ... on marketing ... and they mail catalogs ... lots of catalogs ... and they have stores ... lots of overhead.

All of those extra gross margin dollars enable cash flow used to market more often (catalogs, television), which generate sales which generate gross margin dollars which enable cash flow and you get the picture here.

While Best Buy cannot be marketing-dependent, Duluth Trading Company "can" be marketing-dependent because of their gross margins.

What you sell dictates what your marketing strategy is.

Best Buy 10Q Statement

You probably study this stuff and already know it, but here is the most recent Best Buy 10Q Statement (click here).

On page four, you'll see that Best Buy sold $21.0 billion dollars of merchandise in the first six months of their fiscal year. And you'll instinctively (and correctly) think "that's ... a ... lot".

However, gross margin dollars aren't all that and a bag of chips.

• $21.0 billion in sales.
• $4.6 billion in gross margin dollars.
• 21.9% gross margin percentage.

In other words, when Best Buy sells a $1,000 television they generate $110 of gross margin.

And then it costs a lot of money for Best Buy to support the $110 they made.

• Selling, General, Administrative Expense (which includes marketing and stores and the website, and pick/pack/ship and salaries all that good stuff) was $3.8 billion.
• Best Buy, because of the business model they chose, cannot afford to spend a ton of money on marketing because there won't be any earnings before taxes if they spend marketing dollars unprofitably.

In other words, Best Buy sold $21.0 billion worth of merchandise to make $0.8 billion in EBIT ... about 3.8%.

Best Buy cannot afford to spend a lot of money on marketing. They have to create traffic in different ways, they have to create traffic organically. They have no choice.

The merchandise you sell ... the periodicity with which customer purchase it ... that dictates what your marketing strategy will be.