Welcome to 3-2-1nsight from Marketing Sciences.
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We have lots of new readers this week, and I’m so happy to have you. Given the growth I’ve seen from my retail series, we’re going to continue it this week. Last week I talked about how eCommerce companies are now utilizing Pop-Ups or physical stores to bypass ad platforms. Then I highlighted how retail leaders are moving away from the eCommerce narrative and are proving it’s not just about clicks, its' also about bricks. Today it’s a bit longer, and we go very deep looking at how mid-level luxury is really redefining the retail experience. Doing the best at leveraging their brand, with tactics, for online and offline experiences that allow them to own their consumer. Most consumers may only buy a pair of Gucci slides once every couple of years, but those HENRYs are buying avocado toast and Blue Bottle coffee every day.
And as well, I feature a couple of great things I’ve read or started reading this week.
And as always, download my 130 slide consumer research deck looking at the future consumer in 2021, It’s a ton of primary research, and you can download it for free.
3 Stories
Express, which was best known for its presence across every Westfield Mall in America, is changing its strategy. A day after they announced their Q2 results, they unveiled their new strategy, Expressway Forward, their take on Nike’s Consumer Direct Offense. The big difference is that Express is trying to revolutionize their business, not with a plethora of digital services armed with killer products. Instead, they’re trying to win by tapping into the creator economy to create a digital behavior with new consumers and then elevate that with a focused omnichannel approach that rethinks the location of stores and the purpose of the square footage. Express captures many of the ideas expressed in last week’s newsletter about the future of retail is not just about clicks, but clicks and bricks. Express is taking many of the ideas I discussed further by implementing an omnichannel strategy and building an omnichannel strategy rooted in creating community through fashion.
Eyeglass retailer Warby Parker in IPO filing reveals rising sales—but also widening losses - CNBC
Chances are you’ve heard of Warby Parker because you own a pair, used the service for its novelty, or seen and hung out in one of their stores. Warby Parker, one of the original OG companies that kicked off the DTC trend, is finally going public. Once longed and referenced as the best example of why physical retail was dead has revealed how much physical retail was alive and kicking. Two of the big takeaways from their S1 was how reliant they were on in-store sales. Before the pandemic, 65% of Warby’s sales were from in-store and only 35% online. Contrast that with the last six months, and those sales split changed to 50% in-store and 50% online. Second, they have an extremely sticky system where, on average, they saw a 50% sales retention rate within the first two years of a customer’s first purchase and a nearly 100% sales retention rate over four years. Even though Warby launched over ten years ago online-only, the actual story is how they used that initial buzz of online-only convenience and turned it into an omnichannel business that wholly owns the customer experience.
Why PVH Stock Jumped on Wednesday - Nasdaq
First Express, now Tommy Hilfiger, what next Wetzel’s Pretzels? As I continue down my path of weathered stores, you used to think they were a big deal because we could find them in a mall. I now turn my attention to PVH, owner of Calvin Klein and Tommy Hilfiger. PVH had a very rough 2020 but has now been able to blow past expectations and continue to do so as 2021 heads to a close. The company expanded its top-line revenue and shored up many of its operations to surpass its bottom-line expectations. They did that not by increasing sales volume but by decreasing their distractions, doubling down on their signature brands, and getting every celebrity older than 30 to talk about #mycalvins.
2 Takeaways
Businesses are pulling away from undifferentiated experiences and brands
One of the last companies to report their Q2 was PVH, the owner of Calvin Klein and Tommy Hilfiger. For many older millennials, they’re better known as Phillips-Van Heusen (I know you’ve seen that name whenever you walked through one of those dying department stores). While analysts often discuss revenue growth, which PVH smashed (revenue grew 46% YoY, with 35% coming from digital), all the exuberance comes from how well PVH has improved its bottom line. PVH exceeded their earnings per share forecasts by 127% while only beating their revenue forecasts by 8%. The most under-observed story is how PVH turned around a terrible 2020 to pivot its operations for a better future. To improve its bottom line, PVH knew it needed to exercise focus, so they went on a selling spree, removing their lesser-known or lesser perceived brands. They sold their IZOD and Van Heusen line, which were best known to mid-level managers and suburban American teens, and typically purchased at department stores in a recent sale so they could focus on Calvin Klein and Tommy Hilfiger.
Brands that rely on selling at third-party retail can no longer be relevant or apart from a broader business strategy in 2020. Target created Kindfull, its private-label dog and cat food brand, to further expand their consumer’s basket size and emphasize its brand. Private label brands like this showcase to DTC companies that they should want to sell in-store at Target because their brand and aesthetic fulfill the needs of DTC brands exploring physical retail.
Luxury has always been ubiquitous with prestige but has long been an indicator of customer loyalty. In the past, luxury brands were most successful by maintaining the highest rung of distinction and making mid-luxury brands that would become large pools of customers that companies could eventually transition into their high-end brands, ultimately to their most luxurious offering. The internet, though, has made it easier than ever to remove those unnecessary undifferentiated brands for the sake of a prospecting pool to their high-end offerings. In the age of Shopify and machine-powered self-service ad platforms, every brand needs to stand independently.
Targeting communities is more effective than targeting individuals
Those same machine-powered self-service ad platforms that built the DTC world that we know of today have also turbocharged and reinforced some poor marketing 101 practices. In the past, every marketer’s dream was to target individuals down to their exact taste. Google and Facebook could provide this tool to marketers everywhere, and rather than elevate the tactics and strategies most abused it, using it to bludgeon consumers over the head. With the ability to target anywhere, on the most intimate details, rather than use the tool to create stronger relationships, we saw most companies use the tool just to reinforce popular trends. That practice led to the birth of DTC blanding or deep echo chambers that have reverberated fringe ideas into mainstream talking points. Rather than performing proper marketing, brands, and companies, often because of poor strategy from big agencies, chased trends and tried to create or piggyback off those trends rather than advertise. Companies prioritize winning the moment over winning the mind. Precise self-service targeting obfuscated the actual goal of business by letting every company think they were a growth company and create the data story to show it. These platforms made it easier for businesses to prioritize targeting users at the precise moment to offer them a promotion or discount to drive home the sale rather than find out if their business, brand, or message had any real legs. As a millennial, I see first hand every time I’ve traveled through any metropolitan airport and am overwhelmed by the number of Away luggage getting wheeled through terminals and airport lounges. Begging the question, is the luggage that good or is it just that Away has targeted every millennial in the US that has looked at travel pics on Instagram with that 20% off their first purchase ad? After sending back three, my guess is the latter.
Express knows that buying clicks for growth is a strategy they can’t sustainably employ. Rather than try to sell a growth story that isn’t there, they’re going back to tried-and-true marketing by communicating how their brand is different not just in promotions but in use, taste, and service. Their rollout of an integrated omnichannel strategy that reinforces their communication efforts lets them bypass trying to intercept customers on random online journeys. Instead, it allows them to meet their customers wherever they may be, online or offline. But rather than just giving their consumers products, they’re giving their consumers community. By focusing on building a community that helps them sell, they’ll be able to scale and target future consumers far more effectively than any platform. After Apple’s done with Facebook, focusing on the community will also be cheaper.
1nsight
Due to social platforms and technology, targeting has made it easier than ever to drive the initial transaction. Retail companies are transitioning away from being focused on the sale to a long-term strategy focused on the customer.
In the past, most successful pure retailers have always done a fantastic job at running dozens upon dozens of cohort analyses to bucket their customers. By bucketing a customer, somehow, a sale could happen easier. Could, is the keyword, as often that wasn’t the case. And with the rise of eCommerce and better digital off-the-shelf systems, pure retailers found that the practice of finding the perfect segmentation or cohort analysis was often a fool’s errand. At first, especially during a quarter, every manager will tell you the same story. They did a cohort analysis, discovered that this cohort bought this item more, so they changed their messaging and sold more of those items. That is until the next quarter when that customer is no longer buying those items, the story transitions to how they found this other audience and are seeing traction with that consumer buying this product type, so all is good as they’ll further optimize the experience for that cohort. That’s not bad business operations. That’s just bad business. A pure retailer’s most robust cohort analysis can let you adjust inventory and adjust marketing, which becomes a repeating game of cat and mouse. No one should invest their time in a business that’s focused on playing cat and mouse. Instead, leading companies know that cat and mouse are a part of day-to-day business operations, but they’re focused on driving the market’s direction. You can only push the direction of a market if you own the customer relationship. Not owning the customer relationship means you can never drive the market’s direction, especially in a more mature eCommerce world, which means you’ll continually have a business operating in the state of reaction rather than leadership.
Owning the customer relationship is even more critical to shape the market and dictate how your business will operate in that market. Especially when you consider that the bulk of most transactions are not subscription-based, despite what many eCommerce pundits want you to believe (Prof G, I’m looking at you). Shaping the market is your best weapon in a world with only increasing demands on your attention. A market-shaping strategy allows you not constantly to replace your customers. Instead, you can use your product roadmap to maintain that relationship. It will enable you to age with your customer and carries a habit and expectation with them, rather than constantly try to win and retain them. You don’t have to look further than Nickelodeon and Disney to understand this concept. Nickelodeon is continuously trying to attract the next younger viewer as their audience ages out. At the same time, Disney can drive a viewer from Disney kids to Freeform to ESPN to Hulu, then to their more mature films. They also augment this entire experience with tent pole IP so that someone who started as a Disney fan as a child will grow into an adult with a season pass and turn their child into a Disney fan. It’s a relationship that has lasted for generations and allows Disney to always set the pace for the market.
Owning the customer relationship ensures that your product roadmap can age with the consumer from a retail perspective. In Warby Parker’s case, younger individuals buy glasses for style, then age into buying eyeglasses for need. While they don’t own the manufacturing process, Warby Parker owns the retail, prescribing, buying, and customer relationship. They only need to win the consumer once, maintain the relationship, and they’ll always be able to monetize with their customer as that customer grows older with new services and products.
Businesses that prioritize owning the customer relationship have gotten into the practice of discussing NPS. NPS is an excellent lagging indicator of how strong your customer retention is, which is why brands like Peloton, Disney, and Nike constantly report their NPS score. Those companies also all have direct-to-consumer offerings, balanced with other product lines and business strategies. But that direct-to-consumer relationship is critical. They have the systems and business strategies that allow them to use that relationship to shape their market and move the consumer into that direction and reap benefits from those second-order effects. Companies or passion projects that hide under the moniker of a company or brand that try to tout an NPS without solid business operations and fundamentals are, in contrast, just burning money. As their inability to reap any secondary or primary benefits of owning a market just turns the brand into a prospecting pool for more brilliant businesses to conquest. Do not get confused as a business leader on when to focus on NPS vs when to focus on the product. For many, establishing and maintaining a solid product is the essential tool any business can have. Peloton, which has a great NPS score, is struggling as their product line wanes, and concerns continue to arise about their hardware. Contrast that with Chick-Fil-A, who in 2012 had an enormous controversy surrounding LGBTQ issues, and a PR nightmare could weather the storm because their product is so excellent. Everyone will return to a good product, regardless of your NPS.
In the current world, it’s never been easier to design, prototype, and manufacture a product. A fantastic product is no longer nice to have, it’s a must-have, and the bar keeps rising. If you have a fantastic product, use that as your most significant advantage and create a marketing playbook and system that prioritizes that. As we enter the first part of Marc Andreessen’s latest thesis, targeting will no longer predicate the marketing playbook as more companies build physical products rather than 0s and 1s. Instead, the focus will be on the consumer relationship. As Warby Parker and the next generation of DTC and eCommerce businesses grow, the world will realize that you shouldn’t focus on churn when you have a great product. You should focus on your customer relationship. And it’s never been easier to build a great product.
Great reads I want to share….
This week I got the chance to read a fantastic piece from the Washington Post entitled Perspective | Restaurants are desperate to hire. My coworkers aren’t ready to come back, by Sara Selevitch (a fellow Angelino), exposing us to hospitality workers’ other considerations and realities and the greater industry.
The second story that caught my attention is the amazing Freya Rohn, where she offers commentary on an overlooked part of what’s currently happening in Afghanistan—sharing a touching story about the gender dynamics that exist in cultures from non-western parts of the world and how that experience unveiled to her tales of women who were foundational to the construction of society. Often overlooked by western culture, these stories highlighting the strength of women shaped the world, and now we can see the reflection of those stories on the images we see of families fleeing Afghanistan.