The Relationship Between Marketing and Business Risk; Do One and Reduce the Other

/0 Comments/in , , /by

Have you ever noticed how often the group of people who create ads, run promotions, and manage sponsorships are called the marketing department? That’s always struck me as kind of odd. I think marketing is the process of figuring out who your customer is, or can be, and why they buy your product. Advertising and promotion are the tactics you use to reach and attract those customers after you’ve reached some decisions about your customer based on your marketing.

I suppose it’s so obvious it shouldn’t have to be said, but if your advertising and promotion isn’t based on solid marketing you can spend a lot of money and damage the only real asset you have in this business- your image. We’ve all seen retailers and brands do it.
 
The thesis of this article is that good marketing reduces business risk and the perception of business risk, perhaps helping you to think in a way that facilitates recognizing new customers and markets.  It’s critical if you’re shop or brand is going to stand out in a crowded and highly competitive market.
 
The Status Quo and Its Downside  
 
 Right now, in this industry, everybody pretty much does the same advertising and promotion stuff. You all know what’s on the list of the ways we compete and I won’t bother repeating it here. I recognize that sometimes somebody’s ad is cooler than somebody else’s, or a particular team rider breaks out from the crowd for some period of time. But at the end of the day if we’re all doing the same stuff, and our products are more or less all the same, how do you, as a shop or a brand, break out from the crowd?
 
Answer- you don’t. If you’re doing the same as everybody else, and your product is no better, the best you can do is to be as good as they are. The exception, of course, is that you can do more of what all the others are doing. It may not be better or different, but it has an impact. But to do more, you have to have more- dollars that is. Then it’s only the big guys who win.
 
It probably hasn’t escaped your attention that the big are getting bigger and controlling more and more of the market. I’m suggesting that’s inevitable- in any industry- if, lacking solid marketing, the only basis for doing better over the long term is to spend more on advertising and promotion and cut prices. That tendency is exacerbated by the fact that it’s the larger businesses that are most likely to really do good marketing.
 
The Perception of Risk
 
I suppose this article had its genesis over a year ago when I talked to Santa Monica based ZJ Boarding House co-owner Todd Roberts at ASR. In the course of talking about a whole bunch of stuff, we got around to the ongoing travails of smaller retailers and what they needed to do. Todd said, “Jeff, you can’t be afraid to take some risks.”
 
I thought he was right. Still do. But at the time, I didn’t know where to go with it. It didn’t seem useful to say, “Take more risks!” unless I could explain why the risk was worth the potential payback and how it could be controlled.
 
Still, it seemed an important point, so I put it in whatever the part of my brain it is that holds ideas to be thought about and addressed later. It recently popped out more fully formed.
 
In helping businesses in this industry manage transitions, I’ve known for a long time that we all, including me, like to do what we’re comfortable with and have done successfully in the past. It’s human nature. So we go with the flow in running our businesses, following the annual schedule for developing ads, sponsoring events, attending trade shows and all the other stuff. It feels low risk, doesn’t it? That’s because it’s what we’ve always done.
 
Conversely, from time to time, really new ideas for advertising and promotion come across our desks. But they don’t fit our frame of reference. There isn’t a place for them in the annual advertising and promotion schedule. Other companies aren’t doing them. Doing the new things seems risky. Doing the same old stuff doesn’t.
 
Granted, it’s also a matter of available funds. It’s much less risky to do something new when you don’t have to cut out something old to try it. Another advantage to bigger companies with strong balance sheets.
 
We tend to perceive low risk in doing what we’ve always done. We perceive higher risk in doing new things. I think it’s the other way around. Industry conditions and the difficult competitive environment require that you do some of these new things if you are going to succeed. If you don’t, you have no opportunity to be better than anybody else.
 
And that gets us to marketing as a competitive tool, a money saver, and a way to fix your perceptual problems.
 
Doing Marketing
 
Sometimes I just have good karma. I’d been working on a talk I had agreed to give on how we compete as an industry and how we can do it better. Before I finished preparing, I flew off to ASR. I walked into the room late, but managed to hear most of Mikke Pierson’s (the other co-owner of ZJ Boarding House) talk on how to utilize your data base effectively. I know this article is turning into a damned ZJ Boarding House promotional piece, but sometimes you just have to go with the flow.
 
So here I am, thinking about how the industry competes, why brands and shops need to take some risks, and why they often seem reluctant to do it. Having managed to put off my article deadline until after ASR, I was getting desperate for a good way to tie this all together in the real world.
 
And Mikke saved my ass.
 
To make a longer story short, he said, “We spent $4,000 with Customers First to clean up our mailing list and plot our customers on a map so we knew where they were coming from. We did our usual promotional mailing at a cost of $16,000 and it generated $135,000 worth of business. The cost of doing the mailing was a whole lot lower because we knew who we were mailing to and why. We didn’t have to pay the post office for returns, and we didn’t waste money on duplicates, people who weren’t interested, or who were too far away to come to the store.”
 
The $4,000 spent with Customers First is real marketing. And I want you to notice the following things.
 
  • It wasn’t some esoteric, company wide, long term, epic undertaking that produced a ream of data that nobody knew what to do with. It was practical, cheap, quick, and the return was immediate and measurable.
 
  • It reduced risk. They knew much better who they were doing a mailing to and why. Maybe just as importantly, it also reduced the perception of risk.
 
  • It generated additional sales- quickly.
 
  • It didn’t cost them money- it saved them money.
 
  • It wasn’t some change of direction, risk the company strategy. It was a fairly minimal, common sense sort of thing. If it hadn’t worked out they would have been out $4,000 and a little time and would have learned something.
 
  • It focused on their customers- not on their competitors and not on the industry.
 
What I said I was trying to do at the start of this article was demonstrate the relationship between marketing and business risk. The relationship is both perceptual and practical. Good marketing reduces your business risk. It also reduces the perceived risk because your actions and decisions are based on good data. That means you are more willing to try some new things.
 
And I don’t think you have much choice. Focus on your end customer and why they buy from you. Think of a dozen questions you’d like to have answers for and how those answers would make it easier to reach those customers. Answer just one and see what you can do with the information. The risk of not trying is just too big. Like Walt Disney said, “You don’t build it for yourself. You know what the people want and you build it for them.”

PacSun Quarter and 9 Months Ended 10/28/06- Good Tactics. What’s the Strategy?

/0 Comments/in /by

         Pacific Sunwear’s (NASDAQ: PSUN) official SEC filing isn’t out yet (I’m writing this November 26 because I love working Sundays), but I’ve read the press release, reviewed the associated financial statements for the quarter and nine months ended October 28, and listened to the conference call. Let’s look at the numbers first, and then talk about the conference call.

 The Numbers
        The quarter showed a slight decline in sales from $377 to $375 million. But gross margin fell from $144 to $106 million—or from 38.2% to 28.3%. Selling and General and Administrative expenses rose from $81 to $93 million. Net income fell from $40.5 to $9 million or from $0.54 to $0.13 per share on a fully diluted basis.

         On the balance sheet, the current asset fell from 3.45 a year ago to a still strong 2.34 at the end of this October. The only other thing I’d note from the balance sheet is that, even after a write down, inventory—at $253 million—was still nearly $10 million higher than a year ago.

         In the mix was a same-store sales decrease of 6.7% and the ten cents a share inventory write down—primarily for footwear and accessory categories. The CEO resigned and was replaced by Company Lead Director Sally Frame Kasaks as interim chief executive officer. At different times in her career, Ms. Kasaks was Chairman and CEO of Ann Taylor Stores, President and CEO of Abercrombie & Fitch, and Chairman and CEO of Talbot’s, Inc. I think we can conclude she knows a bit about specialty retailing.

         With financial results like that, the stock must have cratered, right? Nope. The press release was dated November 9. The stock closed that day at $17.27. The next day it rose to $18.56—a 7.47% gain on volume that was 3.76 times the average volume. The company’s most recent closing price as I write this was $19.48. The conference call was held on the November 10 at 5:30 in the morning Pacific Time. No, I did not listen to it live.

       Clearly some people were pleased with what they heard on that call, and maybe had been expecting quarterly numbers that were worse than they were. But what made them so happy?
 
The Conference Call
        I wish they made transcripts of conference calls available or—if they do—I wish I knew where I could get them. Trying to write down all the good things Ms. Kasaks said they were doing as quickly as she was talking was a real pain in the butt. I kept trying to stop and restart the replay, but Media Player isn’t built for rewinding fifteen seconds. And another thing, left-handed people with lousy writing should not be allowed to own fountain pens—much less try and take fast notes with them. Uh, I seem to have gotten off track.

         Anyway, Ms. Kasaks highlighted three key big ideas for Pac Sun to focus on. They were:
      1. A commitment to build the juniors business to increase sales and store productivity.
      2. A focus on improving the in-store presentation of merchandise.
      3. A strategic assessment to understand how they can reconnect with their customers.
 
These three big ideas followed a list of initiatives Pac Sun was undertaking. I want to quote one of those initiatives: “Put more focus on transitional merchandise with the implementation of our spring floor set at the end of January. This will insure that our spring product is presented earlier than last year while being merchandised with more wear now product than in the past.”

         I thought this initiative required a little explanation and discussion.
 
Transitional merchandise is product that’s brought in during one season (winter in this case) and can be worn in that season, but can also be worn during the upcoming season (spring). Sweaters in spring colors might be an example. You sell it now and wear it now—but they carry over into the next season.
         The reason you do this is that it has the potential to improve your sales in the existing quarter. The danger is that if you don’t do a really good job in selecting merchandise, picking the right quantities, and merchandising it well, you may get to the next quarter with assortments that are old.
         In other words, at the extreme, you could theoretically end up just transferring sales from one quarter to an earlier one. PacSun spent some time on its conference call discussing some issues in just these areas, so it will be interesting to watch them implement this initiative.
         I think there were seven initiatives in total, including the one I quoted above. Somehow, I’ve managed to write down nine. I was either listening too slowly or writing too quickly. They included a review of the company’s customer communications program and in-depth customer research. Other initiatives will focus on inventory and in-store presentation. They want to reduce inventory density in their stores “to provide assortment clarity and in store presentation.” They noted a decline in their sneaker business and have plans to improve their assortment.  They will review it “to be in line with customer preferences.”
         They have plans to improve their merchandise presentation “without undertaking a major investment in time and capital.” They are utilizing something they called a “refresh” format that involves certain new design and layout elements. And they’re trying to improve the process by which they update their monthly floor sets.
         Due to time and cost constraints, you can’t wave a magic wand and have all 1,169 stores (835 are PacSun) updated. They are working to figure out what seems most likely to work and to implement the changes as time and capital permit. They are developing a new logo and new layout that provides what they characterized as a much more sophisticated look, and expect to do 30 to 40 remodels utilizing this concept next year. Sounds like the right direction and right process to me.
         That they are doing this isn’t a surprise to anybody who has been in a PacSun, Zumiez, and Hollister store lately. In Hollister, there’s a certain calmness that makes you feel like you’re on the beach. Their attempt to connect to the surf market—and they seem to do it pretty well—is clear. Zumiez carries hard goods. That has given them credibility in the market even as their store numbers expand. PacSun has the right brands and competitive prices but needs, in the words from the conference call, “To understand how they can reconnect with their customers.”
         During the conference call, Ms. Kasaks acknowledged that she doesn’t think PacSun can be authentic at their size. While that may cause a gasp of dismay and prognostications of their demise in some action-sports circles, I found it refreshing. It’s inevitably true for a company with this many stores. So you recognize it, work on evolving your inventory and your look, and undertake a strategic reassessment.
         So what’s the strategy? That’s what PacSun management is figuring out. They’ve done an awful lot in three months. They’ve been open about their issues and have moved to implement tactics that address them. I can’t wait to walk into one of their remodeled stores and see where the strategic reassessment came out. In the meantime, we’ll all keep watching PacSun as a barometer of what’s happening in the broader lifestyle market and worry about how their initiatives impact orders and sales of our brands.

 

Globe Annual Report and the Pacific Brands Deal

/0 Comments/in /by

Being traded on the Australian Stock Exchange, Globe doesn’t have to file the usual reports with the Securities and Exchange Commission here in the U.S. But they did file an annual report (109 pages, but happily for me full of pretty pictures and big type) and, in conjunction with the announcement of the pending sale of its Australian and New Zealand street wear apparel division to Pacific Brands for a maximum of $42 million Australian Dollars, it was worth taking a look at.

 
By the way, all the numbers in here are in Australian Dollars. Currently, an Australian Dollar will get you about $0.76. Do your own math. Oh, and just so I don’t have to say it continually, Globe’s fiscal year ended June 30, 2006. The annual report was released October 13th.
 
The first thing I want to say is that I like these guys. I mean, thanks to them, I now know how to bounce quarters into a glass. You know who you are. Maybe more importantly is that I love any management that starts off its annual report directly and honestly with the Chairman and CEO saying, (I’m paraphrasing here) the first quarter in North America really sucked, but the brands are in better shape and we’ve got our financial and management ducks in order, but we didn’t make as much money this year as we’d hoped. All you can ask of any management is competence, honesty and integrity.
 
Sales fell in 2006 from $204.5 to $197.3 million. Net Income dropped from $3.3532 to $0.471 million. There’s no way to make that look like a good result. However, the improvement they talk about in the annual report is better seen in the cash flow. There we see that in 2005, operations used $7.381 million in cash. In 2006, operations generated $2.780 million. And that is almost entirely the result of increased receipts from customers. That’s a good thing, and suggests they are doing all the appropriate management things that a company has to do when things aren’t going its way- controlling inventory, collecting receivables, being tough on spending. Let’s see if the balance sheet bears that out.
 
Inventories and receivables both down a bit. Good. Payables down almost $10 million. Great. Current ratio went up from 2.43 to 2.83, a 16.5% improvement. That’s a strong current ratio. My only caveat is that a current ratio is as of a moment in time (June 30 in this case) and seasonality, to the extent Globe has it, can wreck havoc with that. As a former President of a couple of snowboard only brands, I am justifiably paranoid about that.
 
Meanwhile, back on the cash flow, I see that Cash Used in Financing Activities fell from $11.1 to $0.3 million. Of course, $8.3 million of those savings came from not paying dividends in 2006 that they paid in 2005 and I suppose the people who use to get those dividends aren’t that thrilled, but I imagine it was the right thing to do.
 
The bottom line is that while they used $22.2 million in cash in 2005, they used only $3.0 million in 2006. The conclusion? They responded appropriately to their business conditions, but now they have to improve their bottom line by selling more at better margins.
 
There’s a limit to how much you can accomplish that by controlling spending. So they are taking the strategic step of making the apparel sale to Pacific Brands. The brands being sold “…include Mooks, M-ONE-11 and Australia and New Zealand licensed brands together with eight concept retail stores in Melbourne and Sydney and two Direct Factory Outlets stores,” according to the Melbourne newspaper The Age. The same article says these assets represent about 35% of Globe International’s group revenue.
 
Certainly, this sale gives Globe some additional resources to use in focusing on its core brands. Apparently, it’s the result of the strategic review that Globe announced it would be conducting last February.
 

The interesting thing to me is that this leaves Globe with a bigger percentage of its revenues in skate hard goods- a tough market for anybody. Hopefully, the tighter focus and proceeds of the asset sale will help them improve their performance there.   

 

What Forward Thinking Retailers are Doing: Trends That Probably Won’t Surprise Anybody

/0 Comments/in , /by

The issues that smaller retailers are facing haven’t changed much. There are too many retail stores, pressure from chains, brand stores and big boxes, a tough financial model, the challenge of keeping margins up, lack of product differentiation, increasing costs, over distribution.

 
That’s a cheery environment, isn’t it? You’ve got a choice. You can bemoan the unfairness of it all or you can take advantage of this tough environment that’s putting a lot of pressure on your competitors and do some things to stand out and that help you address these issues.
 
Here’s what I’m seeing successful retailers doing.
 
One- They Are Growing
 
Higher costs, more competition and margin pressure, too much similar product in too many places means that you need more revenue to make it. This seems so non controversial as to make this a really short section. It’s basically an equation; a fact. It just is.  But I’ve put it first because it’s the ultimate motivating factor for the other actions I discuss below. You have to make a profit if you expect to be around very long.
 
Two- Making Themselves Important to Their Brands
 
How does a shop do this exactly? Well, for a start, it pays its bills to the brand on time. It’s absolutely honest with the brand’s sales reps and management. It merchandises the brand well. It includes the brand in its own promotions. It provides feedback (good and bad) on what’s selling, why, and on trends it sees emerging. It does not abuse the brand’s warranty and return policy. And finally it does not let the brand talk it into buying products it doesn’t think will sell well or order sizes it doesn’t think it can move. As we all know, the season end conversations such moves engender are not helpful in building a relationship.
 
It may have occurred to you that growing (point one) contributes to making a shop important to the brand (point two). Could be a trend emerging here.
 
Three- Gives Credibility to the Brands They Carry
 
The best shops are the ones the brands just have to be in. The shop gives the brand credibility- not the other way around. Any brand carried by the shop is, by definition, credible. For a shop this can translate into flexibility in your relationship with the brand. That may mean, among other things, better terms and conditions, priority in new product and shipping, patience from the brand if you hit a rough spot, support for your community based activities, faster and more positive response from management, and more ability to pick the products and categories you carry. Obviously, it’s kind of a subset to point two above. However, I chose to separate it because at the extreme, when a shop really does this well, there is pretty much no brand they absolutely have to carry to be successful. And that ties in with……………….
 
Four- Expanding Their Circle of Influence
 
When it’s the shop that gives the brand credibility it’s because the shop has become acknowledged as an arbiter of trends and technical product attributes. They are a destination store for their customers. They are part of their community, but of course the definition of that community has changed. It no longer means just the geographic community, but a community of people with shared interests and lifestyles.
 
A customer’s awareness of an established brand is typically the result of that brand’s advertising and promotion programs. Those programs may have a lot to do with getting the customer into the store. But the decision to purchase that brand, in a shop with this kind of stature, can be heavily influenced by the experienced and knowledgeable sales people. You can hear the conversation in your head- “Brand X is a great brand and that deck would certainly work for you, but here’s a couple of others you might consider based on what you’ve told me about your style and level of experience.”
 
And that product, whatever it is, doesn’t necessarily have to be one the customer has ever heard of. If it’s in this store, it must be good. Kind of frustrating to a big brand, I suppose, to think that all their work advertising and promoting their brand and getting the customer into the shop turned out to be a chance for the sales person to sell a brand the customer has hardly heard of.
 
On the other hand, it might give hope to smaller, new brands. The support of shops like this ideal type shop I’m describing may be the best chance such brands have to prove themselves.
 
Five- Buying Together
 
I can’t tell you this is a wide spread trend, but I did have a conversation with one European retailer who was very happy with the result. He was a specialty shop in, I think, Southern Austria. He was practically chortling as he explained to me the happy circumstance he found himself in as part of an 11 store buying group. You see, it happens that the other ten stores were all in Northern Austria. So while all eleven stores got the benefit of better prices from buying together, the ten in the north suffered from the possible disadvantage of all having the same product. He, happily segregated in the south of the country, didn’t have to worry about that. No wondered he positively glowed as he described the scheme.
 
Of course, if you’re getting better pricing through some cooperative buying, maybe the pressure for growth (point one) declines a bit, and lord knows you’re becoming more important to the brands (point two). Maybe not more popular, but more important.
 
Interestingly, my advice to brands has always been, “Europe is different from the US. You can’t think of Europe as one market. You can’t even think of Germany as one market.”
 
That’s still good advice, and I expected it to apply to specialty retailers as well. I thought retail in Europe would be “different” from retail in the US. Imagine my surprise when, in the two years I just spent in Europe, I discovered that it really wasn’t- at least not in terms of the challenges European retailers were facing.
 
 Wow- wherever you go, there you’ll be.
 
By which I mean Europe seems to have the same damned problems we have, and I suppose if we can take any comfort from that it’s because it means we here in the US haven’t done anything egregiously stupid that Europe somehow avoided.
 
Finally- Taking Risks, But Not Really
 
I hope I’ve made the point that these five operational imperatives, to coin a really pompous sounding phrase, don’t stand in isolation from each other. Nor do they stand in isolation from the specialty shop’s retail environment I briefly described at the start of this article. There are as many tactics as you are clever enough to think of that you can try to move your shop towards the market position I’ve described.
 
I’ve talked to lots of retailers who were cautious about trying them. They cost “too much,” had never been tried before, there wasn’t time to do them, etc. In a word, they were risky.
 
And you know what? They are risky- especially if you try and implement them on a piece meal basis. It might even be true that it would be a waste of time.
 
What I’ve tried to demonstrate in this article is that the operational imperatives are related to each other and in fact support each other. Each of them is comprised of a group of tactics that each shop needs to identify based on its particular circumstances. There is a certain momentum you build as you support a tactic from one imperative with a tactic from another. You don’t increase risk by doing more- I think you reduce it.
 
Or look at it another way; If you agree that you got to have a financial model that makes sense, and you are struggling with your current one, and you agree that your business environment isn’t getting any easier and calls for some change, then even if there is some risk here, isn’t it less risk than doing nothing?
 
I’m going to use a word here I usually avoid because (at least for me) it frequently engenders serious confusion about what it means accompanied by a sense that it’s futile to try and figure it out and implement it. The word is strategy.
 
But of course we’re all following one even if we don’t know what it is, speaking of risk taking. And if, like me, you’re just a bit intimidated by “strategy” because you’re not quite clear what the hell it is, maybe we can get some clarity by just considering it a bunch of related tactics.
 
My five operational imperatives, or rather the tactics that would make them up, are a strategy to deal with the existing retail environment. You don’t have to say, “It’s time for a new strategy,” but you might consider picking some appropriate tactics for each operational imperative and start doing them. Might be fun, probably wouldn’t cost much, you might find that the results are cumulative and often quick to see, and there’s not much risk involves. Your business environment requires you give it a shot.