Looking Ahead

It's gonna be interesting, folks.

By the end of 2023 we could be as close to normal as we've been in three or four years. Most of you aren't going to like what you see. For maybe 2/3rds of us, it's going to be difficult to find new customers in the future. With rebuy rates under 40%, this means we're going to contract. It's quite possible that, if we managed a $30,000,000 business in 2019 and a $42,000,000 business in 2020 and a $39,000,000 business in 2021 and a $33,000,000 business in 2022 that we'll manage a $28,000,000 business in 2023. Factor in some inflation and you won't like that one bit. But that's where 2/3rds of us are headed.

Those who worked hard on customer acquisition as a growth tactic in 2021/2022 will be light years ahead of those of us who enjoyed all of the profit from the COVID-bump and are now looking at our situation wondering what to do next.

The near-term future is one where it is really, really hard to convince somebody who hasn't purchased from your brand to purchase from your brand. If the customer can get a comparable item on Amazon and have it delivered tomorrow, well, there's no reason for the customer to evaluate your brand. It's been like that since 2010 to some extent. It's worse today.

If you don't have a robust customer acquisition plan, one that goes beyond "spend more money with Facebook and Google", one that doesn't blame Apple (or for my catalog readers, one that doesn't blame the co-ops), you're going to have a fighting chance in 2023. If you are blaming others and saying "well, it's hard to acquire customers, not my fault" ... then it is your fault.

On the merchandise front, many clients are going through a dramatic transition. 2019 is the right comparison when looking at 2022.

• 2019 = 1,000,000 customers. 1.6 orders per buyer. 2.3 items per order. $40 price per item. Sales = $147.2 million. 3,680,000 items sold.
• 2022 = 800,000 customers. 1.65 orders per buyer. 2.2 items per order. $52 price per item. Sales =  $151.0 million. 2,904,000 items sold.

Price increases are fundamentally changing the dynamics of the businesses we run. Not everybody is experiencing this situation, but many are. We are transitioning from a customer/item fueled business to a price/margin fueled business. In the example above, we have 200,000 fewer twelve-month buyers. Guess what that does to your future?

The news isn't all bad. There's a lot of good out there. Many clients figured out how to maximize margin, or figured out how to emphasize certain items that have good margins, or figured out how to diversify the assortment to account for how customers shop at the end of 2022. Lots of innovation is happening. If you can't point to innovation at your brand, you are a year or two years behind the curve.

I think 2023 is going to be a year of "sifting through brands". Some are going to be very successful, some are going into a dark period. This is always the way it has been. By the end of 2023, we're going to be closer to what the future looks like than at any time in the past three years.

See you in 2023 ... in a few days!

Treating You Like You Are 11 Years Old

Here are some of the headlines.

• "Retailers: It's Time To Move Beyond Outdated Business Models".
• "Returns Are The New Growth Strategy".
• "Given supply chain issues, retailers should promote what they know is in stock".

That last sentence comes from Facebook. Like there is a retail professional ... anywhere ... who is gobsmacked by the thought of promoting what is in stock.

I recall attending a conference in the days before COVID - the Vendor Executive who finished a presentation walks over to me and tells me that nobody in the audience was smart enough to understand what he was presenting (he was teaching attribution).

I spent almost my entire career in retail. Yeah, there are some 40 watt bulbs out there. But you are better off assuming your audience is brilliant. If you assume your audience is dull in the squash, maybe you'll write articles and headlines that cause the audience to think you aren't terribly bright.

Merchants

Every company is run by an Executive Team ... the "C-Suite" as trade journalists like to say.

These folks, unfortunately, do not really run your company.

Your merchants, your product team, whatever you call 'em, these are the people who run your company.

It is rare to be on a Zoom call and see employees defer to somebody not responsible for the product the company sells. The marketing professional might run the call, but the merchant is the one everybody is trying to please.

The merchant is the one trade journalists have contempt for ... "The Era of the Merchant Prince is Over". It's hard for a trade journal or a research brand to make money telling you "what" to sell. It's easy for these folks to make money telling you "how" to sell stuff.

Your merchant team represents an ecosystem ... a bunch of planets or comets orbiting the sun known as your brand. Some are like Jupiter ... huge, gas-filled stormy characters that are hard to work with but deliver outsized profit levels. Some are like Venus ... get too close and you'll get burned. Others are like Mars, you want to explore them, help them, you find their work style and personality similar to you and you'll help these people any way you can. Some are like comets, you never see them until there is an "all-hands-on-deck" meeting and they fly by before heading out on an elliptical orbit into oblivion.

These folks don't always get along with "support departments", and for good reason. They don't need the Creative Team lecturing them about the "brand importance" of a product ... the merchants "are" the brand ... what they choose to sell determines what the "brand" is. I recall being in a meeting at Eddie Bauer in the late 90s when the brand marketing team changed up the creative presentation of our "winners" ... it was more "brand appropriate" as we were all told. Well, it was brand appropriate until sales cratered by about 10%. That's the point where the merchandising team stepped in and reminded everybody that something is brand appropriate when it sells at or above planned levels. The Executive Team didn't do that, the Merchandising Team did that.

These folks can be hard to work with, but you can't really blame them for being hard to work with when you realize they are the first to be fired when things go bad. I visited a client about eight years ago and presented findings ... showing everybody that the Merchandising Team made changes that hurt the company. A month later the Chief Merchandising Officer called me. He told me that because of my analysis he had been fired, and because of my analysis it was now my job to help him find a new job. I didn't get him fired, his inability to sell merchandise at levels planned for got him fired. That being said, I could certainly understand his pain. I wouldn't want to be fired because an outside consultant pointed out productivity issues.

In the UK the 26th of December is Boxing Day. Regardless where you are located, put yourself in the shoes of your merchandising team today and think about the challenges they have and how you might be able to help them.

Merry Christmas!!

For the 17th time, I wish those of you who celebrate it a Merry Christmas (yeah, that's me from a long time ago).

What Impact Did Price Increases Have On Repurchase Rates?

Yeah, I keep hearing the story ... "we had no choice but to raise prices, and now customer response is suffering".

Because each merchandise category is a "mini-brand", and because I usually look at multiple years of customer transactions, I can build a relationship showing how rebuy rates within a brand change as prices increase/decrease.

Here is the relationship for one brand.

That's just a beautiful image!

The relationship above explains 38% of the reason why rebuy rates declined as prices increased. Here is the equation:

• Change in Rebuy Rate = 2.521 - 1.457*(Change in Average Price per Item Purchased).

Let's evaluate an example. Assume that prices increased by 10%.

• Change in Rebuy Rate = 2.521 - 1.457*(1.10).
• Change in Rebuy Rate = 0.9183.

In other words, if you increase prices by 10%, you lower rebuy rates by 8%.

You probably want to understand this relationship, correct?

They're Giving Discounts To Which Customer Segment?

You don't always get honest answers when asking questions about discounting strategy.

Here is a "grid" for one category, with corporate orders on the y-axis and category orders on the x-axis. The metrics in the table represent the share of sales that are generated by items selling below their historical average price point. Tell me what you observe:

The upper-left cell is for customers who are placing their first order with the brand and in that order the purchase at least one item from the category being studied. 40.3% of the sales meeting this criteria feature items selling below their historical average.

Meanwhile, the lower-right cell is for customers who are placing their 21st+ order with the brand and are buying from the category for the 11th+ time ... the most loyal of loyal buyers. 25.5% of their sales feature items selling below their historical average.

This brand has a clear strategy within this category ... they are offering discounts to entice prospects to purchase for the first time.

Is that a smart strategy? Maybe. If the customer can be enticed into buying via full price yielding nice gross margins, the downstream math could work out.

Share of Items Sold Below Average Historical Price Point

Let's look at the data by merchandise class.

This brand just quit discounting, didn't they? That's how they are dealing with price increases. Let's compare 2022 to 2021 by merchandise class.

• 33.5% of old items were discounted last year, 20.3% this year.
• 48.4% of 3yrs ago items were discounted last year, 28.8% this year.
• 48.4% of 2yrs ago items were discounted last year, 30.2% this year.
• 38.4% of 1yr ago items were discounted last year, 36.4% this year (not as big a change).

You can either raise prices, or you can discount less, in an effort to increase gross margin percentages. Of course, either strategy results in lower response. It's a huge game of wack-a-mole, one that is terribly hard to win at.