Special Edition: Shop.org and Macy's

In case you didn't hear, Macy's announced at Shop.org that every dollar spent online influences $5.77 in stores.

Multichannel advocates from near and far raised their glasses in celebration. Or at least that's what appeared to happen. You tweeted me, asking for my thoughts, in some cases, asking me to refute the knowledge offered by Macy's. I'll oblige.

I was at Nordstrom in 2003 when we first estimated the dollar amount that our website drove to our full-line stores. It was in 2005 when we further validated this point, doubling our online marketing budget and killing our catalog business and growing online sales and growing comp store sales all at the same time, a feat that I thought would be nearly impossible, a career-changing outcome. It was in 2006 when we used Multichannel Forensics to demonstrate to the Executive team that when you acquire an online customer, the customer becomes a store customer and then becomes a loyal store customer, helping the multichannel leaders in the company use the information to fuel their multichannel integration initiatives.

So do not be surprised when you hear a statistic like this. This kind of stuff has been documented by companies for some time.

But do pay CLOSE ATTENTION to the language used.

One dollar online "influences" $5.77 in stores.

Unless the Shop.org blog is mis-stating something, the choice of the word "influence" is critically important.

There is a fundamental difference between "influence" and "proven to drive incremental profit". When I worked at Nordstrom, we knew how much incremental store volume would disappear if we shut down the website, and we knew how much store volume was simply tied to a customer visiting the website and browsing in the days prior to a retail purchase.

Both components are valuable.

Both metrics demonstrate the need to have a modern e-commerce website and quality online marketing efforts and retail marketing activities and store merchandising strategies and a social media experience.

But do not, for one minute, confuse what the word "influence" means. "Influence" does not result in profit.

Have you ever read a statement like "Our new mannequins influenced a hundred million dollars in sales?"

Have you ever read a statement like "Our new wooden hangers influenced two hundred million dollars in sales?"

Have you ever read a statement like "The copy on the price tag influenced three hundred million dollars in sales?"

Of course you haven't heard those statements. But without a doubt, the mannequins and wooden hangers and price tags influence sales, don't they? They don't cause sales, they do influence sales.

And then there's the story of debt.

Retail is a voracious beast that is fueled by debt. The e-commerce channel has no choice but to fuel retail, from the strategic viewpoint of a retail executive team.

Macy's is blessed with an almost hopeless $8,600,000,000 of long-term debt. Have you ever had to manage the crippling weight of $8.6 billion in long-term debt? Last year alone, interest expense was $588,000,000. That's $588 million dollars ... of interest expense.

During the past three years (including the two years prior to the collapse of the economy), Macy's lost $2,800,000,000 profit, and paid $1,600,000,000 in interest payments.

Think about that. How much damage could $1,600,000,000 of incremental online infrastructure investment and/or online marketing have done, both online and in stores? All of that money, instead, was sent to a bank.

So let's temper enthusiasm about the role of a website within a retail brand with a simple metric, a simple "KPI" to use the parlance of the day: During the past three and a half years, the success generated by a website that influences $5.77 of retail sales for every $1 online resulted in a total loss of nearly $2,900,000,000, and significant comp store sales decreases. If the website were truly driving such stellar incremental volume to the stores, wouldn't there be some positive motion in comp store sales results during this timeframe?

Without a doubt, e-commerce, and websites in general, significantly, dramatically influence sales. We have no choice but to offer the customer an outstanding experience. And Macy's deserves to crow about this metric, it's a wonderful finding, a validation of something that people instinctively knew but couldn't prove.

But do not, for one minute, assume that "influence" translates to profit. Or even comp store sales increases. You can invest a ton of money in a perfect online experience, please customers, and not see one penny in incremental sales increases in your retail stores.

Keep this information in mind when your favorite vendor calls you, asking you to invest in e-commerce solutions, using Macy's as a poster child for multichannel integration.

Executive Comments From Macy's, Urban Outfitters

Karen M. Hoguet, Macy's, on Internet Sales: "The truth is the dot-com business continues to grow faster than the comp store sales and do well. We are also moving towards more of a multi-channel strategy. Remember, when you buy on the Internet you can return to our stores. That negative gets deducted from store sales, not from the Internet sales. Hence it's getting very murky between the two definitions. Also we currently are testing, in Florida, the ability of being in the store and having the sales associate say, 'We don't have that in stock, let me go get it for you on macys.com', which so far seems to be working very well. We are encouraged by not only what dot-com can do on its own, but more importantly how it is being integrated into the marketing and merchandising for the stores as well.

Urban Outfitters achieves record sales and profit --- and runs opposite of vendor-suggested multichannel best practices by increasing direct sales by 41% on a circulation decrease of 9%.

• From Glen T. Senk, about circulation decreases: "We have not finalized the circulation plans for next year. However, the brands have done a spectacular job marketing the websites and there's a paradigm shift and this is a major shift in the way people are buying particularly for Urban Outfitters and Anthropologie where we have a very developed brick and mortar business. The customer shops between the catalog, brick and mortar and the web absolutely seamlessly. In fact, we've had a lot of internal discussion about combining our direct sales and our retail comp sales going forward. We're thinking now about starting to report two ways because really the two businesses have become interchangeable. If you look at the third quarter for example, our comp increase would have gone up by a whole four points as a company. Instead of being 10 comp we would have been 14 comp and of course the biggest increase would be at Free People where if you combine the direct business and the comp base we actually would have been 28 comp. We're able to do this because of the way we're marketing the website and we have a myriad of initiatives. All of the brands have new sites; we launched the new web platform about a year and a half ago. The blog activity is tremendous. The viral marketing is tremendous. The penetration of direct-to-consumer business in total is up roughly 150 basis points and we don't know how high that is but we believe it can be significantly higher and we're more profitable in our direct-to-consumer business than we are in our brick and mortar business."

• And this from Mr. Senk, about the percentage of the total business coming from the direct channel: "We're going to let the customer decide. We wouldn't be surprised if it ended up long term in the 20% to 30% range in terms of total penetration. It's so exciting to be part of this and when you look at the changes, the speed with which things are happening is exponential. The speed of information, the functionality on websites, people's ability to deliver merchandise quickly, access to information, networking, product review, shopping with friends, getting the sites more tacked up; this is all happening so quickly it is fantastic."

Executive Comments From Leading Brands

Williams Sonoma:

• "We froze our merit increases for the year for our associates, while at the same time we reviewed every associate's compensation with the market and if they were not in line with the market, we did correct that." KH: Try being an employee with no salary increase and fuel costs rocketing skyward. Long-term, employees nationwide will have to find a way to organize or to gain leverage.
  

• "What we are always doing is looking at the productivity of the last catalog mailed versus the next dollar that we can spend on paid search, and over the past couple of years, we have been able to intensify the efforts in search and reduce some of the marginal catalog mailings."

• "We have eighteen million customers who have opted-in and given us their e-mail address". KH: To the e-mail community --- how do you craft an e-mail program, individualized for eighteen million customers? Any ideas?
  

Costco

• "We and Sams continue to be fiercely competitive ... and we are both in each other's warehouses more than once a week shopping key items."

Ann Taylor

• "Internet is a very profitable business segment for us. Within the Ann Taylor division it represents about 10% of the total division’s sales and something less than that for Loft."

Limited Brands

• "Although the Direct business is $1.5 billion, it is the fastest growing channel. We will continue to see growth out of that channel. What you are going to see is within the catalog business. We will not mail as many catalogs or pages. It will still be a heavily integrated web-based business. The community piece is continuing to build and how do you play within the community, which is a new marketing target for us. I think also how do you think about step size, like VS - you know we have VSPink.com and how we are linking that back to the mother ship, and there is some exciting things there. We started to test mobile commerce, and it is just beginning touching in the water so, it may not be a great experience but you get on your mobile phone and you can place orders and through Catalog Quick Orders. It is amazing how many people have already responded to that test. You are starting to see a lot of that in Japan. As our technology and zones continue to upgrade in the United States, I still think that there is some interesting opportunities there."

Urban Outfitters

• "Direct to consumer sales surged by 34% with just 3% additional catalog circulation, with all three brands contributing meaningfully to the result."

• "All three brands continue to innovate in direct to consumer business. For example, Anthropologie began shipping internationally last quarter, Free People introduced product reviews and Urban Outfitters expanded its use of video, generating more than 17,000 YouTube views on its most successful clip."

Macy's

• "The key there is that Bloomingdales.com has a huge potential and we think that that is where we should be investing our resources as opposed to the catalog, and it will have a minor impact on sales and no impact on profit as we discontinue that in 2009. ... We are expecting to do $1 billion this year in volume in our direct businesses and we expect it to continue to grow significantly from there."

Hillstrom's Multichannel Secrets At Lulu.com:

Macy's Bans Some E-Commerce Shoppers From Viewing Their Website

April 1, 2008 (Reuters): In a bold move designed to encourage multichannel shopping, Macy's announced today that it will ban prior e-commerce shoppers from purchasing merchandise online for an unspecified period of time.

"Findings from data mining projects made this decision an easy one for us." proclaimed Stacy Miller, Divisional Vice President of Customer Relationship Marketing at Macy's. "Multichannel customers are five times more valuable than single channel customers. From a marketing standpoint, it is critical that we encourage our e-commerce patrons to enjoy all that our stores have to offer."

Using a proprietary set of business rules developed by industry gurus James Taylor and Jim Novo, Macy's CRM division identified web visitors who only shop via the e-commerce channel and live within twenty-five miles of a Macy's store. These visitors are served a blank, white screen, commanding them to shop at a Macy's store. Visitors are automatically entered into a drawing to participate in a special meet and greet with Jessica Simpson, Martha Stewart, and Donald Trump at a Macy's store in Spokane, WA on April 22.

Industry experts appear to be almost universally against this strategy.

Diane Dilsworth, columnist at DMNews, noted that "... the strategy is a desperate attempt to prop up comp store sales in a difficult economic environment." Tim Parry at Multichannel Merchant suggested that Macy's "... focus on their core economic proposition of offering a wide array of brands coupled with enthusiastic and generous discounts and markdowns." Scott Silverman of Shop.org stated that the strategy "... flies in the face of all that is known about providing a true multichannel shopping experience.", theorizing that "... it is possible that Macy's is experiencing challenges serving millions of daily online visitors, using the marketing ploy as a tool to divert traffic away from a struggling website."

Consumers appear to be enthusiastic about the strategy.

Elle Parks, 29, of La Jolla, CA, thought nothing of getting in her car and sitting on a crowded freeway for ninety minutes just to purchase her favorite cosmetics products. "E-commerce is all about convenience, but there is something romantic about battling the crowds to get the best brands at the cheapest prices, followed by an enjoyable smoothie at Jamba Juice"

Felicity Crawford, 44, of White Plains, NY, was drawn to her nearest Macy's store because of the recent television advertising campaign. "Why shop online when it seems like Diddy likes to be in a Macy's store? I want to be where the stars are."

Though Macy's CEO Terry Lundgren would not comment on the record about the promotion, he did express satisfaction with the concept of increasing the value of individual consumers by forcing them to shop in the channel that the brand wanted the customer to shop in.

The marketing blogosphere expressed deep regret over this strategy.

Mack Collier of The Viral Garden Blog, a popular social media website, suggested that "... Macy's stop forcing customers to behave the way the brand wants the customer to behave." Collier believes that engaging in a conversation with consumers is a long-term approach to increased profitability. Jackie Huba at Church Of The Customer mentioned in a twit on Twitter that "... all of Macy's strategies are brand-oriented, seeking to benefit the brand and not the consumer. Consumers should be allowed to shop how they want, where they want, when they want. Nobody should force the consumer to do something that only serves the purpose of increasing shareholder value."

Still, Stacy Miller, DVP of CRM at Macy's, is undaunted in her approach. "We're told that multichannel customers are the best customers. We want as many best customers as possible. Shutting down a website is the easiest way to achieve our objectives while at the same time harvesting satisfied customers. You'd be a fool in April not to believe in such a simple yet elegant strategy."


Note: This post is a work of fiction, written in the spirit of April Fool's Day.

Need A Multichannel Database Marketer? Macy's Just Fired A Boatload Of Folks

2,300 white collar jobs is ... substantial.

Multichannel Business Models

Fifteen weeks as an independent multichannel strategist provide me with a new perspective on multichannel business models. I can see that there are at least six ways that retailers/catalogers are leveraging the online channel, the channel responsible for the "multichannel" moniker. Each business model has unique advantages, and unique challenges.

Model #1 = Simple Online Presence

• These businesses generate the vast majority of their sales by customers who send orders via the mail, or by calling a sales representative in a contact center. The order was stimulated by the mailing of a catalog. The online channel is not a significant driver of sales for businesses in this situation. The customer does not utilize the online channel as a shopping vehicle. At least eighty percent of the net sales happen via the mail, or via telephone. The average customer is at least fifty-five years old.
  

Model #2 = Online Order Form

• These are catalog businesses that use cataloging as the primary marketing vehicle, but provide a robust online experience that causes customers to place their orders online. These businesses struggle with the concept of being "multichannel", because all analytical work indicates that the catalog drives eighty percent or more of online sales. In reality, these businesses are not "multichannel", they are really catalog businesses that take orders online. Still, it is not uncommon for these businesses to generate half of all orders online.

Model #3 = True Catalog Multichannel Model

• It has been my experience that this is the least understood of all business models. These are catalogers that generate at least half of their annual net sales online. However, these catalogers typically believe that the catalog is responsible for driving the online sales. In reality, the online channel developed a foothold in these business models. If catalogs were not mailed to customers, online orders would happen anyway. This is very hard for catalog executives to understand, to digest, to develop strategies against. Company reporting and matchback reporting indicate that the catalog drives online sales. Mail/Holdout testing indicate that at least half of the online sales would happen regardless whether catalogs were mailed or not. These businesses have robust e-mail, paid search, natural search, affiliate, portal and online marketing programs that generate incremental sales. It is this business model that many industry experts and consultants target when they talk about "multichannel marketing".

Model #4 = Retail Business, Catalog Heritage

• These are interesting business models. Be it Coldwater Creek, Williams Sonoma, Lands' End or now Dell, these businesses practice true multichannel marketing, but with a strong focus on ROI. The catalog heritage drives measurement of all advertising activities across all channels. If an aspiring individual wanted the best multichannel lab to build multichannel skills in, I believe these environments provide the best place to gain valuable, portable experience.

Model #5 = Online Business, Retail Heritage

• A Neiman Marcus, Saks or Macy's fit into this business model. The online channel is strictly complementary to the store experience, as the stores are responsible for the lion's share of sales and profit. Management says the right things about multichannel marketing, and do invest in the online experience. That being said, the purpose of being multichannel is to do everything possible to please a store customer. This strategy leads to sub-optimization of the direct channel. Over time, these businesses will lead the online industry in "entertainment". The online channel (and supporting catalog channel) will likely become the entertainment and informational arm of the brand. Of course, a giant retail presence will cause a ton of traffic to migrate online, driving a huge volume of online sales. But the online sales will not be driven by brilliant online marketing or catalog marketing strategies. The online sales will happen because the online channel acts as the entertainment/informational arm of the retail brand experience. There's nothing wrong with this. But it does require a very different set of marketing skills --- traditional online and catalog marketers may be frustrated by this business model. Traditional analytics individuals may not be pleased with the depth of analytical insight required to run these businesses (i.e. the business is run by "brand instinct", not by analytical findings and ROI).
  

Model #6 = Online Pureplay

• These businesses are fundamentally different than the five models described above. These businesses were born online, and utilize a marketing strategy fundamentally different than other businesses. Traffic is driven by online marketing strategies. To compensate for what I call "channel disadvantage" --- not having catalogs or stores, these businesses utilize free-shipping, free-returns, and rock-bottom pricing to gain a competitive advantage. These businesses need to grow to a size large enough to overcome margin and shipping revenue shortfalls. Zappos is probably the best example of a business in this category. The online marketing departments in these companies offer spectacular laboratories for learning online marketing strategies. If I were a college student today, this would be one of my primary industries to target for employment.
  

Strategically, it is very important to understand where your business model falls on this continuum. The way you utilize multichannel marketing and advertising strategies is highly dependent upon the customer base you have, coupled with your heritage and objectives.

Cataloging makes less sense for business models five and six. Traditional cataloging strategies are frequently not congruent with brand-based retail models and online pureplays.

Online marketing makes less sense in the short term for business models one and two. These business models are supported by customers who are not willing to shop on the web without the benefit of catalog merchandise presentation.

Matchback and analytical expertise are probably most critical in business models three and four. Catalog businesses that migrated from model one to model two to model three have the best opportunity to overcome postal increases, because the customers shopping these businesses will purchase online if catalog frequency is reduced.

Your turn, my loyal reader! What e-commerce business models are missing from this list? How might you change these categorizations to make more sense?

Online Advertising And The Marketing Digital Divide

Using SpyFu, one can get very rough estimates of what leading brands spend on online advertising on a daily basis. The data is prone to errors and inaccuracy, but can be used to view general trends.

Take three companies that thrive on catalog marketing, namely L.L. Bean, Lands' End, and Pottery Barn. Here is what SpyFu suggests these companies spend in online marketing, on an annual basis.

• Annual Average Spend Across These Brands = $10,201,000.
• Average Annual Clicks Generated From The Advertising = 12,015,000.
• Average Cost Per Click = $0.87.

Next, look at three large retailers, namely Macy's, Nordstrom and Neiman Marcus. Here is what SpyFu suggests these companies spend in online marketing, on an annual basis.

• Annual Average Spend Across These Brands = $23,550,000.
• Average Annual Clicks Generated From The Advertising = 33,312,000.
• Average Cost Per Click = $0.78.

Finally, look at two larger-sizes online pureplays, namely Zappos and Blue Nile. Here is what SpyFu suggests these companies spend in online marketing, on an annual basis.

• Annual Average Spend Across These Brands = $40,654,000.
• Average Annual Clicks Generated From The Advertising = 63,483,000.
• Average Cost Per Click = $0.68.

Notice that as we progress from companies with a catalog heritage, to companies with a retail heritage, to companies with an online heritage, the amount of online spend dramatically increases --- and, the average cost per click actually decreases. This is counter to what analytical folks expect to see happen.

I tried to pick companies that had annual traffic that was directionally similar. How the businesses use advertising to drive web traffic is very different. What this does show is that there may be a marketing digital divide. There may be a way for catalogers and retailers to migrate advertising online, and actually see better returns on investment.

As postage escalates, traditional catalogers have an opportunity to emulate the techniques that the folks at Zappos and Blue Nile use. Over the next five years, there is an opportunity to transition advertising strategy from print to online. There is an opportunity to cross over the marketing digital divide.

Endless: A Shoe And Handbag Business Courtesy Of Amazon.com

Amazon recently unvieled a new e-commerce business called Endless. Featuring fashionable handbags and shoes, Endless uses a new hook to compete against multichannel retailers like Macy's and online pureplays like Zappos. The hook: Free Next Day Shipping!! Order an item at 1:00pm on a Tuesday afternoon, and you'll have it on Wednesday.

In case you haven't walked into your local UPS store, attempting to ship a product cross-country via next day air, the proposition is not inexpensive. How can this business compete? The following numbers are for illustrative purposes only --- the numbers are not intended to reflect absolute reality at any of the retailers in the example. However, the numbers should be adequate for a directional argument.

Let's assume you are an aspiring woman hoping to purchase the Jessica Simpson Dawson Satchel via an online business. You narrow your choices down to Endless, Zappos and Macy's.

Assuming you live in a state that has a six percent sales tax, the total price for the same item, including tax and shipping, is $248 at Endless, $251.95 at Zappos, and a whopping $281.91 at Macy's. The item will arrive tomorrow from Endless, in three to five days from Zappos, and in five to eleven days from Macy's.

Given these choices, the logical choice is for the customer to purchase the item at Endless.

Can Endless make money doing this? It is possible. At the end of this post, I include a sample profit and loss statement for each company.

The punchline is this: In order for each company to generate the same level of profit from this item, Endless needs to sell 1,000 units, Zappos needs to sell 741 units, and Macy's needs to sell 491 units. If Amazon has efficiencies that make their expense structure cheaper than Zappos or Macy's, the number of units decrease.

Amazon is betting that the Endless business model will cause customers to be 30% more productive than Zappos, and 100% more productive than Macy's, using these assumptions. This gets Endless to a break-even scenario, most likely, on a fixed-cost basis, and generates the same number of dollars of variable profit as Zappos and Macy's.

What do you think? Do you think customers will flock to Endless to take advantage of free next day shipping? Who will be hurt more by this strategy, Zappos, who is directly competing on total price, or Macy's, who has a retail channel that essentially provide "free shipping same day"??


Sample Profit And Loss Statement

Jessica Simpson Dawson Satchel Price Elasticity And Profitability
	Endless.com	Zappos.com	Macys.com
Item Price	$248.00	$251.95	$248.00
Shipping/Handling	$0.00	$0.00	$17.95
Salex Tax (6%)	$0.00	$0.00	$15.96
Total Cost	$248.00	$251.95	$281.91
Delivery Time	1 Day	3 - 5 Days	5 - 11 Days
Estimated Units	1,000	741	491
Demand	$248,000	$186,695	$121,768
Net Fulfilled (90% of Demand)	$223,200	$168,025	$109,591
Less Returns (30% of Demand)	($66,960)	($50,408)	($32,877)
Net Sales	$156,240	$117,618	$76,714
Gross Margin (50% of NS)	$78,120	$58,809	$38,357
Less Marketing	($18,000)	($18,000)	($18,000)
Less Picking & Packing (20% of NS)	($31,248)	($23,524)	($15,343)
Shipping Expense/Item	$17.50	$8.00	$5.00
Less Shipping Expense	($17,500)	($5,928)	($2,455)
Plus Shipping Income	$0	$0	$8,813
Variable Operating Profit	$11,372	$11,357	$11,373
Profit as a % of Net Sales	7.3%	9.7%	14.8%
Profit per Item Sold	$11.37	$15.33	$23.16
Ad to Sales Ratio	11.5%	15.3%	23.5%

Macy's Pricing

On a commercial this evening, Macy's advertised Friday doorbusters. In the mouse print, they stated that when doorbuster supplies run out, pricing reverts back to normal, with regional differences.

Multchannel pundits --- here's a question for you. Is regional pricing acceptable? Should a customer in Milwaukee pay less than a customer in San Francisco? And how would you recommend Macy's execute their online pricing strategy? How should Macy's price the item online?

Zappos Verses Macy's: A Multichannel Test

Featured to the right are "Bhavin" boots from Nine West. These stylish boots are available at both Zappos and Macy's (and also at Nine West and other retailers, but I digress). I will assume they are available in Macy's stores, though I don't know for certain if this is true.

How much do these boots cost?

Zappos: $112.95. Sales Tax = $0.00. Shipping Cost = $0.00. Total Cost = $112.95.

Macy's Retail: $109.00. Sales Tax = $9.59 in Western Washington. Total Cost = $118.59.

Macy's Online: $109.00. Shipping Cost = $13.95 (item does not qualify for free shipping on $125 purchase promotion). Sales Tax = $10.82 in Western Washington. Total Cost = $133.77.

The multichannel merchant (Macy's) offers you the item for $118.59 if you are willing to spend time driving to the mall, or offers the item for $133.77 if you purchase it online.

The single-channel merchant (Zappos) offers you the item for $112.95.

As a consumer, do you choose the multichannel merchant (Macy's), or do you choose the single-channel merchant (Zappos)? Please provide your opinions in the comments section of this post.