Omni-channel’s migration dilemma

The shift in retail to a more omni-channel world is dramatic and profound. And since the term “omni-channel” gets thrown around a lot–often vaguely or carelessly–let me be clear about what I mean: more and more customers are becoming engaged in utilizing multiple channels–stores, mobile, online, social networks and the like–to explore, research and transact.

One important implication of this phenomenon is that many consumers are becoming what I call “blended channel” customers; sometimes choosing to transact in physical stores, sometimes buying online. And they commonly use multiple sources to aid in the decision journey, regardless of where their ultimate transaction may be recorded.

Their loyalty is to the brand, not a channel.The pressure, therefore, is on retailers to become more channel-agnostic, break down their operational silos and create a frictionless experience across channels if they hope to win over this growing cohort.

So, at one level, it’s easy to understand the retail industry’s frantic quest for so-called omni-channel excellence. But the success from omni-channel will not be evenly distributed–and for reasons that go beyond a given company’s willingness to invest or their capability to execute well.

What many leaders and analysts fail to appreciate is that as customers migrate even a small portion of their purchasing from physical stores to digital channels, a number of important dynamics come into play, and a huge dilemma may emerge.

It’s important to understand that the transaction economics of physical stores and direct-to-consumer (D2C) are quite different. Brick and mortar is mostly a fixed cost business characterized by lots of capital tied up in real estate and the supply chain, married with some relatively high costs just to stay open and staff the store during typical open hours. By contrast, above a basic scale, D2C is highly variable. In most cases, it costs more or less the same to take an order, process it, pick it out of central inventory, pack it up and ship it, regardless of whether the item is priced at $15 or $150. Generally speaking, the higher the average order size, the greater the profitability. If you sell cheap stuff on-line–particularly if you can’t recover your shipping costs from the consumer–good luck making any money.

So if the variable economics of the digital channel are superior to brick and mortar–everything else being equal–the more customers become omni-channel in their behavior, the better a brand’s economics become. This is one of the reasons you’ve seen brands with higher average order sizes (e.g. Nordstrom, Neiman Marcus) investing aggressively in building out their e-commerce capabilities for over a decade.

If the marginal economics of the digital channel are worse than bricks & mortar AND the brand is growing slowly or not all, a real dilemma emerges. On the one hand, changing consumer preferences essentially demand investments in omni-channel capabilities. And this is no cheap date. Yet as customers migrate from stores to online, the overall economics deteriorate in the aggregate. Worse still, a dramatic shift away from physical stores to e-commerce will make many stores questionable economic propositions. Yet, closing those stores may cause the loss of some or all of a blended channel customer’s business. It’s easy to see this as the start of a downward spiral (I’m looking at you RadioShack).

From a consumer’s point of view, the deployment and improvement of omni-channel capabilities is a bonanza. From a retailer’s point of view, the rush to all things omni-channel–without a clear understanding of the underlying economics, the different behaviors by different customer segments and how physical channels interact with digital channels to deliver a remarkable total customer experience –can lead to some very serious mistakes.

 

Note: For an insightful and data rich discussion of many of these issues, I wholeheartedly recommend Kevin Hillstrom’s blog: http://blog.minethatdata.com/

Sears: It’s even worse than you think

The only thing worse than witnessing someone fail, is hearing the denial that pervades their explanations of why things are going to be so much better in the future.

With Sears Holding’s most recent earnings announcement we get yet another quarter of abysmal results and yet another  round of “trust me honey, I can change” assertions from management. Don’t buy it.

Sears was struggling mightily with relevance and profitability when I was still in senior management there more than a decade ago. In the intervening years–despite a merger with Kmart and numerous revitalization experiments–the company has moved from mediocre to bad to just plain sad. Unfortunately, we must now conclude that Sears has zero chance of surviving in anything resembling its current state and size. Given this tragic reality, I recently called for the company to stop the insanity and liquidate ASAP.

While my post was deliberately provocative–and more than a bit hyperbolic–it illustrated two fundamental and important points. The first, that Sears cannot and will not be turned around and therefore the highest value for shareholders is through an orderly liquidation. The second, more urgently, is that the underlying assets continue to decline in value and the sooner their break-up value can be realized, the better.

Last week’s earnings announcement only amplifies my argument–and suggests that things are even worse than most people think. Here are a few points to ponder.

  • Traffic continues to wane at malls and department stores as shoppers increasingly favor online shopping. This trend is sure to continue in the aggregate and bodes poorly for the underlying value of Sears real estate.
  • While they are still far from turned around, JC Penney is on a strong trajectory and beginning to win back customers lost during the Ron Johnson era. A resurgent Penney’s is a growing problem for Sears efforts to improve its soft-lines business.
  • Sears’ much vaunted “Shop Your Way” is clearly making things worse. Sears has flogged this very mediocre rewards program as a transformative strategy. While it’s theoretically helpful in building a customer data asset and enhanced personalization capabilities, all it’s done in practice is give a growing majority of customers an extra layer of discount, without moving the dial on retention or share of wallet. The more people who join, the worse margins get. With its cash balances dwindling, Sears simply cannot afford to keep buying sales.
  • The value of Sears major private brand assets (Kenmore, Craftsman, DieHard) is intrinsically linked to their channel performance, which continues to deteriorate. These brands are also much stronger with an older customer. Here too, Sears does not have time on its side.
  • Lack of investment and a shrinking store base is making things worse. Sears abject failure to invest in their stores to retain any measure of competitiveness has accelerated Sears decline. While some store closings and realignment of space is necessary for virtually any retailer, Sears aggressive down-sizing points to a value proposition problem, not a fundamental real estate issue. Dramatic further shrinking risks de-leveraging the expense structure, losing the support of key vendors and ultimately makes it harder to be top-of-mind with consumers.
  • They’ve yet to find a buyer for Sears Canada. Why? Potential investors see it as a real estate play, not as a going-concern. Bottom line, Sears is very unlikely to get close to their asking price.

Dead brand walking.

 

 

Full disclosure: I have a long, albeit modest, position in JC Penney. 

Move the fence

We’ve all got them.

Fences that dictate who we let into our lives.

Fences that set the boundaries of ideas we’d consider.

Fences that are all about, me, mine and I, instead of we, ours and us.

Fences that mean that if you’re on my side you’re safe, you’re good, you’re “normal”.

Fences that say I’m right, you’re wrong.

Many times, the area prescribed by our fence is arbitrary, determined by inertia, what our parents modeled or simply because “we’ve always done it that way.”

More often that not, we’ve constructed them out of fear.

The fact is that expanding the perimeter allows for a whole new world of possibilities, one that is never as scary as it may seem at first.

The fact is that until we all becoming more willing to move our fences out, we risk remaining hopelessly and sadly stuck.

 

 

How about we start with ‘I’m sorry’?

During the last few weeks, I’ve had far more than my fair share of incredibly frustrating customer service issues to work though. I’ve also encountered quite a few dangerous–or at least annoying–driving situations. Whether caused by global warming, sun spots or, more likely, the universe simply balancing out my karma account, it’s led me to a few observations and conclusions.

In the case of the customer experience snafus, all four companies made stupid errors, some certainly more egregious than others. In all cases, it took quite a bit of time and back and forth–on the phone or via email–to get things straightened out.

Now I get that mistakes happen. I get that, in the big picture, these issues are comparatively minor (feel free to add #FirstWorldProblems if you retweet this). And having led customer service teams myself, I also get that–contrary to retail mythology–the customer isn’t always right. Nevertheless, in the scheme of my multi-year engagement with these companies, these were major fails that had the potential to diminish or destroy my relationship with the brand.

Ultimately, in all cases, the matters got resolved to my satisfaction. Yet how these interactions left me feeling about these brands is markedly different.

Based upon my horrendous experience, I will never do business with one company again. Two of the others, in the end, finally did the right thing. But it was way too hard and took way too long. Now I question whether they really value my business, despite my being a pretty significant, profitable customer. They’ve got plenty of good competition, so when my agreement is up I’m going to be shopping around. The fourth, I’m more or less locked into for a bit, but one of their employees really stepped up and solved a complicated issue.

So what made the difference?

Only 1 of the 4 said “we’re sorry.” When it’s obvious you screwed up, you need to take responsibility. Right away.

Only 1 of the 4 acknowledged how frustrating my experience was. Want to connect with customers? Demonstrate empathy.

Only 1 of the 4 really took on the problem. In all four cases it was immediately clear that the issue was on the company’s end. Yet 3 of the 4 tried to shift blame –and the work of figuring it out–back to me. When you become the customer’s trusted agent, you win.

Only 1 of the 4 had one person who stepped up to drive the matter–in all of its complexity–to resolution (way to go Megan at Cigna!). Own the customer’s problem completely and you have a better chance of owning the relationship.

Which brings me to my recent driving experiences. In one case, someone rolled through a stop sign. Had I not taken evasive action, I would have T-boned them going at least 30 mph. The other day, someone was darting in and out of the traffic going at least 70 and nearly collided with me. Yesterday, someone texting (on the Expressway, doing about 60!) started to drift into my lane, coming within inches of hitting me before they corrected their trajectory.

In all cases, I leaned on the horn; not in a rageful way, but definitely loudly and with a sense of urgency because, hey, high-speed collisions just ain’t my thing. In all cases, I got the same response. They gave me the finger. You know, the one Johnny Manziel likes so much.

Maybe I’m old-fashioned, but it seems to me that whether it’s dealing with customer service issues, engaging in basic human interaction or dealing with loved ones, if we’ve made a mistake–even if we’re embarrassed by our behavior and feel protected by the mothership brand or five thousand pounds of metal–the appropriate response is “I”m sorry.” And the sooner we say it, the better.

Nobody likes a victim. And, in my experience, a little contrition goes a long way, even in the most challenging of circumstances.

The big stall and your angle of attack

Many brands, particularly in retail, seem stuck in a persistent malaise. Earnings report after earning report detail tepid sales and mostly flat-lined profits. The accompanying press releases describe the consumer as “on the side-lines.” Others opine that shoppers have adopted a wait-and-see attitude toward spending. The CEO of The Container Store recently concluded that we are experiencing a “retail funk.”

I freely admit I don’t know a lot about aerodynamics. But what I do remember about why planes stall mainly has to do with their speed and the “angle of attack” of the wings. The reasons we are seeing a big stall in retail are similar.

The lack of speed comes from little to no growth in discretionary income. Combine that with a consumer wariness toward spending after a brutal recession–and an uneven recovery–and we have little forward thrust. There is little reason to believe that this will change markedly anytime soon. And, of course, no brand can do anything to change these macro-economic factors.

The angle of attack is how you approach the market–and this is entirely within your control. Confronted with a lack of acceleration you can choose to follow the herd, taking a one-size fits all approach, making average products for average people, engaging in a race-to-the-bottom price war and so forth. Best case: you hold your ground and your results are in line with your industry segment–which is to say strikingly mediocre. Worst case: inadequate speed and an insufficient angle of attack cause you to plunge to the ground. Not very appealing.

Perhaps you’ve noticed that even in the worst of times there are still some clear winners. Perhaps you’ve noticed that somehow, even when the stock market goes through its gyrations or consumer confidence wanes or weather conditions are not conducive to seasonal apparel sales, somehow or other, a few brands manage to shine.

Maybe these brands are less concerned with the speed of the market and more focused on their angle or attack?

Maybe if you are losing lift, you might want to stop doing the same things over and over that got you there in the first place?

 

The discount ring

I’m amazed that Wall Street analysts are “surprised” that as hot brands get bigger (think Michael Kors, kate spade), their level of discounting increases. Apparently they were all sleeping during their first year economics course when supply and demand was covered.

Target_market_bullseye

 

 

 

 

 

Whether it’s Walmart or Chanel, at the center of any brand’s customer bullseye will be customers who don’t need a discount (or any extra incentive) to buy. This is what I referred to in my recent obsessive core post. As we move out in the rings, away from the center, we encounter customer segments that are less and less intrinsically loyal and thus more in need of extra incentives to buy.

Since Walmart’s value proposition is largely about price–whereas Chanel’s rests on a high percentage of full-price selling–the composition and dynamics of these various customer segment rings will obviously be quite different. But the fact remains that as a brand grows by casting a wider net for customers it will, at some point, develop a discount ring.

As the name implies, customers in the discount ring don’t buy unless they get a deal. In fact, most brands will have multiple discount rings. There will be a ring that needs only minor or modest incentives to pull the trigger. Others only come off the sidelines when prices hit a much deeper level of markdown (or some other incentive).

Unless we are examining a brand that has decided strategically to shun price discounting completely–or assessing certain companies early in their life-cycle–the existence (and relative growth) of a discount ring should surprise no decent analyst.

The real question for anyone trying to understand the validity of a brand’s long-term customer growth strategy is whether the company has a firm grasp of the dynamics within each of these rings and is intelligently balancing the portfolio of these different customer segments.

Coach is a brand that in recent years lost its grip on its customer portfolio and pushed too far on the discount ring. They have paid a steep price and are now trying to rebalance.

In Michael Kors’ case, there are only so many customers willing to pay at or close to full-price for their core offering. Sustaining growth means appealing to more customers. And that means they will need to become more reliant on more price sensitive customers.

Ultimately the point at which the discount ring becomes meaningful is mostly a matter of brand maturity and math. If you get shocked by that it just means you’re not paying attention.

The starting point–the pivotal matter of strategy and intelligent customer development–is to build a level of deep insight about each relevant customer segment. Then we must become intentional about how each plays into the brand’s long-term growth. Having a discount ring emerge is not automatically a matter of good or bad. How it plays out over time is a strategic choice.

Choose wisely.

Just because you killed Jesse James . . .

“Just because you killed Jesse James, don’t make you Jesse James.”

- Mike Ehrmantraut to Walter White, Episode 3, Season 5 of Breaking Bad.

Just because you’ve shot down my idea doesn’t mean yours is better. Defending the status quo can be necessary, but mostly it’s an excuse to stay trapped in our fear.

Just because you sit in judgment of all the “idiot” drivers and “slothful” welfare recipients and “feckless” politicians, doesn’t actually do anything. Though your fragile ego may get a hit for a few seconds, putting others down isn’t a solution. And it certainly adds nothing to the level of discourse.

Tearing down something else isn’t the same as your building something worthy or interesting. So instead of complaining, let’s see your plan.

Being the critic is mostly a place to hide from the hard work of leading us to something new and meaningful. So instead of judging, let’s hear your ideas.

Eliminating the competition may make life easier for a bit, but eventually our art, our projects, our passions have to stand on their own merits.

The universe is listening. And waiting.