SEARS CANADA INC. has managed to solve a database problem that’s confounded many marketers: channel conflict. It accomplished this by putting retail and direct under the same boss, with the humble goal of pleasing the customer.
Sears is the largest general retailer in Canada with sales of $4.6 billion in 1997. That year it had 110 full-line retail stores, eight home furniture centers, eight clearance outlets, 79 dealer stores and 2,000 catalog agents. And it continues to expand. The Sears catalog reaches 5 million households in Canada every year. Two-thirds of all sales in both catalog and retail are done on the Sears credit card.
A few years ago, Sears made a major investment in database marketing, creating a state-of-the-art database which gave it a new perspective on its customer base. A key benefit derived from the database was to put all customer sales-particularly those from the catalog operation and the retail stores-into the same customer record. That was an eye-opener.
At the time the database was built, there were separate senior vice presidents for the retail and catalog operations. These two channels openly competed with each other. Their rivalry went back a long way in Canada. In early Canadian retailing history, the Sears Canada pioneers were the catalogers. They built a strong base in rural Canada, which prompted Sears to open retail stores depending on the growth of the catalog. To the company it was profitable. But the catalogers perceived it as cannibalization. The catalog merchants who previously owned these markets saw sales attrition due to the stores. They saw it as channel competition, which became quite heated over the years.
The competition reflected where the catalog operation was physically located in the typical Sears retail store. In Canada, as well as in the United States, Sears stores put the catalog office way in the back, so you had to walk through the whole store to get there. It was viewed as an overhead to the selling operation, taking up valuable space that should be used for merchandise. The catalog desk was as far away as possible from the store entrance to generate store traffic. It was not designed for customer convenience-just the opposite, in fact.
Once the database was built, Sears was able to measure the performance of catalog customers vs. retail customers. The data was very revealing. In 1997, for example, the average catalog customer spent $492 per year, while the typical retail customer spent $1,102.
What about customers who were shopping both direct and retail? These customers bought more than the average in both channels. When Sears Canada’s general manager for relationship marketing Bruce Clarkson looked at these cross shoppers, the average cross-shopping customer spent $584 on catalog items and $1,299 in retail stores. Leaving these cross shoppers out of the total figures, the customers who only shopped one channel spent $409 on catalog items and $994 in retail stores. Cross shoppers were spending $1,883 annually with Sears, compared with half that or less paid out by single-channel shoppers.
The facts were staggering. The marketing staff provided its findings to top management, which could clearly see that the way the business was being run was inconsistent with customer behavior. The leadership said things like, “We knew it, but we didn’t have the numbers to prove it! We have to do something to encourage cross-channel shopping.”
Once top management saw what was happening, Sears began to make major changes. No longer were catalog and retail each under a competing senior vice president. Instead, Sears Canada now has three major divisions: marketing, sales and service, and merchandising
An executive vice president for each division works across all channels: retail, catalog, credit card, long-distance services, gift registries, etc. Marketing handles branding, advertising, TV, preprint, catalog production, in-store marketing, the store’s “look and feel,” customer relationship marketing and e-commerce. Sales and service delivers efficient service to each channel.
One of the first fruits of the reorganization was the change in location of the catalog desk in the retail stores. Stores have started to look contemporary: bright, functional and convenient. The catalog desks are put at the most used entrance of the store. Throughout the retail store, Sears now has outposts where it puts copies of the catalog. At each outpost, there are telephones for immediate access to the call centers. The catalog is positioned as an extension to the retail store. Selected laminated catalog pages are displayed in various departments throughout the store. If you can’t find a particular size or style, for example, you can pick up a phone and order it. It’s not promoted as being a catalog order; it’s just another way of shopping at Sears.
To encourage telephone shopping, Sears now has 48-hour national service on most orders. No matter where you are in Canada, it can arrange delivery to one of its 4,000 locations throughout the country within 48 hours. There are also no shipping and handling charges, a fact sure to increase catalog/retail cross-shopping.
And what was the result? Before Sears provided the catalog and telephone service in the store, if customers wanted items that happened to be out of stock, they’d likely leave and buy them at another store. With the new system, Sears saved sales in 1998 equivalent to adding another midsized store to their 110-unit chain with no bricks and mortar-essentially at almost no cost. That virtual store may become the largest single store in the Sears Canada chain.
Sears recently began including a teleshopping icon in its fliers and preprint programs. You can call to obtain by phone any product that’s available in the stores. It looks like retail, but it acts like direct. Customers don’t know they’re ordering from a catalog. They think they’re calling a retail store. Sears customers are capitalizing on the convenience of the system. People call the number, then pick up their products at the store. Sears has had double-digit growth in teleshopping in its first 15 months. The incremental sales from teleshopping are equivalent to putting out a new catalog and sending it to 5 million households. The cost, however, has been virtually nil. This is what comes through organizational integration of catalog and retail.
But the database and the reorganization haven’t stopped there. Marketing is now moving toward the goals of retention, acquisition and purchase stimulation. Clarkson developed customer attrition models. His first effort was to find out why people were not shopping through the catalog. He discovered that the strongest predictive variable for not shopping the catalog was exposure to bad service. Sears could prove that money spent on improved service would increase customer retention. The executive vice president for sales and service now measures his performance based on a customer loyalty index that is now well known in the organization.
Clarkson’s staff created two measures of customers: behavioral segments and RFM cells. They developed 14 active customer segments and two lapsed customer segments:
* One segment is the “super spenders.” This group-only 2% of the customer base-has the highest retail transaction dollars, the highest total revenue overall and the highest revenue in five out of 12 merchandise categories. Their credit limit is very high. They are nuts about using the Sears card. They own rather than rent their homes, and tend to live in affluent suburbs.
* At the bottom are the “occasional store shoppers,” representing 17% of the customer base. They are the highest in terms of returns, and highest in payment to the credit balance. They pay off their account every month. They are the lowest in terms of overall revenue, lowest in catalog purchases. But there is a paradox: The “occasional” shoppers are demographically identical to the “super spenders.” And 28% of them lapse each year. Since they use the Sears card, it means Sears has to run acquisition programs constantly to keep their cardholder membership up.
Besides creating these segments, Sears maintains an RFM system with 189 cells, tracking recency quarter by quarter. Clarkson’s analysis showed that each quarter between 20,000 and 30,000 new customers acquire a Sears card, buy once and never buy again. Sears spent a lot of money trying to get the card into people’s hands, but wasn’t doing enough to get those people to use the card. Knowledge of this prompted marketing efforts to shift the focus from acquisition to greater use of the card.
The RFM analysis also showed 14% of Sears customers were $2,500-plus annual buyers who contributed 50% of Sears’ corporate merchandise revenue over the past five years. These loyal customers don’t just buy big-ticket items; they just shop there every month. The revenue builds up over time.
Finally, Sears Canada has started a Web site (www.sears.ca/). So far, 97% of online sales volume is from people who have the paper catalog in front of them, but prefer to order via the Web.
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