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.

Jeff Matthews
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.


Captain Obvious said...

One plausible reason for staying in the catalogue business could be that having catalogues hitting people's mailboxes two or three times a year keeps brand awareness high. This would be a more compelling argument if there was any brand awareness problem...but we are talking about Disney here.

Another possibility is that the mailings could drive website traffic, if indirectly. I can say personally that sometimes I will see something in a catalogue or I will just see the catalogue laying around the house and it will spur me to get on the internet and browse around on the retailer's web site. Sometimes I even buy something.

So, unless I am totally unique in that respect, it does stand to reason that mass catalogue mailings probably do drive web site visits and internet sales, indirectly. They also do their part in bolstering brand awareness. But with that said, given the numbers at play here, it does seem like a no-brainer to shut down the catalogue operation.

I am no marketing expert, but it seems to me there are probably more cost effective ways to drive some website traffic than mailing out 20+ page full color catalogues.

JFB said...

And we wonder why so many call center activities get outsourced?

Talk about a no-brainer.

Once again Jeff, great post.


Its_strange said...

My sister went down to see her girl at Villanova this weekend. She is a 1st year student with a interest in business . After the basketball game my sister was wondering around the school..She told me each and every student gets a laptop computer . While its always interesting reading a contrarian point of view , the Professor needs only open her eyes

Honorable Justice Jorge P. Smythe said...

I like Cpt. is at least asking the right questions. Did Disney compare the catalog mailings to online order volume? I've purchased a decent amount of stuff out of the skymall catalog, but from its website not over the phone on the plane.

Heck even Dell, when they were on the way up, sent out a sort of catalog occasionally. I've perused it countless times while I was clearing out my bowels.

While it may well be a good idea to get rid of the catalog, one should not assume that because the sales come from the website they are not driven by the catalog.

credibility said...

I think this is done for the real customers, children under 10 yrs old.
I have 4 of them and they love to cruise the catalog. Many items are not in the stores and that is primarily where the little shoppers check out inventory. They don't surf the net shopping like adults. It is my opinion, although the adult is making the purchase, they are being direct by the child.
We're talking about products that they WANT, not something they NEED.

Aaron Koral said...

It’s interesting to note how other retailers (i.e., Land's End, Spiegel) have eliminated their catalog based operations and have moved their marketing efforts online. It makes you wonder what is happening to the profitability of publishers producing those catalogs for retailers (hello, R.R. Donnelley). I could, however, be wrong though - great post Jeff, as always.

DaleW said...

It’s interesting to note how other retailers (i.e., Land's End, Spiegel) have eliminated their catalog based operations and have moved their marketing efforts online.

I don't know about Spiegel, but Lands' End's catalog is alive and well.

Captain Obvious said...

That is a great point about the kids. I can't believe I forgot to mention it.

I have a five year old and a three year old and they both love to look through the toy catalogues, whether they have a birthday coming up or not. Around their birthdays and Christmas, there is no doubt in my mind that our shopping for them is at least somewhat driven by what they have seen in these mailings, or during the commercial breaks in between SpongeBob and Dora.

BelowTheCrowd said...

Those Dell catalogs are still alive and well. I just got one this past week.

I think part of what is going on is that the web is still struggling with how to present the "browse" factor that paper catalogs do. It is clearly the superior medium for helping people locate the items they know they want, but not necessarily all that good at getting people to look at stuff that they didn't even know existed.

This is definitely true for me. Half of the stuff I've bought for the cats is stuff I never even would have known about if the Drs Foster and Smith catalog hadn't shown up in the mailbox. I did order it online, but the catalog was the advertising medium that sent me to their website in the first place.

I think the challenge is in identifying those individuals who are likely to be swayed by such a cataglog. Drs F&S got my name (most likely) from a cat-related publication I subscribe to. That made me a good target. I know from experience that many catalog merchants are not anywhere nearly as focused as they need to be. (Used to work for one. Their target market? Anybody of hispanic origin. What were they selling? A fairly large variety of non-unique stuff. And they wondered why the responses were so low...)

Incidentally, the biggest impact of this change will most likely be the USPS, which will have to change radically.

Aaron Koral said...

Hi Dale - you're right (and I was wrong) on Land's End catalogs. They are, in fact, alive and well. My apologies to the board for my error.

Thoughts said...

I'm with some of the other posters here. I've been spurred to some online purchase after seeing something in a small five to ten page catalog sent in the mail. Usually viewed eating breakfast or on the can. Browsing through pages of products at a website is not fun. I'll be interested in seeing how Disney's orders are affected by discontinuing the catalog mailings.

Its_strange said...

Interesting story by Herb Greenberg today. Seems FFH has been buying OSTK . Now thats a good use of stockholders money.

And the SEC writes letters and files papers .