Diagnosing The Challenge

It looks like 75% of retailers tracked by Chain Store Age had October comp store sales under three percent.

Many nervous executives are going to ask what you can do to help lift business out of this slump.

A good place to start is to diagnose how various segments of customers are performing, year-over-year.

For instance, let's assume you have a segment of customers that is considered "best". During October 2007, you observed this level of performance:

• Number of Households On 10/1/2007 = 100,000.
• Percent Who Purchased In October 2007 = 15.0%.
• Spend Per Purchaser, October 2007 = $100.00.
• Net Sales Per Household, October 2007 = 0.15 * 100 = $15.00.
• Total Sales = 100,000 * 15.00 = $1,500,000.

Now, re-run the analysis for October 2006, using a comparable group of customers.

• Number of Households On 10/1/2006 = 105,000.
• Percent Who Purchased In October 2006 = 16.0%.
• Spend Per Purchaser, October 2006 = $97.00.
• Net Sales Per Household, October 2006 = 0.16 * 97 = $15.52.
• Total Sales = 105,000 * 15.52 = $1,629,600.

Compare each metric, year-over-year:

• Number of Households = -4.8%.
• Percent Who Purchased In October = -6.2%.
• Spend Per Purchaser In October = +3.0%.
• Net Sales Per Household = -3.3%.
• Total Sales = -8.0%.

What caused total sales to be down by 8.0%?

• More than half the problem occurred because there are fewer "best" customers compared with last year.
• The rate at which best customers purchased in October dropped by 6.2%. That's not good.
• Sales were helped some by spend levels that actually increased by 3%.

This analysis should be done for "best" customers, "average" customers,
"marginal" customers, and new/reactivated customers.

You want to identify where your shortfall is occurring. If you see the same trends across all segments, you have brand weakness or overall economic pressures suppressing your performance.

But if some customers are impacted, while others continue to perform well, you have unique challenges. If you're best customers are performing well, while marginal, new and reactivated customers are under-performing, you may have a portion of your customer base "trading down" to other brands they can afford, as an example.

If business stinks long enough, you'll notice a trend where all metrics look good, but there aren't enough customers to fuel growth. Called "file momentum", this is one of the more frustrating challenges merchants face --- they fix business problems, but have to wait to see the fruits of their labor.

As business conditions erode, be sure to stay on top of the metrics that tell you which customers are under-performing.

Sharper Image And File Momentum

Sharper Image continues to deal with business challenges, according to Internet Retailer.

Multichannel Forensics sometimes illustrate business oddities. In some instances, merchandise problems can be fixed, and yet, sales will decrease.

For example:

• Assume you start with 100,000 good customers.
• Assume 30% of them repurchase.
• Assume that each customer who repurchases spends $200.
• Assume that you only get 40,000 new customers.
• Assume that each new customer spends $100.
• Total volume = 100,000*0.30*$200 + 40,000*$100 = $10,000,000.
• Total customers = 70,000.

Assume you fix your merchandising woes. Next year looks like this:

• We start with 70,000 good customers.
• Assume 35% of them repurchase (an improvement over LY's 30% rate).
  
• Assume that each customer who repurchases spends $200.
• Assume that you get 45,000 new customers (an improvement over LY's 40,000).
  
• Assume that each new customer spends $100.
• Total volume = 70,000*0.35*$200 +50,000*$100 = $9,900,000.

In this example, you'd post a -1% comp store sales drop ... yet your internal customer metrics are all improved. Your repurchase rate increased from 30% to 35%. Your new customer acquisition counts improved from 40,000 to 45,000.

When businesses go bad, file momentum works against them. This example doesn't explain all the woes at Sharper Image. But the example demonstrates the critical importance of knowing all of your customer metrics. In particular, you need to know customer counts by segment, repurchase rates, spend per repurchaser, and similar metrics for new customer acquisition.

Your merchandising organization depends upon you to provide this service. On the surface, in this example, it looks like the merchants are failing again. In reality, file momentum is the issue --- merchandising of the store has improved.