The
Next Direct Marketing Evolution:
Survival Changes For the Coming Five Year
Donald R. Libey
Libey Incorporated
Advisors and Intermediaries for the Direct Marketing
Industry
Evolution
and Transformation
I
believe the five years ahead will be the most turbulent period
in direct marketing history. This is not a sensational statement
for sensational reasons. This is a rational belief born from
observation and first-hand experience of over a hundred board-level
forensic reviews of business and consumer direct marketing companies
over the past decade. I have observed evolution and believe
I see where it is going.
The
direct marketing era, as we have all historically known it,
is over. The next, logical evolution has begun. Direct marketing
will never return to its former incarnation. It will be forever
changed in its evolving destiny. The conventions of 1 percent
prospecting response rates and 3 percent customer response rates
can no longer be sustained. The formulaic conventions of catalog
lifetime value and dollars per catalog mailed are passé and
obsolete. We have arrived at a point in time where all the rules,
formulas and benchmarks are changing and nothing is stable any
longer.
Retail
Channel Evolution
Massive
channels such as retail, distribution, and direct sales have
undergone tectonic change in the past 25 years. Retail has shifted
from independent to chain stores; from locally owned to nationally
owned; from customer-driven to foot traffic driven; from margin
focused to discount focus; from service providers to self-service;
and from product differentiation to product homogeneity. In
short, retail has become ubiquitous, big, faceless, thin-margined
and merchandised with a dead, unimaginative, cookie-cutter,
boring sameness, mall to mall, city to city, and coast to coast.
Distribution
Channel Evolution
Distribution
has consolidated in size, geography and market share. Where
20 years ago there were 500 distributors in a given market space,
today there are only fifty. The big have survived and the weak
have been absorbed. But the “Bigs” are very big and
the “smalls” are essentially irrelevant. The distribution model
has shifted from a closed, domestic, dedicated manufacturer-distributor
relationship to an open, international, cut-throat importer-distributor
supply chain model that ultimately depends on the continuing
Wal-Martization of America for its sustenance.
Direct
Sales Channel Evolution
Direct
sales has experienced a concentration of accounts and the emergence
of central account management and outbound contact for smaller
accounts. The sales force has been forced and focused upward
in size and sales for maximum productivity and profitability.
A salesperson who managed a book of 100 accounts worth $500,000
twenty years ago, today manages a book of 20 accounts worth
$2,000,000; inside sales are automating the 1,000 accounts worth
only $2 to $3 million. The incredible myth and charlatanism
of CRM, Customer Relationship Marketing, has relegated nearly
all small customers—consumer and business-to-business—to an
endless loop of recorded menus and a maize of “options designed
to help serve you better.”
Advent
of “Net Gnats”
And
adding to the dynamic are thousands of “net gnats,” small Internet
businesses that take 1 percent of sales here and 1 percent there,
wherever they can get recognition and order flow. For virtually
zero overhead, these small irritant entrepreneurs are able to
lightly feed on and bleed off our primary business strength
until we slowly develop anemia. When you have 500 competitors
each taking 2 orders a day for your best product, it is still
1,000 orders you don’t get. And it’s growing.
The
Web
And,
of course, there has never before been anything like the Web.
When my local 10,000 square foot retail store called Golf Galaxy
was unable to inventory a single pair of golf shoes in 9.5 EEE,
a web search revealed 120 merchants with 142 brands and styles
in stock willing to sell them for 30 percent off and ship them
to me in 2 days free. How are you going to compete with that
in another five years of web evolution?
Cultural
and Political Externalities
While
all of this channel evolution is occurring, there are concurrent
external forces at work that are shaping the direct marketing
destiny. Outbound telemarketing has been taken to the stake
for burning. Two million jobs are at risk as is a large portion
of Gross Domestic Product, a fact that seemingly blithely evades
the inmates of the Congressional Asylum.
Privacy
legislation nationwide and federally is bringing direct marketing
to its knees. Absent an effective lobby or trade group, the
direct marketing industry is being structurally dismantled,
piece by piece. E-mail marketing—extremely effective executed
properly—will likely be sacrificed legislatively due to the
outright greed and prurience of spammers and Nigerian Oil Ministers
needing help with making large deposits in U.S. banks. Being
from Iowa, I can say, unequivocally, that if the corn or pork
industries had as many threats as the direct marketing industry
has today, there would be 100,000 tractors parked in Washington,
D.C. until the clowns in Congress got their definition of “pork”
right! But, no, not us . . . 2 million jobs at risk . . . billions
and billions of dollars at risk . . . inane privacy overkill
rampant in every state and now a new Federal Do Not Call empire
. . . sales taxation inevitable . . . and mailing to consumers
and businesses without permission coming next to your national
chopping block . . . and we sit back and say, “Well, we’ll figure
out something.”
The
Retail Economic and Financial Complex
Face
it! Wal-Mart doesn’t want you. You, your catalogs and your Web
sites are a threat to the retail economic and financial complex.
Let’s look at it.
I
will accept that none of you will like what I am about to say.
I can live with that. The truth is a bitter thing sometimes,
but it has to be given exposure to full light in order to see
whether it will stand up and if there are any alternatives.
Since
the first nascent moment of the first catalog, all sales—business-to-business
or consumer—have been birthed from the field sales and retail
sales worlds. Think about it. Our world of direct marketing
is wholly derived from sales taken away from field sales and
from retail sales. We have not created new sales; only
taken away or shifted sales from other channels. If
there were no catalogs or direct marketing, the field sales
and retail sales worlds would be, very conservatively, some
2 to 3 trillion dollars bigger. Direct marketing’s
mom and dad are retail and field sales. And Mom and Dad are
not pleased.
Almost
every business-to-business marketer I know admits that their
true competition is retail, and every consumer marketer faces
this reality daily. In a commercial world where substitutes
can be found, and where those substitutes can be found within
1 to 12 miles of any business or home, retail will have a primary,
competitive influence. If you examine the strategic, geographic
positioning of both retail consumer and business-to-business
merchants, you find that niches are served by placing retail
stores within 12 miles of niche customer concentrations; that
is, no customer should ever have to drive more than 12 miles
to make a purchase. By locating two stores 20 miles apart, the
12-mile circle is established for niche customer satisfaction.
By targeting 12-mile circles in densely populated universe areas,
the geographic niche and market share strategy can be readily
seen.
Knowing
this, why are catalog marketers not challenging their biggest
competitors right in the primary competitive arena? Why not
do geo-selects and blanket a 12-mile or 25-mile overlapping
circle with direct mail specifically targeted to local competitive
offers? Why not take the rebirth of direct marketing to the
battleground and meet the competition in hand-to-hand combat?
And if the wisdom of this strategy is unclear, consider what
is likely to occur in the immediate years ahead.
Retail
is Overbuilt. Catalogs Are Not.
Any
reader who truly believes that this country can sustain all
of the retail stores that already exist and that are being built
or planned for the immediate future need not detain themselves
here any further. You are already hopelessly Pollyanna-ish.
First,
few of the retail merchants own their real estate. Insurance
companies, pension plans, state government annuitants, REITS,
and a host of other fragile, investor-benefit structures own
the strip and destination malls of America. The actual tenant
merchants (your competitors) are renters. They have
little or no investment risk, only high, unsustainable operating
overhead to remain in business.
Second,
if there is a minimal, say 15 percent, pull-back in retail spending,
these investment structures cum landlords are in deep
trouble. Consider: the 2002 retail season was a disaster financially
and there was actually 1 to 2 percent growth, year on year.
Imagine the gnashing of teeth if there was a 15 percent decline
in retail spending. And, that is possible. Allow me
to draw your attention to oil prices, terrorism, wars, global
instability and global financial stress. If there is a draw-back
in retail spending—whether consumer or business-to-business—(it
makes little difference), there will be a lot of shuttered and
boarded retail stores. As this nation is inevitably forced back
to a consumption equilibrium that is significantly below the
levels of the most recent decades, what happens to all of that
excess retail capacity? Will we repave the mall parking lots
with grass? Face it: the post-1970s level of U.S. consumption
is simply not sustainable in a common sense outlook for the
future.
What
will happen is fairly clear, it seems to me. We are doubtless
headed into a period of increased financial stress. Cities and
states are already experiencing unfunded mandates from the Federal
government for Homeland Security and a plethora of other expensive,
special interest regulatory and legislative imperatives. The
federal, state and local coffers are empty and the only solution
is markedly higher taxes, and we now want a couple of hundred
billion for Iraq, Afghanistan and Heaven only knows where. Higher
taxes mean less disposable income. Less disposable income means
a reduction in spending. A reduction in spending means excess
retail capacity. And that means store closings and downsizing
and reduced manufacturing. Probably for at least 10 years or
more. A “consumption winter” descends on America for the first
decades of the 2000s. Genuine buyers, both business-to-business
and consumer, will be driven into an escalating environment
of scarcity of products, services, convenience, advice, civility,
and geographic access. Look around! There is a corrective period
coming in American commerce—bank on it!
But,
direct marketing companies are not over built. Direct
marketing companies are not nearly as subject to excess
capacity. Direct marketing companies are not at the
whim of investor group or pension plan landlords. Direct marketing
companies can “relocate” their geographic competitiveness at
a moment’s notice. They can zero in on a geographic area that
is no longer served, or is underserved, by retail competition
by simply doing a zip-select. Catalog companies, indeed all
direct marketing companies, are positioned by virtue of their
internal and financial structures to take significant share
away from mass and small retailers in the decades ahead. Our
industry clearly has the financial and operational advantage
in this period of economic re-ordering if we have the ability
to re-focus on segmenting lists and mailings to the changing
and opportunistic local level.
Now,
couple that formidable strategic advantage with the functional
advantages of the Internet, and we begin to see the scope of
the rebirth of direct marketing and the shape of direct marketing
to come. The catalog remains integral; the Web becomes the tertiary
destination; the speed and relevance of offers become critical;
the geographic targeting becomes incessantly local. We no longer
focus only on prospecting lists at the macro universe level,
but prospecting lists at the local “universe of one” level.
The rebirth of direct marketing will follow and fill the voids
left by retail store closings. We fill the vacuum. Customers
are shape-changed and order is restored. A large portion of
retail purchasing is shifted to self-directed, remote purchasing,
and the established, experienced, invested catalog and Internet
channel masters win . . . if you want to and if you do something
now to assure your dominance in the inevitable commercial milieu
of the future.
What
Would You Want In The Rebirth of Direct Marketing?
If
I were authoring the strategic plan for the decade ahead for
office supplies, I would be looking for innovative list work
that would provide me with the combined universes of all businesses
in the U.S. located within a 12-mile radius miles of all potentially
closing big box office supply stores and segmented into the
12 regions of this report on a hierarchical basis of economic
viability.
If
I were in the MRO business, I would want the geographic lists
of all businesses within a 12 mile radius of every closed big
box MRO retail supply store. If I sold to contractors, I would
want lists of every construction-related business within 12
miles of every future closed Home Depot. And then I would create
offers and incentives for each of those local niches on a local
basis, in a local voice.
And
as the retail downsizing panoply develops, we have the innovative
ability and capacity to track and develop localized list segments
for every major SIC group that has a local retail presence.
We can develop shared databases of retail-challenged or retail-vulnerable
customers. We can do it for the shared benefit of catalog businesses.
And, we can do it for food service equipment, dental supplies,
office furniture, safety equipment, agricultural supplies, landscaping
equipment, and on and on for nearly every niche target group
you can name. And we can make offers and position ourselves
as local suppliers interested in the customer’s local
needs.
The
rebirth of direct marketing will occur at the local level and
it will fill the competitive void left by a shrinking and diluted
retail presence.
The
rebirth of direct marketing will consist of more of what we
are good at, but focused not on national universes, but on local
segments of underserved local universes.
The
rebirth of direct marketing will occur on the local retail battleground.
And if it doesn’t and I am wrong, you will still be more
competitive and will have found an entirely new method for prospecting
to take new customers away from the retail share of the marketplace.
You can’t lose!
The
rebirth of direct marketing will unite direct, catalog and e-com
marketers and it will finally be recognized that list rentals
among direct competitors are absolutely and unabashedly essential
in an all-out war for market share derived from the bones of
the retail channel dinosaurs. You cannot afford to keep your
list from your increasingly cooperative and mutually sustaining
direct marketing and cataloging colleagues, especially if they
are competitors. Not renting your list to competitors is classic
1970s thinking.
The
rebirth of direct marketing will occur only in an environment
where a disillusioned, disenfranchised, discommoded and disappointed
retail customer is made to feel welcome, important and appreciated
by a channel that is genuinely thoughtful of and thankful for
that customer’s business.
The
rebirth of direct marketing requires that we do more of what
we have always done so well, but that we now bring it to the
individual customer at the local level. It is back to basics
locally. And the battle is for channel conversion of market
share, one customer at a time. Even Wal-Mart is massively vulnerable.
The
Next Prospecting Frontier
Local
prospecting. Mastering local prospecting to zero in on reduced
retail activity in your niche will pay off for several reasons:
1.
You learn about “local” direct marketing, an extension of the
national direct marketing we have all experienced for so many
years. Local is different than national and it requires far
more sophisticated segmentations and economic profiling of both
business-to-business and consumer prospects. And, the list and
circulation expertise, uniqueness and experience will be priceless
for the future.
2.
You develop “local” offers and local relevance for local customers.
We have never gone out with prospecting offers that are geared
to a small geographic target. By necessity, printers will have
to develop local segmentation binding and multiple offer press
capabilities that reflect and cost-effectively drive this local
marketing focus. Imagine: a marketing campaign replete with
lists, offers, printing and mailing targeted to business buyers
in specific cities and neighborhoods where major big
box office supply stores are closing. Now, imagine the same
campaigns in every city and neighborhood where they are closing
. . . and read the teaser copy on the catalog cover: “Your
OfficeBox at 5th and Oak may be closing, but we’re still here
. . . and we’ve got what you want, at better prices, and we
can deliver to your door . . . FAST
3.
You have all of the internal IT systems , call centers, fulfillment
operations necessary to make this work at the local level, and
it’s already paid for. You also have highly skilled and experienced
marketers who can find those customers if they will only begin
to look locally.
4.
It is a “No Risk” strategic concept. Right or wrong, true or
false, prophesy or shamanism, you benefit from learning how
to better service customers on a local basis as well as a macro-national
prospecting basis. And, if you really believe you want
to have local distribution and local warehouses and local retail
stores (as many of you are actually thinking), then you have
to master local prospecting anyway. But, my belief is that you
can master local prospecting and marketing from a centralized
position. Your chief strategic advantage is economic. Don’t
obviate that advantage by getting into the retail business!
Price
and Survival
The
outcome of the Wal-Martization of America is that Americans,
whether consumer or business buyers, have become hyper-sensitized
to price. As few as ten years ago, price was the least important
element in the competitive mix for a catalog company. Today,
price may be the determining element in the purchase decision.
As price comparison became simple via the Internet, as price
bludgeoning became commonplace via the “big box” retail model,
as price incentives became the idiotic retail world’s stock-in-trade
and self-fulfilling incentive of choice to attract fickle, price-motivated,
predatory customers, we as a nation of consumers have finally
and irrevocably become price-driven creatures of habit. Of course,
the tail of the 55-year boom cycle of the American economy may
have a fair amount to do with the sudden, transformational idée
fixe about obtaining the lowest possible price on everything
that suddenly cloaks our every waking thought about purchasing
and our insatiable desire to hob-nob with the nether-world denizens
of the local Wal-Mart so splendidly arrayed in Spandex by Tommy
Hilfiger.
Bitter
as it may be, America has dumbed down when it comes to consumption
(quantity, not quality). People who would not have been cremated
in clothing from Wal-Mart are now wearing it to work and wine
bars because it is cheap chic. If you can save $3 on dish soap,
it’s $3 you can spend on a better Old Vines Zinfandel (the red
wine in the bottles, not the pink stuff in the boxes).
So,
here we are, all cozy in our Wal-Mart cheap chic mode and applying
that whole mind-set to capital expenditures, advertising specialties,
software, business forms, laptops, and anything else we buy
in the normal course of our day. And we still buy from catalogs
and, for about 25 percent of us, on-line. So, where are the
catalogers?
There
they sit. With products like $14,000 stainless steel, backyard
gas grills and faux marble flower pots that go for $389.99 each.
I don’t know if anybody at the Big & Tall catalog companies
have noticed, but $69 for a casual shirt is no longer thought
to be an irresistible bargain. And why is it always Big & Tall;
why isn’t there a Short & Fat? Anyway, the catalog world got
expensive, over-priced and out-of-whack when nobody was really
noticing and while everybody had lots of cash. Suddenly, it’s
2003 and the 401 K’s are all being renamed 101 K’s and people
are buying their microwave popcorn on sale at Wal-Mart for $1.29
for six bags and the catalog world is irrelevant because
of price! Wake up and smell the coffee here! Catalogs are
not competitive and the buyers have figured that out. Game,
set, match. Thank you for playing. Hey, Wal-Mart did it, not
me.
And
guess what? Wal-Mart’s pretty smart. Take a look at the stock
value appreciation. They know how to source product better than
anybody else in the world. When it was time to crank up the
Wal-Mart expansion bubble machine years ago, they got real plugged
in on the import thing. If a fishing lure sold for $6, they
could source it from vendors who were having it made in Taiwan
for 8 cents. Then, they beat up the vendors and bought that
fishing lure in really big quantities for 7 cents each
. . . they could convince their suppliers to sell under cost
because of the huge volume Wal-Mart would kind of promise. When
the fishing lure guy went under, they owned the market and could
source it for 3 cents . . . and put it on special for $3.89,
almost half of what the local fishing tackle shop had to sell
it for. Ergo: total retail dominance. Coupled with unlimited
expansion of locations, one has the perfect vehicle for imprinting
the American psyche about price being the only determining element.
And, they hired everybody’s grandmother and grandfather to be
“Greeters” whatever those are. Ten years later, the average
American’s car has developed an instinctive and near-universal
homing behavior. It only drives to Wal-Mart.
The
Bind
It’s
bad enough to be irrelevant on price in America. The only thing
that could be worse is to be price irrelevant, charge shipping
and handling as a budgeted profit center requirement, and be
positioned just under the most expensive seller of your product.
Wait a minute! That’s precisely the position we all strived
to achieve ten years ago: high threshold pricing; high margin;
make money on every UPS shipment; not the high price leader,
but just below, hiding in the weeds. Suddenly, that once-attractive
positioning is lethal. We’ve got competition from discounters
and 8,000 one-product-one-employee wonders selling stuff on
the Internet and E-bay at 40 percent below our price. These
“net gnats” are nibbling away at us, draining blood from our
best products at one or two percent a year while the big box
discounters are rapidly taking away our best customers, those
with a high RFM profile who are suddenly enamored with low prices
and could care less about anything else, like “CRM.”
And,
what could be worse? While the discounters of the world were
busy sourcing their products by the container-load from China
at 70 percent net margins, we sat back and debated the relative
merits of multi-variant regression analyses, CRM systems and
other inane and banal distractions. We are a whole decade behind
in sourcing sophistication. We didn’t believe it when Ross Perot
told us about the “giant sucking sound.” As an industry, the
catalog world has little competitive experience with overseas
sourcing at maximum margins. And when I ask you, “So, where
are you going to get an additional 12 points of net margin?”
you don’t have an answer. But, you can tell me that
87.96 percent of your 1st decile customers also appear on the
Abacus list. So what!
And
there’s the bind: Price is elastic and you’ve got no price
advantage.
The
Solution
Focus
on the things that matter:
1.
List technology with advanced database structures and advantages
(such as MeritBase);
2.
Sourcing for margin advantage; a minimum of 12 points improvement,
net of import costs and transport;
3.
Incremental sales over the threshold for carrying fixed costs.
If this means taking high sales volume from the low-end of the
market under another name and operation, so be it.
4.
Increased economies of scale from import strategies combined
with low price leader sales volume strategies;
5.
Acquiring multi-channel merchandising and sales skills beyond
the requirements of the catalog.
6.
Adopting local prospecting and retail tactical planning to take
market share from the largest portion of the market—the retail
share--and convert it to better and smarter direct models.
Those
six tactics, focused on and done well, will put you back in
the game and eliminate much of the profit-eroding bind that
has plagued the industry as it matured and changed. The smart,
successful retailers did not take their eye off the ball; the
Wal-Martization of America is almost complete and they own your
future customers.
Now,
you may not agree or like what you have heard. But, I ask you
to present the rebuttal. What exactly do you have as an alternative?
Where will you get the 12 points of margin to offset the ever-present
margin erosion and variable cost creep that is legion in this
business? How will you develop the necessary ongoing EBITDA
to maintain your business valuation and the financing essential
for your growth? The solution is clear and logical.
DONALD
R. LIBEY
Don
Libey is co-founder of Libey Incorporated, Cherry Hill New Jersey,
Philadelphia, Pennsylvania, and Des Moines, Iowa, advisors and
investment bankers to CEOs of catalog, direct marketing and
e-commerce organizations. The firm specializes in representing
buyers and sellers in mergers & acquisitions, investment capital
placement, strategic growth planning, and in-depth forensic
reviews of marketing and financial performance for CEOs of direct
marketing companies and for investment groups and banks with
catalog company holdings.
Don,
a long-time industry advisor and strategist to CEOs and boards,
is the author of six books on marketing, future change, and
the economic and technological influences on the global marketplace;
he is the author of the Libey Incorporated Economic Outlook, the
bi-monthly, in-depth analysis of the economy and its implications
for circulation and marketing strategy, published by MeritDirect.
Don has operated numerous direct marketing, catalog and publishing
companies as an owner and CEO and sits on the boards of a number
of direct marketing corporations.
Libey Incorporated
Advisors and Investment Bankers To The Catalog Industry
Copyright
2003 by Donald R. Libey. All rights reserved. This material
may not be reproduced or used in any way without written permission
form the author, Donald R. Libey, Libey Incorporated, 811 Church
Road, Suite 105, Cherry Hill NJ 08022, (877) 903 9448, www.libey.com,
e-mail libey@libey.com.
