Transcripts from presentation given by Michael Sherman, president, Fingerhut Cos.
“It surprised me how many catalogers had three-year plans: more than 70 percent of them. I think that’s a good thing. People who have a strategic plan, they’re going to have to change it all the time and update it and revise it, but at least it’s a starting point. If you don’t have it, I think the hill to climb is higher. As Jules [Silbert, executive vice president of Brylane] said, [we're] an industry that’s squeezed now by big postal increases, stagnant consumer spending, and concerns about privacy. So really, the best are going to survive. So who can survive and how can you strategically figure out an end game for the future?
“Well, I think the smaller-volume niche marketers with healthy margins and a real reason why customers shop from them, they have stable cash flow. As long as they have an efficient cost structure, they should be able to do well. But unless you have a really great niche or a terrific reason for people to come to you, you’ve got to really look at the other side of this and look at what it’s like to be much more efficient on the cost side. You look at the multititle consolidators, people who have acquisition capital and who can figure out how to integrate their back rooms and really take advantage of consolidating telecommunication distribution centers, vendor relationships–how you execute across brands, across titles, how you really leverage this business.
“What’s great about this business, what’s so exciting, is it truly is a leverage business–how do you leverage it? So if you’re not a cataloger with a terrific niche, with a healthy margin, you’ve got to really figure out how you’re going to make this a leverage play. And leverage is really what this is all about, and how do you leverage it: What kind of strategies are people going to undertake for the future, what are they going to invest in.
“I think they’re going to invest in technologies that are going to enable them to have more customers with a higher lifetime value. What’s so interesting about [the catalog industry] is that [we] ‘dinosaurs’ know the language that we speak is now the language of everybody: lifetime value, customer contact strategies, cost per name, cutoffs. Those are great, great metrics that we all use together to figure out how you rack up a marketing budget. We at Fingerhut look at it and say, ‘It’s one marketing budget; how do we spend it?’
“We’re with Jules. We started having an e-com group with its own separate building and …a ping-pong table and a pool table and alfalfa sprouts and skateboards and a lot of fun, and brand advertising, and ultimately came back to one group now reporting to our marketing group to figure out what’s the best customer contact strategy. In the future those strategies are going to be [about] how do you get more customers at lower costs. I think Internet technologies are going to help us with that, providing you use the catalog metrics, the direct marketing metrics that we were trained in. You’re not going to see people just throwing money up in brand advertising because it really feels good. I think you have to be accountable for every dollar you spend.
“We’re going to have to improve customer retention. … I think we’re going to spend a lot of time reactivating customers who’ve walked away from us. How do you get them to come back? It’s so hard to find new customers. If you had a customer and you lost her, how do you find her again? Maybe you can’t find her because she moved on, but what is it that you did that you can fix. It’s all fixable; it’s a great business. People can return more than 20 percent [of their purchases] and still be a loyal customer–that’s a great business. You can fix it. So how do you fix it and get those customers back-[it's] very important for us.
“For us it’s going to be leveraging our assets and our strengths. … Where do you spend your money in the future? Everyone that I’m meeting now isn’t spending on new, fancy systems; that’s not what they’re doing. On our Websites we’re trying to figure out how to make it a more pleasant and faster, more efficient shopping experience. We’re sitting there with stopwatches to figure out how long it takes from start to finish, so that the customer doesn’t fall asleep in the process of an order. So we want to spend our money not in fancy stuff but in projects that are going to have paybacks.
“I think that’s really the endgame: how do you pay the stuff back, how do you earn a return for your shareholders. Whether it’s going to an IVR on your telephone, whether you’re going to figure out how to further automate your distribution center, whether you’re going to further consolidate with others on getting postal discounts, how do you do it.
“We’re going to spend the kind of capital that lets us have a return on it. We’re not going to spend capital just to have the most servers or the biggest ERP budget–quite the contrary. And all the successful direct marketers that I know have always been traditionally stingy with capital. … So we’re going to continue to spend money where it makes sense for us, [on] customer segmentation analysis and software that enables us to have individual customized customer contact strategies. Why? Because we can get more customers, and we can retain them longer, and we can have a higher lifetime value. That’s the endgame. We’ll spend the capital to do that.
“And we’ll also spend the capital on acquisitions. I still believe we’re in an environment of consolidation. If you’re a cataloger out there and you don’t have those great niches with those really healthy markets and not too much competition, you’re really faced with a cost structure that’s really hard, a postal [service] spiraling out of control. … This used to be a business where the variable costs were so small, and now the variable costs are so huge. So consolidation, acquisition.
“I think there’s still an opportunity to figure out how you can leverage your back end, acquire new customers on the front end. I see an environment of continued consolidation as a growth strategy. So if you’re a company, acquiring not just new customers but also new titles … [is] going to be a strategy for catalogers in the future.”