Secrets of the Catalog Master
Vol. MMVI No. 5 September-October 2006
(Continued--page 3)
It’s All About Margin: Reaping the Whirlwind
Margin is the pivot point, and we have created this reality
Regardless of the reasons, American commerce has created a troublesome reality of margin erosion. Some cite NAFTA; some technology; some Wal-Mart; some the EU; some the alignment of the planets. It makes no difference why, because that is the past. It only matters that we recognize that—in the present and the future—it is much more difficult to make a buck.
I was struck by this reality recently while listing the various alternatives for improving performance and growth at a major business-too-business multichannel catalog company. This company has a highly competent CEO and management team and almost all of the obvious needs were basic and began and ended with gross margin improvement. The CEO, after quietly studying the five essential steps on the flip chart, made the revelatory observation, “It’s all about margin, isn’t it?”
Back in the early 1990s, when I was doing some 200 days a year of speaking and seminar work, I began focusing on the coming emergence of margin erosion due to the rise of a three-tier global market: 1) the Orient; 2) the European Union; and 3) the Americas. Logic told me that labor would be cheaper in the India, China and other far eastern nations, and that they would supply the other two global trading block entities, the Americas and the European Union. Logic also told me that gross margin would erode due to price pressure as a result of low-cost substitutes and that the historic high gross margin U.S. footprint would shrink.
And it did.
And now we must deal with the whirlwind and the withering Sirocco that is blowing across the commercial landscape, desiccating the juices of profitability. When everyone buys cheaper and sells cheaper, the only possible outcome is an erosion of earnings if all other operating factors remain constant. Technology can only do so much, and we are now more than two-thirds of the way through the technological productivity era. Cost-cutting has been the mantra for some time, but there is a limit to that, as well. There are only price increases, response increases, or retention increases in order to stay even. At some point, that has to be recognized and acted upon. The basics are what have to be focused on if enhancements in performance are to occur. We cannot continue to chase the next two percent off the cost of goods in yet another small factory somewhere in the interior of Bangladesh. That is nothing more than a self-fulfilling hamster wheel. Keep on turning and the retail prices go down another two percent due to universal price wars. Where will that get us?
It seems to me the base foundations of buying and selling have been lowered in the last fifteen years. Many of our business-to-business direct marketing companies have seen gross margin retreat from as high as 65 percent to, in some cases, as low as 40 percent. This is almost entirely due to price pressure as a result of importing lower cost products. We have been engaged in a price war against ourselves. At the same time, advertising cost has increased and response has diminished. Fixed costs have increased. Normally, earnings will decrease given that combination of factors. In some companies, they have decreased. In many, however, they have actually increased, and I think it is temporary and primarily due to technology influences and, frankly, cost-squeezing, particularly getting more productivity and sales per employee. But, my guess is that the outermost limits of those temporary solutions to the issue of margin erosion are being reached.
The real question is: “Now what?”
Frankly, I don’t see magic amulets. What I see is hard work and blocking and tackling across all channels and a re-commitment to The Basics. If there is a new frontier in direct marketing, it is going to be where you should expect it to be—in database proficiency, in list testing, in new product development, in new merchandising approaches, in a re-commitment to customer-focused, sincerity marketing and a universal casting out of the systematized CRM demons that automate and reduce the customer to a pre-determined action and threaten the bond of trust, and to wringing out the chronic waste that is the all-too-common by-product of our prospecting and customer retention performance. Inside nearly all of our present multichannel direct marketing companies is another company of equal size struggling to emerge. These unborn, “shadow” companies need only to overcome inefficiency, sub-optimal response, ignored customer retention levels, uninspired merchandising, ineffective and insufficient product development, medieval analytic understanding, untalented and under-talented management, and mediocre customer service to reach the sunlight of profitability and margin improvement.
It may be all about margin, but first and foremost, it is about The Basics.
Back
Pages: 1 2 3
