CRITICAL ISSUES & TRENDS

It’s enough to make you break out into a chorus of “Happy Days Are Here Again”: An impressive 74% of respondents to Multichannel Merchant’s 2005 Benchmark Survey on Critical Issues and Trends reported that their companies had met or exceeded profit goals last year, up from 63% of the 2004 respondents and just 51% of respondents two years ago. And 70% had met or exceeded their revenue goals, compared with 64% of the 2004 participants and 58% of the 2003 respondents.

And the good-news trend continued through the first half of this year. Seventy-six percent of the multichannel merchants surveyed said that they’d met or exceeded their profit expectations for the first six months of 2005, and 69% had met or exceeded their sales goals for the same period.

Respondents felt optimistic about the year ahead as well. Although the survey was conducted from Sept. 14 through Sept. 27, when executives might understandably have been concerned about the effect of rising fuel costs in the wake of hurricanes Katrina and Rita, 45% of respondents nonetheless predicted that during the next 12-24 months their businesses would grow at a faster rate than they had during the past two years. Another 27% anticipated the same rate of growth during the next two years as they’d enjoyed during the past two.

Despite the rosy financial figures, respondents to the survey still felt the need to trim costs without cutting offerings or services. Eighty-seven percent of participants rated it one of their top three management issues, making it by far the most-cited issue overall. The number-one merchandising and operations concern was also cost related: Forty-nine percent of respondents said that rising package delivery costs were one of their three most pressing merchandising and operations concerns. As for marketing concerns, managing multiple marketing channels was cited most frequently, by 36% of respondents.

Business-to-business respondents were far more worried about rising catalog distribution costs than were their counterparts at consumer companies. Nearly one-third (32%) of the b-to-b participants cited it as one of their top three marketing issues, compared with 15% of the business-to-consumer respondents. And more b-to-bers (27%) than b-to-c respondents (18%) cited the need to acquire customers more profitably as a top concern. On the flip side, while 38% of the consumer respondents cited managing multiple marketing channels as a top concern, only 27% of the b-to-b participants felt the same.

B-to-b executives were much more worried about the need to integrate operations for multiple channels: 57% named it as one of their top three merchandising and operational concerns, compared with a scant 12% of b-to-c respondents. But while 26% of the executives at consumer companies cited as a major issue the need to upgrade customer service operations to remain competitive, fewer than 10% of the b-to-b respondents did.

B-to-b and b-to-c respondents also differed regarding their use of e-mail as a marketing tool. Nearly three-quarters (74%) of the executives at consumer companies said they had an e-mail marketing campaign in place, and every single one of those that didn’t said they were considering implementing one. But only half of the b-to-b companies had an e-mail marketing campaign; of the remainder, 27% weren’t even considering adding one. Among all respondents that used e-mail marketing, incidentally, 53% said their response rates had increased during the past year; only 12% saw a decline.

For both business and consumer merchants with print catalogs, proprietary Websites were the favored medium for promoting them (used by 84% of b-to-c respondents and 78% of b-to-b respondents). But when asked which media they planned to use to promote their print catalogs in the next 12 months, more b-to-c respondents expected to use e-mail (84%) than their Websites (77%). More consumer merchants will likely use solo mailers and other sorts of noncatalog direct mail too: Whereas 29% said they currently used them to promote their catalog, 39% planned to use them next year. Likewise, only 6% of b-to-c respondents said they promoted their catalogs in trade publications, but 19% intended to do so in the coming year.

B-to-b respondents anticipated making far fewer changes to their catalog promotion strategy in 2006. The one appreciable difference: 56% of those with catalogs expected to promote them via e-mail next year, whereas only 39% had done so this year.

Top marketing concerns

Respondents with sales of less than $10 million

The b-to-b respondents also expected to use e-mail more to promote their Websites: 48% of those with Websites used e-mail this year, but 62% planned to do so next year. Again, though, the business merchants as a whole didn’t plan to dramatically increase or decrease their usage of other media to tout their sites.

Respondents with sales of at least $10 million

Not so the respondents at b-to-c companies; they planned to rev up their traffic-driving efforts big-time. This year 88% used e-mail to promote their Website; 97% expected to do so next year. Thirty-two percent used solo mailers and other types of noncatalog direct mail this year, but 41% expected to do so next year. This year 29% used online services such as America Online; 38% planned to next year. Likewise, 29% used co-op Websites or online malls this year, but 38% expected to use them next year. And while just 12% of the b-to-c respondents with Websites used trade publications to drive online traffic this year, twice as many expected to do so next year.

Most popular media used to promote print catalogs

B-to-c respondents:

  1. Finding prospects 50%
  2. Increasing competition from manufacturers and retailers entering catalog/Web marketing 40%
  3. Managing multiple marketing channels 33%
  4. Rising catalog distribution costs 33%

B-to-b respondents:

  1. Managing multiple marketing channels 42%
  2. Retaining customers 32%
  3. Increasing competition in my specific product market 29%
  4. Matching back the source of buyers to the correct medium and promotion 29%

Most popular media used to promote Websites

B-to-c respondents:

  1. Own Website 84%
  2. E-mail 77%
  3. Space ads 29%
  4. Solo mailers/other direct mail 29%

B-to-b respondents:

  1. Own Website 78%
  2. Solo mailers/other direct mail 61%
  3. Trade publications 44%

Top merchandising and operations concerns

Respondents with sales of less than $10 million

  1. E-mail 88%
  2. Print catalog 68%
  3. Banner ads on other Websites 35%

Respondents with sales of at least $10 million

  1. Print catalog 62%
  2. E-mail 48%
  3. Solo mailers/other direct mail 48%
  4. Trade publications 48%

Top management concerns

Respondents with sales of less than $10 million

  1. Rising costs of package delivery 60%
  2. Rising customer service expectations 40%
  3. Inventory forecasting 37%

Respondents with sales of at least $10 million

  1. Inventory forecasting 56%
  2. Rising costs of package delivery 49%
  3. Rising customer service expectations 33%

Methodology

  1. Need to reduce costs without reducing offerings/services 83%
  2. Difficulty in securing additional/continuing financial support 43%
  3. Difficulty in finding experienced staff 40%
  1. Need to reduce costs without reducing offerings/services 90%
  2. Difficulty in finding experienced staff 51%
  3. Difficulty in retaining staff 32%

On Sept. 14, Primedia Business e-mailed invitations to participate in an online survey to 6,795 subscribers of Multichannel Merchant selected on an nth-name basis. The invitation contained a link routing respondents directly to the Website where the survey questionnaire was located. Respondents were offered a chance to be entered into a drawing for one of four $50 Amazon.com gift certificates. A follow-up e-mail was sent on Sept. 20. Of 5,905 deliverable surveys, 101 surveys were completed, for an effective response rate of 1.7%.

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Critical Issues & Trends

Catalogers continue to agonize over the need to reduce costs without reducing offerings or services. Among respondents to Catalog Age’s exclusive Benchmark Survey on Critical Issues and Trends this year, 81% cited it as their top management concern, the same percentage as last year. And once again, it was the most frequently cited issue overall. In comparison, the number-one marketing issue, making customer acquisition efforts more profitable, was considered a critical concern of 49% of respondents. And the top merchandising and operations issue, the rising costs of package delivery, was a key concern of 47% of respondents.

When it came to marketing issues, there were no significant variances between consumer catalog respondents and their business-to-business counterparts, nor between small catalogers (those with annual sales of less than $10 million) and the larger survey participants. For instance, 52% of this year’s consumer catalog respondents and 41% of the b-to-bers considered the need to acquire customers more profitably a top concern. Among last year’s survey participants, only 20% of the consumer catalogers and 17% of the business mailers deemed it a pressing issue. In fact, last year only 18% of all those surveyed considered it one of their top marketing worries.

This year’s consumer and b-to-b respondents did have different concerns regarding merchandising and operations. Both agreed that rising package delivery costs was a key issue, with 53% of the consumer respondents and 45% of the b-to-b catalogers listing it as such. But the number-two and number-three concerns of the consumer catalogers — the availability of fresh or unique merchandise (cited by 49%) and the ability to rapidly restock and rebuy merchandise (46%) — weren’t among the top three issues worrying b-to-b respondents. B-to-b catalogers were more concerned with inventory forecasting (45%) and the need to integrate the operations of multiple channels (36%).

Similarly, 36% of the consumer catalogers said that federal and state attempts to implement use taxes were a top management concern, making it second only to the need to cut costs without reducing offerings (82%). But merely 19% of the b-to-b respondents said use taxes were a key concern. They were more worried about the difficulty finding experienced catalog talent (29%), the need to merge with or acquire another company to achieve economies of scale or fund expansion (38%), and of course the need to cut costs (71%).

Not surprisingly, larger catalogers were more concerned about attracting experienced employees (39%) than were smaller respondents (26%). Also unsurprisingly, while 30% of those with sales of less than $10 million cited the difficulty in securing additional or continuing financial support as a top concern, only 22% of those with sales of at least $10 million did. But while 20% of the smallest companies mentioned the need to merge with or acquire another company as a top management issue, 36% of the larger catalogers did.

On the somewhat brighter side, not one respondent cited employee fraud or pilferage as a pressing concern. And just one respondent said that service bureaus’ ability to process rental orders correctly was a key issue.

Money Matters

When asked about their profit results for the previous year, 37% of respondents said that they’d fallen short of their goals. That’s a significant improvement from the previous year, when 49% of survey participants said they’d missed their profit goals.

Both marketing expenses and operating expenses consumed a smaller mean percentage of respondents’ revenue this year than last year. Participants in this year’s survey spent a mean 23.0% of their revenue on marketing; last year’s participants spent a mean 26.1%. Operating expenses as a percentage of revenue declined more dramatically. Among last year’s respondents, they equaled for 33.7% of revenue; this year’s respondents spent a mean 25.9% of revenue on operations. General and administrative expenses as a percentage of sales did increase slightly, though, to 22.0% from 20.7% last year.

On the revenue side of the ledger, 36% of this year’s participants said they’d missed their sales goals last year. Among those surveyed in 2003, 42% had fallen short of revenue expectations the previous year.

Nearly half of this year’s respondents (47%) said they expect their company’s revenue to grow more quickly during the next 12-24 months than it had during the past two years. B-to-b respondents were more optimistic, with 57% expecting sales growth to accelerate compared with 43% of the consumer catalogers. Forty-eight percent of the smaller catalogers expected sales to grow faster than they had during the past two years, as did 46% of the larger catalogers.

Slightly more than one-fourth (26%) of this year’s respondents said that they’d considered selling their company. That’s down from 35% of those surveyed last year. What’s more, 20% of this year’s respondents are considering buying or merging with another company next year.

Methodology

On Sept. 8, Primedia Business e-mailed an invitation to participate in an online survey to 3,660 Catalog Age subscribers selected on an nth-name basis. The invitation contained an embedded URL linking the respondent to the Website where the survey questionnaire was located. Respondents were offered a chance to be entered into a drawing for one of four $50 gift certificates to Amazon.com. A follow-up e-mail was sent on Sept. 15. Of the 3,105 deliverable surveys, 107 usable surveys were completed, for an effective response rate of 3.4%.

Top Merchandising and Operations Issues
2004
Rising costs of package delivery 47%
Inventory forecasting 45%
Availability of fresh or unique product 43%
2003
Inventory forecasting 56%
Rising costs of package delivery 51%
Ability to rapidly restock and rebuy merchandise 38%
Top Marketing Issues
2004
Making customer acquisition efforts more profitable 49%
Managing multiple marketing channels 38%
Rising catalog distribution costs 36%
2003
Rising catalog distribution costs 43%
Keeping creative fresh 36%
Increasing competition within the specific product market 34%
Top Management Issues
2004
Need to reduce costs without reducing offerings or services 81%
Difficulty finding experienced catalog talent 33%
Need to merge or acquire to achieve economies of scale or to fund expansion 29%
2003
Need to reduce costs without reducing offerings or services 81%
Attempts by federal and state legislatures to pass use tax bills 37%
Difficulty in securing additional or continuing financial support 35%
Expenses as a mean percentage of revenue
Marketing expenses Operating expenses G&A expenses
Respondents with sales of less than $1 million 19.0% 29.1% 23.0%
Respondents with sales of $1 million-$9.9 million 26.5% 27.4% 27.7%
Respondents with sales of at least $10 million 23.1% 24.0% 19.3%
Mean percentage of revenue from list rental income…
Consumer respondents 1.9%
B-to-b respondents 3.7%
Respondents with sales of less than $1 million 5.0%
Respondents with sales of $1 million-$9.9 million 4.1%
Respondents with sales of at least $10 million 3.1%
…and shipping and handling income
Consumer respondents 4.6%
B-to-b respondents 2.3%
Respondents with sales of less than $1 million 5.1%
Respondents with sales of $1 million-$9.9 million 2.9%
Respondents with sales of at least $10 million 4.0%

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Critical issues & trends

Despite the overseas fiscal turbulence that’s been threatening the U.S. economy for months, and before the scandal in Washington came to a head, the participants in Catalog Age’s Benchmark Report on Critical Issues and Trends had fairly high hopes. When polled in July, 40% of the participating catalogers said they expect sales to grow at a faster rate over the next 12-24 months than they had during the past two years. You could argue that catalogers were more optimistic a year ago, however, in that 51% of those surveyed then expected to grow sales more quickly than they had the prior 24 months. But then again, last year 11% of respondents expected that the next two years would bring flat or falling sales; this year only 6% are equally glum.n Maybe those catalogers with high hopes for the next two years are looking to make up for this year’s revenue shortfalls: 40% of this year’s respondents say they missed their 1997 revenue projections (only 28% of last year’s respondents fell short of their ’96 sales goals). And 35% of this year’s participants missed their profitability goals, compared to 28% of last year’s. That’s not terribly encouraging, given that we’re talking about sales and profits for a period prior to the tumult of Wall Street, back when consumer confidence was soaring and the country had reached near-full employment.

Hybrid respondents (those that sell to both consumers and businesses) are the most discouraged about future growth-only 32% expect to grow sales faster over the next year or two than they had over the previous two years, compared with 39% of business-to-business respondents and 44% of consumer participants. But b-to-bers and consumer respondents have downscaled their expectations the most: Last year 54% of b-to-b participants and 59% of consumer participants had anticipated increased sales growth, compared with 38% of the hybrids.

B-to-bers, in fact, have the most cause for pessimism, judging from last year’s sales performance among respondents. Nearly half (49%) fell short of their revenue expectations, a startling increase from 17% the previous year. Showing more consistency, 30% of both this year’s and last year’s consumer respondents missed their revenue projections, as did 29% of hybrid respondents for the same two years.

Along the same lines, while the percentage of consumer respondents that missed their profitability goals rose slightly (to 40% among this year’s respondents from 36% of last year’s) and the percentage of hybrid respondents that fell short dropped slightly (to 29% from 35%), the percentage of business-to-business participants that missed their profitability projections more than doubled, to 30% from 13%.

Reflecting concerns about improving profitability, the need to mail smarter to their house file is the top concern among b-to-bers, with 55% rating it a “5”-the most pressing-on a scale of 1-5, followed by rising distribution costs (52%), increasing attempts by the states to assess use tax (42%), and the impact of price on customers’ purchasing decisions and the need to keep creative fresh (38% each).

The concerns of other segments of respondents are similar to those of the b-to-bers. The need to mail smarter to the house file, for instance, is also the top concern among consumer respondents (52%). What’s more, 53% of all respondents with annual sales of $10 million-$49.9 million rate the need to mail smarter a “5,” making it their top concern. It was also the most pressing concern among all respondents with annual sales of more than $50 million: A staggering 81% rated it a “5.”

Oddly enough, only 24% of hybrid respondents cite mailing smarter as a top concern. Perhaps if more of them worried about mailing smarter, though, fewer hybrids would rate rising catalog distribution costs (tied with package delivery costs) as their top concern; as it is, 46% of hybrid respondents consider catalog distribution costs a vital issue.

Lists and databases To mail smarter to your house file, you need to know the buying habits and demographic traits of the names on your database. “Catalogs used to be pretty simple in terms of merchandise and circulation strategies,” says George MacNaughton, president of uniforms cataloger WearGuard, “but as you try to get more out of a small group of customers, you have to understand them better than in the past. We’ve always applied a high degree of statistical analysis to our customer file.” Not enough other catalogers can say the same. Among participants in Catalog Age’s 1998 Benchmark Report on Lists and Databases (July issue), 51% do not use any sort of modeling, 87% do not reverse-append data collected from other marketing venues, and 56% don’t conduct lifetime value studies of their customers.

Among other database and list issues, only 11% of respondents to the Critical Issues survey consider the lack of new catalog-buyer names a top concern. But for 29% of respondents (including 50% of those with annual sales of at least $50 million and 47% of those with annual sales of $10 million-$49.9 million), acquiring customers profitably is a key issue.

Marketing Among participants in Catalog Age’s 1998 Benchmark Report on Marketing (February issue), 24% of those that have bought magazine space ads rated them a “very good” source of new names, making them the second-highest rated alternative prospecting method.

Multititle mailer Ebbets Field Flannels, which sells apparel bearing the logos of vintage football, hockey, and baseball teams as well as licensed Late Night with David Letterman items, has had great luck with space ads in magazines such as The New Yorker and Smithsonian, says catalog spokesperson Suzy Davenport. “Finding our customers is harder than you’d think, because what we sell isn’t licensed sportswear; it’s not fashion exactly; it’s not really nostalgia.”

Only catalogers’ Websites rated higher than space ads as a “very good” source of new names among participants in the Marketing survey, by 1 percentage point. Three-quarters of respondents to the Critical Issues survey (80% of b-to-bers, 78% of consumer respondents, and 70% of hybrids) have their own Websites, up from 64% last year (and appreciably greater than the 36% of participants in the Benchmark Report on Print and Production, which appeared in the November issue). But far fewer respondents to the Critical Issues survey-26% of consumer catalogers, 27% of b-to-bers, and a scant 12% of hybrids-rate the growth of interactive media a critical issue. Yet it is the third most-pressing issue among respondents with annual sales of $10 million-$49.9 million, with 41% considering it important. And though 28% of respondents with annual sales of less than $10 million rate Internet growth a top issue, only 12% of respondents with annual revenue of at least $50 million do.

“I think for mail order companies to grow, they have to become aware of the Internet,” says Mike Shoup, president of The Antique Rose Emporium, a cataloger/wholesaler of plants. The Brenham, TX-based marketer jumped onto the Internet four years ago, selling product through the cooperative Garden Escape Website. Garden Escape covers the cost of building and maintaining the site in exchange for a percentage of the sales. The partnership with Garden Escape provided the horticultural marketer with a “harmless” introduction to the Internet, Shoup says. “Right now less than 10% of our total sales [of $2.3 million] are from the Web, but with the growth that’s occurring, it shouldn’t take long for that portion to be much more.”

Ebbets Field Flannels just made online ordering available in September, “and already we’re seeing results,” Davenport says, although she won’t give figures. “To have that unlimited space and be able to market in unusual, grassroots ways, without the expense of producing and mailing catalogs-it’s a godsend.” The cataloger’s “grassroots ways” of marketing itself online include establishing links to and from baseball Websites and the home pages of sports historians and hobbyists.

Leaving aside the Internet, respondents to the Critical Issues survey don’t seem preoccupied with marketing issues in general. Increased competition has 24% of consumer respondents and 23% of b-to-b respondents on their toes, but only 12% of hybrids list it as a top concern.

Still, MacNaughton says WearGuard has “seen an incredible increase in competition” over the past few years, as the growing popularity of casual workplaces has induced more consumer catalogers to begin personalizing shirts, jackets, and the like with company logos. Partly as an outgrowth of this increased competition, MacNaughton cites customer retention as the primary concern of the Norwell, MA-based mailer.

To boost retention, WearGuard stepped up its outbound telemarketing efforts three years ago. “We’ve seen strong top-line growth among those customers that we contact with an outbound call,” MacNaughton says, but “modest incremental earnings improvement. It’s a very expensive method of sales because of the number of salespeople needed, but you do a better job of retaining customers.”

Operations Marketing efforts such as increased outbound telemarketing aren’t the only strain on catalogers’ bottom lines. Rising package delivery costs are a critical concern for 37% of all respondents, and for 41% of those with annual sales of less than $10 million, compared to 24% of larger respondents. Mailers that sell heavy products, such as Antique Rose Emporium, have reason to be concerned about shipping costs and their effect on sales. “In some cases shipping adds 30%-40% to the price,” Shoup says.

Among participants in the 1998 Benchmark Report on Operations (April 15 issue), 41% of respondents charged just enough for shipping and handling to cover costs; 11% took a hit on S&H, and 48% made money on S&H. For this last group, increases such as United Parcel Service’s annual rate hike and next month’s Postal Service rate boost could force them to sacrifice profits to stay cost-competitive.

“We use our S&H as a profit center,” says Jim Fitzgerald, vice president/ general manager of $1 million-plus APG-Direct, a Richmond, VA-based cataloger of spiritual and family-oriented gifts. We need to deliver the same bottom line without losing sales.”

Respondents to the Critical Issues survey are less concerned about their customer service standards than they are about costs. An unimpressive 19% cite service performance as a top concern-the same percentage as last year. Also consistent with last year, b-to-b respondents are more likely to worry about their service (36%) than are hybrids (15%) and consumer catalogers (10%).

Perhaps the consumer and hybrid catalogers should worry more. Of respondents to the Operations survey, hybrids had a mean phone abandonment rate of 4.9%, and consumer catalogers had a 4.7% mean; in comparison, b-to-bers had a mean abandonment rate of 3.5%.

Merchandising Only 17% of total respondents view the availability of fresh merchandise as a top concern, down from 26% last year. Generally speaking, the larger the catalogers, the less likely they are to worry about finding new or unique product: While 18% of the respondents with sales of less than $10 million regard finding fresh product as a key issue, only 12% of respondents with annual revenue of $10 million-$49.9 million do. And not one respondent with annual sales of at least $50 million considers it a top concern. (By the same token, not one of the respondents with sales of at least $50 million sees increased competition is a key concern.)

But respondents to Catalog Age’s 1998 Benchmark Report on Merchandising (October issue) were more concerned with product freshness-not surprising given that many of those respondents were merchants and buyers, whereas the vast majority of respondents to the Critical Issues survey are presidents, CEOs, and owners. Nearly half of the Merchandising survey respondents (48%) rated uniqueness of product as “very important” when selecting a vendor; 30% rated exclusivity of product “very important.”

Production A significantly smaller portion of respondents cite rising paper and production costs as a top concern this year than last: 36% of b-to-bers this year vs. 68% last year; 30% of hybrids this year vs. 46% last year; and 24% of consumer participants this year vs. 48% last year. This easing of catalogers’ minds reflects several years of relatively stable paper prices; in fact, a paper rate hike expected this past summer failed to materialize, as the mills realized that demand had not yet outstripped supply. Production costs have held steady, too, thanks in part to increased competition among digital production vendors.

The paper and production price stability is apparent on financial ledgers. This year’s mean revenue allocation to print and paper is 7.8%-little more than half of last year’s 15.5%. Some catalogers may have whittled their print and paper expenditures by trimming their book size, as did 15% of the respondents to Catalog Age’s Benchmark Report on Print and Production (November issue). Or they may have cut page counts or, like The Antique Rose Emporium, added a thinner prospecting book to their marketing mix.

“Our 100-page reference guide is still available for $5, but to show our product to many more people, we’ve taken the best garden varieties and put them in a book that’s half the size, which we can now afford to send free,” Shoup explains. Although the response rate from requesters who paid $5 for the catalog was 30%, compared to roughly 10% response from requesters of the free catalog, “we can send the free catalog to more customers, because it costs around 60 cents a book, while the reference guide costs $2.37. And our mail order sales are about 20% ahead of what they were this time last year,” he adds.

Indeed, many catalogers have had a good run over the past few years, with stable production and distribution costs, confident consumers, and an upbeat economy. But lackluster early fall sales (“Fall shortfalls,” November issue) are doubtless causing some to readjust their expections. Then again, diminished expectations may result in more catalogers meeting-if not exceeding-next year’s sales and profits projections.

In July 1998, the Catalog Age subscriber file was sorted on an nth-name basis to extract a representative sample of 1,000 catalog presidents and owners. These subscribers received a letter of explanation, an 87-question survey, and a postage-paid envelope in which to return the survey to an independent marketing/ research firm. Of the sample group, 22 were undeliverable and 118 were completed and returned, resulting in a response rate of approximately 12%.

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