Before Changing Your Business Model, Consult a Direct Marketer
When the management of America’s largest retail jewelry chain, Zale Corp., imperiously decreed a sweeping business model change in the wake of flagging sales in 2004, it bombed big time.
The company president, Mary Forté, was forced to resign and board member Betsy Burton, 55, billed as a “turnaround specialist,” was named interim CEO.
In the aftermath of the disaster, Burton—with an MBA in marketing from the University of Chicago—made a pronouncement of major import: “You should never just roll something out that is not proven.”
Direct Marketing 101
For years direct marketing was considered general advertising’s ugly, little step-sibling.
It was never a business of glitz and glamour. It is no longer (alas!) a business of three-martini lunches.
Rather it is a profession devoted to numbers, to return on investment (ROI) and to a single, overarching premise: “Test Everything.”
If a test works, you increase the numbers and run confirming tests.
Only when the confirming tests have proved themselves successful—and you have a solid control—do you roll out and blitz the marketplace, hopefully leaving your competitors to eat your dust.
The only thing worse than rolling out with an untested marketing campaign is to roll out with a complete change in a core business model without testing.
The Zale Catastrophe
On March 29, 1924, Morris (M.B.) and William Zale opened a jewelry store in Wichita Falls, Texas, with a revolutionary offer to prospective customers: “A penny down and a dollar a week.”
Not only was jewelry—once the purview of the rich—made affordable for every person, the store offered friendly service and liberal credit terms.
Over the years it grew, buying up competing stores and chains and going public in 1957. By the close of its last fiscal year—July 31, 2005—Zale Corp. consisted of Zales Jewelers, Zales the Diamond Store Outlet, Gordon’s Jewelers, Bailey Banks & Biddle Fine Jewelers, Peoples Jewelers, Mappins Jewelers, ZLC Direct and a kiosk jewelry business that sells primarily to teens. It generated $2.4 billion in net revenues and had 16,000+ employees.
At the end of FY 2003 Zale stock was at $47.55. A year later the stock was selling at $27.14. As of yesterday the price was $24.13.
After a poor holiday showing in 2004, CEO Mary Forté instituted radical changes by eliminating 30 percent of Zale’s mainstay, low-end diamond jewelry in favor of upmarket bling bling with higher prices and better margins. She ditched the traditional holiday sale events that customers had come to expect—Valentine’s Day and Columbus Day—which generated a lot of cash but at poor margins. Forté also revamped its holiday catalog leaving out information about monthly payment plans, and even fired Zale’s advertising agency after a 50-year relationship.
The result: a considerable loss of regular customers to Wal-Mart and other discounters without bringing in any new ones.
All of this was done company-wide without testing.
Many years ago I briefly had as a client QVC. My visit to its headquarters on the outskirts of Philadelphia is etched in memory.
The place was humming with seemingly hundreds of telemarketers peering into computer screens and taking orders. Elsewhere was a brightly-lighted sound stage with live talent urgently hawking merchandise and taking live calls from viewers that were heard over a loudspeaker.
Meanwhile a legion of technicians was monitoring a vast array of electronic wizardry that measured incoming calls, average length of calls, abandoned calls and sales. In addition, they were able to project in real time total sales and total profits in relation to the cost of talent and airtime based on a matrix of prior product sales going back in history.
If sales began to flag, another sound stage would be lighted and different product would be offered.
At the time I was a writer and analyzer of junk mail where testing takes at least six weeks. Yet with all this technology, QVC had the most miraculous testing mechanism I had ever seen.
Prior to joining Zale Corp. as president, Mary Forté—the textbook non-tester and major screwer-upper of a business model that had been successful of 80 years—had been QVC’s vice president of marketing.
What was she thinking?
One of the pernicious aspects of public corporations is that all too often Wall Street dictates corporate strategy. If analysts downgrade a stock from buy to hold or hold to sell, the ripple effect is horrendous. Stockholders sell, depressing the price even more, while management—whose compensation is frequently tied to options and stock prices—panics. Decisions are made in haste with the hopes of giving the stock a short-term bump instead of the officers and directors gritting their teeth and looking at the long-term benefits to the company, stockholder and employees.
A marketer schooled in direct would not dream of rolling out without testing. In the case of Zale Corp., it had 1,464 retail stores, 812 kiosks and 69 shopping mall carts in the United States. and Canada.
Testing would mean splitting off some stores—perhaps in the East, West, North and South—and trying out the new business model while nearby stores with comparable demographics would serve as the controls.
This is not rocket science. Just very hard work. For example, limited editions of catalogs and solo promotions would have to be printed and mailed on a 9-digit ZIP code basis at the same time standard promotional material was mailed nationally. These test stores would axe the Valentine’s and Columbus Day sales with the results compared to the control stores.
The idea of discontinuing monthly payment plans—a marketing tool on which the entire business had been built—was simply nuts.
In the words of Stuart Lee, merchandising VP of Signet’s, which overtook Zale Corp. and is now America’s leading jewelry retailer: “If you’re going to make a mistake—which we do sometimes—make it on a 100-piece order.”
Who Is—And Is Not—Testing
* Digital Photography. Nikon, Kodak and Minolta have all announced that they will cease selling traditional film cameras. No tests needed here. Digital cameras had been tested successfully, rolled out and became the core business. Film was vestigial. Kodak caught heat from diehards when it went out of the Super 8mm film business. But in the wake of three quarterly losses in a row and the elimination of 11,000 jobs, hard choices had to be made.
* Dunkin’ Donuts. From Janet Adamy’s April 8, 2006 story in The Wall Street Journal:
Dunkin’ Donuts last year paid dozens of faithful customers in Phoenix, Chicago and Charlotte, N.C., $100 a week to buy coffee at Starbucks instead. At the same time, the no-frills coffee chain paid Starbucks customers to make the opposite switch. When it later debriefed the two groups, Dunkin’ says it found them so polarized that company researchers dubbed them “tribes”—each of whom loathed the very things that made the other tribe loyal to their coffee shop. Dunkin’ fans viewed Starbucks as pretentious and trendy, while Starbucks loyalists saw Dunkin’ as austere and unoriginal.
Having gotten inside the customers’ heads to see how they think and what they feel, Dunkin’ Donuts—with an infusion of new capital—is going to take on Starbucks by upgrading its current 5,000 stores during the coming three years and opening 15,000 more. The chain knows what it is doing.
* Escolania of Montserrat, the oldest boy’s choir in Europe, was founded in the thirteenth century. The musical education—voice plus two instruments as well regular academic subjects—is superb. As well as performing daily, in 2005, the choir also performed 15 full-blown concerts in Montserrat, Barcelona and Bilbao, and has an impressive discography. However, since the death of Franco, the inclusion of Spain in the EU, Spain’s booming economy and with a more secular Europe, parents and children have become loath to commit to a medieval regimen. As a result, applications have tanked. The business model is being changed to include a more modern repertoire, weekend visits home and, in the near future, (Gasp!) girls! No testing possible here. It was either change or go out of business.
* “Kinky Boots” is the madcap film—based on a true story—of what is probably the ultimate business model change. I urge you to see it now or rent it when it comes to DVD on September 6, 2006. It is both instructive and a hoot.