Analytics for better business

Likely Economic Impact of Demonetization

2016-12-07T18:00:00.001+05:30

On November 8, the Indian government announced that the two largest denominations of notes (Rs. 500 and 1000),would be discontinued immediately. These accounted for 86% of the Rs. 17.54 Trillion currency in circulation (amounting to Rs 15.08 Trillion in value).

It has been acknowledged as a bold move by many economists and citizens. The objectives of the policy were to root out black money, to discourage future generation of black money, and to root out counterfeit currency that was being used by terrorists.

I have been thinking about what could be the likely economic impact of demonetization.

Demonetization is likely to have the following impacts:

1) Reduction of black money: This manifests itself in two ways:

New disclosures of unreported income and government seizures: So far Rs. 11.5 Trillion has been deposited (until December 6) in bank accounts. The Income Disclosure Scheme (IDS) which was operational before November 8 had yielded disclosures of more than Rs. 0.67 Trillion. Rs. 2000 crores of unreported income disclosures and Rs 130 crore of seizures have been reported from depositors after November 8 so far. The tax revenue to the government from this is likely to be Rs. 958 crores (as of Dec 7). This number is expected to rise as more disclosures and seizures are made. Future seizures of real estate, gold and other assets bought from unexplained sources of income is an area of great promise.

Old currency not deposited back in the banks. This leads to a reduction in the liability of the RBI (India's central bank) and could create an extraordinary profit for the RBI. Given that the deposits in the first 30 days since November 8 account for 76.3% of the value of old notes in circulation on November 8, many analysts and economists feel that less than 5% of the old stock of currency will remain in private ownership on December 31. The RBI Governor has clarified that old currency not returned back will not decrease the liability of the RBI, and therefore will not be recognized as income.

2) Printing cost for the new stock of currency (net of scrap value of old notes): According to the RBI , there were 16.5 billion ‘500-rupee’ notes and 6.7 billion ‘1000-rupee’ notes in circulation on November 8. Each 2000 Rs note costs Rs. 3.73 to print whereas a Rs. 500 note costs Rs. 2.97 to print. Due to the movement towards digital and plastic transactions, we could assume that the currency required to run the country's business could be reduced by 25-50% (Note that 26% of the deposits made till Dec 3 have already been withdrawn by citizens. That number is likely to rise as withdrawal limits ease and currency is made more available). My estimate is that the cost of printing an adequate stock of new currency would be between Rs. 3000 crores and 5000 crores.

3) Decrease in value of housing and land stock: According to PropEquity research, (a real estate data and analytics platform covering over 83,650 projects of 22,202 developers across over 42 cities in India), valuation in the top 42 cities in India, sold and unsold, will take a tumble and fall up to 30 per cent ( approximately Rs 8,02,874 crores. If we were to include older urban housing, rural housing and land, the impact will be several times more.

4) Impact on GDP: Demonetization is likely to effect national output in several ways:

Liquidity Reduction: As the availability of legal tender to conduct transactions is constrained for few weeks after the policy announcement, it impacts the ability of citizens and corporations in conducting transactions. This impact will get reduced only when adequate supply is made available and/or when citizens and corporations move to account-based transactions. As of October 2015, 233 Million citizens were still 'unbanked'. Even at full-capacity, the RBI printing presses will not be able to replace 50% of the stock of old currency in the next 4 months. This will impact cash-sensitive industries such as retail trade, hotels and restaurants and transportation, and in the unorganized (including agriculture) sector. These constitute collectively more than 50% of the economy, by my estimates.
Confidence Reduction: As liquidity got sucked out of the system in one fell swoop, consumers and purchasing managers become more frugal. Their confidence in spending their savings/income/profits gets impacted. This is visible in the latest Nikkei/Markit PMI Survey released in early December. The Nikkei/Markit Services Purchasing Managers’ Index sank to 46.7 in November from October’s 54.5, the first time since June 2015 that the index has gone below the 50 mark that separates growth from contraction.It was also the biggest one-month drop since November 2008, just after the collapse of Lehman Brothers triggered the global financial crisis.“The latest set of gloomy PMI figures for the Indian service sector shows that companies were heavily impacted by the Rs500 and Rs1,000 banknotes ban,” said Pollyana De Lima, economist at survey compiler IHS Markit. The reduction in confidence will manifest itself across all sectors of the economy but particularly in luxury goods, automotive, jewelry, home appliances, and capital goods. These sectors have seen a 20-30% dip in business since November 8.
Activity Reduction in Construction: As real estate prices are expected to fall by 20-30%, construction of new homes will slow down. This will impact activity in the housing/ construction sector. As secondary transactions dry up in the remainder of the fiscal year, the registration taxes collected by state governments will also take a significant hit.
Productivity Loss: As people line up in queues for many minutes/hours per week (particularly in rural areas), there will be a significant loss in labour productivity. This impacts the unorganized and self-employed sectors more than other sectors.
Economic stimulation by increased government spending: The government can negate the impacts of the above effects by increasing spending. The Finance Minister, Mr. Jaitley has already proposed an increase in budget spending of Rs 35,170 crores to fund rural jobs development, the RBI Monetary Stabilization Scheme, farm subsidies and higher pensions. However this number is less than 1% of the quarterly GDP of India, and is unlikely to fully negate the other effects.
Vicious cycle effects: Even when liquidity is restored to 'acceptable levels' in 4 months, the ripple effects of the GDP de-growth will continue for a few months as people adjust to the 'new normal' (lost jobs/income in the unorganized sector, lost wealth for asset holders, etc). Of course, every government official and banker will try to convince the public that the future will be more rosy as the past, so that these vicious cycle effects are negated.

Various economists have indicated a 50 to 200 basis points reduction in GDP growth due to demonetization in FY'16-17. Due to the magnitude of the effects stated above, I personally believe that the impact will be much more. Even if the GDP for the 140 day period in FY'16-17 after the announcement reaches the same level as the GDP during the same period last year, the GDP growth for the year will have been impacted by more than 290 basis points. In my mind, it is likely that GDP impact is more than the gloomiest analyst's estimate (Ambit Capital's estimate of 330 bps impact in FY'16-17). Even if we assume that GDP growth is impacted by 330 bps in FY'16-17, that impact would total Rs. 4,95,000 crores!! Considering that taxes in India amount to 17.7% of GDP on average, the government's revenues for the last 2 quarters of the year will take a significant incremental loss.

Other Impacts: While I considered the impact of demonetization on future corruption and counterfeit currency, I believe these impacts will be short-term and insignificant. Counterfeit currency in circulation is estimated to be less than Rs. 400 crores. Counterfeiting will continue to be a challenge as counterfeiters find ways to duplicate the new currency.

What should the government do now?

Increase government spending in the rural and unorganized sectors. The 37,000 crore relief being planned may not be enough!
Increase social and welfare scheme funding to protect the weaker sections of society
Aggressively mine data from bank depositors to identify tax cheats. Raid premises to seize gold/jewelry/property documents that have not been disclosed in tax statements
Ensure that there is a taxable entity (PAN number) associated with each piece of real estate. Follow up with step 3.
State governments should reduce property registration fees and property tax to prop up the secondary market, and to disincentivize creation of future black money.

(Disclaimer: Please note that I am a business analyst and not an economist. So please do take my analysis with the requisite amount of caution. It is definitely not an advice to buy or sell any assets.)

In the 'Big Data' rush, let's not forget our 'Large Data' problems

2014-01-30T12:02:00.000+05:30

As the Big Data hype cycle has swelled over the past two years, all sorts of people (hardware vendors, marketers, software vendors, business analysts, social media analysts, data scientists, etc) have jumped on to the bandwagon. Everyone wants a piece of Big Data on their resume, it seems.

Of course Big Data solutions (involving a NoSQL database and analysis to solve business problems that involve high velocity, variety, and volume of data) do have a huge potential to revolutionize marketing, customer care and supply chain in a host of industries.

However it seems to me that in this rush to find and solve problems involving 'Big Data', many companies are overlooking the potential to use large structured data-sets to transform their business. One of the applications of 'Large Data' is in real-time marketing. By 'real-time marketing', I am referring to the ability of the marketer to customize and automate marketing campaigns on a real-time basis.

If you think this is a trivial issue, answer the following questions:

1) How many marketers (OK, let's count Amazon, Macy's and Tesco out) send offers that are personalized to the browsing and transactional activity of each customer?
2) How many marketers put in an effort to customize their website landing page to the prior purchases of the customer or to the search term the visitor came from?
3) How many marketers customize the banners on their website to the preferences and the search history of the customer?
4) How many marketers follow the rule of not sending email to someone who hasn't responded to the last X offers? or set a rule for not sending more than Y communications to any particular customer?

...As it turns out, not a lot!

So as I said before, please get your 'Large Data' real-time marketing in order before you jump on to the Big Data bandwagon.

My 2 bits about the Bitcoin phenomenon

2013-04-13T20:21:00.000+05:30

There is a lot of discussion about the BitCoin, the digital currency which is to be issued in finite quantity (21 MM Bitcoins in the next few years). The BitCoin has seen a sudden rise (and then a significant reversal) in its value over the past 2 months.

People who try to justify the value of the BitCoin point to its advantages:
1) Frictionless medium of commerce, devoid of banking interchange fees
2) Ability to conduct commerce across borders and circumvent local governmental/regulatory money restrictions

This logic holds good if the BitCoin holds its value over time or has a mildly increasing value over time (as was the case from its inception till early April 2013). Merchants who held the currency had the added advantage of BitCoin appreciation in addition to the 2 points above.

But the last few days (the decline from $266 to $120 per BitCoin) shows the risk of this 'asset' for merchants. Imagine a merchant that sold a widget worth $266 for a Bitcoin at the peak of its value. If the merchant held on to the BitCoin and exchanged it for dollars today, he would have to take a loss of more than 50%!

Clearly the lack of stability is a bigger negative than the 2 points noted above (unless you are a merchant in a country where you are willing to take the risk of getting an X% lower payment in an international currency than your local currency).

Thus I feel the usage of the BitCoin for international commerce will diminish.

Some of the latecomers to the party don't seem to fully comprehend the economics of this 'asset'. They think that the finite liquidity of the BitCoin, along with the divisibility of the BitCoin (upto 0.00000001 Bitcoins) make this a viable 'asset' class and medium of exchange (along with points 1 and 2 noted above).

I think the whole BitCoin phenomenon is similar to the Dutch Black Tulip bubble in the 17th century.

Companies that solve complex problems are issued BitCoins (similar to lucky or meticulous Dutch farmers who produced a single deviant tulip). This process is called 'mining'. These 'miners' are the only group of people on the planet who are given economic benefits by a herd of cheering 'investors', for doing an activity that adds no economic value to humankind (solving meaningless math problems).

I think this is going to end badly unless the Central bankers/ Governments caution investors against the perils of this digital tulip.

Sign-up discounts: Bad strategy for eCommerce firms

2013-02-11T10:25:00.001+05:30

A lot of eCommerce players in the Indian eCommerce industry offer up to 25% discount coupons on sign-up which give discounts up to Rs. 2000 (~$35). These include Jabong, Myntra, and fashionara, among others.

The logic that these players might be using for this strategy may be:
1) The discount coupons allow them to acquire new customers, that may remain loyal after the initial discounts are over.
2) They operate mainly in the apparel category where regular gross margins are 30-40% to begin with. So a 25% discount would not lead to a negative gross margin on each sale.

I think this is not a good long-term strategy because:
1) Based on chatting with a few young friends, I feel that most have figured out that they can use multiple email addresses to get multiple coupons. They don't use the same email address to purchase after the discount coupons are exhausted. This also leads to a problem of customer duplicates in the database of the eCommerce retailer.

2) A 25% discount on an item which had an initial gross margin of 35% may not sound like unprofitable business. However that calculation ignores the free shipping given to the customer and the cost-per-action commissions (up to 10% of the sale!) given by the website. This implies that the items purchased by these 'acquired customers' are often being sold at a negative margin. The terms of the discount coupons (e.g., 'Cannot be combined with other offers') mean that most signups occur for fully-priced merchandise during the regular season. This is clearly a double whammy.

3) Most of these online apparel retailers are getting into accessory businesses. The discount coupons are often valid on accessories. This converts what should be a regular, high-margin, attachment business into a money loser.

4) I imagine there would be a significant sales backlash when the sign-up discounts are eventually withdrawn.

My advice: The industry needs to move from rewarding customer sign-up to rewarding long-term customer loyalty.

Retail discounts and the illusion of success

2013-02-07T10:46:00.000+05:30

I came across a blog post for a retail software product (which I will not name here), which said the following: "We have achieved great success with our product implementation at a European online auto parts retailer. Our product was able to deliver a 15% sales lift with an effective discounting of only 2.17%..."

I thought that sounded very good.

But then I indulged myself in a thought experiment: 'What sales lift does a retailer need to breakeven on an initiative which discounts the price by 2.17% below the regular price?'. Stop for a moment and answer that question within 5 seconds without pen and paper....

Now let's look at the math behind a 'successful' promotion

If you are an online retailer with gross margins of 20%, average CPA commission of 1% and net shipping costs (shipping costs less shipping charges to customers) of 6% of revenue, then your 'effective' margin is 13% of revenue.

To breakeven on a 2.17% discount, you would require a sales lift of 20% (!!!).

Here is a What-if scenario table which calculates breakeven sales lift for various levels of effective margin and discount:

Said in another way, to breakeven on a 2.17% discount with a sales lift of 15%, the European retailer would need an 'effective' margin of 16.7%. With 1% average CPA commissions and 6% net shipping costs, they would need a gross margin higher than 23.7%.

I doubt whether the European retailer broke even on the discount, because my thought experiment doesn't even include the cost of the software (which claimed 'great success').

The thought experiment is an eye-opener for eCommerce and retail companies who are willing to spend a lot on discount programs. Remember that even a harmless looking 5% discount requires a sales lift of 63% if your 'effective' margin is 13% (refer to the table above).

So that set off another thought in my mind: "What long-term strategic reasons would merit making an apparent loss on a discount program?"

Here's what I think are potentially valid strategic reasons for any retailer:

1) It is a short life-cycle/ shelf-life product (clothes, shoes, books, mobile phones, cameras, laptops, perishables) which is approaching the end of its season/life-cycle/ shelf life. As a retailer you are taking a strategic call that the cost and the risk of carrying inventory beyond the end of the season/life-cycle/ shelf life would be too high. However it is critical to distinguish long life-cycle products in short-life cycle categories (e.g., plain blue jeans, basic dress shoes, text books, reference books, etc) and ensure that you are not discounting those as much as the short-life cycle products.

2) Competition is discounting the same product heavily and you assess that you will not be able to sell the product at a 'regular price' later. This reason may often play along with reason 1. However it makes sense to use price comparison frequently (at least daily) to ensure that you are not pricing well below competition.

3) By discounting the product and taking a short-term loss, you estimate that you will be able to acquire new customers who will be loyal beyond the short-term. Many eCommerce companies seem to be thinking this way. My good wishes for pulling this strategy off :-)

Would love to hear your thoughts. If you need a copy of the spreadsheet behind the breakeven table (which has a more detailed working based on gross margin, CPA commissions, and shipping costs), please email me at raj AT knowledgefoundry.net

JC Penney's pricing experiments (continued)

2013-02-04T11:56:00.001+05:30

I had written about JC Penney's failed experiments with reducing discount sales a few weeks ago (click here). I had made 4 points:
1) Everyday Low Price needs to be tested before being implemented
2) Need to continue store-in-store concept
3) Need good exclusive designers
4) Website needs major overhaul

I heard that they are getting discount sales back in the store (click here). They are also showing price comparisons for comparable products and maximum suggested retail price for each product.

While I think this is a good move, it will take significant effort to turn-around JC Penney. They will have to convince shoppers who have struck JC Penney off their shopping list to visit the store again...and that's not an easy task.

JC Penney's experiments with pricing and holiday season discounting

2012-11-14T16:09:00.000+05:30

Around a year ago, JC Penney's CEO Ron Johnson announced their 'Fair and Square ' pricing policy, to wean customers off discounts and move towards a three-tiered pricing strategy that focused on 'Everyday Low', 'Monthly' and 'Best' price levels. This was supposed to reduce the number of annual promotions from 590 to 12, thereby simplifying the shopping experience (and allowing customers to 'shop anytime on their terms'). In August, they moved completely to an Everyday Low pricing scheme.

The strategy seems to have failed...last week JCP announced that their sales have dropped 26% year on year for Q3 and have dropped 23% year on year for the first nine months. Even the online business seems to have shrunk significantly (37% year on year in Q3!). It is burning through its cash reserves and may need to raise capital soon.

In the backdrop of these bad numbers, JCP announced that they will not be using holiday season discounting this year, choosing instead to hand-out 8 Million buttons that allow customers to get freebies. Shoppers can redeem the buttons online for a chance to win one of 20 million gifts by entering a unique code located on the back of the button at jcp.com/Christmas. On Black Friday, 100 vacations to U.S. destinations will be awarded, including trips to Los Angeles to see a taping of JCPenney spokesperson Ellen DeGeneres' show. One additional trip will be awarded each day through Christmas Eve, along with gift cards, holiday certificates and merchandise.

However Ron Johnson also announced that they will offer the company's lowest prices on Black Friday and Cyber Monday.

All this begs the question: Is JCP doing the right thing on the pricing strategy front? What else can it do before it exhausts its cash reserves?

1) While Everyday Low pricing may be a great idea in grocery and household purchases, it may not be such a great idea in apparel because customers have different price perceptions for different brands. If most customers prior to January 2011 were drawn to stores by the discount sales on the jcp brand, they are unlikely to change their behavior abruptly. JCP needs to conduct focus groups and surveys to understand the pricing preferences of their customers (since their current understanding of their customers' preferences seems to be flawed). While modeling apparel sales using price data, we always model the 'price effect' (the effect of the effective discounted price) and the 'sticker effect' (the effect of the X% off sticker). An item marked at everyday $15 price may have lower sales than if marked at 25% off from a $20 price.

2) JCP needs to aggressively continue the store-in-store concept which seems to be working well for them.

3) They need to sign up good designers to design exclusively for them (like Target does).

4) The JCP website needs a major overhaul:

The landing page has fewer merchandize displayed than most other apparel websites. While the uncluttered look may suit Apple stores well (with its limited range of products), it does not suit an apparel website very well.
The quality of in-image zooming is much inferior to the out-of-image zooming in other apparel websites.
Finally, the checkout page does not have recommendations for 'People who bought X also bought Y" which is usually very useful while purchasing clothes

Let me know what you think

Will Windows 8 hybrids kill laptops and ultrabooks?

2012-08-31T10:50:00.001+05:30

Most PC companies are lining up tablets, hybrids and Touch-screen ultrabooks using the Windows 8 and Windows RT operating systems to be launched in October 2012 (click here for a Technically Personal article on the topic).

I wonder whether the Windows 8 hybrids will kill the Ultrabooks category? and what will happen to good old non-SSD laptops?

While I think that there is ample room for tablets and hybrids, I still think that Ultrabooks, non-SSD laptops, and even desktops will survive for a while. Here's why:

Price: While few companies have given any indication of pricing, Samsung has announced a $1,199 price for the Series 7 hybrid (11.6" screen, Intel Core i7, 4 GB Ram, 128 GB SSD) and a $649 price for the Series 5 tablet (11.6" screen, Intel Atom, 2 GB Ram, 64 GB SSD). These are significantly higher price points compared to today's Ultrabooks ($700-1000), non-SSD laptops ($200-700) and desktops (even lower). The tablet is priced lower than the current generation of high-end tablets (64 GB iPad at $699), but with bigger screen, and more memory.

Screen size: There is a significant segment of corporate workers that do need a screen bigger than 14" for their work. I am sure 14" hybrids will eventually be announced. However I expect the price points to be much higher.

Emergence of the touch-screen Ultrabook: HP has announced yesterday (click here) that it will be launching the Spectre XT TouchSmart (15.6" touch screen, with NFC for $1,399) and an Envy Ultrabook 4 (14" touch screen Ultrabook). This sub-category seems like a compromise between touch-screen, media-creation using keypad and large screen size. I personally don't see why many folks wanting a fixed keypad would want a high-priced touch screen. Imagine stretching out and touching the screen to consume media while the keypad is still fixed to the computer...too un-ergonomic :-(

For these reasons, I feel non-touch Ultrabooks, non-touch non-SSD laptops and the good old desktops still have ample market potential. Of course, I do expect the price war going on in non-SSD laptops and desktops to soon affect non-touch Ultrabooks... which means even better deals for consumers!

Let me know what you think!

What should Best Buy do to survive?...part deux

2012-08-24T10:11:00.001+05:30

I blogged recently about Best Buy's problems and what I think it should do (click here).

Best Buy has come up with a new branding, service and store layout strategy in June (explained here in an Ad Age article). Their new tagline is "Making technology work for you". They will change store layouts to aid customer decision making using Central Knowledge Desks, and will move the Geek Squad to the front of the store.

I recently read a Fast Company article by David Brier, a brand identity expert, about Best Buy's branding (click here). Here are some excerpts of the article:

Best Buy, your culture is about unloading inventory, not helping the customer. Taking a page from Apple’s retail strategy by adding “Central Knowledge Desks” will not replace doing something real and authentic. My personal experiences unfortunately have not changed what is inbred into your culture.

But let’s get more fundamental: That slogan is not only tired, it is a death sentence that is bland, old, worn, uninspired and not reflective of a single strand of your customer’s aspirations. It reeks of “marketing speak” and “committee-itis.”

The strongest brands stand for something as well being opposed something else...

Apple is opposed to technology that sets the rules and asks people to adapt; it champions technology that adapts to the needs of the people.
Nike stands for athletic achievement and is opposed to sitting on your ass.
Dyson stands for no loss of suction and is opposed to stagnant complacency, first making obsolete the old guards of vacuum cleaners and then doing the same with their own technological solutions.

.. Best Buy, what do you stand for? Also, what are you opposed to? Until you answer those questions, the likelihood of rising from the ashes is grim at best.

Only after answering those questions can you honestly determine what to sound like, what to look like, what your design aesthetic is, and why anyone should care.

And if the best you’ve got is “Making technology work for you,” then the likelihood anyone will care is very slim.

I tend to agree with David that a brand needs to clearly communicate what it stands for and what it does not. It is one of the essentials of clear differentiation in the customers' minds.

So how should Best Buy differentiate itself (and communicate what it does and does not stand for)?

As I discussed in the previous post, I think services should be a key part of Best Buy's revival (and survival) strategy. I feel, they should be saying "We sell, install, maintain and replace (if broken) technology devices. We do not just stock the devices and leave it up to you to figure out which product you need, and handle the shipping, unwrapping, installation, maintenance and replacement of the device (unlike our competitors)."

I think "Making technology work for you" does capture parts of this message (and in this sense I disagree with David's assessment). Maybe Best Buy can do better by reinforcing the full extent of the differentiation message in their commercials.

Let me know what you think.

What should Best Buy do to survive?

2012-08-22T20:43:00.000+05:30

Best Buy just announced a bad Q2 (click here). Same store sales are down in the US and significantly down internationally. Their operating income has shrunk 87% on falling margins and rising SG&A. Their services, mobile and tablets sales are the only bright spots in a fairly sad story on declining TV, gaming and computer sales. Even the shutting down of stores does not seem to have enabled them to stem the tide.

Here are excerpts from their earnings release:

FISCAL SECOND QUARTER PERFORMANCE SUMMARY
(U.S. dollars and square footage in millions, except per share and per square foot amounts)

	Three Months Ended
	Aug. 4, 2012	July 30, 2011	Change

Revenue	$10,547	$10,856	(3%)
Comparable store sales % change¹	(3.2%)	(3.8%)	60bps
Gross profit as % of revenue	24.3%	25.4%	(110bps)
SG&A as % of revenue	23.1%	23.0%	10bps
Restructuring charges	$91	$0	N/A
Operating income	$33	$260	(87%)
Operating income as a % of revenue	0.3%	2.4%	(210bps)
Diluted EPS from continuing operations	$0.04	$0.39	(90%)

Adjusted (non-GAAP) Results²
Operating income	$124	$260	(52%)
Operating income as a % of revenue	1.2%	2.4%	(120bps)
Diluted EPS from continuing operations	$0.20	$0.39	(49%)

Key Metrics³
Total U.S. big box retail square feet	41.0	42.6	(4%)
Revenue per square foot (Domestic segment)	$857	$846	1%
Adjusted operating income per square foot (Domestic segment)	$41	$45	(9%)
Adjusted return on invested capital⁴	11.1%	10.7%	40bps

Fiscal Second Quarter 2013 Highlights

Domestic comp store sales decline of 1.6 percent improved compared to fiscal first quarter decline of 3.7 percent
Domestic estimated market share maintained year-over-year
U.S. big box square footage reduced by 4 percent year-over-year; Domestic revenue per square foot up 1 percent year-over-year
Similar to the first quarter of fiscal 2013, International segment year-over-year operating income decline driven primarily by lower revenue in China, Canada and increased competitive conditions in Europe
Domestic segment total Services category revenue increased approximately 6 percent
Momentum grows in Domestic services with key partnerships announced recently: AARP, Verizon and Target
Domestic segment online revenue growth of 14 percent
Domestic segment connections growth of 11 percent
Domestic segment mobile phones comparable store sales growth of 35 percent
Domestic segment comparable store sales growth in tablets, mobile phones, appliances and eReaders more than offset by declines in gaming, digital imaging, televisions and notebooks
Adjusted (non-GAAP) Domestic segment year-over-year operating income decline driven primarily by lower gross margins in computing, mobile phones and televisions

Best Buy today announced GAAP net earnings from continuing operations were $12 million, or $0.04 per diluted share, for the three months ended August 4, 2012 compared to net earnings from continuing operations of $150 million, or $0.39 per diluted share for the prior-year period.

Revenue

	Three Months ended Aug. 4, 2012			Prior-Year Period
($millions)	Revenue	Change YOY	Comp. Store Sales	Comp. Store Sales
Domestic	$7,803	(2.2%)	(1.6%)	(4.1%)
International	2,744	(4.7%)	(8.2%)	(2.8%)
Total	$10,547	(2.8%)	(3.2%)	(3.8%)

The Domestic segment comparable store sales decline of 1.6 percent was driven by declines in gaming within the Entertainment revenue category, digital imaging and televisions within the Consumer Electronics revenue category and notebooks within the Computing and Mobile Phones revenue category. These declines were partially offset by comparable store sales growth in tablets and mobile phones within the Computing & Mobile Phones revenue category, the Appliances revenue category, and eReaders within the Consumer Electronics revenue category. The Domestic segment online channel revenue grew 14 percent compared to the prior-year period.

The International segment comparable store sales decline of 8.2 percent was driven by the lower growth in consumer spending in China and the continued impact from the expiration of government sponsored programs, which negatively impacted sales in Five Star. Market softness in notebooks, digital imaging and home theater in Canada also contributed to the International comparable store sales decline.

Gross Profit

	Three Months ended Aug. 4, 2012
($millions)	Gross Profit	Change YOY	% of Revenue
Domestic	$1,896	(6%)	24.3%
International	668	(9%)	24.3%
Total	$2,564	(7%)	24.3%

Domestic segment gross profit decreased 6 percent, reflecting a rate decline of 110 basis points compared to the prior-year period. The Domestic segment rate decline was primarily due to three factors. In mobile phones, connection growth and a mix into higher price point smart phones resulted in strong comp sales and gross profit dollar growth, although at a lower overall rate. Second, industry softness in computing resulted in increased promotional activity in the quarter to stimulate consumer demand ahead of the second half of fiscal 2013, which will include the Windows 8 launch. Finally, there was less favorable product mix within the television category.

International segment gross profit declined 9 percent, reflecting a rate decline of 130 basis points compared to the prior-year period. This rate decline was driven by Best Buy Europe and due primarily to increased mix of lower margin wholesale sales and promotional activity within a price competitive environment for mobile phones.

Operating Income

	Three Months ended Aug. 4, 2012
($millions)	Operating Income	Change YOY	% of Revenue
Domestic	$83	(65%)	1.1%
International	(50)	n/a	(1.8%)
Total	$33	(87%)	0.3%

What should they do to survive the onslaught of online retail (and the show-rooming effect) and of discount retailers?

I think the following measures would make sense:

Continue to aggressively expand the services business by extending tie-ups to a wider range of partners (much like their VZ, TGT and AARP alliances). Become the preferred service partner for as many telecom and cable companies, and computer/ TV manufacturers as possible so that customers look to Geek Squad irrespective of the brand of device or service being consumed.
Improve online buying experience. Bestbuy.com does not have a good recommendation engine ("People who bought this product also bought Y", "People who viewed this product bought X"), unlike Amazon. Also BestBuy.com should clearly state its free shipping policy and clearly highlight the value of the store pick-up option.
Continue to close down unprofitable stores
Focus more on small kiosks at airports (mp3 players, DVDs, headsets) and on smaller store formats -- these locations have lower SG&A

Let me know what you think!

Pricing issues for Abercrombie & Fitch

2012-08-14T17:24:00.000+05:30

I had blogged 3 years ago (click here) about why Abercrombie & Fitch should consider using selective (and end of season discounts) to increase volume so that it does not have an inventory pile-up. Most of the world might have considered me silly for saying that... A&F was hot, had raging sales growth and industry-high margins.

After 3 years, I hear this from a Reuters article in May 2012 of its Q1 report:

Abercrombie & Fitch Co (ANF.N) posted a sharp drop in profit and its first quarterly decline in sales at established stores in more than two years, leading to concern that a growing inventory could mean future discounting.

Its shares fell 13 percent to touch their lowest in more than two years on the New York Stock Exchange.Same-store sales, or sales at stores open at least a year -- an important measure of retail growth -- fell 5 percent in the quarter, and the teen clothing retailer forecast a tepid year ahead.

"While management didn't quantify international comparable sales ... we estimate total international comparables were down double digits," Paul Lejuez, an analyst with Nomura wrote in a note to clients. He noted this was the first negative quarterly comparable sales for the company's Hollister brand in Europe.

Net sales rose 10 percent to $921.2 million, but even that missed estimates.
Abercrombie said it ended the quarter with inventory up 44 percent, against the 10 percent rise in sales. Lejuez said that could signal more markdowns were on the way.
Abercrombie said margins were expected to improve throughout the year, but if it had to resort to discounting while rivals were selling clothing at full price, it could affect margins.

Earlier this month, American Eagle Outfitters Inc (AEO.N) raised its profit expectations for the first quarter sharply as it sold more clothes at full price.
Most clothing retailers, especially those that cater to teens and young adults, were expected to post strong sales for the first quarter as wardrobes were updated for spring breaks and warm weather.

For the first quarter that ended April 28, Abercrombie earned $3.0 million, or 3 cents per share, compared with $25.1 million, or 28 cents per share, a year earlier.

In Q1, ANF was holding 56 days of sales in inventory (the actual number is higher considering that I use cost of inventory and price of sales). Its gross margin has reduced to 62.5% (down from 66% 3 years ago)...but still significantly high compared to industry average.

According to this AP report:
Abercrombie & Fitch announced in June that it was closing 180 U.S. stores over the next few years. The chain had already closed 135 under-performing U.S. stores in two years. The closure will primarily be among its namesake and kids brands but it also plans to close a few Hollister stores as well.

I will be watching their Q2 results on Wednesday to see how this story develops.

Customized database marketing for Indian e-commerce

2012-08-06T11:07:00.000+05:30

Most of the players in the Indian e-commerce market are losing money.

My friend, Sanjay Dattatri has blogged about the challenges facing Indian e-commerce (click here). As he points out, Indian consumers are price-sensitive, dis-loyal and ill-behaved. I tend to agree with him.

As Sanjay points in another blog post, pricing sanity needs to prevail (click here). I agree with him on this one as well.

I do think that e-commerce vendors in India need to adopt a more customized approach to marketing and pricing. After all, aren't online marketers supposed to know all about their customers' buying behavior, browsing, email response (and customer care calls).

Why give the discount to all your customers when the reality is that some customers value your brand and superior delivery performance (and couldn't care less about the few rupees extra for that). The vendor can give a golden treatment to these price-insensitive customers by giving differential free shipping terms, and loyalty points. Some players like indiaplaza and healthkart do have a loyalty program.

On the other hand, one cannot lose out on selling to the price-sensitive customers, who will switch on a better deal available somewhere else.

The only way out is customized database marketing.

In my opinion, e-commerce vendors need to stick to the following rules of customized database marketing:

1) Target your discounts at customers who are likely to shift their purchases from your competition to your website, when given a discount. Examples of these customers include:

Customers who bought a regular purchase like clothes, or diapers, or books, or groceries or nutritional products many months back and have not purchased since. I was delighted to see that healthkart sent me a customized coupon code for whey protein 6 months after my first purchase. They avoided giving the discount to everyone as they know they have targeted a potential buyer. The key is to send out a customized coupon code which works only with the specific customer's login.

Customers who have browsed a particular product or a category for a long time and not bought that product/ category. This can be done only when the customer is browsing with his cookie activated, and the e-commerce vendor is smart about tracking browsing behavior. A classic example would be a books-buyer browsing a mobile phone product page, getting a customized offer. My recommended approach would be to price the product at slightly higher than competition for the masses, and to give a discount coupon to customers who browsed and did not buy. (Quick programming note to vendors: Please don't send discount coupons for lingerie to men who are just browsing. But for that you've got to read the next point.)

2) Get to know more about the customer (even though you may know nothing to begin with). I get shocked when online retailers say that they deliberately have no information about their customer other than their user ID, name and shipping address. As a trusted seller you should try to get more information about the customer. Incentivize customers to update their profile online (such as gender, date of birth, marital status, interests, etc). The Payback program (called imint earlier) did that when they transitioned. When you know that you are dealing with a single guy who has never bought women wear before, you can stop sending him lingerie ads and coupons. Also some interesting things you can do with demographic data:

Promote Gudi Padva to Maharastrians, and Onam to the Keralites and Eid to Muslims (irrespective of where they live)! -- if you can classify names by mother tongue and religion
Promote kids items to families with kids

3) Send personalized recommendations/ suggestions, by putting yourself in the customer's shoes. Most e-commerce vendors are using formulaic recommendation engines which give recommendations based on the customer's last purchase. Ideally the recommendation engine should be based on the basket of goods purchased by the customer in the last 6 months.

Also, the recommendation logic needs to be altered for capital goods purchases (mobiles, electronics) vs. regular purchases (books). A mobile phone buyer does not need recommendations on what other similar mobile phones to buy! However a book buyer may appreciate recommendations on which other similar books to buy. For the mobile phone buyer, a list of accessories which go with his/her phone may be useful, but a formulaic recommendation engine may not capture that.

More later...let me know what you think!

Is Windows 8 doomed?

2012-07-27T11:59:00.000+05:30

Mr Hampton of Bronte Capital published a blog article called "Changing my mind on Microsoft" .

He opines that Windows 8 will be a failure because it does not adapt to the usage behavior of different usage situations (tablet, desktop, phone):

Windows 8 was to serve a dual purpose. It was to be above all a pad operating system - one that doubled as a desktop operating system. You were going to be presented with bunch of tiles - the functional equivalent of Apple's app icons. If you used it as a pad it would have the limited functionality of a pad.

However you could take the pad, put it on a docking stand and use it with a keyboard and mouse as a desktop computer. This solves a lot of problems.

(a) it offers a distinct improvement over existing pads which are not very good for content creation. I cannot see myself editing a video on a pad or writing a blog post this long. But hey - I could with a plug-in-keyboard and mouse,

(b) it offers enterprises a chance to take their existing enterprise software and make it mobile. For example if a customer relationship system runs on Windows you could - without much further development - make it run on a Windows pad. This means there would be no incentive to redevelop it using (say) Python to run on iOS.

(c) it gets a large number of people used to the Windows system. There is a lot of human capital developed in using computer systems - trying to change - even Windows to Mac or vice-versa costs a lot of time as you work out how to say copy a file to an external hard drive or from a camera.

(d) it leads you to a world where the pad has some computing power - but if you need more grunt you connect it to a docking station in turn connected to a fast internet connection and you put the power in a cloud and rent the power out by usage. A world of semi-smart terminals - a pad if not docked, a super-computer if docked.

But the combined desktop interface has a big problem. Because desktops and pads and phones do different things they have different interfaces. A windows, icons, mouse and pull down menu interface has a venerable history because it works.

He also feels that Microsoft is losing its hold over developers:

The Microsoft virtuous circle is now dead. Two related things killed it: the rise of platform agnostic developer tools and the rise of alternative operating systems (Linux for servers, iOS and the "Big Cat" series for Apple, Android).

To my way of thinking the platform-agnostic developer tools came first - though this is a chicken-and-egg problem. The first really important platform-agnostic tool was Java. Programs written in Java run on Linux computers precisely the same way as they run on Apple computers or Microsoft computers. If you developed something on Java you could run it anywhere and you thus undermined the Microsoft virtuous circle.

Developing things for Java became widespread when people downloaded programs (applets really) from the internet. The person writing the applet had no idea what the customer computer set-up was and so had to write in a platform-agnostic fashion. Interactive Brokers for instance writes its software to run on Java - and they do this because it is a complex piece of software that has to run on many different flavours of client computer.

Over time Python developed as an even more important platform agnostic developer tool.

Nowadays nobody under thirty writes anything on Microsoft developer tools unless they are demented or brain-dead. Firstly the kids out of the colleges know the platform agnostic stuff well. Secondly when half the computers leaving factories either run iOS or Android (that is are smart-phones) nobody sensible will write in a way that does not allow easy porting to these platforms.

Microsoft's developer tools business and the customer lock it created has had a bullet through the brain. The body is lying on the floor - and most the users who have never developed anything and did not know that there even was a developers tool business have not noticed the blood-soaked victim.

I agree that Windows 8 may find a limited number of takers in the 'always-at-home' consumer market. However I feel that office goers will find good use for a product that docks to their office desktop (and can run enterprise applications), can be used as a portable for corporate presentations and can be carried on the subway ride back home to consume media.

On the developer front, I feel that there is still a fair number of .Net programmers out there, and it is too early to call the doomsday on Microsoft.

What do you think?

RIM faces GRIM future?

2012-06-01T11:23:00.002+05:30

I had blogged about what RIM should do about its flagging smartphone business (click here).

Looks like it was a timely blog post. The senior management of RIM have appointed bankers to search for 'strategic alternatives' (click here for NY Times article on the topic).

In addition to the PC makers without a smartphone/tablet presence, I think facebook might take a hard look at RIM too. They have some ambitions in the smartphone business and their market valuation (despite the recent drop) is many times that of RIM.

Whither Blackberry?

2012-05-05T12:14:00.001+05:30

Samsung and Apple are winning the war of smartphones (through different strategies...Apple through a single elegant phone built on its proprietary OS and Samsung through a rapid launch of a slew of multiple sized devices built on Android). The chart above is taken from a recent Time article.

In the meanwhile, RIMM (and its Blackberry) are losing traction rapidly. Its share of worldwide smartphone shipments dipped from 13.6% to 6.7% in a year's time! Looks like their attempt to get the general populace into the Blackberry Boys' club has not worked.

Given that most folks replace their phone every 2-3 years, RIMM could quickly lose its installed base around the world.

What should it do now?

I suggest the following options:

1) Open up Blackberry Messenger (BBM) by tying up with Yahoo and Google so that Blackberry users can message any Yahoo Messenger and Google user (and vice-versa). BBM is still the big draw for many die-hard Blackberry fans.

2) Woo VoIP developers (such as Skype) to develop a VoIP application for Blackberry OS.

3) Figure out a way to marry BBM and Blackberry email with the Android platform. RIMM will gain access to the myriad of apps for the Android platform and Blackberry users will love RIMM for it.

4) Sell the company to any leading PC manufacturer (HP, Dell, etc) who are lusting for a position in the smartphones/ tablets space. RIMM has relationships with leading mobile carriers around the world. This is a big asset for any newcomer (or marginal player) in the smartphones business. Though this is a drastic move, RIMM is trading at just 6 times earnings and can get a good premium by selling.

Digital Attribution: Moving beyond last-click attribution

2012-04-06T10:07:00.000+05:30

Happy Easter/ Good Friday!

I read a Google Analytics paper (click here) recently about digital attribution and how most advertisers are unhappy about last-click attribution but yet 54% continue to use last-click attribution.

For the uninitiated, attribution is the process of assigning credit for a favorable outcome (e.g., a sale, click on a request for more information, registration to a mailing list, etc) on a website to the various sources that led the visitor to the website. The complication arises because a visitor may click on a search ad on her first visit, a banner on her second visit, and eventually buy during a visit initiated by an organic search. How would you attribute the sale to these different sources? Last-click attribution is a technique where the last source leading to the favorable outcome gets all the credit. Most people agree that's a dumb way of looking at the digital/multi-channel/ multi-device world (but are doing precious little about it).

Attribution is important because it allows the advertiser to correctly price the value of a keyword (on a particular search engine) or the value of TRPs on a network TV ad or the value of a banner on a particular social media website or the value of an affiliate lead. The accuracy of the value computation will become a source of significant competitive advantage in the emerging digital and multi-channel era.

Some smart folks have moved beyond last-click attribution to give weightage to sources contributing to visits leading up to the favorable outcome. My question is : How do you know that your attribution technique is working?

My suggestion is that the advertiser should test various attribution techniques to understand the pricing of various keyword-engine, banner-publisher, TV TRP-creative combinations using data over recent time periods using these alternative techniques. the technique that yields a statistically stable estimate of pricing should be chosen.

The other thing that an advertiser should do is analyze the contribution (to a favorable outcome) of a first visit, the last visit, a visit in the last n days, etc by type of source (Search Engine, Publisher, Social media website, affiliate, etc) using a decision tree. This will help understand typical patterns of visits leading up to the 'successful' visit.

Amazon launches as Junglee.com in India! Is it a big deal?

2012-02-09T19:56:00.000+05:30

Amazon launched as Junglee in India earlier this week. It is a price comparison site for various merchants to list their products and provide prices. Already quite a few significant Indian vendors (homeshop18, indiaplaza, healthkart, uRead, bookadda, etc) have listed their products on the website.

So, with the brand name of Amazon, one would think this will be a major development in the Indian online market. Right?

Well I don't think so.

Amazon has launched this price comparison site (and not an ecommerce website) only because Indian law prohibits 100% foreign direct investment (FDI) in multi-brand retail. Foreign investors who want to own Indian retail operations (e.g., international private equity firms, foreign internet retailers) have typically invested in the 'supply chain back-end' operations of retailers or in 'wholesale cash-and-carry' operations. Amazon apparently is not interested in playing such games.However let's be clear that Amazon will launch its own store-front in India the very day that Indian government allows FDI in multi-brand retail.

Given that scenario, it is likely that Junglee is only an attempt by Amazon to learn about the Indian ecommerce market and understand the price sensitivities of the Indian consumer. They are also getting pricing information freely from their competitors !! I assume many of the sellers listed would only be too happy to be acquired by Amazon when the time is right.

However some of the bigger players in the Indian market (flipkart, snapdeal, dealsandyou, fashionandyou, yebhi, myntra, etc) seem to be staying away from Junglee. They seem to understand the threat of giving structured pricing data to their future competitor.That is why, Junglee is unlikely to be a great force in the Indian e-commerce landscape.

Current Alexa rankings for India:
snapdeal 26
flipkart 30
homeshop18 124
Myntra 153
koovs 186

infibeam 208
indiaplaza 284
Junglee 533

While these rankings are based on 3 month averages and Junglee is likely to rise in rankings over the next 3 months, there is also a honeymoon effect which is likely to wane (also as buyers see lot of items with only 1-2 sellers).

My bet is that Junglee will make it to top 200 within the next 3 months, but will not generate as much traffic as the leading Indian e-commerce sites.

The big fuss about 'big data'

2012-01-21T20:41:00.000+05:30

There has been growing interest in the idea of big data in the past few years. Indeed as McKinsey wrote about 'big data' (Read here) in May 2011, there has been an exponential rise in data available to businesses for taking better decisions. Indeed there will be a shortage of big data analysts in the US (and much of the Western world).

However in the growing swell of interest in big data, I find all sorts of companies and people talk about their data as 'big data'. This brings me to think: "How big should a dataset be to qualify as 'big data'?"

According to Wikipedia: "In information technology, big data^[1] consists of datasets that grow so large that they become awkward to work with using on-hand database management tools. Difficulties include capture, storage,search, sharing, analytics,and visualizing. This trend continues because of the benefits of working with larger and larger datasets allowing analysts to "spot business trends, prevent diseases, combat crime."Though a moving target, current limits are on the order of terabytes, exabytes and zettabytes of data.

To me,it is not just important how big the data is, it is critically important how fast the data is generated and how fast it needs to be analyzed.

As this blog article from ikasoft correctly puts it:"The answer is not "Now the data is big" -- the answer is "Now the data is fast!" Google didn't become Google because their data was big -- Google went to MapReduce so they could keep growing the number of sites-crawled while still returning results in < 100 milliseconds, and now they're going to Google Instant because even 200 milliseconds isn't fast enough anymore. Consider all the action we're seeing today in NoSQL data stores -- the point is NOT that they are big -- the point is that apps need to quickly serve data that is globally partitioned and remarkably de-normalized. Even the best web-era app isn't successful if it isn't fast."

To me, only companies who generate terabytes of data every second (Google, Linkedin, facebook, twitter, Akamai, Yahoo, etc) are truly in the age of 'big data'. Companies who have terabyte+ databases over a year's time period can still stick to their RDBMS databases (and should quit calling themselves 'big data' companies).

Would love your thoughts!

Cold winter for Indian apparel retailers

2012-01-06T17:56:00.000+05:30

Many Indian apparel retailers are offering discounts ranging from 40% to 60% three weeks ahead of schedule this season (newspaper article). Sales have been impacted by 20-30% due to higher excise duty taxes and higher cotton prices which have led to a 10-15% rise in product prices.

Could this situation have been foreseen by the retailers? Are they too late on the buzzer? One can only say that apparel retailers will do well to use BI and analytics better to track sales shortfalls in real time and adjust pricing before everyone else realizes that a slowdown is on.

From an analytical perspective here's what they could do:
1) Price elasticity studies and market surveys to understand the impact of 10-15% price rise on demand
2) Markdown models that advise the retailer on how much the price should be discounted if a particular sales target is not met in the early weeks/months of the season.

These are especially relevant in the Indian market since the festivals/ holiday periods occur in the middle of the season (e.g., Divali) and dates vary year by year. Retailers need to be very nimble to adjust prices quickly if festival/holiday targets are not met.

Uncertain times in US apparel retail

2010-09-09T15:31:00.009+05:30

The last couple of years have been exceptionally uncertain for US apparel retailers. As is seen from the graph below, sales had a significant year-on-year dip in September 2008 with the financial crisis. Each of the subsequent twelve months witnessed year-on-year declines. In September 2009, apparel retail sales started showing signs of stabilization. Since December 2009 retail sales have shown year-on-year increases. As of July 2010, apparel sales have crossed 2007 levels and appear poised for a full recovery.

Figure 1: US Monthly Retail Sales ($ BN) for Apparel Retailers (US Census)

However consumer sentiment remains much subdued. Although the University of Michigan Consumer Sentiment Index (refer Figure 2) has recovered from the lows of late 2008, it is still at/below the levels seen during the slowdown in the early 1980s and the dotcom crash in 2000. The lack of cheer among the consumers has made the outlook highly uncertain for apparel retailers.

Figure 2: University of Michigan Consumer Sentiment Index

Existing home sales, another important indicator of economic wellbeing, had a dramatic decrease in recent months. This has left many wondering how the future will shape up.

Figure 3: Seasonally-adjusted US Existing Home Sales (National Association of Realtors)

This period of uncertainty has left retailers rethinking their allocation plans and inventory management. Inventory turnover ratios dipped significantly between September 2008 and March 2009 (Q3’08 and Q4’09). Retailers adjusted to the new realities of low consumer sentiment, reducing retail sales and credit deleveraging, and adopted a more cautious inventory approach and an aggressive sales (discounting) approach. This led to higher turnover ratios between April 2009 and October 2009. Just as higher retail demand kicked in during Q4’09, the inventory turnover ratios returned close to 2007 levels.

Figure 3: Inventory Turnover for US Apparel Retailers (US Census)

Retailers have been cautious in filling shelves in the first two quarters of 2010. Retailers such as Macy’s have commented about their disciplined approach to inventory management. Inventory turnover ratios across the industry are running at historically high levels reflecting tight inventory management. Of course, one could wonder whether retailers are losing sales because of lesser material on the shelves.

Now, more than ever, apparel retailers will have to pay careful attention to making sure that the right product is in the right places at the right time and the right price. Retailers can use advanced analytics to better decisions in assortment, allocation, forecasting and pricing.

If you are interested in apparel retail best practices in assortment, allocation, forecasting and pricing, please write to me at raj@knowledgefoundry.net

Localizing assortment in fashion retail

2010-08-12T11:59:00.005+05:30

CNBC reported today that Macy's recent outstanding results can be attributed to its local approach to customizing its assortment and its size mix (click here).

Chief Executive Officer Terry Lundgren attributed the results to better margins, disciplined inventory management and Macy's program to allow stores greater leeway in catering to local tastes. These factors also prepared the company to woo shoppers despite the threat of a new dip in consumer spending.

Although the department store chain has centralized its buying, planning and marketing operations, it also has local managers on the ground who examine sales data and travel to a specific handful of stores to study customer buying at those locations. Based on their work, individual Macy's stores may decide to stock more of a particular dress size in a particular style, for example.

Other store chains make similar inventory moves, but without the granularity of Macy's approach. For example, a store may ship more of a specific size for a whole range of clothing to a store. That may be all it takes to make more apparel sell at a full price rather than linger on the rack and be marked down.

Kudos to Macy's.

Based on our work for several US women's apparel retailers, I can tell you that assortment localization can be achieved through good analytics. Retailers don't need many local managers to observe the shelves to achieve localization.

The key aspects of analytics for assortment localization include:

Collating the transactional sales data (gross sales ($,units) , net sales ($, units), cost ($)) at a weekly level across stores for the past few quarters -- typically hundreds of millions of rows
Adjusting the sales data for stock-outs and negative margin sales (to get a true picture of demand for each style at a store level
Rolling up the sales data to the desired level of product hierarchy (Department/category/class/section/end-use/Color/Size/etc)
Using the rolled-up adjusted sales data across stores to decide assortment and allocation for the future.

Drop me a mail at raj@knowledgefoundry.net if you want more details.

... phone?... tablet PC?... No it's a Dell Streak Part 2

2010-08-12T09:29:00.003+05:30

I have commented earlier on Dell's mobile device strategy (click here) and on the Dell Streak (click here).

Today Walt Mossberg reviewed the Dell Streak (click here) in the Wall Street Journal. Some salient points:

I couldn’t find, and Dell couldn’t identify, any apps written especially for its larger screen. In fact, a few Android apps I tested seemed to crowd all their icons into just a portion of the Streak’s screen, especially when the device was held vertically, leaving lots of white space.

It’s much lighter than the iPad, at just under half a pound, but heavier than many smartphones. In my tests, I found I could carry the Streak comfortably in the pocket of loose jeans, or in a suit jacket’s inner pocket, but not in a shirt pocket or the pocket of more fitted pants. It would take up a lot of room in a small or medium-size woman’s handbag. And it looks somewhat ridiculous when held up to the ear to make a phone call.

When held horizontally, the screen felt luxurious, with lots of room, and good sharpness and color, for playing video or viewing photos. Even in portrait mode, reading books using the Amazon Kindle app was a much better experience than on any smartphone I’ve tested, though not nearly as good as on the iPad or Kindle e-reader.

Its 5-megapixel rear camera took sharp photos and fair videos, and phone calls sounded clear. The large screen was a big plus for Google’s free voice-prompted navigation app. Battery life was very good, easily lasting a full day, and the battery is removable.

But the Streak also crashed on me several times. On one occasion, it started vibrating endlessly, only stopping when I removed and replaced the battery.

The device has a front-facing camera—unlike the iPad, which has no camera at all. But video calling isn’t integrated, unlike on the new iPhone, and requires you to sign up for a third-party service.

Twice the device proclaimed it couldn’t find the memory card and had to be restarted before it could. Twice, the YouTube app failed to load any content.

Also, the buttons on the top edge for turning the Streak on and off and for taking pictures are very close together and easily confused for each other. And the camera button eventually stopped working for me altogether. The speaker, located on the back, sounded tinny when playing music. And it was too easy to block the rear camera with a thumb or finger when holding the Streak naturally.

Dell sees the Streak as a tablet first, with phone calling as a secondary function. It may well appeal to people for whom the iPad is too large to carry around, yet want some of the tablet experience coupled with a phone. But tweener devices can be hard to love and Streak buyers will have to overlook some of the shortcomings I encountered.

No one says it better than Walt.

Is it a phone? Is it a tablet PC?... No it's a Dell Streak

2010-07-19T11:30:00.004+05:30

Dell Streak has launched in the UK and will soon be launched in the US. Here is the product page from the Dell UK website (click here) and a much better product page on the O2 UK website (click here). Here's a more instructional blog post from Dell (click here).

I had blogged in January 2009 (click here) about Dell's entry into smartphones. I had said then that Dell would find it a difficult business plan to pull off. It's time to revisit that assessment. (Of course, Streak is a cross between a smartphone and a tablet PC, not just a smartphone, but lets park that for now).

I was able to see a real-life demo of the Streak (don't ask how) and was impressed by the clarity of the display and the compact form factor.

Here's what works in the Streak's favor (or 'favour' if you are from the UK):

It has a 5 inch screen as compared to the 3.5 inch screen of the iPhone4
Dell Streak is based on the Android platform, which is an open platform, as opposed to the Apple platform.
The Streak has a Gorilla glass display that prevents scratches.
It is priced more attractively than the iPhone 4 (GBP 399 with Pay as you go compared to GBP 470 for the iPhone; On O2 it is free with a GBP 25 plan as opposed to a GBP 60 plan for the iPhone4)

Here's what works against it:

Should I compare Streak with iPhone or iPad? Is there really a white space between a smartphone and a tablet computer?
The brand pull of iPhone, iTunes and Steve Jobs
iPhone4 has Retina Display.... one can read a significant part of a newspaper page on the 3.5" screen without squinting
iPhone4 has video calling whereas the Streak does not

I still think Dell Streak will find it difficult to crack the US mobile market. Here's what Dell needs to do (to pose a serious challenge to Apple in this space):

Don't launch exclusively on AT&T. Go for T-mobile, Verizon Mobile, Sprint, also so that you are not competing head-on with iPhone4.
Clean up the Dell website to give more focus to the Streak. Currently you have to click 3-4 times to know that Dell sells mobile phones too. Maybe they should launch a separate product website for the Streak.
The website needs to have more video on how the phone looks and feels. They should show how apps looks on the phone when they run... In PCs that is not critical as most potential customers have worked on PCs before.
Currently Dell sells rival mobile phones (Samsung, HTC, etc) including some Android models. They need to be clear whether they want to sell Streak or help their rivals sell their smartphones.

I still feel it is difficult for Dell to pull this off....but I'll wait to be surprised.

Cola wars begin again

2010-07-19T10:47:00.005+05:30

Pepsi is relaunching its cola wars ad from 1995 with a new generation twist. (Click here).
Interestingly they are comparing Coke Zero with Pepsi Max.

Interesting sections of the NY Times news article:

Introduced in Britain and Italy in 1993, and widely available in Europe ever since, Pepsi Max was not introduced in the United States until 2007. The sugarless cola, which is sweetened with a combination of aspartame and acesulfame potassium, contains nearly twice the caffeine of Diet Pepsi, and also contains ginseng.

A 2009 report by Mintel, the market research firm, said the soda’s sales had been “impressive,” even during the economic downturn, “likely by attracting price-sensitive energy drink users.”

I had earlier blogged (in November 2008) about the potential of Pepsi Max in the US market (click here) due to the attractiveness to price-sensitive energy drink users. I am pleased to see that variant doing well.

Also interesting to note, from the same NYT article:

Diet Pepsi is more popular with women, but about 60 percent of Pepsi Max drinkers are men, according to Lauren Hobart, chief marketing officer of the sparkling brands division of PepsiCo. Diet sodas popular with men, like Pepsi One, Pepsi Max and Coke Zero, which many in Europe refer to as “bloke Coke,” avoid a word to which marketers believe men are averse: “diet.” (It is a widely held view in the weight-loss industry that men are more apt to say they need to “get in shape” than “go on a diet.”)

Among the company’s sugarless brands, Pepsi Max is popular with Gen X and Diet Pepsi with baby boomers.“Boomers generally grew up drinking Diet Pepsi but Gen X has been raised with more choices, and we’re trying to provide more choices that may meet their needs differently,” Ms. Hobart said.

Its interesting how demographic (gender, age) segments have distinct choice preferences and how product names can play a big role in product choice. Brand managers at both Pepsi and Coca Cola must be busy poring through their Usage & Attitude (U&A) studies to understand the segmentation better and to better target their products... Watch out for interesting positioning moves in the cola variants!!

Little Red(box) Riding Hood

2009-09-02T00:18:00.003+05:30

Redbox, the in-store kiosk movie rental company has been blazing the news recently. Hollywood studios seem to hate Redbox or love it.

Redbox is suing Universal studios (click here) and Fox (click here) for their attempts to instruct distributors not to supply Redbox for 30-45 days after a DVD is released.
Meanwhile Sony (click here), Lionsgate (click here) and Paramount (click here) have signed multi-year contracts estimated to be worth hundreds of millions of dollars each, to get a share of the Redbox shelf and to ensure that used DVDs are not sold by Redbox

Its surprising to see Hollywood content owners vary so widely in their approach.

So I ask myself: Why are studios approaching this so differently? What is the right position a studio can take on this issue?

Redbox is taking revenue away from DVD sales for studios by offering daily rentals at $1. DVD sales are down 16% for the first half of the year according to Video Business Magazine (click here) whereas all other segments are growing. DVD sales account for more than 50% of all sales and rental revenue for the studios. Meanwhile Redbox quarterly revenues have grown to $189 MM (click here) and are doubling on an annual basis.

The real issue (other than rentals cannibalizing DVD sales) is that Redbox sells used DVDs at $7, often within a few weeks of the DVD being released. This has made price-sensitive customers buy recently-released used DVDs rather than shell out four times that amount for a new DVD. Electronics retailers like Best Buy are venturing into selling used DVDs and kiosk rentals (click here).

So Hollywood studios would like to limit the 'under-priced' sales of used DVDs and restrict the time when these are available to customers -- to be able to 'monetize' the time value of recently released content.

Sony seems to have played its cards well by getting a higher than representative share of the Redbox shelf and ensuring that its used DVDs are put out of circulation.

I personally think that Redbox can still rent Universal and Fox DVDs by sourcing them at retail prices and renting them at $2 instead of $1 (Note: this is not a legally informed opinion. Do not use this to make investment decisions) and selling used DVDs at higher prices. Consumers would still be attracted to the proposition.

Eventually though, I think the industry will be well-served if Universal and Fox can settle with Redbox out of court... and everyone can get back to the business of (profitably) providing compelling content to customers at the right-price in the right time window.