Retail Is Struggling

J.C. Penney merges marketing and merchandising functions across online/retail channels, then cuts 100 - 200 jobs. I'll bet that the 100 - 200 people who lost their jobs aren't big fans of multichannel integration.

Ann Taylor lets go of 13% of their corporate staff, 180 jobs amid a tepid retail environment. In addition, 117 stores will be closed.

Talbots to shut down 78 kids and mens stores. Sure this is old news, but it is reflective of what could be a widespread problem in 2008. This economic downturn could weed-out a lot of over-assorted retail square footage.

Eddie Bauer cuts 16% of its corporate staff, even as sales improved in Q4.

Home Depot cuts 500 corporate jobs, 10% of the corporate staff. Assume these are $75,000 a year jobs (including benefits). Take the $210,000,000 that former CEO Robert Nardelli garnered as part of his golden parachute, divide it by $75,000, and you are able to keep these 500 folks gainfully employed for another five years.

Dell plans to close 140 shopping mall kiosks.

Starbucks will close 100 underperforming stores.

If you are a retail real estate executive, you have to be wondering who the retailers are that will line up for the store locations made available by the great recession of 2008?

Old Navy updates their logo, and elects to move away from families, now focusing on a fashion-based twenty-something target audience.

Trees rejoice as USPS volume drops by 3% in Q1-2008.

Major Pain Points In Catalog/Online Multichannel Marketing

Having just spent three days with 400+ top online and catalog marketers, there are a few things that really stand out from my conversations with these folks. Here are the major topics in catalog/online multichannel marketing, based on discussions folks had with me at the conference.


Topic #1 = Colliding Forces. There was a lot of discussion about the USPS increase, set for May 14. For many smaller online and catalog businesses, this results in an approximate 25% increase in postage. This force will cause many small businesses to reduce circulation, especially among marginal housefile and prospect names. This force will eventually collide with the inevitability of online marketing. Customers under the age of forty-five are shifting their behavior away from traditional media (television, radio, catalogs too) to online media. The colliding force of the USPS increases and customer transfer from traditional media to online media will require a change in mindset and skillset among those in attendance.

Topic #2 = Allocation Of Advertising Dollars. Those in attendance are frustrated with our new marketing world. We have more metrics than ever to measure performance with. Almost none of the metrics are relevant in telling the overall story about what caused a customer to purchase something. Ten years ago, we argued about how to allocate those pesky fifteen percent of orders that came into the telephone channel without a valid source code. Today, we realize we have no idea how to properly allocate orders, when a combination of three catalogs, six e-mails, and two Google searches and one price comparison on mySimon truly caused the customer to order. Seriously, how do you allocate this order across these twelve advertising vehicles? It was obvious that the attendees did not trust Abacus to do this for them, as some badgered the company during a presentation (I would say that Abacus has better thought leadership on this than most). This is going to have to become an organic field of experimentation --- I strongly advise non-competitive catalogers and online marketers to work together on knowledge exchange, in order to come up with allocation methods that make sense for our industry. Heck, give me a call, I'm very willing to help out on this topic!!!! Getting even more theoretical, some of the big companies are struggling with allocating orders, when not all catalog advertising produces incremental sales (i.e. a customer spends just as much online when receiving seven catalogs as when receiving ten catalogs). That's a really enjoyable, really theoretical project to tackle.

Topic #3 = Strategy: I saw this repeatedly at the conference. Attendees were asking so many questions about the first two topics that true business strategy was rarely, if ever, discussed. I heard several CEOs discuss the problem of having a unique merchandise assortment --- that as soon as a unique and creative product is created and marketed, folks like Target (and even small competitors) can create their own product, with equal quality, at a lower price. Since there aren't a whole bunch of new, original ideas just laying around out there, it makes "staying alive" very challenging for the smaller online/catalog business. This is one place where online marketing and catalog marketing can make a significant difference. E-commerce is a TERRIBLE storytelling platform. However, blogging and cataloging are BRILLIANT storytelling platforms. There is a lot of opportunity to morph the catalog into the primary storytelling vehicle, as a way to keep paper viable.

Topic #4 = What Happens When A Catalog No Longer Exists? This was the question I was asked the most, during the conference. Folks wanted to learn, in detail, what happens to the online channel, and to catalog customers, when paper is taken out of the mail. Having lived through the experience during the past three years at Nordstrom, I have a unique perspective on the topic. Obviously, I can't be liberal in my discussion of those events. That being said, folks were VERY interested in hearing what happened to employees who spent their lives growing the catalog business at Nordstrom. Attendees wanted to know if these people were able to move into online marketing, if they were laid-off, if they became disgruntled and quit, or if they happily made the transition. Obviously, all of those things happened. It was the most fascinating and painful experience of my professional career, I wouldn't trade it for anything. The experience will allow me to help others as they go through this process.

Topic #5 = Google Is Getting Too Much Credit For Online Orders: This came up over and over again, and is closely tied to Topic #2. In an instance where a customer receives three catalogs, six e-mails, conducts two Google searches, and does one shopping comparison on mySimon, why should I pay Google twice for sending the traffic to my site? There's no doubt that Google and mySimon are partners in this process. However, the catalog/online marketer is now forced to pay for three catalogs, six e-mails, two paid searches and one shopping comparison affiliate commission. Ten years ago, three catalogs would have sufficed. In the next ten years, you will see an evolution in how Google and affiliates get paid. Search and affiliate marketers have taken advantage of the ignorance of all of us who have a catalog heritage. It's time to make things more equitable, and this can only begin to happen if non-competitive catalog/online marketers band together as a unified force.

Topic #6 = "Multichannel" Doesn't Mean Executing The Same Across All Channels: The vendor-speak and pundit-speak of the past eight years (all channels should execute the same) has been rejected by those actually practicing multichannel retail. While everybody generally agreed that items should be the same price across all channels, the attendees generally agreed that the strengths of each channel should be readily exploited. If one wants to do free shipping in an e-mail and not in catalog, then by all means, do so --- but be willing to honor the promotion in other channels. If one wants to keep clearance items off the internet, go right ahead! If a brand wants to have a different look and feel in advertising, creative execution, merchandise assortment, you name it, go right ahead and do so. There was an absolute groundswell of consensus on using each channel appropriately, so that the customer ultimately chooses our brand over somebody else's brand.

Topic #7 = E-Commerce Is "Cold", Catalog And Retail Are "Warm": This was the first time I've heard multiple people tell me that they are frustrated with the lack of warmth in E-Commerce websites. Many felt that the E-Commerce experience lacks humanity, is clumsy, and often breaks down from a technological standpoint. Marketers must take their most important marketing vehicle, a website, from the information technology folks that currently dictate what gets done in online development, and dictate when things get done. If you are a fan of the catalog advertising channel, this is your chance to create great creative execution via print --- your chance to show others how to market with warmth, and in the process, win over some of your marginal customers.

Under Pressure

Profit is being squeezed out of our multichannel businesses, especially in the online and catalog channels.

This is an example of what a reasonably healthy online/catalog profit and loss statement might look like today.

Demand	$50,000,000
Merchandise Fulfilled	$45,000,000
Returns	$11,250,000
Net Sales	$33,750,000
Gross Margin	$16,875,000
Less Catalog Marketing	$4,000,000
Less Online Marketing	$2,000,000
Less Pick/Pack/Ship	$4,050,000
Variable Operating Profit	$6,825,000
Less Fixed Costs	$4,050,000
Earnings Before Taxes	$2,775,000
EBT As A % Of Net Sales	8.2%

This business generates $2.8 million profit on $33.4 million net sales, yielding a healthy EBT of 8.2%.

Then, the USPS elects to make mailing catalogs more expensive. If you simply absorb the cost of this increase, your profit and loss statement might look like this:

Demand	$50,000,000
Merchandise Fulfilled	$45,000,000
Returns	$11,250,000
Net Sales	$33,750,000
Gross Margin	$16,875,000
Less Catalog Marketing	$4,360,000
Less Online Marketing	$2,000,000
Less Pick/Pack/Ship	$4,050,000
Variable Operating Profit	$6,465,000
Less Fixed Costs	$4,050,000
Earnings Before Taxes	$2,415,000
EBT As A % Of Net Sales	7.2%

The USPS increase takes a full percent of your Earnings Before Taxes.

Even more interesting, however, is the looming trend toward free shipping and free returns. Long-term, I don't think we can escape this trend. The customer will demand we provide this service for free. A customer will gladly pay $3.00 for a $0.60 cup of coffee at Starbucks, but she won't pay to have a dress shipped from Columbus, OH to her home in Portland, OR.

Free shipping and free returns will put a lot of pressure on the profit and loss statement. If free shipping and free returns drove enough top-line sales to offset the expense, every multichannel retailer would already be offering free shipping and free returns. Let's take a look at the future p&l, after absorbing the expense of free shipping and free returns.

Demand	$55,000,000
Merchandise Fulfilled	$49,500,000
Returns	$14,850,000
Net Sales	$34,650,000
Gross Margin	$17,325,000
Less Catalog Marketing	$4,360,000
Less Online Marketing	$2,000,000
Less Pick/Pack/Ship	$5,890,500
Variable Operating Profit	$5,074,500
Less Fixed Costs	$4,050,000
Earnings Before Taxes	$1,024,500
EBT As A % Of Net Sales	3.0%

Ooops.

Free shipping and free returns are likely to increase the overall return rate, and reduce shipping and handling income, costing our business another $1.4 million of Earnings Before Taxes.

Remember, our business was generating $2.8 million in profit before the USPS increases, $2.4 million after, and maybe $1.0 million after having to move to free shipping and free returns.

Business leaders will be put in a difficult situation. Expenses will have to be cut, in order to maintain a healthy level of profit. I see two areas where this is likely to happen.

First, catalog circulation will be dramatically cut, mostly in low-productivity areas like prospecting. This is why you see our vendor community so up in arms.

The second area will impact the customer. Items with high return rates will not be featured in advertising, and may not even be offered at all, in an effort to lower the overall return rate. Free shipping and free returns will encourage customers to take more risks, but it will encourage businesses to take fewer risks to make the p&l work. Ultimately, the customer is going to lose the breadth of merchandise assortment she has grown used to.

Multichannel CEOs and CMOs: Start planning today for the pending pressure our profit and loss statements will face in the future. This is a good time to test free shipping and free returns (for an extended period of time, not just a few weeks in December), and project the financial impact this will have.

Victoria's Secret --- Free Shipping And Free Returns On Pants

Varien.com talks about Victoria's Secret, and their free shipping and free returns promotion on pants. Kudos to Victoria's Secret for trying an interesting promotion that can benefit customers. It takes courage to incur an average expense of around $10 per order, without $13.95 from the customer to offset the expected expense.

Many multichannel retailers make money on shipping and handling. Zappos, Endless.com and Piperlime are essentially applying enormous price pressure on all multichannel businesses.

This long-term pricing pressure will cause multichannel retailers to reduce expenses elsewhere.

The very same vendor community that is unified in its fight against the USPS will fall victim to the eventual cost-cutting that free-shipping/free-returns is guaranteed to bring to multichannel retailing.

Google, Online Vendors, and Accountability

For all of the e-commerce and multichannel executives who follow my commentary, I am curious what you think of Google.

For those of you who spent your formative years in the catalog industry, you know the vital importance of a partnership with the USPS, with your merge/purge house, and with your printer. Without these partners, your catalogs didn't get delivered to the homes of your loyal customers. If the catalogs didn't arrive, you didn't generate sales.

Today, the e-commerce ecosystem has replaced the USPS, Experian and Quad Graphics with your ISP, a myriad of e-mail vendors, and Google.

Do you view your ISP, e-mail vendors and Google as strategic partners? Do you apply the same level of pressure on them that you applied to Quad Graphics about image quality, Experian about duplicate names, or the USPS about delivering your catalog two days late?

Can you prove that 194,381 valid customers clicked on your sponsored link on Google? How do you hold Google accountable? How could you ever hold Google accountable?

Does the Direct Marketing Association lobby as hard for your online issues as they lobbied for postal reform?

What are your thoughts? Are you letting Google and others off the hook, compared with the other vendors you work with?