From Mass Marketing to the Customer or an Individual

April 30, 2008



From Mass Marketing to the Customer or an Individual



DENE L. ROGERS

President and CEO, Sears Canada Inc.



Chairman: Jo-Ann McArthur

Second Vice-President and President-Elect, The Empire Club of Canada



Head Table Guests:



Verity Craig: Principal, Hays Executive, and Director, The Empire Club of Canada

Keira Herry: Grade 11 Student, Westview Centennial Secondary School

Reverend Byron Gilmore: Rector, Christ Anglican Church, Brampton

Tim Flemming: Senior Vice-President, Sears Canada Inc.

Rebecca Rogers: Spouse of Dene L. Rogers

Rajiv Mathur: Partner and GTA Consumer Business Practice Leader, Deloitte & Touche LLP

Lou Natale, Sales Director: RedKnee Inc., and Director, The Empire Club of Canada

Diane J. Brisebois: President and CEO, Retail Council of Canada

Brent Houlden: Partner and National Consumer Business Practice Leader, Deloitte & Touche LLP.



Introduction by Jo-Ann McArthur:

Wikipedia states that there is a Sears location within a 10-minute drive of 93 per cent of Canadians. With annual revenues of $6 billion, Sears with its 37,000 associates has long been a force in Canada—both economically and culturally.



From Simpson-Sears to Sears to a relaunched Eatons to Sears Home Stores it had great brands like Craftsmen and Kenmore. The Sears catalog was a precursor to today’s Internet retailing. As a kid in my household it was an annual sport to race my two brothers to be first to mark up the Christmas Wish Book for Santa.



Sears’ corporate mission is actually one of those rare mission statements that is focused, actionable and easy to remember—build customer relationships, make more money, and improve every day!



We hear a lot about mass advertising dying; what about mass merchandising?



Well, it certainly has its challenges—with a strong Canadian dollar, consumer belt tightening, big box competition like Best Buy with bigger selection and lower prices, fashion stores like Zara with up-to-the-minute European fashion at disposable prices for a new generation of consumers who want it now. In the face of this, Mr. Rogers and Sears Canada managed to record an increase in profit for its most recent quarter. Instead of battling increased cross-border shopping they are capitalizing on it with a “pop up” boutique in Windsor. I think this is a man who understands brands and has some insight to share.



Dene Rogers was appointed President and CEO of Sears Canada in April 2006.



Prior to Sears Canada, Dene was Executive Vice-President and General Manager, Kmart, where he oversaw the operations of approximately 1,500 stores and $18 billion of revenues.



Prior to joining Kmart, he was a Senior Vice-President at Starwood Hotels and Resorts where he helped create the W Hotels brand and rebuild the Westin Hotels brand.



Before Starwood, Dene was with GE. He has also worked in Japan, Europe and China. He is a graduate of Yale University and started out life as a petroleum engineer.



Dene hails from Kalgoorlie, Western Australia. He is married and has three children. His interests include history, crew and theatre. Please join me in welcoming Dene Rogers.



DENE ROGERS:



Mr. Rogers used a number of slides in his speech.



I have an idea of individualism and the long tail. This is, I hope, a not-too-complicated way of expressing it. The idea is that you plot all of your stock keeping units (skus) or products on this axis. This other axis shows the demand for those products. Obviously there would be some where the demand is huge and then as you go out you would find that there were others that are much less in demand. Typically as consumer businesses we have tended to operate in the large demand area, especially at a department store like Sears, and we’ve sort of ignored the long demand tail. I think the wave of diversity that’s happening today is that more and more people will be interested in this tail, known as the long tail, which is more of a customized product offering. We are going to see something we have been talking about for a while which is mass-to-mass customization.



The other point that I’d make is that individualism is probably not strongly related to traditional and modern forms of diversity. This means that someone who’s an Asian-Canadian has the same choices and preference as someone who’s a Swedish-Canadian. In other words the idea of whom the person is, unrelated to their racial, religious and other background, is probably becoming more predominant than in times gone by.



An example is on-line music popularity and here is that mass-market area in the darker red and then the long tail. I won’t disclose the identities of these companies but this is a really large discount store. You can go on-line and get roughly 25,000 songs. It sounds like a lot. It is more than you can listen to over a long weekend and yet you can go on to another on-line store and they’ll have almost a million. I think that when you draw this chart for everybody, for all of the products that they buy, sooner or later all of us aren’t buying from the mass market. We want to buy from the tail. Maybe your family came from Sweden and you’re really interested in Swedish music that they played during certain festivals. Maybe as a family tradition you play it once a year, maybe more than that. That might be a reason for being in this long tail. I think that as individuals sooner or later all of us fall into that long tail. We’re not mass.



Another example would be hit albums. If you plot that from 1960 through to 2005 these are the gold, the platinum, the multi-platinum and the diamond. You can see the effect of technology, emerging in the 1980s. That’s probably the boom-box era right there, with portable music and then obviously into the 2000s, a pretty rapid increase—probably iPods and other devices with larger memories.



You see in about 2002 the beginning of a precipitous drop. I would say that there is more than one thing behind that, but this idea of individualism and technology has enabled people to listen to music not in the form of albums but as a mix that suits them. People are customizing and mass products are no longer working.



Getting to a topic near and dear to most Australians’ heart, this is beer. This is Anheuser-Busch in 1997. They had roughly 26 brands, which sounds like a lot of beer. You look at that number in 2007, 10 years later, and there are 80. I don’t think this is related to traditional forms of diversity. I think this comes down to individualism. For business to go from 26 to 80 in 10 years is pretty significant and I think this is a measure of diversity in the form of individualism.



Talking about Sears and what might appear to be a fairly static form of product—major appliances such as refrigerators, dishwashers, all that sort of stuff—in a 15-year period we have had almost a nine-fold increase from 260 to over 2,500 skus. Look at what factors have caused that. They range from expanding national brands, the introduction of European and Asian brands and colour choices, so we have the cherry red washer dryer units, royal blue ones with all kinds of finishes. This is a nine-fold increase in 15 years. I should also mention that with any of these product diversifications there’s always an underlying operational capability involved. In the case of major appliances there are things like quick response logistics which enable us to buy from a vendor as the customer buys the product at the point of sale and to have that product shipped either direct to the customer or via our own facilities. In order to be able to cope with this many skus we need these operational facilitators for quick response.



Another example is the fun-in-the-sun catalogue. Back in 1998, 10 years ago, we had 28 brands. Today, 10 years later, we have 35, so there has been a 25-per-cent increase. And of those 35, a little bit more than one-third are new brands. That reflects customers wanting a greater choice from different brands than they had in times gone by.



We’re testing new merchandise in order to be relevant. I hope you’ve seen some of these catalogues—more European-styled fashions—and we are beginning to test this brand, which is for a younger-minded customer. As a department store we have realized we need to be relevant to more people. These are some of the efforts that we are undertaking to be more relevant.



Some more examples are these products, which are made from sustainable cloth such as bamboo shirts and soya bean socks. These are expansions into new product types—more European-type fashions, women’s intimates for a younger-minded customer.



So all of us have to be able to react to this idea of individualism if we are going to maintain relevant relationships as consumer businesses and those are some of our examples.



There’s another effect that we need to look at and that is the idea of product absorption. This is a graph, which shows from 1920 through to the year 2000 the penetration in the number of households of various products. Refrigerators started around 1920 and it took about 30 years before almost all households owned one. But then you get to the more modern era. Microwave market penetration grew very rapidly. Home PCs, even more rapidly. A lot of these products are produced globally, large-scale production is reached more quickly and costs reduce more rapidly. Think about LCD and plasma TVs. It is getting to the point where there aren’t that many households without one of them. And then in technology, Moore’s Law applies. The new product flow is increasing. So in addition to the need for more skus, I think there is another dimension. The absorption rate of new products is accelerated for these sorts of reasons. And even in fashions leading retailers like Zara are able to refresh their fashion floor far more frequently and it is one basis of their success.



Internationalism is a driver of diversity. Diversity is more comprehensive than just race, creed, all those sorts of definitions. Let’s talk about who’s meeting the needs of this ever-expanding sku universe and providing the ability for new products to be absorbed more quickly.



Let’s start off with imports to Canada. These are the increases since 1998. China is up 600 per cent. Mexico is up 200 per cent, primarily because of NAFTA. Japan and the U.S. are up 49 per cent and 52 per cent respectively. Some of the less traditional suppliers show pretty significant increases. The volumes are not so great but I think it displays a couple of things. The economy is becoming more global. The number of partners that we have to deal with is ever-expanding and will continue to expand. This expansion of the international community is based on commonization. Countries are dedicated to the same values, the same ways of operating, the same legal system etc. The international organization of standardization in 1980 had 88 members. Today it has 158, almost twice that number.



Countries are realizing they need to join the global economy and they need to adopt common standards. The number of those standards is increasing dramatically and it is providing the basis for international trade. Look at the benefit of international trade on certain economies. China’s GDP is probably about four and a half times the size of Canada’s and growing much more rapidly. If you were to look at China’s GDP back in 1950, it was probably the size of the city of Chicago, so someone’s benefiting from all of this international trade. They are making money out of it. Their economies are growing. It’s leading to more education, more capabilities. Those countries have adopted standards, which enable them to trade with more countries.



Where is China in terms of its ultimate potential? Maybe we can use Japan as an example. I think most of us would agree that during the fifties, the sixties, the seventies and the eighties, Japan was a supplier to the Western world. If you wanted to make a car, you imported Japanese components. And then in the sixties and the seventies they started to produce their own product. Most people thought Japanese cars were junky. In the eighties they became a powerhouse and in the nineties became an international issue between North America and Japan as to the impact of the auto industry on North America.



I would argue China is still in the supplier phase of its development. In other words, China is providing basic products and components to North America. It is not at the point of being a retailer, a consumer retailer. It hasn’t developed to that point. But I would argue that it will and when it does perhaps it will experience a trajectory similar to what Japan did from the 1970s. That’s going to be a reflection of its population, 1.3 billion, relative to Canada’s 33 million. It is going to be a reflection of its enhanced education system. All the support structures are changing in China to enable them to evolve their economy to the next level.



China has 1.4 trillion in currency reserves. Right now they have $200 billion worth of assets but I’m sure that there is a lot more available and they have publicly announced that they intend to invest in 50 companies or enterprises, large-scale enterprises, worldwide.



They are thinking about what to do with their cash. Do they invest it in U.S. treasuries at a pretty low interest rate, low risk, or do they start doing something more entrepreneurial? I would argue that increasingly they are going to be more entrepreneurial in their use of those reserves and in doing so their culture is going to change. The Chinese and Indians are watching the equivalent of American Idol, they are travelling to North America, a lot of them are being educated here. They want the same things. They have got the cash so I think this trend is only going to continue.



What are the implications of all this? We have to plan for constant consumer behavioural changes. We have to think about the customer as an individual. The idea of segments is probably losing ground to the idea of individualism and we need to treat people as individuals. To maintain a relevant relationship with individuals means having more products and services available and being able to operate in the long tail. We have to trade internationally and that has the implication of increased dependence and increasing the likelihood that some of our partner vendors are likely to become competitors.



To plan for constant consumer behavioural changes, we need to stay on top of what they are. It is very, very normal when we talk about customers to want to segment, to be able to simplify and we typically start to segment by gender, age, religion, racial background, the place where someone’s born etc. I would argue that that’s no longer adequate. I would also say that if we are to react to individualism, then the culture of our companies needs to embrace that. It needs to accept that it is happening and to view it as their priority to react to it properly. The need to be relevant probably means expanding our product and service universe and it also probably means that we are going to have to customize our assortments and our marketing. For those of us who have real estate-based businesses that’s a pretty tough challenge.



We need to understand what products need to be in the long tail and how frequently they are purchased and to be able to get access to them. We are going to have to become multi-channeled retailers and consumer companies to be able to avoid the square-foot constraints that store-based businesses have.



We need to think about our brands. Does Sears need to focus on some of its more core customers or do we need new retail brands that appeal to different groups of customers and choices and preferences?



To reduce dependence upon trading partners who may become competitors in the future I think we need to spread the exposure. That means perhaps moving away from China as a production source to emerging economies like Vietnam, but probably having to do that at a faster rate than what the Chinese are doing.



We have to become more productive and we have to be able to deliver increased productivity, which gives us the ability to remain price competitive. I think in particular, as we increase our dependence upon direct imports, and recognizing the fact that we have lower storage capabilities, it enhances the challenge of having to manage our inventory and avoid seasonal reserves and other very necessary accounting procedures to be able to look at the redundancy of inventory.



We should look to align our long-term goals. What would be better than joint venturing with a company, which right now is a partner vendor and looking to avoid having competition with them in the future? And then I also think there’s a very strong case for carefully considering using domestic vendors. Creating relationships that are mutually beneficial which reduce that dependence upon direct imports.



Those are some examples of possible actions that I think we can think about and certainly things that we are thinking about at Sears.



The appreciation of the meeting was expressed by Lou Natale, Sales Director, RedKnee Inc., and Director, The Empire Club of Canada.