E-commerce: Winning the War

Congratulations, catalogers! We’ve won the battle against the “pure play” e-tailers. We all said they couldn’t last, and now they are dropping quicker than power lines in a Wisconsin ice storm.

At the same time, catalogers have brought to the Internet channel all of the great assets we knew we had. Merchandising, graphics and copy capability, systems and fulfillment. The results are in, and the catalog business is migrating successfully to the Internet more quickly than any other type of business.

With all the great new Internet business for catalogers shown in the chart below, shouldn’t we be experiencing the best of times? You’ve all read the headlines: “Coldwater/Hanover/J. Jill, etc. report Internet sales increase,” “Most catalogers’ Web sites profitable...” “Jupiter research reports holiday e-commerce sales at $10.8 billion...”

Unfortunately, just as the dot-coms have found there is no New Economy or New Math for measuring profits and worth, catalogers have found there’s no “new profitability” in producing an Internet sale.

The chart accompanying this article shows how rapidly seven catalogers are bringing the Internet into their sales mix, and what the effect has been. The companies included in the chart meet four criteria:
1. They’re public.
2. They report catalog and Internet sales quarter by quarter.
3. They’re principally oriented to merchandise sales to consumers.
4. They derive a very significant portion of their sales from the direct channel.

We’ve had to eliminate a few companies from the chart, because they simply do not break out Internet sales. For example, Blair Corp. feels its new Internet initiatives are too small to break out, and Lands’ End reports Internet sales annually only.

It’s a small sample of companies, and the last reported quarter as of press time does not include the all-important holiday selling season. But the numbers are real—not hype from market research firms with a vested interest in growing Internet sales, nor press releases from investment analysts or trade associations. Based on these data and conversations with other catalogers, I have drawn a number of conclusions about the Internet phenomenon.

Internet Sales Grow By Leaps

In the third quarter of last year, Internet sales grew to 16 percent of all direct sales for this group of companies. The range was from a high of 35 percent for Sharper Image to Williams-Sonoma at 10 percent. (Williams-Sonoma achieved these numbers without having all its brands online).

Overall, Internet sales were 2.6 times higher than in 1999, and at all seven companies Internet sales were more than 10 percent of total direct sales. In 1999, only three of the seven companies had Internet sales of 10 percent or more.

Conclusion #1: Catalogers are doing a lot of business via the Web, and Web sales are growing very fast. If your company isn’t getting at least 10 percent of its direct business in Web sales, take a serious look at the reasons.

Conclusion #2: Companies that got in early don’t seem to have any great advantage. Hanover and Skymall were early entrants, and their Web sales growth have slowed. J. Jill, Coldwater Creek and Williams-Sonoma were later to the game, and are doing as well as others at converting their clientele to Web shopping.

Conclusion #3: Despite fears about selling apparel on the ‘Net, firms in that category are doing very well, much better than most of the pure-play dot-coms like the late, lamented Boo.com.

Internet Diverts Sales

While Internet sales leaped, direct sales taken in the traditional manner—phone and mail—did not. In this group of companies, in this quarter, three of the seven companies saw declines in phone/mail orders, and only two showed double-digit increases.

In the case of Williams-Sonoma, its 18-percent increase was less than its increase in circulation, and The Sharper Image’s fabulous 42-percent increase was just a part of its spectacular 2000. Overall, phone/mail orders grew a meager average of 4 percent for all seven.

Conclusion #1: If you are not charging your Internet profit and loss with a good chunk of catalog advertising costs or crediting your catalog P&L with Web sales, you’re misleading yourself.

Conclusion #2: If it looks like catalog response to your prospecting lists or housefiles is flagging, your company needs to find a way to accurately reassign Web transactions to the catalogs that pushed them.

E-tailers have hit the wall while our e-commerce sales have grown by leaps and bounds. Unfortunately, this has not translated into significant new profits, yet.Web-based sales don’t seem to be saving tons of operating expense—at least not yet!

With all the great new Internet business for catalogers shown in the chart below, shouldn’t we be experiencing the best of times? You’ve all read the headlines: “Coldwater/Hanover/J. Jill, etc. report Internet sales increase,” “Most catalogers’ Web sites profitable...” “Jupiter research reports holiday e-commerce sales at $10.8 billion...”

Unfortunately, just as the dot-coms have found there is no New Economy or New Math for measuring profits and worth, catalogers have found there’s no magic “new profitability” in producing a sale on the Internet.

A number of catalogers are finding that the Internet is less important than previously believed for creating new sales and increasing profits. Let’s recall a couple of the promises of the Internet revolution: (a) Drastically lower operating costs as customers fill out their own orders, and as customer service is conducted electronically! and (b) Hugely improved inventory control (and margins) as you sell only what’s available and sell it down to the last item! While five of the companies shown in the chart did show improved net income in the third quarter of last year, none has stated that Internet operating efficiencies are the cause. Add this to the recent earnings warnings from Lands’ End, Lillian Vernon, William-Sonoma and others, and we do not get the picture of an industry with rapidly rising profits and lower costs.

So far, we can’t see a lot of evidence that catalogers’ cost structures are improving due to Web marketing. For 10 years (the last three in conjunction with the Direct Marketing Association), W.A. Dean & Associates has tracked typical operating costs for catalogers in “The State of the Catalog/Interactive Industry Report.” For larger companies, operating costs have run about 16 percent of sales; in the just-released 2000 report, they’ll again be 16 percent. The same story holds for gross margins. It’s hard to draw the conclusion that catalogers have seen big improvements in backorders, margin or inventory control due to their increased Internet business.

Conclusion #1: Now that Internet sales are up—pushing 10, 15, 20 percent or more at catalogers—it’s time for companies to take a concerted look at their operating costs to determine how one can use the Internet to lower operating costs! Are you staffing your customer care center with the right blend of phone/mail/Web staff? Have you automated customer inquiry response to the extent you can? Are your e-mail customer contacts clear and complete or do most customers have to call to clarify your e-mails? Conversely, look at all those expensive little add-ons to e-care that your Web staffs want to install. How much volume will it take for them to be cost justified?

Conclusion #2: While it’s not clear that the Internet will eliminate backorders and overstocks, it can be a big help. Can you integrate your Internet presence into your liquidation strategy? Are you making backorder dates clear to the customer when they order?

Catalogers have won the battle with pure e-tailers. E-tailers have hit the wall while our e-commerce sales have grown by leaps and bounds. Unfortunately this has not translated into significant new profits—yet. The Internet has inspired great new creative energy in our companies. Our customers love our new Web sites, we have access to dozens of new technical tricks to enhance sales and customer satisfaction, and we’ve built sites that both look great and work. Now it’s time to focus that creative energy on producing the incremental sales growth and operating cost improvements this new technology affords us. The outlook for direct marketing has never been better!

Mark Swedlund is a partner with W.A. Dean & Associates, a San Francisco-based marketing, planning and business consultancy. Reach him at mswedlund@dean-assoc.com.