Outlook 2005: What's Ahead for Consumer Catalogs?
That understood, we turn our analysis to the significant and shaping events that are occurring in consumer direct marketing.
Retail Invasion of the Direct Marketing Channels
Retailers have discovered something new: Direct marketing is profitable. After years of having only one strategy - discounting - retailers need to find new answers, and cataloging is a very attractive answer to growth. And let's admit it: direct marketing has become multichannel marketing. The boundaries that were once so distinct have become very blurred. Retail and direct are increasingly joined at the hip. In another decade or so, there will be very little distinction and all forms of consumer marketing will be multichannel.
Add to that evolutionary homogenization the fact that Wal-Mart is probably about to become a serious cataloger. We saw The Home Depot enter the catalog milieu in 2004. Lowe's can't be far behind.
In fact, if you want to really understand the future from the past, remember that Sears at one time had many specialized catalogs in addition to the big book. That could happen again and the new major consumer catalogers could be the giant discounters. The difference is that they dominate the retail landscape and control overlapping 12-mile geographic circles. Add catalogs to the mix and they dominate consumer commerce totally. Then we will have three or four major multichannel retailers in the same way we will have three or four major banks in this country.
The big story for 2005 that will be the harbinger of the retail evolution will be Lands' End. What will happen to Lands' End when the ill-fated Sears and Kmart merger occurs? My prediction is that it will have its own IPO and go public.
If Lands' End is allowed to be bought privately, either by a strategic buyer in cataloging or a private equity group, it would indicate that big retail is abdicating a great brand and a great catalog and may not have interest in the direct catalog channel.
If Lands' End is taken public in an IPO, it would indicate retail's confidence in the channel and their desire to dominate cataloging in the future (read: create earnings for shareholders). Since Sears owns the greatest flagship in all of American cataloging, even if it hasn't done much with it, the Lands' End decision will be monumental to the future of consumer cataloging.
Paper and Production Costs
One will go up and one will go down. Paper will become more expensive simply because the paper industry is structured similar to the oil industry. It's all about capacity and production and they can crank the valves as needed.
For the foreseeable future, the price of paper will be increased because consumer catalogers still need catalogs to drive Web traffic. When that need diminishes, the price of paper will fall with falling demand, but that isn't going to happen for a few more years. Therefore, the paper companies are in the enviable position of being able to maximize prices with increased demand by catalogers.
Production costs are likely to go down, or at least remain stable. The new emphasis on manufacturing productivity by forward-looking printers will produce cost efficiencies that have not been seen since the 1980s with the digital revolution in creative and pre-press. Few catalogers have scrutinized press running costs and manufacturing rates for savings like they did pre-press costs two decades ago.
In anticipation of this inevitable scrutiny, smart printers have found ways to lower cost by re-engineering the footprints as well as the configuration of pressrooms. This will bring them increased business. Consolidation will occur as will Darwinian elimination of the weak printers who are unwilling to face future reality.
Consumer Access and Comparative Online Shopping
Google and its pretenders will make further inroads into cataloging, online marketing and all of direct, multichannel marketing. Through the art and science of comparative pricing and product selection, these transmogrifying organizations will emerge as the access controllers of direct marketing.
When Google has scanned in every book into its labyrinthine cerebrum, it is only a simple step to imbed paid search advertising in the margins of every page next to the products that may be mentioned.
As an example, in "Jane Eyre," the description of a dinner in the text might be accompanied by an offer by an English cheese or French wine purveyor in the margin, all brought to you by the incredible mind of Google.
Price will become increasingly transparent because of the growing prevalence of comparative shopping engines. When brand name products are listed side by side and the lowest-cost vendor floats to the top positions, we will have arrived at the specter of "the only thing that matters is price." We're not that far away.
Winners and Losers
This year is likely going to be a watershed year for sustainable consumer catalogs and unsustainable consumer catalogs. The costs of catalog production, postage, online operations, order entry, fulfillment and benefits will reach a level where only the "bigs" can survive. As a consequence, many "littles" will be acquired and the industry will consolidate to yet another level. We will lose the all-important variety of catalogs that has been our passion and that has created such a diverse and interesting medium of commerce.
This year perhaps is the beginning of the "great gray homogenization" of cataloging. But, out in the lead for the foreseeable future will be the truly great catalog companies: Lands' End, L.L. Bean, Cabela's, The Sharper Image, Levenger, CDW, Dell, J.C. Penney, Williams-Sonoma, Oriental Trading, Coldwater Creek and many others.
Missing, however, will be many small, highly-niched, unbranded catalogs that simply are too undercapitalized to achieve the necessary growth to survive. The "bigs" will win the acquisitions of the "littles" and the "littles" will win the financial reward of the exit strategy. And, it has always been thus.
And so it will be - again.
Donald R. Libey is managing director of Libey-Concordia, an investment bank for the catalog and direct marketing industry with offices in Philadelphia and Cherry Hill, NJ. His e-mail address is firstname.lastname@example.org.