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Libey Incorporated
Economic Outlook
Secrets of the Catalog Master
Vol. MMVI No. 1
February 2006
Consultants & Recruiters to Multichannel Direct Marketing
Cherry Hill, New Jersey
Des Moines, Iowa
Donald R.
Libey, Editor
The Monster Trends
by Donald R. Libey
For those CEOs and Senior Managers unable to attend the recent MeritDirect CEO Forum, here are the 2006 and beyond Monster Trends that were presented for consideration and discussion.
Since 1988, I have provided observations and thoughts on the trends for the coming year, either in my newsletter or in keynote speeches to the industry. To date, after seventeen years, those observations are running about eighty-five percent accurate which means nothing more than I continue to be reasonably able to observe and comment on that which is blatantly obvious. Once again, for 2006, my simplistic but tongue-in-cheek approach has isolated—out of a dozen or so significant, evolving, strategic changes—a number of Monster Trends for consumer and business-to-business direct marketing that I wish to explore in some detail. I hope they are of some value to you in planning your strategies for the coming century and meeting the ever-increasing challenges of rampant change in the year ahead.
The Monster Trends
Catalog Function
Clarity is emerging regarding the future function of the catalog. This past year (2005) has produced numerous tentative observations on the changing benefits and intents of the catalog. There is a philosophic twist to the buzz, a genuine questioning of the future utility of the catalog. That is an interesting term: utility. It is an economic term and implies benefit, as in the question “What is the benefit of a catalog?” Or, perhaps more strident, “How much benefit do we get from the catalogs?”
Perhaps the underlying question is, “What does the catalog do today?” Up until now, the function has been to cause a phone or mail order because the catalog actually sells products. Everything necessary to the creation of a sale has been embodied in the design, copy, photography, ordering process, and the customer service elements of the ‘catalog shopping experience.’ The utility of a catalog has been in its ability to silently and remotely make a sale. Everything we know about catalogs, and everything we do in creating catalogs, has been codified for one purpose: to sell.
Suddenly, half of the orders, or more, are coming to us online. Our online catalogs are absorbing more of our resources and energies than our paper catalogs. And wherever we turn and whatever we read, the predictions are for thirty or forty or fifty percent growth in online shopping, consumer or business-to-business. In fact, on the precarious and slippery slope of mall retail shopping, the growth is flat to declining. Yet, the share of the shopping dollar continues to shift to online and continues to grow unabated. The retail malls, those future Cities of the Dead, are in denial and ineluctable peril as this lumbering monster trend, this rough, online beast, slouches towards Amazon.
What is happening is the catalog’s function is changing from selling to driving. It is the catalog that causes an online experience where the selling now takes place. A high percentage (inevitably shrinking over time, however) of online orders are driven by catalogs, and that is rapidly becoming the catalog’s utility, its reason for existing.
Think of the logic and the common sense questions that arise. If the utility of the catalog is as a web-driver, why do we have expensive photography both places? Or, why do we show all of the products in an expensive catalog and also on an expensive web site? Or, why do we show a steak, or a doll, or an imprinted pen to drive us to the same picture online of the steak, the doll, or the imprinted pen? What we are currently doing is redundant. Nature abhors redundancy.
By definition, this philosophic construct demands that we question the future value and form of the catalog. If its value is to drive sales that take place online, perhaps the concept and present form of the catalog are obsolete. Perhaps what is wanted—what increases utility—is instructional information on how the products improve your life, your business, your service needs, your health, or the nutrition of your pet. Perhaps we have finally arrived at the magalog, that mythical mix of product and editorial content that informed and secondarily sold. Perhaps this incarnation will be called the webalog.
Webalogs have a very different utility. They exist to help consumers find you online where your lotions, potions and magic charms are arrayed on endless web pages masquerading as ‘old-timey’ catalogs. The webalog tells stories, features satisfied customers, offers recipes, gives hints and tips, displays box scores, tantalizes, strokes and encourages.
Even the format is very different from the cast-off catalog. A webalog has all the excitement and seduction of Cosmopolitan or the ruggedness of Rod and Gun or the luscious, gastronomic promise of Bon Appetit. But it doesn’t sell. It steers, drives, points, refers, solicits, reveals, entices, encourages, promises, piques, calls, reveals, proselytizes and evangelizes . . . but it doesn’t sell. The online catalog does the selling.
More logic. Maybe the webalog can do in sixteen or thirty-two pages what a full-line catalog did in 320 pages. Maybe . . . just maybe a cutting-edge article on a new product application that repeatedly calls for a further beneficial web experience can drive more online product sales than a full-page paper photo and descriptive copy with a price block. Maybe the concept changes from ‘catalog circulation’ and ‘catalog frequency’ to ‘customer contact’ and ‘concept frequency.’ And don’t forget the all-important prospect. Can you get more prospects involved using concepts, ideas, interests, excitement and beneficial utility than you can with a discount offer? Could be.
And so, here is this year’s requisite heresy that you have come to expect from me over the years. Create a new concept mail piece—a webalog—that presents three or four of your products the same way and with the same excitement found in a great infomercial. Tell a story and show how the products are used and why you benefit and push the sales to the web only. Do an A/B split with a normal catalog showing the usual sixteen square inches for each of those products somewhere in the book. Then measure the total online sales of the specific products from both media. You may learn something interesting. The classic catalog will, of course, sell more total dollars, but for the products in the test, I’ll bet you a bushel of corn the webalog drives more online sales than the catalog for those products featured.
This trend will produce tectonic rifts in the art and science of cataloging, indeed, direct mail marketing. Notice that the prospect name, the customer and the list become much more important, and the attributes of the prospect shift to include interests and affinities. The names, however, become associated, not only with the classic physical addresses, but interchangeably-at-will with cyber addresses, Blackberry addresses, and alias addresses. With that level of desired, opt-in personal involvement, the customer will demand email contact, other forms of contact and constant informational refreshment. That changes the definition of direct mail marketing to Direct Interest Marketing.
And the final, killer-logic. If you really believe, in the year 2006, after all that your eyes and your intelligence have told you, that the form, format and relationship of the paper catalog and the online website is a static relationship that will never change, then you will ultimately savor the rusty taste of obsolescence and irrelevance. It is totally illogical that paper catalogs will continue on a utility par with websites given the constraints and costs of their six to twelve month creative cycles, their prices fixed unchanged in time for half a year, their inability to instantaneously discontinue or add products based on availability or demand, the redundancy of web and catalog pages, the twelve-month horizon for analyzing test results, the onerous reconciliation of tracking and analytics, the sheer cost burden, and dozens of other disparities and inequalities.
Direct and TV Convergence
We are about to enter upon what may bet greatest Monster Trend ever to emerge in all of the history of commerce: the convergence of the Internet and television and the television viewing experience. Think of Internet channels and you will begin to see what I am talking about. The remote will be replaced by the mouse. And inane TV programming will be replaced by the limitless programming of the Internet. Let’s just think about this . . .
Private Equity
The private owners of catalog companies are almost gone. The industry has grown up and become large—very large. Most of the largest catalog companies are, or are part of, public corporations. A large number of non-public catalog companies are now owned by private equity groups, leveraged buy-out firms. And, as you expect, there are reasons for this.
First, the multi-channel direct marketing company is attractive to financial buyers and operators because it is formulaic and consistently predictable. There may be no better business and financial model (except for a hot dog stand), than a catalog company. There is little risk in a solid direct marketing organization once you understand how they work. As we used to say back in the Golden Age of Catalogs (1970s and 1980s), “Just put a lot of stuff in the mail and people send you money!” It’s even better now: “Just put a lot of stuff on the web and in the mail and in the email and in stores, and even more people send you even more money!”
Second, the multi-channel ‘space’ as the private equity MBAs call it, is expanding. The rate of expansion is better than almost anything else (except hot dog stands). In fact, the multi-channel/catalog space consistently beats the rate of expansion of the U.S. economy, and that of most any other economy except for China, and that’s where we get all of our stuff!
Third, private equity groups have a gaztrillion dollars to invest. They get the money from really wealthy people who want a twenty percent return on their money (or better) which is a lot more attractive than Certificates of Deposit or savings accounts. And, here is the really interesting part: the private equity groups can’t find enough multi-channel direct marketing companies to acquire. You see, the fund managers have to invest the money or the really wealthy people ask for a refund. And so, the prices they pay go up. And what does that mean? Private entrepreneurs sell out. That’s why the private owners of catalog companies are almost gone. Oh sure, there a lot of $2 million and $5 million catalogs out there, but there are darn few $50 million and $75 million and $100 million catalogs left. There are, however, a fair number of $20 and $25 and $15 million catalog companies, and the private equity groups are turning their laser-like attention to these mid-size catalog companies.
First, the private equity groups buy a ‘platform.’ That’s a catalog company with a lot of customers, a lot of proven products, stable demand, scalability, good operating systems, under-utilized fulfillment systems, a savvy and seasoned management team, and the ability to absorb two to five ‘add-on’ acquisitions. Over a period of two to seven years, the private equity groups ‘add-on’ several $15 to $25 million companies with reasonable synergies. They pump up the prospecting, build great websites, expand the customer base, and drive the combined revenues up two to three times. And then they sell the resulting mega-group for four or five times what they paid for it to another, larger private equity group.
At some point, logic dictates that one enormous private equity firm will own all of the multi-channel catalog companies and will then merge with Wal-Mart. At that point, we will reach the end of life as we know it.
This is becoming a Monster Trend that changes the structure and the philosophies of direct marketing forever. We have seen a twenty-year trend to management by next quarter’s operating profits. Current earnings are now more important than customer service or satisfaction, or perhaps even long-term lifetime value. But, perhaps most disturbing is the shift from a customer-oriented, long-term relationship to a financial ‘model’ of operation. With all of the ‘Mom and Pop’ style of customer relations wrung out in the service of fast profits and multiples of earnings, the future is uncertain. This industry cannot exist only on financial modeling. It requires quality that goes beyond formulas. We got here by being good at what we do, not by managing for short-term gains.
If you will review the just completed year’s acquisitions, you will see that the investments are now moving down to the $25 to $100 million range. In another year or so, those companies will be ‘add-ons’ to the ‘platforms’ and the focus will be on the $15 to $50 million companies, and then the $10 to $25, and then the $5 to $15 . . . and then the industry is something else altogether.
Mega-Retail Dominance
It is clear to me that not only large investment groups, but the mega-retailers have set their sights on the direct marketing channels. Future competitors now include Home Depot, Lowe’s, Wal-Mart, and major department store consolidators. Fewer and fewer individually owned direct marketing businesses will thrive in this ever-consolidating environment.
Retail must battle for control of the share of pocketbook. The overbuilt malls and the boring retail structural complex are in danger of becoming Cites of the Dead at any significant economic downturn. Only the direct marketing channels offer a business model without the expense of the incredibly expensive retail locations. This monster trend is almost purely economic; however, increasingly convenience and customer service is driving the demand for direct marketing businesses by traditional retailers.
Retail must also invade the direct channels in order to stave off the flood of customer defection to the online channels. The just-completed holiday shopping season was rife with double-digit gains in the online channels and flat performance in the retail channel. That spells doom for the future unless the hemorrhage is stopped.
Creative Mediocrity
One of the insidious monster trends to emerge in the past few years—and one that is growing relentlessly—is the mediocrity of all forms of creative. Whether it is television programming, gaming, space advertising, long and short-form infomercials, catalog design, copywriting—even photography—the technological embedding, digitalization and all-important web functionality have supplanted true creative excellence with the drear grayness of creative expediency.
Direct marketing—a discipline that thrived and reached heretofore unachieved success in commerce—did so on the power of creative originality, innovation and mastery of the creative disciplines, as well as exceptional customer service. With the rise of technological disciplines, creative has lost its cachet, its prominence and its importance. Those who seek to maintain the highest standards of creativity will gain more than those who allow creative vigor to wane and become rote, flat and automated. We live in the dangerous “Gray Period” where only technology is admired and beauty has become abstract.
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