A Catalog Apollo Program

My father was a very logical and practical person. He always thought it was foolish that every little town in New England had its own police and fire departments. When you think about it, why should each town incur the fixed and variable expense of maintaining these expensive departments?   We have a regional high school shared by multiple towns, why not a regional police department?

The rational against this idea from other residents in any town where it is proposed is always the same – our own local police and fire department have quicker response times, and can “get to know the town better and thus provide better customer service”. My small town has a volunteer fire department, and a police force with only two officers that both go off duty at 9 PM – if  you call for help at 2 AM, you’re going to have a long wait, no matter how well they know the town.

Purely by coincidence, as I was writing this posting, there was an article in our local newspaper about two local towns that successfully combined their two police departments in 2005.  In the intervening ten years, the two towns have saved a combined $1 million (which is a lot of money to a little New England town), and actually ended up with better service. The article also mentioned that this is the only known example of two towns in New England that have done this type of partnership.

I bring this up because I think it is time to again re-visit an old concept. I read the other day that the Boston Globe (New England’s largest daily newspaper) now prints the Boston Herald (New England’s second largest daily newspaper) – and the Globe’s closest competitor. This is savings to the Herald, and income to the Globe. That got me thinking about catalogs cooperating with each other.

Years ago, we had a speaker at the VT/NH Direct Marketing Group that advocated a similar concept for catalogs, which was to simply band together and do joint purchasing of services and joint fulfillment. To a large degree, only the big catalog conglomerates (like Cornerstone) are taking advantage of this, by having one or two distribution centers for multiple brands.

I know, I know – this idea has been talked about numerous times over the years and has even been attempted a few times. I also know that the few times it has been attempted, the venture failed resulting in the participating companies losing their inventories in padlocked warehouses.  But let’s look at what has changed.

Almost all catalogs are facing greater competition from online giants. Small and mid-sized catalogs are struggling to grow and stay profitable. Cash is short and additional funding to do what is really important – develop new products – is scarce. Moreover, having distribution efficiency and depth of product inventory are the hallmarks of the online giants like Amazon and Wayfair. Those companies don’t have any innovative products – they just have a ton of ordinary products.

Catalogs need to acknowledge that they will never be able to compete with Amazon and similar online giants on same day shipping, or even next day, but they could be as competitive with 2nd day shipping, if they had enough volume and with enough efficiency.

Let’s look at some other options for how catalogs can become more efficient and save money. Cut more circulation and pages? Sure, but that eventually reaches a point of diminishing returns. And besides, if catalogs could concentrate on developing more truly unique, innovative product, then they might want to expand circulation.  Cut more staff? No, that just leads to more of a downward spiral.  Stop doing stupid stuff? Yes, that’s obvious, but the stupid things that catalogs do usually are not the things that put them out of business.

The main reason companies go out of business is they ran out of cash. Cash at times is more important than your mother. Savings add up every time you negotiate a new contract. But savings also add up if you can get rid of non-core expenses. For catalogs, that means the warehouse and product distribution/ shipping.

In a famous Wall Street Journal article from 1989 entitled Sell The Mailroom, management consultant Peter Drucker argued that companies could be more efficient if they farmed out support services like the “mailroom”. Part of his rational, and the one that has always resonated with me was that “In-house service and support activities are de facto monopolies. They have little incentive to improve their productivity. There is, after all, no competition. When in-house support staff are criticized for doing a poor job, their managers are likely to respond by hiring more people. An outside contractor knows that he will be tossed out and replaced by a better-performing competitor unless he improves quality and cuts costs.”

Most of you will tell me that your in-house distribution staff are super-efficient, and could not possibly be any more so. Further, you will tell me that you simply would never trust your fulfillment to a 3rd party because they could never do it as well as your staff. Oh, pride goeth before the fall.

Look, most of your fulfillment staffs are efficient, within the confines that you allow them to operate. From Datamann’s own experience, we know that most companies only use 20% to 50% of their order processing systems, and often the tools that are unused are the ones that could lead to highest efficiency. But even if you are maximizing your available systems, most of you have difficulty staffing up to meet seasonal demand, and you cannot afford to keep up with all the new hardware and software innovations, such as warehouse robots. Those are the types of cost savings that continue to give the online giants an advantage.

Could catalogs actually band together and make something like this work? In my opinion, no. The reason is that the catalog industry, just like most other industries, is too fragmented. The impetus is going to have to come from the outside, and will have to be market driven. However, there is a precedent.

Most of you have never heard of C&S Wholesale Grocers, but they are the 10th largest privately held company in the United States. C&S is the largest wholesale grocery supply company in the US, supplying independent supermarkets, chain stores and institutions with every product they sell, delivering everything from seafood to soup to soap from more than 50 high-tech distribution facilities. The reason most people have never heard of them is that they do absolutely no branding (their trucks are blank); they just provide incredible service and efficiency to the clients/stores they serve. The reason they are so big is that more and more large grocery chains realize that C&S can handle all the aspects of ordering, storage, and transportation of their products better and more efficiently than they can.

Granted, the number of products the modern US supermarket sells is finite – somewhere around 150,000. Many of you have that many SKUs in your current assortment. And with the exception of regional variances in things like the consumption of BBQ sauce, planning the weekly consumption of Kleenex, Ragu, and Diet Pepsi probably doesn’t change that much across 50 states. So, some of you are saying “Sure, they’ve got it easy, they don’t have to deal with getting dresses made in China, or furniture shipped from Vietnam.”

But those issues are part of merchandising, and those are the aspects of being “your brand” that you would retain. What I’m suggesting is that the time has come for catalogs to give up two non-core areas – warehousing and shipping – areas in which we will never be as efficient as our ecommerce competitors. Think of the advantage if you had one warehouse, next to a FedEx hub, that handled 200 catalogs, with all the picking and packing done by robots. More to the point, think of the advantages if you had two competing companies supplying that service next to that hub.

Unfortunately, if you have read this far, you are probably thinking “Yes, this could work. But, instead of using an outside company, why couldn’t our warehouse be that industry hub?  We could do fulfillment for the whole industry, plus our own!” I’m sure that over the years, many grocery stores thought they could do the same. But in the end, the reason that C&S Distributors reigns supreme is that they are in the distribution business, not the grocery business. You are a merchant, and you will only grow by selling stuff – unique stuff at that. You are not going to grow by being in the distribution business.

Pulling this off at the scale necessary to make it viable would require an equivalent of an Apollo program for the catalog industry, where a commitment would be made to not land a man on the moon in ten years, but to close every catalog warehouse, and create a co-operative infrastructure in which all the non-core operations of catalogs were handled by outside vendors, with incredible automation and efficiency.

Ok, so my father was not a volunteer fireman, and I’m no operations expert like Stan Fenvessey.   I’m sure that many of you will find many faults with my simplistic idea for saving the catalog industry some money.    But if you are looking for solutions to how we as an industry can stay afloat, and compete, maybe it’s time to revisit this idea.  If the Boston Globe and the Boston Herald can cooperate to survive, we should consider the concept as viable for catalog survival too.

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by Bill LaPierre

VP – Business Intelligence and Analytics

Datamann – 800-451-4263 x235

blapierre@datamann.com