Merchandise Forensics: Growing/Shrinking Businesses Standardization

Let's say that your business is on the upswing.

Last year, you had 100,000 customers, and you sold $12,000 of a certain item.

This year, you had 150,000 customers, and you sold $16,000 of a certain item.

Clearly, your merchandising team is doing a great job with this item, right?

• Last Year's Demand per Thousand Customers = ($12,000 / 100,000) * 1,000 = $120.00.
• This Year's Demand per Thousand Customers = ($16,000 / 150,000) * 1,000 = $106.67.

Now, I get it ... if you featured the item in catalogs more/less frequently, or in email campaigns, then the metrics will be impacted.  But for most items, this isn't the case.  Consequently, you can get a directional view of merchandise productivity by controlling for the number of customers who purchased in the past year.

This metric can be adjusted - for great customers, for average customers, for marginal customers, for new customers ... your choice.

But you owe it to your merchandising team to tell them, in a changing environment, how items are performing, correct?

Contact me (click here) for your own, customized merchandise forensics project.

Netflix

Sounds like Netflix is doing pretty well these days (click here).

Remember when Netflix changed DVD and Streaming pricing strategies, back in 2011?  The change was considered a social media disaster.

• How Netflix Could Have Avoided Social Media Disaster (click here).
• 7 Rookie Social Media Mistakes From Big Brands (click here).

What did we learn?

• You can commit the most shocking social media disaster of the year, and it has no impact on sales and profit in the long-term.
• A small and passionate group of social media zealots should not stall business decisions you believe in.

Focus on merchandise presented creatively.  Focus on the future of your business.

Proceed.

J. Peterman

The mid-1990s were the zenith of the catalog marketing industry.  And no cataloger flew closer to the sun than J. Peterman, spoofed on Seinfeld:

That's what we know.  Nearly twenty years ago, J. Peterman was the toast of the town.

Why was J. Peterman, a $75,000,000 business back in the day, popular in the first place?  Was it omnichannel?  Heck no, the prior version of omnichannel, called multichannel, bankrupted the company.

Go ahead - read this little ditty (click here) and think about what Mr. Peterman says about running a business.

• "I didn't know how to set up a warehouse."
• "I didn't know how to set up a distribution system."
• Pretty soon, he opened 15 retail stores.  The faster it grew, the more cash he needed, and before he know it, the company was bankrupt.

Why I am referring to something that happened nearly 20 years ago?

Because it is happening again, today.  You're getting the same kind of advice.  "Be social, be authentic".  "Brands that don't embrace digital will surely die".  "Let your customers do the marketing for you."  "Trust the cloud."  "Omnichannel customers transact everywhere, and are worth 29 times as much as average customers."

If you aren't going to have the lowest prices and the best customer service (hint - Amazon), then you need a different approach.

• Unique Merchandise.
• Creative Presentation.
• Sound Operational Fundamentals.

J. Peterman sold oxford shirts, just like everybody else.  But the creative presentation was so over the top that you purchased because of it.

Instead of focusing on the next big idea, why not focus on selling merchandise in a creative manner?  Instead of channels, why not tell a story?

And then, when sales take off, make sure the fundamentals of the business are well taken care of.  With all of the profit you earn, you can invest in a dreamy, omnichannel solution.

Dear Catalog CEOs: Online Education

Dear Catalog CEOs:

I recently viewed a roundtable discussion about the future of education, six people, all over the age of 50, predicting the future.  The core of the discussion was this:

• Online education is the future.
• Online education, and simulations, are fun!
• We're embracing the future of education.
• Nothing replaces the experience of a campus-based experience.
• Nothing replaces in-person discussions with a professor.
• In a blended model, with online and on-campus, the results (high grades) are potentially much higher.
• You need a teacher to generate the motivation factor for students.
• Great teachers are necessary, they must inspire the student.
• The future is the integration of online education with the teacher, and the campus experience.

What does this sound like?

OMNICHANNEL!!!

Catalogers, of course, went through this evolution ... ten years ago ... then called multichannel.  Just integrate the online experience with the offline experience, and the customer will reward you with riches.

Did it work?  The winner was Amazon.  No catalog.

If you are the incumbent, you seemingly have no choice but to sell a vision of the future that tethers old-school tactics to new technology.

There are many great things about being a cataloger in 2013.  I'd much rather be a cataloger in 2013 than in 2003.  A decade ago, there were no rules, so every expert under the sun was telling you what the "new rules" were.  Today, there aren't many people telling you what you have to do.  You have a ton of latitude to be creative.  What a blessing!

In the roundtable discussion, Tom Friedman said that the panel was selling "Altavista" in the late 1990s.  In other words, the panel was discussing a solution, while the real solution (Google) would eventually arrive, and be different.

This is what is great about cataloging today.  In e-commerce/retail, omnichannel is Altavista.  E-commerce/retail is being distracted, strategically. 

In cataloging, you've been through this transition ... so you get to focus on merchandise and demographics, the stuff that is important.  The payoff of this strategic focus is coming.  Get ready!

Macy's

Click here to read their 2012 annual report.

They now call themselves "America's Omnichannel Store".  You'll have to come up with a different slogan, sorry.  This slogan, however, comes with a price.  Now we're watching.  If you claim you're the best at something, we're going to compare your progress to the progress of others who aren't quite as boastful.  And for being "America's Omnichannel Store", Macy's did not post comp store sales gains as strong as Nordstrom, a company that does not mention the word Omnichannel once in their 2012 10-K.

In fact, the word "omnichannel" appears 30 times in the report.  Thirty.  The word "profit" or "profitability" appears 9 times.  Nine.

Profit should be called out, because EBITDA is closing in on 14% of net sales.  In retail, that's some sweet action.

Comp store sales were +5.3% in 2011, and dropped to +3.7% in 2012.  Oh oh.

Let's think about a key omnichannel strategy - the ability to fulfill items from other stores or the online channel should boost sales, right?  Macy's went from 23 stores in 2011 to 292 stores executing this key omnichannel strategy in 2012. So why are comp store sales falling, when this key omnichannel initiative should cause sales to increase?  Give that some thought.

Macy's 10-K talks about marketing to Millenials ... those age 13-30, suggesting that this is a key marketing initiative.  Pay attention, folks.

Macy's generated $422,000,000 in co-op advertising ... in other words, brands paid Macy's $422,000,000 to advertise their products.  Catalogers - pay attention!!!

Macy's has $6.8 billion ($6,800,000,000) in long-term debt, and paid $425,000,000 in interest payments in 2012.  This is common in retail.  It also illustrates why retailers jump all over omnichannel initiatives ... when sales struggle, it hurts to make $425,000,000 in interest payments, payments that accomplish virtually nothing. 

Think about this ... Macy's has 800ish stores, suggesting that each store generates somewhere in the range of $3,000,000 to $4,000,000 in profit.  It takes 100 stores, generating average levels of profit, just to pay the interest on long-term debt.

Worded differently - the sole purpose of 100 of the 800+ stores is to generate enough profit to only pay interest on long-term debt.  Did anybody tell you how important a heavy debt load was, when thinking about accomplishing a brilliant omnichannel strategy?  Macy's has +/- 30% of annual net sales tied up in long-term debt, and it must be paid off.  We're only talking interest here.  And when you do pay it off at a faster than expected rate, Wall St. hammers your stock price.  So there.  Omichannel.  Fun stuff!  Just don't let sales decrease, you've got interest payments to make.

We're going to pay attention to Macy's, going forward.  If you claim to be "America's Omnichannel Store", we're going to measure you against alternative strategies.

Omnichannel: Are #Omnichannel Customers Truly More Valuable?

The most popular meme in retail is "omnichannel".  The theory posits that by aligning all channels around the customer, by creating a consistent experience across all channels, by tearing down silos inside organizations, by integrating a digital experience in-stores and online, by fully integrating mobile into the customer process, retailers get to reap the rewards of a customer demanding a fully holistic purchase experience.

You'll have to look hard to find any researcher or vendor who has proof that this strategy leads to a dramatic increase in profitability.

Here's how the argument begins.  We're told that omnichannel buyers, those who purchase from many, many channels, are much more valuable than single channel buyers.  Researchers cite this table as proof - here's what the data typically looks like:

This is where the research ends.  A simplistic query is run, and of course, there's clear proof that customers who shop many channels spend much more than customers who only shop a small number of channels.  In this query, 0-3 month buyers were chosen.  Then we measure historical channels purchased from, and we measure how much customers spent, historically.

Clearly, omnichannel matters.

Or does it?

Researchers need to go one step further, don't they?  Given that a customer is an omnichannel customer and has the same frequency as a single-channel customer, can we prove that omnichannel leads to increased future spend?

This table measures repurchase rates in the next month, after controlling for historical frequency, and for historical number of channels purchased from.  We're still evaluating 0-3 month buyers.

What do you observe, in this table?

Look at a customer with 6 life-to-date orders.  Read across the table ... these are customers who purchased from 1, 2, 3, 4, and 5 historical channels.  The customer buying from 5 historical channels should be much more valuable than the customer buying from 1 historical channel, correct?

But that's not what we observe.

In fact, you have to get to 10 historical orders, and 5 historical channels, before you start to see an increase in future repurchase rate.

Let's look at future spend, not future repurchase rate.

Average spend (no repurchase = $0, averaged with those who do repurchase) illustrates that there is some incremental value to getting a customer to purchase from multiple channels.  Read across the Life-To-Date Orders = 6 row.  You see that four channels are better than 1-3 channels ... mind you, only 20% better, but it's still better.

But there are quirks, aren't there?  Read across the Life-To-Date Orders = 3 row.  Here, buying from one channel is better than buying from three channels.  Read across the Life-To-Date Orders = 2 row.  Here, buying from one channel is better than buying from two channels.

For this retail brand, when a customer is early in the life cycle, omnichannel behavior is counter-productive.

For this retail brand, when a customer is deep in the life cycle, omnichannel behavior is more productive, but only 15% - 25% more productive, not 7 times more productive as is commonly published.

Run these queries for your business.  Seriously, go run them.  You'll see similar results.  Of course, your mileage will vary.

If your results look something like what I've illustrated above (hint - they will look similar to this), then there are a whole bunch of interesting strategic questions that need to be asked.

Strategic Question:  If most of my customers have 1-3 historical purchases, and the gains promised from omnichannel come from customers with 10+ historical purchases and 3+ historical channels, and the gains are in the 15% - 30% range (not 700% or 800% as promised in omnichannel literature), then of what benefit is an omnichannel strategy?

Strategic Question:  If the gains are in the 15% to 30% range, wouldn't I be better off investing in 1 new customer, so that I have 2 customers, than to re-arrange every process in my company so that I have 1 customer spending 15% to 30% more - only if the customer makes it deep into the life cycle?

Strategic Question:  If the payback of an omnichannel strategy is 15% to 30%, only among the 5% of customers who ever make it deep into the customer life cycle, then why should I tear down all silos in my company and work terribly hard to integrate all of my processes around digital channels?

Strategic Question:  What do Forrester Research, IBM, HP, and any other vendor promoting omnichannel integration have to gain by getting you to reinvent your entire business around a concept that only pays back 15% to 30% among the 5% of your customer audience that is deep into the customer life cycle?

Use the comments section to offer your thoughts.  Provide links to research that complements or refutes the information presented here.

And if you're looking for help determining if omnichannel is right for your retail brand, click here to email me, now!!

Picking The Wrong Side Of A Fight

Yesterday, I wrote about the two topics that are buzzing around the catalog vendor community this week (click here to read the blog post).

1. Possible USPS postage increases.
2. Possible requirement to collect sales tax.

Feedback on this article was distributed as follows:

1. 100% of the feedback came from vendors in the catalog industry, and it was largely opposite of my point of view.
2. 0% of the feedback came from actual catalogers.

Let's address the feedback I received, in the Frequently Asked Questions (FAQ) format.

If catalogers are required to collect sales tax, annual sales will be hurt, that's a no-brainer, correct?

• Maybe.  Maybe not.  Time will tell.  I have measured the phenomenon for many retailers.  Retail brands open new stores in new markets all the time.  They will open a store in Omaha, and as a result, be forced to collect sales tax in all of Nebraska.  In the vast majority of cases (in fact, I cannot remember a case where this didn't happen), the e-commerce side of the business takes a brief sales hit, then sales recover within a short period of time (often 60-90 days), and return to prior levels.  In other words, there is no long-term impact on e-commerce sales.  Your mileage may vary.
• Remember, 85% of most sales still happen in stores ... where customers willing pay sales tax.  Please keep that fact in mind - we're in a world where you can get free shipping and no sales tax, and yet, 85% of sales still happen in retail stores, where you have to pay for gas, invest time, and then pay sales tax.
• Did you stop purchasing MP3s from the iTunes store when Apple opened a store in your market?  Did you switch to Amazon, who offered the same item at the same price with no sales tax, or did you continue to purchase music through the iTunes store?  Be honest!

But if catalogers have to collect sales tax, at scale (i.e. everybody), then the result is different, correct?  When everybody has to do it, won't annual sales take a 5% or 10% hit?

• Maybe, maybe not.  When the depression started, back in Q4-2007, weak businesses were literally pushed out of business, while strong businesses (hint, Amazon) steamrolled along.  Issues do not hit all companies evenly.  If we assume that collecting sales tax will result in a dire outcome (retailers have suggesting the result is not dire), why will it happen evenly, across the board?  Might the issue push a weak business into the ground, re-distributing the demand from the weak business among strong business, thereby having no impact on strong businesses?  That's what happened during the depression of late 2007 - mid 2009, right?  Weak businesses ceased to exist, strong businesses re-calibrated and moved on.

But sales tax collection is currently illegal, we can't just let our laws change, we'll damage society and hurt the consumer, right?

• It used to be illegal for women to vote.  
• Our response to change is more important than the change itself.
• What will your response be?
• Remember, you have a control group ... states like Oregon that you'll be able to measure results against.

If the USPS raises rates, won't that cause catalogers to go out of business?

• The USPS raised rates in the past, correct?  How did that impact your business?  Did prior rate increases cripple your business?

I don't think you understand, Kevin.  The combination of sales tax and catalog rate increases is like an additional 25% tax on catalogers.  The impact will be fatal.

• Is that a question?
• This will not be fatal to catalogers.
• This might be fatal to weak catalog businesses that sell merchandise that customers largely ignore.
• Focus on merchandise excellence.
• Identify channels that your target customer shops in, and take advantage of those channels.

Your blog is widely read, and you're spreading misinformation out there to a large audience.  Why?

• I am sharing actual project findings, based on actual customer behavior.  I have mail/holdout tests on my side.  I have e-commerce results from retail store brands forced to collect sales tax in markets where they previously did not have to collect sales tax.  I participated in the shut-down of a catalog division among a Jennifer-focused customer audience, and watched annual net sales increase on a $36,000,000 catalog ad cost reduction - think about what that does to the profit and loss statement?
• I care deeply about my clients, and the catalog industry.  That's why I share actual facts, not memes.
• Let's bring facts, based on actual purchase data from retailers, e-commerce brands, and catalogs, to the table.

Logically, it makes sense that these forces are going to destroy catalog marketers, right?

• Since many of you are from New England, go talk to your friends at L.L. Bean (they are not a client of mine).
• Ask L.L. Bean if their catalog business was crippled when they were forced to collect sales tax when they opened stores in new markets?
• Ask L.L. Bean what impact the 294 prior USPS price hikes had on their catalog business?
• Use L.L. Bean as a case study for how catalogers might respond to drastic changes.  They were not pushed out of business.  Give L.L. Bean Management a call, and have a discussion with them.  Get facts from somebody who has lived with the consequences of a sales tax burden.

Doesn't the customer need catalogs to shop?  Sales Tax + Postage Increases = Fewer Catalogs and Fewer Shoppers, Right?

• Ask Amazon if their customer (hint - that's everybody) needs a catalog to shop?
• Does Amazon's customer in Washington State, where Amazon must collect sales tax, spend so little that it devastates Amazon's profit and loss statement?
• If your customer is June / Judy (age = 69-85, 52-69), yes, mail/holdout tests prove that this customer will shop less if you stop mailing her catalogs.  For this customer, sales tax increases and USPS postage increases could cause problems.
• If your customer is June/Judy, ask yourself why you aren't supporting the ACMA?
• If your customer is Jennifer / Jasmine (age = 36-51, 20-35), mail/holdout tests prove that this customer will continue shopping with your brand, but at lower rates (Jennifer) or will be barely impacted at all (Jasmine) if you stop sending catalogs to her.  If your customer is Jennifer / Jasmine, go tell the USPS what to do with proposed rate increases ... tell them you'll stop spending money with them and you'll reinvest your marketing dollars in the channels that Jennifer / Jasmine use.
• If your customer is Jennifer / Jasmine, you are in a position of power with the USPS.
• We need to stop acting out of fear.  We need to use the power we have to make a statement.  If the customer is Jennifer or Jasmine, we don't have to send catalogs to her.

I thought you were a defender of the ACMA?

• I am!
• If you are a cataloger who caters to June / Judy, I don't like the fact that you don't support the ACMA!!!!!
• But if you are a cataloger who caters to Jennifer / Jasmine, the world has changed, and your customer changed.  Print is no longer the driving force for Jennifer, and is close to irrelevant to Jasmine.  And I have data to prove it, via mail/holdout tests.

I know, some of you think I picked the wrong side of a fight.

I picked the right side of the fight.  I chose data, facts, analyses, and mail/holdout tests, to determine my position.

Ask yourself what happens to the co-ops if fewer catalogs are mailed, thanks to the USPS, thanks to having fewer current buyers due to sales tax increases?

Ask yourself what happens to printers if fewer catalogs are mailed, thanks to the USPS?

Ask yourself what happens to whatever is left of the list industry if fewer catalogs are mailed, thanks to the USPS and sales tax changes?

Now ask yourself how you will respond?  You won't go out of business.  You will make strategic changes.  If your customer is June / Judy, you'll make one set of changes.  If your customer is Jennifer / Jasmine, you are already making changes that the catalog vendor community is not thrilled about.

I'm just asking you to use data and facts to see issues more clearly.