Catalog
Marketing: The View From 35,000 Feet
Donald R. Libey
Libey Incorporated
Advisors and Intermediaries for the Direct Marketing
Industry
What
is going on and where is our industry headed? These two questions
keep coming up regardless of the assurances or reassurances
that are offered CEOs in these difficult times. As always,
there is a need for perspective and, more important, the sense
of relevance of that perspective.
Where is the Economy ?. . . Really.
Our
long term, stable national economy has suffered a number of
unforeseen and crushing body blows in recent years. The escalating
psychology of terror has had a measurable economic impact
on the nation. This comes, unfortunately, at the end of a
major business bull cycle, thereby magnifying the effect and
the reach of the influences. The cyclical, long term change
in weather has also had a measurable impact on the economy.
Due to massive, weather-related insurance losses in the immediate
years--likely due to changing, long-cycle weather patterns
and severities--economic shock waves have ripped through the
nation’s insurance and agricultural realms, producing a lengthy
litany of negative influences on investment portfolios, pension
funds, and other pillars of the active, day-to-day, under
economy.
The exposure of the soft belly of corporate financial fraud,
greed and moral expediency has had a sobering, if not devastating,
influence on the broad economy of the U.S., primarily investor
confidence and corporate valuations as reflected and measured
by stock prices. What may continue and hasten this deterioration
of confidence and value is the growing, global recognition
that this is a widespread and engulfing influence. It exists
in the board rooms of the corporations, and their accounting
firms, law firms, banks, supply chain partners, and down the
obscure layers of their strategic partners and alliances;
the very fabric of numerous U.S. stock corporations may be
moth-eaten, if not dry-rotted and decayed throughout., and
a revaluation and economic penance is assuredly on the horizon.
It is the necessary cost of reestablishing an acceptable risk
: trust ratio. With high trust comes high risk investment;
with low trust comes low risk investment . We are currently
at the trust to risk level of, essentially, utility company
investing.
At
the same time, the establishment and activation of the European
Union, as well as the emergence of China as a protean production
machine capable of out-producing even Taiwan, have jiggered
the economy of the U.S. through the stereo effects of the
artificially controlled Euro and the rapaciousness of “Deep
China” import pricing. Globalization and the Euro are primary
economic influences. We first wrote of the coming downstream
effects of the European Union and its Euro dollar in 1998
and warned that the real outcome would be felt with currency
conversion and repatriation and with trade zone regulation
and anti-American discrimination. Et, voila! European trade
sanctions and Deep China have figured in our outlooks for
the past five years. It has all come together in a Bose-like
thumping bass that screams, “EU Favoritism” and “margin-erosion”
and “lowest-price-point migration.”
The monumental hanging, fall and shattering of the telecom-technology-Internet
glass ornament were not only unseen and unthinkable, but inevitable.
At a time when a catalyst was needed, one was provided. Great,
steaming hunks of phantom, imagined value were Rolfed from
the gluttonous body economic during that lovely little era.
On
top of these not insubstantial, global influences on the U.S.
economy, our consumers succumbed to the numbing drone of price
cutting salaciously tongued in every ear by the merchants
of competitive death at Wal-Mart. The Wal-Martization of America
has left a wake of price sensitivity and inelasticity that
has caught Main Street in its deadly undertow from which there
is no escape or return (except, of course, for in-store credit).
Add
to this the nation’s Siamese twin, the joined-at-the-buttocks
congenital anomaly called Congress, and the economic directions
become ever more ill-conceived and illogical. But, if you
possess a Magic Decoder Ring, admitting you to the Inner Sanctum,
you can decipher the Congressional messages, and you will
find they all begin and end with the words, “Big Oil and Big
Money.” If you simply remember that it’s all about oil and
money, you’ll be fine.
The
Fundamental Elements
And
so, those seem to be the background influences on this circus
we call the U.S. economy (in order of presentation above):
geo-political; nature; greed; regionalism/globalism; irrational
exuberance; price migration; government and politicians; and,
the ringmaster of all, fear. While there are many other elements
that exert pressure, and while the hierarchy of influence
tends to shift back and forth at any given time, these are
the primary influences on whether your customers buy or not.
At the end of the day, businesses and people are going to
spend money if (a) they have it, and (b) if they believe they
will be able to replace the money they spend with new money;
i.e., they will continue to sell products or be employed.
The economy is, after all is said and done, mostly determined
by fear.
Evaluating
these primary influences, then, becomes of some interest to
the student of tomorrow. Were we to simply assign a state
to each of them, we could use “positive,” “neutral,” or “negative”
to describe the present conditions. Let’s do that:
| Geo-political |
Negative |
| Nature |
Negative |
| Greed |
Negative |
| Regionalism/Globalism |
Neutral |
| Irrational
Exuberance |
Neutral |
| Price
Migration |
Negative |
| Government/Politicians |
Negative |
| Fear |
Negative |
There
would seem to be a predisposition to the negative side currently
and a fairly negative economic outlook based on the fundamentals.
But fundamental analysis does not an outlook make. We must
consider the technical elements of the economic analysis,
those indicators that can be measured and squeezed neatly
into an oranges and oranges comparative relevance.
The
Technical Elements
To
balance the fundamental outlook on the national and international
economies and, further, to extrapolate the fundamental influences
on the direct marketing and catalog industry, it is necessary
to examine a variety of long term measures to attempt to achieve
relevance and balance. Some of the regular measures we look
at include:
Real Gross Domestic Product: annual rate of change;
Unemployment Rate: seasonally adjusted;
Industrial Production: percent change in capacity utilization
from previous month;
Purchasing Managers’ Index: expansion and contraction in manufacturing
activity;
Retail Sales: seasonally adjusted total, month-to-month;
Consumer Spending: change in monthly personal consumption
expenditures;
Consumer Confidence: Conference Board’s measure of confidence
in the economy;
Consumer Prices: percent change from previous year, month-to-month;
Producer Prices: percent change from previous year, month-to-month;
Housing Starts: annual rate of new home starts;
Existing Home Sales: annual rate of sales of existing homes;
Trade Deficit: amount of import dollars spent over export
dollars invoiced;
Leading Indicators: year-on-year and month-on-month percent
change in aggregate economic indicators;
Payrolls: increase or decrease in non-farm payroll activity,
month-to-month.
From
these individual technical elements of the overall economy,
a further “positive-neutral-negative” determination is made
in each case and an aggregate picture is formed for comparison
with the overarching fundamental elements influencing the
economy and, by extension, our industry. In order as above,
these would be:
| Technical
Indicator |
Measure |
Condition |
| |
|
|
| Real
Gross Domestic Product |
+
1.2% |
Neutral |
| Unemployment
Rate |
+
5.6% |
Negative |
| Industrial
Production |
-0.25% |
Negative |
| Purchasing
Managers’ Index |
<
50 |
Negative |
| Retail
Sales |
$302
billion |
Positive |
| Consumer
Spending |
+
1.0% |
Neutral |
| Consumer
Confidence |
<
100 |
Negative |
| Consumer
Prices |
+
1.8% |
Neutral |
| Producer
Prices |
-
2.0% |
Negative |
| Housing
Starts |
1.63
million units |
Positive |
| Existing
Home Sales |
5.4
million units |
Positive |
| Trade
Deficit |
-
$35 million |
Negative |
| Leading
Indicators |
-
0.2% |
Negative |
| Payrolls |
decreasing |
Negative |
The technical elements show 6 positive or neutral directions
and 8 negative directions, overall a negative outlook and
a reinforcement or validation of the more steroidal fundamentals.
It is logical and balanced to state that the economic elements
of the national, and actually, global economy are negative
at present. If we examine the directional momentum and velocity
of each of these elements, the majority of them have gained
in negative momentum and likely will not reverse in the immediate
future.
Strategic Influences
Moving
from the broad-based economic analysis and focusing on the
direct marketing and catalog industry, a number of strategic
influences can be isolated and commented on. The first of
these is the growing influence of retail sales in the catalog
industry. Many catalog companies in recent years have moved
closer to the retail world. Similarly, many retail companies
have moved closer to cataloging. The end result is a much
more hybrid industry than we had 10 or 20 years ago. This
evolution is seen in both consumer and business-to-business
catalog companies; both seem to have found opportunities for
expansion and, perhaps, profitable growth in the retail channel.
And, while some catalog companies have moved laterally to
a larger presence in the retail channel, there are non-catalog
companies in both the consumer and business-to-business realms
who have, at the same time, also moved laterally and have
entered the catalog channel for the first time. The net effect
is homogenization of the channels, a fact I first began to
see and write about in 1988. Whether in the U.S. or in the
U.K., the Main Street and High Street retailers and the catalogers
have blended together to a greater degree, in both retail
and business-to-business. The middle has expanded, and perhaps
that is positive.
A
second strategic influence is the growth in commonality of
products. Simply put, there are way too many “stores” selling
the same stuff. In a time of negative economic conditions,
a lot of those undifferentiated merchants---retail and catalog--have
to go away in order to restore equilibrium in the economy.
It’s just a fact: the weak die; the strong survive.
A
third strategic influence is the reality of economies of scale.
A five million dollar business is hard pressed to compete
against a three-hundred million dollar business in the same
space. Critical mass and buying power have reached levels
unseen before in the catalog and direct marketing channel.
At a time when price is being driven down globally, the economies
of scale favor the large player and the mass merchandiser.
It is no longer sufficient to say, “But, we dominate our niche
and differentiate ourselves through customer service.” Increasingly,
price is what matters. The billion dollar plus, omni-channel,
price leaders have exquisite power over the niche player in
today’s economy. If you don’t believe it, remember that Sam’s
Club and Wal-Mart are the largest pharmacy in the U.S. and
sell more flowers than almost all independent flower shops
combined.
And,
fourth, all three of these strategic influences discussed
are enhanced, elevated or expanded in influence through the
Internet. Yes, the Internet favors channel homogenization,
product homogenization, economy of scale and lowest price
migration. The Internet favors the Bigs, and when the Bigs
figure this out, it will be a whole new deal.
If then, we list the strategic influences on the direct marketing
and catalog industry, we see:
| Strategic
Influence |
Measure |
Condition |
| |
|
|
| Channel
homogenization |
Increased |
Neutral |
| Product
homogenization |
Increased |
Negative |
| Economies
of scale |
Increased |
Negative |
| Low
price migration |
Increased |
Negative |
| Internet
manipulation |
Neutral |
Neutral |
Overall,
then, these few strategic influences can be seen as exerting
negative pressure on the catalog industry, especially on the
small catalog company.
The
Aggregate Condition
The
aggregate fundamental, technical and strategic influences
on the economy are clearly tipped to the negative side. “But,
aren’t these influences usually negative?”
The
answer might just be, “Yes.” There have been few times when
all of the technical indicators of the economy were pointing
in the right direction or the fundamental influences were
all perfect. In fact, some of our best catalog companies were
begun during the difficult economy from 1973-1983. What the
aggregate condition doesn’t show are the record low interest
rates we currently have, the immensity of the U.S. economy,
the strength of foreign investment and other underpinnings
that allow us to weather the downturns. Without resorting
to jingoism, it is fair to say that this is the most powerful
and stable economy in the world and it would take a great
deal more disruption to lessen that inherent strength.
However,
There IS a Message
If
one looks at each of the elements discussed here under the
fundamental, technical, strategic and aggregate influences,
one must conclude that there are, indeed, operational, financial
and strategic priorities that require attention now.
For some catalog companies, the focus will be on strengthening
the position relative to the fundamental potentials. For others,
honing operations and expenses relative to the technical elements.
And for others, enhancing the strategic influences will be
the first priority.
Unfortunately,
there are also those catalog companies who must focus on all
three. They are likely the weak companies and the catalog
houses that will be absorbed into the ongoing consolidation
that feeds the insatiable drive for economy of scale, critical
mass, growth and incremental profitability, and enhanced EBITDA.
As
always, the message is that here, at 35,000 feet, is another
perspective, another sense of relevance, another synthesis
of thought that might not have been conceived had we not had
this moment together. Perhaps it will lead you to a new and
beneficial course of thought and action. If so, I have accomplished
my purpose.
