Chicos and Retail

Have you read this ditty about Chicos (click here please)?

I've talked extensively about retail ... as e-commerce takes over (not next year, but over time), pressure is placed on the profit and loss statement. Given that so many retailers owe a ton of debt on retail stores, there is double whammy about to hit. In other words, it will get harder and harder to generate profit in a physical retail store, while at the same time, the expense structure of the store is saddled with debt ... interest and principal payments that do not change.

So if you have fixed debt payments and reduced income, something has to give.

In the article, the future of retail is clearly articulated.

• Stores are going to get smaller.
• Expenses must be cut.
• E-commerce must pick up the slack to cover the debt.
• Only best sellers will be made available.
• An assumption is made ... customers will enter a store, not find what they want to purchase, and then be perfectly happy shopping online while standing in the store chatting with strangers who instantly become dear friends. 
• The online purchase may or may not be credited back to the store.

The assumptions are the biggest piece of this puzzle. We hear this all the time ... we assume that if the customer doesn't find what s/he wants, s/he will buy it online while standing in the store.

Big, big assumption.

Catalogers know all about this dynamic. Large catalogers actively measure the relationship between reduced space and reduced demand. The relationship looks something like this:

What do we observe here?

With a 96 page monthly catalog, $2.00 million is generated that month.

With a 72 page monthly catalog, $1.86 million is generated that month.

With a 48 page monthly catalog, $1.71 million is generated that month.

With a 24 page monthly catalog, $1.41 million is generated that month.

Without a monthly catalog, $1.00 million is generated that month. Without a catalog, half of the demand flows online anyway.

This, then, is the secret to the alleged omnichannel movement. This is the theory. If the store gets smaller (or even disappears), and if only best sellers are offered in the store, the theory suggests that customers will still spend $1.86 million, or $1.71 million (instead of $2.00 million), even though the store is 75% or 50% the size it used to be and only offers best sellers. The theory is that the customer will, even if standing in the store, shop online. The theory suggests that it is ok to have the entire assortment online, only selling best sellers in-store.

Theory does not equal reality.

But the theory could be proven correct.

That's what makes work so much fun!!

Why Is It So Hard To Find New Customers And Reactivate Lapsed Customers? Some Numbers, Please!

Here's something I ran across in a recent analysis. The metric is a simple one ... percentage of demand at full price (click here to pick up your copy of Hillstrom's Diagnostics).

• New Buyers = 46% Full Price.
• Lapsed Buyers = 41% Full Price.
• 1x Buyers Last Year = 37% Full Price.
• 2x Buyers Last Year = 33% Full Price.
• 3x Buyers Last Year = 28% Full Price.
• 4x Buyers Last Year = 21% Full Price.
• 5x+ Buyers Last Year = 18% Full Price.

Not surprisingly, on a comp basis, there's a problem with this business:

• New Buyers = -15% vs. Last Year.
• Lapsed Buyers = -8% vs. Last Year.
• 1x Buyers Last Year = -2% vs. Last Year.
• 2x Buyers Last Year = +1% vs. Last Year.
• 3x Buyers Last Year = +3% vs. Last Year.
• 4x Buyers Last Year = +4% vs. Last Year.
• 5x+ Buyers Last Year = +5% vs. Last Year.

I keep seeing stuff like this ... companies give the "best" customers all the promotions and sale purchase opportunities and liquidation opportunities. Not surprisingly, folks hang on to better customers.

The CRM folks demand that only best customers are rewarded, and we listen. Either don't discount, or discount to everybody equally, if you want uniform outcomes. We're causing our own problems, folks!!

Go run this query on your own business. Right now! Go do it. What did you learn?

And if the numbers look like these numbers, well, maybe you just learned why you cannot acquire new customers anymore.

It's Here! Hillstrom's Diagnostics

You are doing everything right. The trade journalists praise your omnichannel efforts. You are aligned with every single vendor that Woodside Research deems to be in the "best quadrant". Your mobile traffic is skyrocketing into the stratosphere. Your social efforts are engaging.

And yet, comp stores sales are +2%.

Or your catalog customer is now 63 years old, on average, and you're struggling to find enough 63 year old customers to keep growing.

Or you are an e-commerce business that is seeing slowing growth, for the first time ever.

You need Hillstrom's Diagnostics.

I'll help you identify why your business won't grow in an age of unlimited marketing channels.

Click here to pick up your Print or Kindle version, and start identifying why your business won't grow.

Hillstrom's Diagnostics: The Problem With Campaigns

Do you see the image on the cover of Hillstrom's Diagnostics - available soon from an Amazon website near you?

That's the Snake River - my favorite river, if I may be so bold. It begins near Yellowstone National Park, hops across Southern Idaho, forms part of the border between Oregon and Idaho, defines a portion of Southeast Washington State, then merges with the mighty Columbia River at The Tri-Cities.

Here's the thing with the Snake River. You can stand near Twin Falls (where the image on the cover of the book was taken), look down, and surmise that "all is good". Looking at the Snake River in Twin Falls is a lot like evaluating an omnichannel campaign.

However, salmon born in the Snake River exit into the Pacific Ocean nearly a thousand miles away in Astoria, Oregon. There, salmon feed endangered Resident Orca Pods (J, K, and L). In recent years, there aren't nearly enough salmon to feed the endangered Orca Pods, causing greatly reduced numbers.

In other words, you can do everything right in Twin Falls, and you can measure that you're doing everything right. And yet, the outcome, in Astoria, is lousy, causing an endangered species of Orca whales to become even more endangered.

Such is the case with omnichannel marketing strategies.

The vast majority of our measurement techniques are campaign-centric, like looking at the Snake River in Twin Falls. We measure what happens at a point in time, in one location. We do not measure the impact on the total ecosystem, do we?

In retail, omnichannel is slowly killing store performance - the exact opposite of the desired outcome. Our digital marketing tactics cause customers to sit at home, browsing, not traveling to a store to shop. Worse, when the customer shows the slightest interest in buying something, we exhibit no patience for the online-to-retail experience to happen. Instead, we demand that the customer empty that shopping cart into a viable purchase transaction - now - NOW! That has to happen online, further decreasing the in-store buying opportunity.

After a decade to training the customer to sit at home and shop, is it any wonder that we're fretting about foot traffic in stores?

Hillstrom's Diagnostics help the retailer, cataloger, or e-commerce maven to understand if there are specific productivity issues or new+reactivated customer issues. Across forty companies during the past two years, these two issues (merchandise, new+reactivated customers) are the dominant challenges facing my clients. The booklet will help you diagnose your specific problem.

Coming Soon: Hillstrom's Diagnostics

Each year, I look back at what clients asked me to do. Then I map their requests and issues against the direction our industry is headed in.

The story of the Fall of 2014 is obvious - new + reactivated customers. Retailers have spent a decade teaching customers to never visit a store, just sit at home and browse (omnichannel). As a result, anywhere between 25% and 50% of store foot traffic simply disappeared over the past four years, depending upon the specific study you read. Loyal customers are hanging in there, but there are too few new + reactivated customers to allow the retail channel to grow, sinking so many omnichannel strategies.

In e-commerce, the story is the coming ceiling on new customer acquisition. This will set off a rapid deceleration in sales growth, given that most e-commerce brands retain between 25% and 40% of twelve-month buyers, coupled with a sub-standard 1x-to-2x customer evolution process.

And in catalog marketing, the story is demographics - new + reactivated customer counts are falling apart, as the merchandise assortment caters mostly to a 60+ customer audience.

It became obvious, then, that most businesses are struggling to diagnose customer problems. If businesses could accurately diagnose the problem, then we'd see strategies and tactics to counter the issues I consistently identify. Worse, most businesses are using campaign-centric reporting (RFM response in catalogs, conversion metrics in e-commerce, monthly comp store sales in retail), and as a result, businesses cannot possibly diagnose the problems I am seeing.

So, it's time for a booklet on diagnosing customer productivity problems.

You'll learn all about the diagnostics I am using to identify popular retail, e-commerce, and catalog problems. The diagnostics quickly identify when problems started, and frequently outline (in short order) what the problems are. The diagnostics do not, of course, tell you how to fix the problems. But they clearly identify where the problems are, so that your merchandising and marketing experts know where to start.

Hillstrom's Diagnostics - coming soon to an Amazon website near you.

When A Store Closes

If you really want to see the (complete lack of) power in the omnichannel business model, take a look at what happens in a market where you decide to close a store.

The secrets to your business happen in those markets.

Here's what you typically observe within the market:

• 2012 Retail At Store = $1.00 Million.
• 2012 Retail Via Other Stores = $0.40 Million.
• 2012 E-Commerce = $0.20 Million.

• 2013 Retail At Store Closed = $0.50 Million (closed mid-year).
• 2013 Retail Via Other Stores = $0.50 Million.
• 2013 E-Commerce = $0.20 Million.

• 2014 Retail At Store Closed = $0.00 Million.
• 2014 Retail Via Other Stores = $0.60 Million.
• 2014 E-Commerce = $0.25 Million.

Let's compare 2012 to 2014.

• 2012 Market Demand = $1.60 Million.
• 2014 Market Demand = $0.85 Million.

We lose $0.75 million. The closed store generated $1.00 million.

In the omnichannel future presented to us by the experts, customers are shopping everywhere, using all devices and spending a fortune.

Then you close a store, and 75% of the demand from that store simply disappears. Gone.

If omnichannel had any power whatsoever, then the demand would still be captured, right? The customer wouldn't quit shopping, the customer would move to another store, or would transition purchases online.

But that's not what happens.

That's almost never what happens.

When a store closes, one of two things usually happen.

1. 75%ish of the sales disappear, with the remaining demand recaptured among existing stores or e-commerce.
2. In a multi-store market, 50%ish of the sales disappear, with the vast majority being recaptured by existing stores, and a minority of demand flowing back into e-commerce.

Why pay attention to this trend?

As retail demand leaks out into e-commerce (because retailers will work hard to become "more digital", and will continue to siphon demand out of the in-store experience into e-commerce), individual stores will look unprofitable. This will cause CFOs to demand that unprofitable stores be closed. Then, after unprofitable stores are closed, demand will not flow back out into other channels, growth will stall, and all sorts of chaos ensues.

Run the query for yourself - look at what happens to e-commerce demand in markets where you close stores. This is the future that omnichannel is going to give us, if it continues down the current path.

You Get What You Pay For

This is a frequent outcome in e-commerce. I run a principal components analysis to segment twelve-month buyers into nine groups.

The most valuable customers are on the far right. What do you observe, when you look at the three segments with the best buying behavior in the past year?

Ok, I'll walk you through the three segments.

Bottom Right: Loyal customers, with prior purchasing behavior. They tend to use the company blog, email marketing, and tend to visit the site via SEO.

Middle Right: Loyal customers, with prior purchasing behavior. They are similar to customers in the bottom right segment, but they are much more active online - influenced by retargeting, affiliates (they want their discounts), paid/branded search (they know the company well), and they are socially active via text-based social channels (i.e. Twitter / Facebook).

Upper Right: Highly productive customers, mostly first-time buyers (newly acquired). These customers "do everything". They are literally scavenging the internet before purchasing ... they digest corporate content (blog, email), they are online carnivores as illustrated by retargeting, search, and display attributes. They thoroughly consume social channels, including Pinterest / Tumblr / Instagram (image social channels).

Marketers adore customers in the Upper Right segment. This segment is "proof that online marketing works". Well, of course online marketing works!

CFOs adore customers in the Lower Right segment. How much do you have to pay to get these customers to purchase? Nothing. NOTHING!! Your blog, email, and SEO. I know, I know, there are fixed costs associated with the disciplines, but those fixed costs are close to zero as a percentage of net sales. Marketing expenses are often 10% to 40% of total net sales ... think about that one.

Vendors demand that you go after the Upper Right segment - and for good reason - vendors generate profit when you attract that type of customer.

Every company needs to have a huge chunk of customers in the Lower Right segment - you generate profit when you attract that type of customer.

I know, vendors are going to demand that you "do both". So go ahead and do both.

But every dollar you save in marketing expense is a dollar that can be reinvested elsewhere. By cultivating customers who do not purchase because of online marketing, you have more money to spend growing in other ways - or to pay staff or owners or shareholders.

You get what you pay for.

P.S.: If you'd like me to run this analysis for you, send me an email message (kevinh@minethatdata.com).