Outlook 2006: Is It Time for the Catalog To Become the Webalog?
That is an interesting term: utility. It is an economic term and implies benefit, as in, "What is the benefit of a catalog?" Or, perhaps more strident, "How much benefit do we get from catalogs?" Perhaps the underlying question is, "What does the catalog do today?" Until now, the function was to cause a phone or mail order because the catalog actually sold products. Everything necessary to creating a sale has been embodied in the design, copy, photos, ordering process and customer service elements of the "catalog shopping experience."
The catalog's utility has been in its ability to make a sale. Everything we know about catalogs and everything we do in creating catalogs has been codified for one purpose: to sell. Suddenly, half of the orders or more are coming to us online. Our online catalogs are absorbing more of our resources and energies than our paper catalogs. And wherever we turn and whatever we read, predictions are for 30 percent or 40 percent or 50 percent growth in online shopping. On the precarious and slippery slope of mall retail shopping, growth is flat to declining. The retail malls - those future Cities of the Dead - are in denial and ineluctable peril as this lumbering monster trend slouches toward Amazon.
Driver, Not Seller
The catalog's function is changing from selling to driving. It is the catalog that causes an online experience where the selling now takes place. A high percentage - inevitably shrinking over time, however - of online orders are driven by catalogs, and that is rapidly becoming the catalog's utility, its reason for existing.
Think of the logic and the common sense questions that arise. If the catalog's utility is as a Web driver, why do we have expensive photography in both places? Why do we show all of the products in an expensive catalog and also on an expensive Web site? Why do we show a steak or a doll or an imprinted pen to drive us to the same picture online of the steak, doll or imprinted pen? What we do now is redundant. Nature abhors redundancy.
By definition, this philosophic construct demands that we question the future value and form of the catalog. If its value is to drive sales that occur online, perhaps the concept and present form of the catalog are obsolete. Perhaps what is wanted - what increases utility - is instructional information on how the products improve your life, your business, your service needs, your health or the nutrition of your pet. Perhaps we have arrived at the magalog, the mythical mix of product and editorial content that informed and, secondarily, sold. Perhaps this incarnation will be called the Webalog.
Webalogs have a very different utility. They exist to help consumers find you online where your lotions, potions and magic charms are arrayed on endless Web pages masquerading as "old-timey" catalogs. The Webalog tells stories, features satisfied customers, offers recipes, gives hints and tips, displays box scores, tantalizes, strokes and encourages.
Even the format differs from the castoff catalog. A Webalog has all the excitement and seduction of Cosmopolitan or the ruggedness of Rod and Gun or the luscious, gastronomic promise of Bon Appetit. But it doesn't sell. It steers, drives, points, refers, solicits, reveals, entices, encourages, promises, piques, calls, reveals and evangelizes ... but it doesn't sell. The online catalog does the selling.
Maybe the Webalog can do in 16 or 32 pages what a full-line catalog did in 320. Maybe, just maybe, a cutting-edge article on a new product application that repeatedly calls for a further beneficial Web experience can drive more online product sales than a full-page paper photo and descriptive copy with a price block. Maybe the concept changes from "catalog circulation" and "catalog frequency" to "customer contact" and "concept frequency." And don't forget the all-important prospect. Can you get more prospects involved using concepts, ideas, interests, excitement and beneficial utility than you can with a discount offer? Could be.
Here is this year's requisite heresy that you have come to expect from me over the years. Create a new concept mail piece, a Webalog, that presents three or four of your products the same way and with the same excitement found in a great infomercial. Tell a story and show how the products are used and why you benefit, and push the sales only to the Web.
Do an A/B split with a normal catalog showing the usual 16 square inches for each of those products somewhere in the book. Then measure the total online sales of the specific products from both media. The classic catalog will sell more total dollars, of course, but for the products in the test I'll bet you a bushel of corn that the Webalog drives more online sales than the catalog for those products featured.
This trend will produce tectonic rifts in the art and science of cataloging ... indeed, direct mail marketing. Notice that the prospect name, customer and list become much more important, and the attributes of the prospect shift to include interests and affinities. The names, however, become associated not only with the classic physical addresses, but interchangeably at will with cyber addresses, Blackberry addresses and alias addresses.
With that level of desired, opt-in personal involvement, the customer will demand e-mail contact, other forms of contact and constant informational refreshment. This changes the definition of direct mail marketing to direct interest marketing. And the final killer logic? If you really believe, in 2006, after all that your eyes and your intelligence have told you, that the form, format and relationship of the paper catalog and the Web site will never change, then you ultimately will savor the rusty taste of obsolescence and irrelevance. It is illogical that paper catalogs will continue on a utility par with Web sites given the constraints and costs of their six- to 12-month creative cycles, their prices fixed in time for a half-year, their inability to instantaneously discontinue or add products based on availability or demand, the 12-month horizon for analyzing test results, the sheer cost burden and dozens of other disparities and inequalities.
The private owners of catalog companies are almost gone. The industry has grown up and become large. Very large. Most of the largest catalog companies are, or are part of, public corporations. Many non-public catalog companies are owned by private equity groups, leveraged buyout firms. As you expect, there are reasons for this. First, the multichannel direct marketing company is attractive to financial buyers and operators because it is formulaic and predictable. There may be no better business model (except for a hot dog stand) than a catalog company. As we used to say in the Golden Age of Catalogs (the 1970s-1980s), "Just put a lot of stuff in the mail and people send you money!" It's even better now: "Just put a lot of stuff on the Web, in the mail and in e-mail and stores, and even more people send you even more money!"
Second, the multichannel space is expanding. The expansion rate is better than almost anything else (except hot dog stands). The multichannel/catalog space consistently beats the expansion rate of the U.S. economy and most any other economy except for China, and isn't that where we get all of our stuff? Third, private equity groups have a gazillion dollars to invest. They get the money from wealthy people who want a 20 percent return on their money, which is more attractive than certificates of deposit or savings accounts.
Here's the interesting part: Private equity groups can't find enough multichannel companies to acquire. You see, the fund managers have to invest the money, or the wealthy people ask for a refund. And so, the prices they pay go up. What does that mean? Private entrepreneurs sell out. That's why the private owners of catalog firms are almost gone. Sure, a lot of $2 million and $5 million catalogs are out there, but darn few $50 million and $100 million catalogs are left. There are, however, a fair number of $15 million and $25 million catalog companies, and the private equity groups are turning their laser-like attention to these.
First, the private equity groups buy a platform. That's a catalog company with a lot of customers, a lot of proven products, stable demand, scalability, good operating systems, underutilized fulfillment systems, a seasoned management team and the ability to absorb two to five add-on acquisitions.
Over a period of two to seven years, the private equity groups add on several $15 million to $25 million companies with reasonable synergies. They pump up the prospecting, build great Web sites, expand the customer base and drive the combined revenue up two to three times. Logic dictates that eventually one enormous private equity firm will own all of the multichannel catalog firms and then will merge with Wal-Mart. At that point, we will reach the end of life as we know it.
This is becoming a monster trend that changes the structure and philosophies of direct marketing. We have seen a 20-year trend toward management by next quarter's operating profit. Current earnings are more important than customer service or satisfaction, or perhaps even long-term lifetime value. But perhaps most disturbing is the shift from a customer-oriented, long-term relationship to a financial model of operation. With all of the mom-and-pop style of customer relations wrung out in the service of fast profits and multiples of earnings, the future is uncertain. This industry cannot exist only on financial modeling. It requires quality that goes beyond formulas. We got here by being good at what we do, not by managing for short-term gains.
If you review last year's acquisitions, you will see that the investments are moving down to the $25 million to $100 million range. In another year or so, those companies will be add-ons to the platforms and the focus will be on the $15 million to $50 million companies, and then the $10 million to $25 million, and then the $5 million to $15 million ... and then the industry is something else altogether.