Tuesday, February 21, 2006
The Professor Versus the Real World
Disney Shopping, a $160 million a year direct-to-consumer purveyor of Disney merchandise, announced a change in its business model that to anybody on Wall Street—and to consumers under the age of 30—should come as no surprise: it is eliminating its paper catalogue.
According to an interesting article in this weekend’s New York Times, “Disney spent $18 million to mail 30 million catalogs last year,” with half the catalogs going out in the fourth quarter holiday season.
The result was a whopping 45% decline in peak season telephone orders.
Now, you might expect that a 45% decline in telephone orders from a catalogue mailing would lead to a fairly big decline in overall sales for the Disney Shopping business, but thanks to the overwhelming proportion of internet-based orders, sales actually increased 5% for the year.
You don’t have to be a math whiz to figure out the general direction of the variables in the equation embedded in this discussion: catalogue-based sales down, internet-based sales up.
Why, you might wonder, would anyone spend $18 million to contact consumers using a labor and resource-intensive method when the response to that method was a collapse in customer response at a near-50% annual rate?The answer is you wouldn’t—unless of course you happen to be a college professor.
While the folks at Disney have taken the highly logical step of paying attention to the data and putting an end to the $18 million catalogue operation, Donna Hoffman, a professor of marketing at Vanderbilt University, told the Times the move was “really short-sighted” and said the company ought to reconsider.
As if the trend is a momentary blip.
Ms. Hoffman, to her credit, provides a statistic to back up her point of view: the purported fact that consumers who use a retailers’ store, catalogue and web site spend 15% more at that retailer than customers who use only one shopping method. “Disney’s just leaving all of that on the table,” she told the Times.
But what, precisely, does “all that” amount to here?
Let’s assume Professor Hoffman is correct, and Disney is realizing a 15% sales lift from the shrinking base of customers who shop in Disney Stores, order online and peruse those catalogues—say, one quarter of the $160 million total Disney Shopping sales.
So perhaps $40 million out of those sales were boosted by Professor Hoffman’s 15% synergy number—implying Disney generated an extra $4 million of sales thanks to the catalogue mailings.
Now let’s try to figure out what it cost to get that extra $4 million in sales.
Without detailed access to Disney’s books we’ll have to guess, but there’s an interesting data point inside the article: 80%—or roughly $130 million—of Disney Shopping’s $160 million sales came from online customers.
Which means only about $30 million came from the telephone-based catalogue customers.
Assuming a 50% gross mark-up on $30 million of merchandise sales (a generous assumption), Disney Shopping’s catalogue might have generated $15 million in gross profits.
$15 million in gross profits which does not even cover $18 million in catalogue mailing costs.
Then there’s the call centers where operators take down the information and transform a customer order into a sale (Disney has closed one call center already), and Disney’s catalogue operations are clearly bleeding cash—I’d guess $5 to $10 million last year.
All for the sake of Professor Hoffman’s theoretical $4 million in extra sales lift Disney might experience by mailing 30 million catalogues straight to 30 million recycle bins around the United States.
Which is why the Disney Shopping VP told the Times there is no way Disney would ever revive the catalogue business, despite Professor Hoffman’s concern that Disney might eventually “decide it was a mistake.”
I give the Professor credit for taking a contrarian point of view. But when it comes to The Professor versus the Real World, my money’s on the Real World.
I Am Not Making This Up
© 2005 Jeff Matthews
The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.
Posted by Jeff Matthews at 6:57 AM