Williams Sonoma Q2 2009 Results

Thought you might find this quote interesting, from their Q2 conference call (click here for the actual transcript):

"In direct marketing we continue to move forward with our catalog circulation optimization strategy. During the quarter year over year advertising expense declined 26% net of a 34% increase in on-line marketing. We continue to believe that refining the balance between catalog sales and on-line marketing is a significant opportunity and we will be participating in a strategic test with Google at the end of the month to test this initiative at the next level."

The second-most popular project I work on is catalog optimization --- reducing catalog expense without a major hit to topline sales. It's a very popular topic these days, for obvious reasons.

Here's a quote about Pottery Barn Kids: "We will also continue to shift our advertising spend from catalog to e-commerce as we capitalize on the new functionality in customized e-mail, affiliate marketing and search."

Here's an exchange you might enjoy --- anybody who's ever been responsible for reducing catalog marketing expense while at the same time is responsible for growing the online channel can relate to this:

Anthony Chukumba – Ftn Capital Markets
I had a quick question in terms of the catalog circulation optimization effort. Your catalog circulation if I wrote these numbers down correctly, catalog circulation declined 19% and your catalog pages declined 25%, but year over year your direct to customer business was down 24%. I guess what I'm wondering is do you feel comfortable that you haven't cut back too much on your catalog circulation? In other words, it strikes me as a little bit out of line that you're direct to customer sales be down even more than your catalog circulation. It sort of implies that some of the circulation you got rid of wasn't necessarily marginal kind of dead beat circulation.

Sharon McCollam
A substantial piece of the reductions were in the Pottery Barn brand, so I'll let Laura speak to the specifics related to Pottery Barn and their strategies, and then I'm going to let Pat talk about the broader catalog circulation optimization strategy. Laura could you take this specifically related to the Pottery Barn brand where you're doing a lot more versioning?

Laura Alber
We have been actually, this is a very important question for all of us and we continue to have a lot of discussion and research done on the subject and we look at it monthly and go through and look at where there are opportunities and make adjustments, and it's a very productive process.
We do have less promotions than last year, so as Sharon said earlier, there are sales that we drove last year that weren't as profitable as they should have been and weren't good for the brand longer term, and that is part of what you're seeing with the direct to consumer decline that's worse than the catalog circulation cut.

Howard Lester
And just to extend that a bit across all of our brands, the techniques, we're in our 23rd year of using the sophisticated regression analysis to rank our file when we go to mail it. And over the growth years, we were looking at how we could use this to find the next best prospect. In this environment, we're able to use these techniques to identify those people who would most likely not buy and not mail them, and we have done a number of control groups and are very confident that the circulation we've cut would have produced minimal sales compared to the cost of having mailed those catalogs. The other point that Sharon brought out earlier, and Laura mentioned, is that we're able to divert some of our catalog spend to on-line digital marketing that is producing more attractive results and we are very optimistic about our opportunities here especially in the back half of the year across a wide range of digital marketing efforts from e-mail, to affiliates to re-targeting to paid search and also the initial results of Google's new caffeine algorithm which tends to favor brands and pushing up our page rankings.

Williams Sonoma: WOW!

Have you had a chance to read this press release from Williams Sonoma yet?

Comp store sales of -26.6% for the month of October? Are you kidding me? We're looking at a -9% comp in Q1, -8% in May, -14% in July, -20% in September, and almost -27% in October.

Direct-to-consumer revenue is down as well.

Brands have a habit of canning a lot of employees when this happens. There aren't enough variables in a retail environment to improve profitability without bouncing hard-working individuals who did not cause this business downturn.

We know that catalog volume was seriously cannibalized by the inception of the internet, we know that internet volume is thwarted by store expansion, and now we have a dominant retail channel that cannot "flex" when the economy implodes.

What happens if comps are down by 20% for a full year, especially when a brand is in "hybrid mode"? Take a peek at the Multichannel Forensics simulation below --- one where a brand goes -20% for a year, then sees all metrics return to normal for the next four years.

Multichannel Forensics: Scenario #1
	Year 1	Year 2	Year 3	Year 4	Year 5
Buyers	100,000	110,000	115,000	117,500	118,750
Repurchase Rate	50.0%	50.0%	50.0%	50.0%	50.0%
Retained Buyers	50,000	55,000	57,500	58,750	59,375
$ / Buyer	$325.00	$325.00	$325.00	$325.00	$325.00
Total Demand	$16,250,000	$17,875,000	$18,687,500	$19,093,750	$19,296,875
Newbies	60,000	60,000	60,000	60,000	60,000
$ / Newbie	$175.00	$175.00	$175.00	$175.00	$175.00
Total Demand	$10,500,000	$10,500,000	$10,500,000	$10,500,000	$10,500,000
Total Buyers	110,000	115,000	117,500	118,750	119,375
Total Demand	$26,750,000	$28,375,000	$29,187,500	$29,593,750	$29,796,875
Spend / Buyer	$243.18	$246.74	$248.40	$249.21	$249.61
Multichannel Forensics: Scenario #2
	Year 1	Year 2	Year 3	Year 4	Year 5
Buyers	100,000	90,000	105,000	112,500	116,250
Repurchase Rate	45.0%	50.0%	50.0%	50.0%	50.0%
Retained Buyers	45,000	45,000	52,500	56,250	58,125
$ / Buyer	$300.00	$325.00	$325.00	$325.00	$325.00
Total Demand	$13,500,000	$14,625,000	$17,062,500	$18,281,250	$18,890,625
Newbies	45,000	60,000	60,000	60,000	60,000
$ / Newbie	$175.00	$175.00	$175.00	$175.00	$175.00
Total Demand	$7,875,000	$10,500,000	$10,500,000	$10,500,000	$10,500,000
Total Buyers	90,000	105,000	112,500	116,250	118,125
Total Demand	$21,375,000	$25,125,000	$27,562,500	$28,781,250	$29,390,625
Spend / Buyer	$237.50	$239.29	$245.00	$247.58	$248.81
Change In Demand	-20.1%	-11.5%	-5.6%	-2.7%	-1.4%

When in hybrid mode, like many retailers are, one bad year causes another two years of sub-standard performance. Even though metrics return to "normal", the loss in file power causes a hangover.

When a business plummets like this for a second year, the results are catastrophic --- a -20% expectation in year two becomes a 29% decrease due to file weakness, followed by -16% in year three, -8% in year four, and -4% in year five.

The more loyal the customer base, the longer the hangover is. Brands in acquisition mode bounce back much faster.

This is why I am hopeful that you will, when possible, keep the gas pedal on customer acquisition during a downturn --- we don't want to crush the future to minimize pain today.

We're facing a challenge that is going to be with us for several years. The more "catalog focused" a brand is, the more able the brand is to flex expenses without catastrophic consequences. As a brand migrates online, flexing becomes harder. When a brand goes into retail, the brand goes into the world of fixed costs --- a fixed cost retail brand cannot tolerate -26% comps without eliminating expense. Guess who represents "expense" in a retail environment.

Gotta love multichannel retailing.

Williams Sonoma: Catalog And E-Mail Circulation Optimization

Courtesy of the folks at Multichannel Merchant, this article about huge circulation cuts at Williams Sonoma stimulates some thought, doesn't it?

The article mentions digital direct marketing as an alternative to catalog marketing. When you have a retail presence, it is much easier to go down this path, and sometimes it is more profitable to go down this path.

If you're a traditional cataloger, without a retail presence, life is more challenging. One of the things we have to do is more testing --- testing what happens when we combine catalog marketing with e-mail marketing.

Check out the sample test results, measured over a three month period of time to customers who receive both catalogs and e-mail marketing campaigns.

Catalogs	E-Mails	Phone	Online	Total	Profit
6	Yes	$6.50	$6.50	$13.00	$0.92
6	No	$7.50	$4.75	$12.25	$0.69
4	Yes	$5.50	$6.25	$11.75	$1.68
4	No	$6.50	$4.50	$11.00	$1.45
2	Yes	$3.50	$6.00	$9.50	$2.10
2	No	$4.50	$4.00	$8.50	$1.78
0	Yes	$0.00	$5.50	$5.50	$1.90
0	No	$0.00	$3.00	$3.00	$1.05

This is the style of test our industry can capitalize on. We compare combinations of catalog marketing contacts and e-mail marketing contacts, searching for the most profitable strategy. In this case, receiving two catalogs over the course of a quarter, coupled with a weekly e-mail marketing strategy, is most profitable.

Notice that this strategy doesn't yield the best result, in terms of total sales volume.

Also notice that sending no catalogs, and no e-mails, still causes customers to spend money. This might be the most important metric for you to obtain --- what percentage of volume happens if you don't execute any traditional direct marketing (catalog / e-mail)? Do you know this percentage? It's an awfully important one to know.

Where are we heading: We will slowly back off on traditional direct marketing --- and we will re-invest the advertising dollars we save in untested online marketing strategies. And over time, we'll identify online micro-channels that recoup the sales we lose by cutting back on catalog marketing, and we'll be more profitable!

E-Mail Marketing Gurus: Your Thoughts On Williams Sonoma

The e-mail marketing blogosphere has been buzzing lately, suggesting that we minimize campaign based blasts in favor of targeted, relevant, personalized messages that the customer eagerly anticipates. Sounds good to me!

And then a few weeks ago, Williams Sonoma mentioned that they have eighteen million opt-in e-mail addresses, across all of their brands.

So my question to all of us who share a belief in relevant, targeted e-mail marketing is this: How would we accomplish this feat for eighteen million unique customers who have multiple relationships and multiple e-mail addresses across multiple brands and multiple channels and multiple stated preferences?

And if we can answer the question effectively, how do we do this when we don't have the systems infrastructure to do what we want to do? It's really easy to blast big brands for their silly practices. How would we solve the problem when faced with real life constraints?

Discuss.

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:

Your Company's Multichannel DNA

Here's what I did. I scanned the 2007 10-K statements of five publicly traded companies:

• Nordstrom (JWN).
• J.C. Penney (JCP).
• Williams Sonoma (WSM).
• J. Crew (JCG).
• Coldwater Creek (CWTR).

Within each document, I scanned terms, like STORES, RETAIL, MULTI-CHANNEL, CATALOG, ONLINE, INTERNET, WEB, MAIL ORDER, CUSTOMER, CONSUMER, E-COMMERCE, E-MAIL, and DATABASE.

After tabulating the results, I was able to rank each of the five brands on the basis of how often these terms were used. The terms reflect how the management team of each company views the world. Let's take a peek at the findings.


Stores / Retail: The results aren't surprising, with Nordstrom and J.C. Penney skewing heaviest to these terms. Clearly, these brands view themselves as retailers, not so much as direct marketers.

• Nordstrom = 68.1%
• J.C. Penney = 67.3%
• J. Crew = 56.4%
• Coldwater Creek = 53.3%
• Williams Sonoma = 51.5%

Catalog: Guess which companies used this term most often? Sure, the ones with a catalog heritage (though JCP shows how they changed over time).

• Williams Sonoma = 14.9%
• Coldwater Creek = 12.5%
• J. Crew = 10.6%
• J.C. Penney = 5.6%.
• Nordstrom = 4.7%.

Internet: This one is a bit murkier to interpret. I'll leave it up to you!

• Williams Sonoma = 11.6%
• J. Crew = 11.5%
• Nordstrom = 9.7%
• J.C. Penney = 8.1%
• Coldwater Creek = 7.8%

E-Mail: Do these companies care about e-mail marketing enough to say something about it? Nope. E-Mail marketers appear to have work to do to prove the viability of this channel to Sr. Management.

• Coldwater Creek = 3.0%.
• J. Crew = 0.9%
• Nordstrom = 0.0%
• J.C. Penney = 0.0%
• Williams Sonoma = 0.0%

Multichannel: We hear the buzzword over and over and over from the vendor community. Do the management of these brands talk about it publicly? Not really.

• Nordstrom = 2.9%
• Coldwater Creek = 1.8%
• Williams Sonoma = 0.4%
• J.C. Penney = 0.3%
• J. Crew = 0.3%

Customer: Often mentioned in context with the direct channel, this illustrates how often these brands talk about serving customers, vs. managing stores. Notice the inverse relationship with retail focus.

• Williams Sonoma = 21.4%
• Coldwater Creek = 20.3%
• J. Crew = 19.8%
• J.C. Penney = 18.8%
• Nordstrom = 14.7%

Database: Does anybody mention metrics from the customer or e-mail database? Nope! A tip of the hat to Coldwater Creek for at least having a bit of database information available.

• Coldwater Creek = 1.3%
• J. Crew = 0.6%
• Nordstrom = 0.0%
• J.C. Penney = 0.0%
• Williams Sonoma = 0.0%

Does Any Of This Mean Anything? Yes!

The management teams of each company speak publicly, in an official manner, once a year. When they speak, they signal to the public what they care about.

Nordstrom and J.C. Penney care about retail, though Nordstrom talks more about being multichannel than anybody else. Clearly, Nordstrom wants to use the direct channel to inspire retail growth, given that they don't talk about their catalog or online channels much.

Williams Sonoma management discussions are skewed toward catalog. Williams Sonoma speaks about the online channel more than anybody else as well. The DNA of this company is all about direct marketing. Even though this company has a veritable plethora of retail locations compared with somebody like Nordstrom, the way this company views the world is fundamentally different.

J. Crew has a direct marketing skew, though the skew is focused online. The web means something more to J. Crew management than to the companies that have a catalog focus.

Coldwater Creek has the most unusual DNA of the companies listed. Management appears to view channels from a marketing standpoint, mentioning catalog marketing, e-mail marketing, and the customer database more often than the rest.


The data qualitatively illustrate that the management teams, and in all likelihood the culture of each company, have a DNA that determines "who they are".

This view of "who they are" may determine how each company approaches the future. Companies with a catalog heritage will believe in catalog marketing as a solution. Companies that view the web as an integral tool will use it to drive future business. Companies that view stores as the core part of the business might use direct marketing to improve comps.

What is the DNA of the company you work for? How does your DNA shape how your company views the future?

Williams Sonoma / Pottery Barn And Multichannel Growth

The DMA is selling a research report suggesting that "Retailers Have Multichannel Skills But Need Help Integrating Channels". The conclusions are based on questions brands answered in a recent survey.

Is there any place we can verify the claims outlined in the report?

Let's look at long-term sales trends from a respected and profitable multi-brand retailer, Williams Sonoma (WSM), owner of the flagship Williams Sonoma brand and the popular Pottery Barn brand.

One can go back to at least 1991 to understand how Williams Sonoma grew sales in the direct-to-consumer (catalog + website) channel and in the retail channel (here are results from the past five fiscal years).

Williams Sonoma introduced the e-commerce channel in 1999. In the table below, annual results are listed, as well as pre-internet and post-internet results:

Williams Sonoma: Comp Store And Direct Channel Growth
Year	Direct Growth	Retail Comps
2007 (Nine Months)	2.9%	0.5%
2006	4.5%	0.3%
2005	13.6%	4.9%
2004	17.1%	3.5%
2003	20.8%	4.0%
2002	10.2%	2.7%
2001	8.4%	1.7%
2000	33.1%	5.5%
1999	34.2%	6.4%
1998	15.7%	5.0%
1997	11.2%	2.8%
1996	11.9%	4.6%
1995	16.2%	3.4%
1994	55.0%	16.5%
1993	23.9%	13.8%
1992	-0.2%	2.1%
1991	-3.8%	0.5%
Results: 2000 - 2007	13.5%	2.9%
Results: 1991 - 1999	17.1%	6.0%

It isn't a stretch to suggest that Williams Sonoma and Pottery Barn do an above-average job of integrating channels, per the recommendations offered in the DMA research report.

And yet, during this era of multichannel goodness, direct-to-consumer sales are growing slower post-internet than pre-internet. Retail comp store sales are growing slower post-internet than pre-internet.

Some of this is due to scale --- as a business grows, it becomes harder to grow sales as a percentage of prior year sales.

Could some of this be due to a failure of perceived multichannel best practices? Adding an e-commerce channel to an established catalog channel should result in new customers, a new audience, and much improved growth, right?

Instead, we see slower growth rates.

We're also told that catalogs and e-commerce drive comp store sales increases. Pages circulated increased a total of 36% in the past four years, but comp store sales increases are, at best, tepid.

Williams Sonoma is a respected brand with increasing sales and robust profit, profit levels that any company would be proud of. Williams Sonoma exhibits most of the multichannel marketing behaviors and cross-channel integration that we're told we must employ to be successful.

To date, multichannel best practices at Williams Sonoma have not translated to incremental increases in direct-to-consumer sales or retail comps.

Why do you think this is the case? Are the multichannel experts missing something? Is Williams Sonoma an anomaly? Is there a multichannel brand that executes multichannel marketing well, demonstrated via publicly reported sales and profit increases?

Incremental Online Sales: Nordstrom

Click on the image to enlarge it.

Earlier, we reviewed financial results at Williams Sonoma. The data clearly indicated how important catalog is to the growth of the direct channel.

Nordstrom is a highly profitable multichannel retailer, one that took a very different approach to catalog.

In 2005, the brand decided to eliminate $36,000,000 of ad-spend on a targeted direct-to-consumer catalog business that featured merchandise for a niche of women's apparel consumers. (FYI, data in the table above are freely available via Nordstrom 10-K annual reports).

Had this happened at a company like Williams Sonoma, where catalog items ARE the brand, a catastrophe would have occurred.

But at Nordstrom, where the catalog items were a subset of all items offered in stores and on the website, something different happened.

The catalog strategy was discontinued on June 30, 2005. Notice that catalog + internet sales in 2005 only grew by one percent. Yet, in 2006, even though half the year was comped against a prior year that had a significant catalog investment, catalog + internet sales grew dramatically. Nordstrom Direct management figured out how to leverage the marketing tools and merchandise assortment available to them to grow the business, in spite of the dramatic loss of catalog advertising.

Furthermore, we are all aware that Nordstrom retail comps were spectacular during this time period, opposite of what industry experts might suggest would happen if $36,000,000 of catalog advertising were removed from the multichannel ecosystem.

This leads me to my point. At Williams Sonoma, catalogs ARE the store, the website, the brand. Catalog marketing is critical to the success of this multi-brand organization.

At Nordstrom, however, traditional catalog marketing was discontinued. After a brief blip, business came roaring back.

This is why I advocate that catalog marketers have an "open mind". You may desperately need catalog advertising to grow your online business. Or, like Nordstrom, you may not need catalog advertising to grow your online business, you may be able to cross the digital divide, and utilize online and multichannel retail marketing to fuel your online business.

Listening to pundits leads you to the conclusion that you have no choice but to maximize your catalog advertising efforts. Instead, listen to your own business instinct, and the needs of your customer base, and chart a course of your own. Industry experts are only experts to the extent that they have seen various business models succeed. The Nordstrom example runs counter to what most industry experts are used to seeing.

Incremental Online Sales: Williams Sonoma

Click on the image to enlarge it.

Catalog purists looking for a poster child for catalog productivity need look no further than Williams Sonoma.

Williams Sonoma is a multi-brand retailer with stores contributing the majority of sales.

The best part about Williams Sonoma is that they openly share catalog and online information in their annual reports. In addition to sales information, management tells us what percentage of online sales are believed to be incremental to the business, verses the percentage driven by catalog mailings.

During the past four years, Williams Sonoma estimates that 45%, 40%, 40% and 55% of online sales are truly incremental during 2006, 2005, 2004 and 2003.

The graphic at the beginning of this article restates catalog and online sales during the past four years, given the estimates management provides us.

This means that, since 2003, the following trends have occurred:

• Telephone Sales decreased by 13%, an annual drop of about four percent.
  
• Online Sales increased by 138%, an annual increase of about thirty-three percent.
  
• True Catalog Sales increased by 26%, about eight percent per year.
• True Online Sales increased by 95%, about thirty percent per year.
• Catalogs Mailed increased by 15%, about five percent per year.
• Catalog Pages Circulated increased by 35%, about eleven percent per year.

The comparison that "seems reasonable" is a 26% increase in true catalog sales on a 35% increase on catalog pages circulated. This ratio is about what one would expect to observe, given an annual increase in inflation of 3%.

In other words, Williams Sonoma is observing a true catalog productivity decrease (26% increase in sales on a 35% increase in pages circulated), though the change is reasonable.

If we can believe the estimates Williams Sonoma provides in their annual reports, this suggests that management is managing the the catalog and online sales transition in a reasonable manner. Non-competitive businesses could/should speak with Williams Sonoma management about how they are approaching this "channel-shift" challenge.

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?

Annual Report Update: Williams Sonoma

A few findings from Williams Sonoma's annual report:

• Retail = 58%, Direct-to-Consumer = 42% of the business.

• New products: "... we believe that the mail order catalogs and the Internet act as a cost-efficient means of testing market acceptance of new products and new brands."
  

• Internet sales: "... we estimate that approximately 45% of our company-wide non-gift registry Internet revenues are incremental to the direct-to-customer channel and approximately 55% are driven by customers who recently received a catalog".

• Direct Channel Challenges: Sales growth (telephone + web). was just 4.5%, on a 3.2% increase in catalog pages circulated, and a 1.6% reduction catalogs mailed. Oh oh. Pay attention folks, this is a harbinger of the future for all of us.

• Online sales grew 21% to $927.6 million. In 2007, "... plan to intensify the marketing support behind our fastest growing shopping channel, e-commerce".

• Telephone sales were 58% of direct-to-consumer sales in 2004, and are 42% of direct-to-consumer sales in 2006.
  

It will be interesting to watch how Williams Sonoma evolves their catalog marketing over the next three years. They are publicly saying they plan on growing their marketing efforts online. What will happen to catalog marketing at Williams Sonoma? In addition, direct channel growth is slowing (although a title was killed). All of us need to pay close attention to this trend.

The MineThatData Honor Roll: February 16, 2007

Several articles caught my attention during the past week.

DMNews talks about happenings at the eTail conference. Pay attention to the comments from Jodi Watson at Williams Sonoma. Over the next few years, you are going to see a separation between the concepts of "e-commerce" and "website". The website will become the primary marketing tool for a multichannel retailer --- it will be an indispensable tool for marketing retail brands. I really believe a skillset will emerge, people will finally learn how to utilize a website to maximize retail sales, not just e-commerce sales. These are the folks who will drive our multichannel businesses in 2012 and beyond.

This story in CRMBuyer, written by Denis Pombriant, illustrates one of the biggest failures of "CRM" systems, and highlights the future of analytics. Our industry spent so much time collecting purchase information. Denis correctly illustrates the uselessness of the information. In so many ways, the data collection systems we have today represent a 1995-style world, one where the data could be used for old-school targeting programs. Today's data needs are so very different. We don't have a lot of control over marketing anymore. Catalog don't drive sales like they used to. Google controls the customer via search. Mass marketing is largely dead because we don't have a mass to market to. We marketers need to harness customer intentions, and use that information to influence merchandise assortment and in-store/website presentation, which drives sales.

Andy Monfried writes about his efforts at landing a key client. Pay close attention to what he talks about. Technology doesn't play a role in his success. Hard work, perseverance, and an element of humanity result in success.

Finally, on Fallon's Trendpoint Blog, we learn about plucky ad agency Anamoly's acquisition of the Virgin America account. Funny how Anamoly didn't pitch classic advertising techniques ... they offered to help grow sales. After a deluge of Super Bowl ads designed to drive "buzz", we learn about somebody who wants to increase sales.

Top Four Articles From November

November saw a 40% increase in traffic. Thank you! Here's what you enjoyed reading the most in November.

• Number Four was a tie. "Business Review: Overstock.com", a discussion about profit and loss at the low-cost, low-margin online pureplay. Tied for fourth was "Return on Investment Equation and Copywriting". Google helped this out (do a search on ROI Formula, and see what appears in the top 7 results).
• Number Three was "Mergers and Acquisitions", a discussion about Eddie Bauer being purchased.
  
• Number Two was "Williams Sonoma, Incremental Online Sales and Matchback Analysis". Our multichannel retailing audience enjoyed this post.
• And the Number One article was, in a landslide, "Please Help Our Industry Measure Advertising Effectiveness!". The spreadsheet, which needs to be solved by January 31, 2007 (all valid answers will be published here), has been downloaded by individuals in nearly a dozen different countries. My hope is that a good mix of data miners, and folks from industry leaders like Abacus, Merkle, Acxiom, Unica, Experian, SAS, SPSS and others genuinely try to do good for the multichannel retailing and online industry, and provide a solution to this problem.
  

Williams Sonoma: Incremental Online Sales and Matchback Analysis

Williams Sonoma always does a nice job of sharing fun facts with the public. In their third quarter earnings release, they state that "55% of online revenues are generated by customers who recently received a catalog."

This is always an interesting topic of debate in the database marketing world. Williams Sonoma does not specifically state which of two popular analytical methods they use to measure this metric.

Most popular, and most vigorously argued against by the analytically adept, is the method of attributing every online order to the catalog channel, if a customer recently received a catalog. The theory behind this technique (often called a "matchback analysis") is that the catalog inspired the order. Many vendors promote this methodology, and for good reason. The technique can overstate orders attributed to mailed catalogs, and vendors have a vested interest in promoting paper as a viable means of profitable marketing. Critics will argue that if you mail your entire housefile, this methodology will cause you to attribute every single online order to the mailing of the catalog. Critics will also argue that if you mail every housefile name a catalog, and send every housefile name an e-mail, the methodology completely breaks-down, rendering the analysis useless.

Less popular is the method of an "A/B" split. The marketer randomly splits her mail list into two halves. 50,000 customers receive the catalog, a like group of 50,000 customers do not receive the catalog. Several weeks after the in-home date, the marketer measures total sales in the mail group and control group, in both catalog and online (and, where applicable, retail) channels. This method tends to provide much less-optimistic answers than the "matchback analysis". Critics will argue that this methodology cannot produce reliable results due to sampling error issues.

Which methodology do you believe is more appropriate for allocating online orders to the marketing channel that drove the order?