Critical Issues Roundtable: Not Sleepless in Seattle

It’s a scary world out there for catalogers. In addition to the economic doldrums with which all marketers have to contend, mailers have to worry about postage hikes, paper quality, and margin erosion, among other issues. Yet the five executives who participated in Catalog Age’s most recent roundtable discussion, held in September in Seattle, were surprisingly upbeat. Sure, they had plenty of concerns. But they all felt they were more than holding their own, given the recession and threats of war. And as one participant said, those catalogers that can survive these tough times should be in great shape come five years from now.

The roundtable participants

John Bales, director of marketing for NRS, a manufacturer/marketer of paddlesports gear based in Moscow, ID.

Robert Eastman, CEO of Medford, OR-based Musician’s Friend, a cataloger of musical instruments.

Cathy Fowler, vice president, marketing programs for Renton, WA-based computer reseller Zones.

Colleen O’Connell, owner of GaelSong, a Seattle-based cataloger of Gaelic-inspired gifts.

Terry Powers, president of Computer Gear, a manufacturer/marketer of computer-themed gifts and novelties based in Redmond, WA.

Catalog Age managing editor Melissa Dowling and special projects manager Shayn Ferriolo moderated the discussion.

Changing channels

Catalog Age: Where do you see the industry now and where do you see it in five years?

John Bales: Well, I have to give Robert [Eastman] credit for this one. A moment ago he was saying that the healthier catalogs are still suffering through this tough economy but will come out on top. In the outdoor [sporting goods] market, we don’t feel the impact like some other companies. But in five years companies that are still strong today are, in fact, going to be doing much, much better. Where do I see us, NRS? We are going to be in good shape. We are weathering this economy well.

Terry Powers: I pretty much see the same thing. I think the Internet has really helped too. Those with fewer proprietary products who are more price sensitive, we have seen these weaker players fall out in the last year to 18 months. I think the rest of us are poised for growth. I know Computer Gear is. We are a pretty lean and mean catalog at this point. We are small, and we have come to feel that we have phenomenal growth potential.

Catalog Age: How is the Internet helping you?

Powers: I think that most people thought the Internet was going to take away from catalogs at first, but most people have found that it is increasing the pool of mail order buyers. It’s a form of direct marketing, so now besides having list rentals, exchanges, and co-ops, we have another group of buyers coming on board thinking, Hey, this is just like ordering from a catalog. In the past they might not have ordered. … Some age groups, younger customers, for instance, would not necessarily have been mail order customers in the past, but now they are because it is easy for them to say, Yeah, I’m an Internet buyer, but I’m using the catalog to get there.

Colleen O’Connell: GaelSong is actually doing OK. We are a very small niche catalog, and I think the identity of many of our customers is tied up in the items that we sell. I think that gives us some resilience in a weak economy. I don’t know that we are going to go through huge growth, because it is a narrow niche and hard to find the right buyers, but when we find them, they are loyal.

Cathy Fowler: I’m kind of wondering about five months down the road, not five years. To start with I should explain that we have two pretty distinctive catalogs now. We have Mac Zone selling Apple products and led by the catalog and supported by the Web, and the other side of our business is our IT business, and that really is a b-to-b relationship model that is supported by the [PC Zone] catalog. The catalog isn’t the main driver; it is mainly supported by 250 account executives. When we talk about direct response, it is really the Mac products right now.

During the past two years, the economic downturn has had a big impact on the IT market, particularly after a strong 1999-2000. But we are seeing signs of a lot more activity. On the opposite side, it is very product centered. There are a lot of great new announcements from Apple, and they are headed for an upswing, so that helps us. During the past five years, I think that Apple has really kept expanding its product line to meet a broader IT market, so I think that is going to continue to open up things for us.

Robert Eastman: We have always been a high-growth company, and we will continue to grow through more market share. We are starting to expand into the woodwind and brass markets. We are also getting more into recording and A/V.

Musicians in general are hugely on the Internet. They are Internet savvy because of all the MP3s. Forty-five percent of our business comes over the Internet. A lot of it is of course driven by the catalog, but that is one of the highest percentages of anyone that I have talked to in our industry.

But the Internet is a double-edged sword for us. The barrier to entry in our industry five years ago — you had to produce the catalog, get a warehouse, so we had few competitors. But now with the Internet, there are about 1,000 sites, not all necessarily nice Websites, but they are out there low-balling each other. We are really in a commodity-driven industry. You’ve got your Fender guitars, your Roland keyboards, your Gibson guitars — very definitive brands that you have to have. One of our initiatives is to get more proprietary products: more imports and more specialty products that you just can’t find through other marketers.

Fowler: What do you think the main driver to your Internet site is?

Eastman: Our catalog. Definitely by far. Our e-mail list is 2.5 million people right now.

Bales: About 40% of our orders come in via the Web. We have treated the channels synergistically from day one. And the little research that I have done shows that customers are sitting at the computer with catalog in hand.

Eastman: One thing we did to try to pinpoint [customer source] is have a different 800-number on the Website [than in the catalog]. We found that 25% of calls into the call center initiate from the Internet.

Fowler: We also segment our calls that originate from the Web. We find that the average order size from the catalog number is much higher. But the close rate is much higher than the close rate on calls just coming in from the catalog.

Powers: Do you think it is age-driven at all? Is it a younger customer or an older customer driving those numbers?

Eastman: Our demographics are pretty wide, about 26- to 54-year-olds. That is higher than our [parent company Guitar Center], which specializes in retail. They have the 15- to 20-year-old demographic.

Bales: Do you do any cross-selling on your site?

Eastman: We use collaborative filtering with software provider Net Perceptions. And we do the merchant recommendations where we have three or four collaborative recommendations.

Fowler: Do you see a larger conversion rate with the filtered products?

Eastman: Yes. Collaborative filtering does work. We are trying to quantify the exact amount because a lot of the things that they recommend would have been things the customer would have purchased anyway. That is why they get recommended, because most people buy them together anyway. We are trying to find out how much it is the recommendation and not the need that is converting them to buy.

Pinching pennies

Catalog Age: Would you say that the postal situation, especially given the recent rate increases, is a top concern?

Bales: It is definitely a concern. It is going to cost more money. It is very relevant for me, since I am looking to add another catalog drop next year.

I have a question for everybody: I do a full trim size of 8″ × 10″, and we get a good response rate. But we have an opportunity to go to a mini. In my heart of hearts, I am expecting the response rate to drop with both customers and prospects. I am wondering if anybody had tested a full book and a mini at the same time, side by side.

Eastman: We have looked at it over the years. But what we have done, we started back in ’83 on a 40-lb. coated stock, and we always A/B-tested lighter paper, and we kept adjusting to the rate hikes that way. We are now beating the current postal hike by printing on 25-lb. [coated groundwood] made special [for Musician’s Friend] at the Frasier Mill in New Brunswick.

Bales: We are on 36-lb stock. I have been looking at papers.

Eastman: We were on 26-lb. And we A/B’ed it. Again, we are commodity-driven. Our paper gives us good resolution and good presentation, but if we had specialty products and higher margins, we would stick to a heavier gloss, a thicker paper. But since we haven’t seen any degradation we keep getting lighter.

Bales: We are pretty graphic intensive, so I am scared to go too low and have a lot of show-through.

O’Connell: We started out as a digest-size, and we have been increasing just a little bit each year.

Eastman: The interesting thing with us is that we find breadth and assortment very important. We tested smaller prospect editions over the years, several times. Our core catalog is 176 pages, full size, with more than 4,000 products.

We have tested a 72-page “best of the best” prospect edition, and every time we do, we find that the response rate drops so much that the contribution to the cost of the book is less than when we send out the full book.

Fowler: With postage being the most important cost of putting out a catalog, I would say, you might as well use all of your pages and ounces to get it out there.

Eastman: It is not that they are necessarily even buying the other products, but it is that breadth of assortment — when they see that you really have it, they tend to convert.

Bales: We have done the exact same thing on a prospect book and saw that to get the response, you need to mail the whole book.

Catalog Age: Are there other areas where you’re concerned about cost pressures?

Fowler: I think it is more of a concern for smaller catalogers. But what I am concerned about is warehouse help. I can’t hire workers for less than $10 or $11 an hour. Whereas in the Midwest, minimum wage is par for the course, I think. You see so many catalogs that maintain their call centers and their DCs in midwestern cities for this reason.

O’Connell: I have seen a drastic improvement in our situation. Two or three years ago, I had people with high school diplomas angry that they were going to make less than $40,000 a year. Now I am getting people with graduate degrees who are so happy to get $10 an hour, they will take on part-time work, full-time work, work on weekends. So we are benefiting in one small way from the economy. It is amazing — I got about 80 resumes in the past week.

Fowler: Plus a few years ago, we had to hire two to three months out to make sure someone like Eddie Bauer [the apparel and home goods marketer based in nearby Redmond, WA] didn’t get them first. Now we are finding that we can hire closer to our forecasted need.

Eastman: We have seen it too. Medford is a small town, and Harry and David [which is also based in Medford, OR] was hiring seasonal employees as far out as August, and it was just real tough. We ended up relocating our call center to Salt Lake City. And we moved our warehouse to Kansas City — because of the labor pool, but also because of our volume, so we can get the best outbound freight benefits.

We get three-day delivery across the country and the lowest cost for outbound freight. I don’t know what your volumes are, but we find that outbound freight is a big expense. The savings in the warehouse was more than the cost of labor when we moved from the West Coast.

It was also a big marketing advantage for us to be able to guarantee three-day delivery anywhere in the country. We used to do a lot of two-day air upgrades for $6.95, and most of that went away.

Bales: We used to use a lot of Priority Mail, but FedEx Ground has been very competitive with its pricing. We are testing FedEx Ground right now to see how that works.

Catalog Age: Do you have a lot of heavy products being shipped?

Bales: It varies. We have everything from a 200-lb. boat to a nose plug.

Eastman: Same here, everything from a sound system to ear plugs.

Fowler: How do you see your customer reacting to freight charges?

Eastman: It is a sensitive issue for us. With the rise of Internet players, there are so many more free shipping offers out there. All of our competitors are either experimenting or offering free freight.

Bales: [As a consumer and business-to-business marketer] we are often working with dealers, so we aren’t going to offer free shipping and try to take that sale from a dealer. So yes, it is a sensitive issue, but we are not in a position where we are going to lower it significantly.

O’Connell: We have a flat $6.95 shipping rate no matter what the customer orders, so that keep things easy. But with the freight increases, we are looking to restructure that.

Powers: Our product price range is about $19.99-$500, and we have a stepped-rate freight pricing system. From a competitive standpoint in the gifts catalog arena, we need to have that $4.95 starting point, or customers will complain.

The retail relationship

Catalog Age: Is anyone doing anything new in the retail channel?

Eastman: We had nine Musician’s Friend retail stores when we merged with Guitar Center [in May 1999], and they changed them to their own brand. We are keeping them separate because of nexus problems. I know some major retailers such as Wal Mart are getting around [the nexus issue], but our accounting firm is keeping us out of the gray areas.

We really don’t use any synergies between the two companies right now. The catalog people don’t know that we have stores, and the store people don’t know that we have a catalog. When it was just Musician’s Friend we did, because we were creating nexus everywhere we opened a store, so we leveraged the synergies.

[The current arrangement has] worked out well for the catalog. If we had to charge tax as well as shipping it would put us at a disadvantage compared with the local retailer.

Powers: We look at retail constantly, but we make our products, and it has taken us a while just to fill a 48-page catalog, so I don’t know how we would fill a retail store just yet.

Bales: The position that we are in, people want to see the equipment, sit in the boat, etc. Good dealer representation means that they supply the service to the market, so we have small sections inside dealer stores, which we promote in the catalog as well. It helps us increase the line distribution through dealers, and in the end we are selling more product. And we are seasonal, so the store would probably be more expensive.

Eastman: In a niche market, there is usually room for only one or two retail players. It’s different from direct mail marketing, where more competitive companies seem to coexist and still do well.

When we had the stores, we were competing with Guitar Center and Sam Ash. Guitar Center needed to move toward catalog to expand, and we started bumping heads and competing in the same area, so the merger saved us from taking away market share from the strong portions of each business.

Moving merchandise

Catalog Age: We have been hearing that margins are getting slimmer and that many catalogers are rethinking their merchandising strategies. Is this true?

Eastman: In our market, it used to be really small mom-and-pop stores that were working close to list price. We used to have higher margins and at one time were operating at six to seven [margin] points higher than we are now. We lost off the bottom line six to seven margin points due to consolidation in the industry.

And a lot of the problems are coming from our parent company. As they expand, they are hitting more and more markets where there wasn’t a store, the assortment, or the pricing. They are getting into areas where we could dominate. The margin loss that we have had during the past 10 years is double what our postal bill is. So we are really worried much less about postage than about margin erosion. That is making us focus on how we can get products that you won’t find everywhere.

O’Connell: [Nods in agreement] One of the biggest problems I have had is buying products from very small manufacturers in Ireland and Scotland. Now they all have their own Websites. I have to constantly check their Websites because they will put something out [for sale to consumers] at a very small percentage above the wholesale cost. Our customers seem to be savvy and can convert the currency, and many times the prices are advertised in dollars so it is easy for them to compare. It is a big problem, and I have had to drop a few products from vendors.

Eastman: After the Guitar Center merger, we became a 1,000-lb. gorilla, so when we are inking deals with manufacturers, we tell them that they cannot sell direct to consumers if we are going to carry their products. We were able to stop it pretty quick, but they were moving it that direction.

Bales: We have had a retail catalog for 31 years and started manufacturing 20 years ago. But it has been during the past 10-15 years that we have developed relationships with our dealers. They view us as a competitor sometimes, but when they get working with us they realize the support and independence we give them. But it certainly is a hard sell at times.

Fowler: Our vendors are not only selling on the Web, but they also have sales forces that are calling on the same customers as we are. But we do have the depth of brands, so we offer that to the customer instead of pushing a specific brand.

Catalog Age: The importance of new, different, and proprietary products seems to be a recurring theme, but exactly how are you going about obtaining those products?

Eastman: We are literally building them. We have a research-and-development team, and we are making them ourselves.

Powers: And if you are doing that, youcan leverage the Internet to see what will work. We used to use focus groups as a product testing ground, but now the Internet allows us to do it and get more accurate results. And that helps us decide if we will unroll it in the catalog.

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