The Market and War: Attitudes

Donald R. Libey

As you read this, it is likely the US will either be engaged in active conflict with Iraq or on the verge of action. The foremost concern you have, aside from the concerns for our youth in harm's way, is the effect this will have on your business. The Direct Marketing Association has offered a White Paper titled Contingency Planning For Catalogers During International or Domestic Crises: Key Issues and Alternative Responses. This article is a discussion of a number of points about that White Paper and seeks to offer alternative thinking to those "key issues and alternative responses."



What is Possible and Probable?

The DMA White Paper does an excellent job of offering the information and considerations as a checklist of possible suggestions; no firm position is presented and, of course, none is possible until something specific occurs. The broad indications are, however, that a brief, intensive war is probable and a terrorist-like domestic incident or incidents, such as the attack on the World Trade Center or the Anthrax attacks, is possible. The downside risks are further described as a loss of readership, drops in direct and indirect demand and disruptions of the informational and financial infrastructures. The upside risks are given as a shift to direct channels, an increase in shopping from home or business and a return to healthier economic factors post-conflict. In the national crisis and conflict, essential objectives for a business are described as liquidity, flexibility, caution and imagination. Clearly, one cannot disagree with these possibilities and positions. They are, after all, common sense and logical.

It is, however, in the DMA's offered possible alternative responses for circulation, contact strategy, sales and revenue enhancements, merchandising, catalog costs and logistics, overhead and operating costs, balance sheet management, banking relationships, and personnel that an unfortunate tone of softness and resignation seems to emerge.

Circulation and Contact Strategy

In circulation and contact strategy, the thrust of the DMA suggestions are to consider cutting back or trading off new prospecting in favor of adding circulation to the house file segments or increasing older house file reactivation. I would suggest that most pull-backs in prospecting and increases in house file mailings will result in a further dilution of house file performance and a longer term loss of momentum in new customer acquisition and share shifting in the cataloger's core markets. Regardless of what happens in Iraq, your local supermarket will still be open, still be selling Black Angus prime beef, still be offering solid, margin-producing value propositions to attract new customers. The Mom and Pop local grocery that opts to cut back on circulars, newspaper advertisements, or reduce any of its minimal promotional budget, will drop farther and farther behind the power of the major competition, and it will lose core customers. A reduction in quality prospecting, even in times of short, intense conflict, is a guaranteed downstream increase in irrelevancy and a guaranteed downstream reduction in the valuation of the catalog company. In the immortal words of the late Larry Quadracci, "There are some things so important, you cannot afford to know what they cost." Consistent, relentless prospecting in the face of all adversities is one of those things.

The house file has been the repository of "increased circulation" strategies for some time now, and the response results are telling us something. Universally, I hear the committed catalog customer- both consumer and business-to-business-say, "You send me too many catalogs." Maybe it's time to listen to those customers. Maybe it's also time to stop apologizing all over ourselves and actively go after the 50 percent of the national market that has never bought anything from a catalog. The largest portion of the catalog market potential is not currently our customer. An industry with imagination and imaginative leadership should focus all of its energies on initiatives for growth and expansion when the untapped potential is as large as that of the multi-channel direct marketing industry, not on scaling back its primary marketing strength: prospecting to the immense universe of potential customers who have never even set foot in our "stores."



In the area of merchandising, the overall thrust of the DMA White Paper is to examine product productivity in order to decide if new product/old product ratios can be adjusted, to consider price incentives and to consider cutting under-performing product from the catalog. The case is fairly made for decisions on either side of the questions, however, momentum historically resides with the cataloger who aggressively introduces new products, maintains price positioning and margins and increases viable page counts in the face of diffident, retreating competitors.

Let's assume what likely will happen from recent experience of September 11, 2001 and the Anthrax debacle. Most consumer and business-to-business catalog companies will, in fact, pull in their heads, stop prospecting, combine mail drops, reduce page counts and postpone growth hires, capital expansion, and other normal activities of viable catalog companies. Mind you, these are the same companies that blithely flushed several million down the Internet drain in 1999 and who are now afraid of maintaining $500,000 in prospecting momentum because CNN induces frequent mass hysteria, but that's another issue altogether. If all of the sheep do the "safe thing" which catalog companies do you think will emerge with increased share and progressive growth momentum, albeit at a slightly higher cost? Right!

This time of impending conflict can be either a time of retreat or a time of progress. When the retail and sales force channels pull back into a safety zone, it is an opening in the merchandising defense. Now is the logical time to penetrate those defenses and run and pass for yardage. Those catalog companies that increase new product/old product ratios, increase prices, increase page counts, increase prospecting and increase product penetration strategies will be positioned, whenever the conflict ends, ahead of the rabbits that went to ground. Who do you believe will command a place of honor in European history: Winston Churchill or Jacques Chirac?


Catalog Costs and Logistics

The DMA position is, overall, one of a consideration of possible pull-backs in creative and production costs for the catalog, such as deferring on-site location spreads, using vendor-supplied artwork, and smaller quantities on print runs with re-mails printed on a selected basis. While logical and good concepts on the surface, and concepts that could be considered, I would offer that maintaining a consistent quality and integrity of creative and production is the only possible position of strength; diminution of proven creative and production strategies will diminish the post-conflict outcome for the individual catalog company. Yes, you might save short term money, but you will lose long term momentum.

The true key issue here is about preserving long term momentum and valuation.

There are two points of view and two strategic positions involved in this issue: one is conservative and considers pulling back where indicated; one is aggressive and seeks to preserve and expand momentum and capture future share in a time of disruption. American history favors the side of aggressive action. Capitalist history favors the side of aggressive action. And catalog history favors the side of aggressive action.


Overhead and Operating Costs

The DMA paper is very clear on these elements. The paper states:

The issues here are very straightforward. Without jeopardizing the remainder of the year, or the core strength and morale of your organization, you should keep costs down whenever possible . . . . Defer new hires, spending increases, even if planned, and capital expenditures until you see the market environment normalizing.

Here, I must take exception. First, the market environment may not "normalize" for another five years. We are in the midst of a major business cycle change that could extend over a decade. Second, nothing positive has ever been accomplished by deferring growth. If you had 5 children living in a two-bedroom home, would you defer building an addition until things got back to "normal," whatever that is? Of course not. You move ahead and use common sense, but you service the future.

I was in the midst of evaluating businesses for acquisition in England on December 20, 1989 when the US invaded Panama. There was no consideration of what would happen to catalog demand; no consideration of cutting prospecting or circulation; no consideration of deferring new hires, capital expenditures or even acquisitions. And if you go all the way back to 1983 and the invasion of Granada and numerous other conflicts throughout the post-World War II era, there has never been such paralyzing business fear as we are currently experiencing regarding the unknown. My re-write of the DMA position would be as follows:

The issues here are very straightforward. In order not to jeopardize the remainder of the decade or the core valuation of your business, continue operating your business and maintaining your budget to invest in and assure growth. Make needed new hires, increase spending on viable prospecting in order to capture new market share, and invest in needed capital expenditures to assure appropriate positioning for future opportunistic and organic growth and expansion.


The Bottom Line on High-Level Strategy

The combined postal increases of the past 15 years have hurt your business more than the possible effects of a conflict in Iraq. The privacy constraints that have been allowed to occur legislatively have hurt your business far more than the possible effects of a conflict in Iraq. The near-national Do Not Call lists and near-universal national telemarketing legislation has hurt your business far more than the possible effects of a conflict in Iraq. The erosion of the fundamentals of direct marketing are far more dangerous than the minimal costs of a short term dip in demand due to conflict.

But even more dangerous, even more insidious, even more fatal to the individual and collective valuation of the catalog industry is an attitude of fear, diminution, resignation, and retreat in a time of difficulty, whether economic or geo-political. It is precisely in these times that an attitude of perseverance, aggression, boldness and strength is essential for the capture of the future. No catalog company has ever succeeded by stopping and no catalog company will ever grow by shrinking. Invest in the future. Invest in the future during difficult times. Adopt a contrarian philosophy. Assume the mantle of the lion, not the sheep. Look beyond the horizon ahead, not the horizon behind. And remember, it's not complex: it's all about consistency, staying the course, discipline and following a proven, logical, sound plan for continuous growth. In the end, those catalog owners who understand this will harvest the largest portion of wealth.

Copyright 2003 by Donald R. Libey. Permission to reprint or quote is granted.


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