The third place for toddlers

Free prosciutto on a toothpick at the deli, free gift with purchase at the cosmetics counter, free trial magazine subscription...examples of free abound.  As consumers, FREE is so enticing to us because we want to avoid risk.  Humans assess the price of an item by assessing its benefits and subtracting its costs.  Free is so appealing, according to behavioral economist Dan Ariely, because the absence of cost seems to add to the benefits.

My favorite free gift right now is entertainment-- story time at a beloved local bookstore in St. Paul, MN called the Red Balloon.  Story time is a weekly event hosted at the bookstore.  Tuesday is baby story time, Wednesday is preschool story time, and Thursday is for toddlers.  The gifted storytellers combines music, puppets, and rhymes with reading books.

Sure, lots of bookstores and libraries have story time.  Most are occasional.  For moms like me who are planners, their sporadic nature makes them less appealing.  Plus, I see kids, mine included, come to anticipate the different portions of the story time, and look forward to their favorites segments.

This weekly event fills a need for SAHMs.  Its regularity enables parents to integrate it into a routine, a challenge with bi-weekly or monthly story times.  Typical baby behavior is accepted.  Kids are encouraged to grab books and explore them.  Internationally, Starbucks has successfully created a third place, the place beyond home and work where consumers can go to relax.  Within St. Paul. The Red Balloon's story time has transformed it into a third place for parents and the under-four set.

Of the forty or so parents who attend, I would guess that eight or ten make a purchase right after story time.  I rarely do.  However, whenever I need a birthday or holiday gift, Red Balloon ins my first stop.  Sure, I can save a few bucks if I order the books online, but the Red Balloon has given me so much joy with its story times.

Red Balloon has one location and a website.  This sort of retailtainment is a challenge to scale because it requires an investment in space and talent.  Examples include wine tasting at wine shops.  What other retailers create a link with their target shoppers by offering entertainment?

The future of shopping

Darrel Rigby's provoking article "The Future of Shopping" (in the December 2011 issue of the HBR) posits that retail is about to undergo a technology-driven transformation.  Rigby calls retail "an industry stuck in analog."  The current state for traditional retailers is a bricks and mortar and a competing e-commerce operation.  Rarely do the two operate synergisticly. and often the two operations overtly compete.  In the not-too-distant future, the retailers who successfully meld B&M, on-line, and other retail technology will dominate.

The article inspired me to consider retailers I frequent that have consistency in pricing and promotions on-line and in-stores.  Retailers that focus on big-ticket, less impulsive, less promotional items items (Room & Board furniture, Tiffany) offer consistent pricing in-store and on-line.  I can think of instances in which J. Crew, Banana Republic, Gap, LL Bean, Barnes & Noble, Target, Williams Sonoma had different on-line and in-store promotions.  At one end of the spectrum, Williams Sonoma occasionally offers discounts on-line that aren't available in stores.  At the other end, Barnes & Noble has a completely separate pricing model for the exact same merchandise to compete with Amazon on-line.

Price transparency has improved exponentially with smart phones.  Retailers complain about showrooming, customers examining a product in a B&M store before buying it more cheaply on-line.  Have you used smart-phone technology to negotiate a better price from a B&M merchant?  What retailers do you think are positioned to compete?

Land's End--a bright spot at Sears

Sears stock is up about 66% this year, making it a top performer in the S&P 500.  The retailing behemoth will announce its quarterly earnings this week.  My recent Sears experiences suggests that Sears will have a hard time attracting new customers.  Perhaps it can hold on to existing customers, but the shopping experience will have to evolve to attract new customers in the competitive middle market.

A few weeks ago I had a return from the Land's End catalog, so I popped into Sears.  I don't shop much in department stores.  I spent the summer between high school and college behind a makeup counter in a now-defunct department store.  I find the lack of natural light dispiriting and the layout confusing.  In sum, I recognize that I am not the core Sears customer.

When I walked into Sears through a side entrance with my 18-month old, she stopped, pointed, and yelled "wow!"  She was taken by a display of a headless mannequin sitting on a riding mower.  I wonder if there is much demand for mowers during the Minnesota winter.  The rest of the first floor also felt strange--an immense display of plastic storage bins, what struck me as a make-shift coffee shop, tools, more mowers, and washing machines.

We navigated our way to the escalator, which deposited us on the second floor.  The jewelry and cosmetics section were tightly packed onto the same floor pad, leaving little room for browsing.  The cosmetics section featured displays like a drug store or mass merchandiser.  The impression I had was of clutter, and I wondered why consumers choose to shop at Sears.

Then we came to our destination--the Land's End Shop.  The space opened up.  The department was easy to navigate, as the merchandise was logically grouped.  Even the signage featured the updated preppy look that is Land's End signature.  When I stood in the Land's End department, I got the story Sears was trying to tell me.  It seemed genuine and consistent with the Sears brand.  Sure, if you don't like the navy-and-white sailor look, the brand isn't for you.  But the merchandising, presentation, and signage all created a pleasant shopping experience.

Land's End is a bright corner in a dreary box.  Sears highlighted Land's End's strength during the 2011 holiday despite dismal overall sales.  The Land's End brand demonstrates that Sears has the ability to execute well.  How can it leverage this in other departments in the store?

I suspect Sears stock will have a rough week this week, and I can't imagine that one brand will be enough to spark a turn-around in this once-great retailer's decline.

I cannot resist the siren song of FREE! Great Harvest Bread Company often lures me in when I'm passing by one of its locations. I like their bread and I like to support neighborhood business. But I love getting my free hunk of bread and slathering it with butter.

In my mental calorie calculus, a free slice of bread doesn't count as a meal or a snack. From a mental accounting point of view, a free gift like a slice of bread throws me for a loop. I don't know how to evaluate the value of a slice of bread (it is probably a whopping $.15). It enables me to justify the visit.  After the bakery has lured me in the door with the gift of FREE bread, of course I'll buy a loaf of multi grain.

I see this behavior when grocery shopping too. I am a huge fan of Cooks Illustrated magazine.  I love it because the results rarely disappoint.  The recipes call for very specific ingredients and tend to be long and involved.  I can shop at the supercenter, which is less expensive but inevitably requires a second stop a a specialty grocery store for Parmesan rind or leeks or some other distinctive ingredient. Sometimes I just eliminate the trip to the supercenter and go to the more upscale grocer. I justify the more expensive prices with the knowledge that I will get a few nice snacks from the free samples on offer.

In his book "Influence:  The Psychology of Persuasion," Robert Cialdini illustrates that giving a gift changes the dynamics of the relationship. Even for a hunk of warm bread or a fancy cracker topped with aged Parmesan can impact how readily and how wide we open our wallets.  The recipient of the gift feels that she owes the retailer something in exchange. So if you are trying to sell something, sample or gift potential clients. If you are offered a gift, think about how it might influence your behavior before accepting.

I'll illustrate this concept with more examples in future posts.

Skipping the Groupon Middleman

In the build-up to the highly anticipated Groupon IPO, the Groupon business model has been examined ad nauseum.  Barriers to entry in the daily-deal game are low, consumers are suffering from daily-deal fatigue, and so on.  I wanted to highlight another potential threat that showed up in my inbox last week:  businesses that find the daily deal model effective can take a DIY approach.  Picaboo offered a limited-time, deep-discount vouchers directly to consumers.

Picaboo is an on-line printer of photo books, photo cards, and the like.  During the past two years, Picaboo has offered multiple Groupons.  I've purchased many of these, as the quality of Picaboo product is outstanding.

Last week I received an email offer for a $100 credit to Picaboo for $30.  The offer, available for one day only, was directly through Picaboo.  If Picaboo has a lot of repeat customers using Groupons, it is brilliant to tap into their existing customer base.  Creating the offer themselves makes offer much more lucrative for the website.

Groupons are expensive propositions for businesses--typically Groupon receives between 40% and 50% of what consumers pay for the voucher.  If a business offers a $100 Groupon voucher for a cost of $50 to the consumer, the business will receive $30 to $25 in revenue...ouch!

As the daily-game evolves, businesses will find creative and profitable approaches to compete for customers.  What novel approaches do you see?

big box pharmacy blues

I had a minor outpatient procedure this week, and afterwards I needed two prescriptions filled.  The doctor's office called the prescriptions in, and I arrived at the pharmacy about two hours later expecting to dash in and out.  I felt pretty crappy, so when I was told that yes, the prescriptions had been called in but they hadn't been filled yet, I was annoyed.

Apparently the doctor's office was supposed to tell the pharmacy when I was going to be in to pick up the prescriptions.  Hmmm...did the pharmacy ask the doctor's office when I would be in to pick it up?  Did the pharmacy call me to clarify?   More questions--of the seven or so employees behind the counter, why was only one person at the pharmacy counter helping customers despite a line 6 people long?  Is it right that one customer skipped the line entirely by going to the drop-off desk rather than wait behind us poor fools in line for the pick-up?

So after a considerable wait in line, I had to kill another ten minutes or so for my prescriptions to be filled.  These are the the same prescriptions that had been called in hours earlier.  Ten minutes can seem like a long time when you are nauseous and have just traipsed across a parking lot and through a store, and already cooled your heels in line.

The ideal customer, in the retailer's eyes, would spend that time shopping around making high-margin impulse purchases.  Instead, I sat on a hard bench uncomfortably close to an un-sound-proofed bathroom and flipped through a magazine I grabbed from the display by the register (with no intention to buy).  It was clear that I was not welcomed to wait by the pharmacy and little provision for comfort had been made.

The mix-up I encountered is consistent with other interactions at that same pharmacy.  The cost of prescriptions from a pharmacy is hard to compare if the drugs are covered by insurance--not impossible, but it does demand considerable legwork.  So I don't know if it is cheaper for me to use the big-box retailer, and I'm pretty frustrated with the one I've been using.

The next time I need a prescription I'll try a local pharmacy.  I'm not seeing the ability to sell cheap t-shirts and diapers translate effectively into a more service-oriented business like the pharmacy.  What's your experience with the pharmacy at big-box retailers?  Is my experience consistent with yours or not?  

Big changes in store for J.C Penney shoppers

The retail news of the week is the reinvention of J.C. Penney.   The retailer's new CEO announced it will revamp its pricing and promotional strategy next month.  At the same time it will transform the shopping experience by rolling out the concept of store-within-a-store.  We'll see the first of these in Fall 2012 and the roll out will be complete in 2015.  I'm going to focus on the pricing and promotional strategy in this post.

The mid-price chain of some 110 stores has struggled, turning in the worst performance among department stores over the last five years according to the New York Times.  As Paco Underhill notes, department store shoppers are aging and younger ones are not replacing them. Mid-price department stores are in an especially touch spot, saddled with aging mall locations, stiff competition from the high end and low end, and little to differentiate them.  The intense competition yielded the couponing and discounting wars that the new JCP ads spoof.

JCP is stepping away from the couponing madness to offer consumers a great price everyday.  Coupons and price promotions were were the lifeblood of JCP. The retailer reports that it ran 590 sales  last year, and that more than 70% of its revenue was discounted at 50% or more.  Next month JCP will go cold turkey, significantly curtailing the number of promotions it offers.  JCP  will cut the everyday retails by about 40% on most items.

This sounds great--shoppers will know they are getting a good value and JCP will save a boatload on labor, since no one has to put up those signs and re-tag discounted merchandise.  Advertising costs are also expected to decline, as the retailer will not need to to promote the incessant sales.

Overall, though, I think JCP is onto something here.  JCP wins if it can get its existing shoppers--those who know, love and trust JCP-- to buy more on each trip to JCP or to come to JCP just one more time a year.  Those shoppers are critical to the success or failure of JCP, and how they change their behavior will determine the future of the chain.

However, I have some concerns about the everyday-low-price strategy.  In an era when consumers are laser focused on bargains, how will they know what a good value is?  Consumers are notoriously bad at being able to assess the value of an item without context clues (see my post on anchor pricing).  Will the lower tag price give consumers the impression that the quality of the goods are lower? Will consumers prefer to get a pretty good deal on a lot of items at JCP?  Or do they  love the hunt and want an outstanding deal with a coupon on one item at Macy's or Kohl's?

Wall Street is enthusiastic about the changes--the stock price went up over $6 last week, when the broader market didn't fare nearly as well.  I'm not ready to buy JCP stock yet though!  It will be fascinating to see if the JCP consumer is as receptive to the changes.  What do you think?

Target's CEO wrote a letter to key national brand vendors asking for their help in combating online retailers.  Target's ask is for lower prices and differentiated product to prevent consumers from comparison shopping and buying on-line.  The big box retailer wants to eliminate "showrooming," when consumers evaluate a product in a Target store but buy it, often at a lower price, online.

I am an avid Target shopper, a former Target employee, and a holder of a very modest amount of Target stock.  I am disheartened by Target's request of its vendors.  As consumer behavior evolves to on-line shopping, Target's request suggests that it is relying on what worked in the past.  Target lovers want to see Target evolve by fix its website issues and making shopping in stores better and more fun.

The assertion that differentiated product with special features will prohibit consumers from comparison shopping is condescending.  People talk to their friends and online.  Folks won't be so wowed by a different color of vacuum cleaner, an extra attachment for a blender, or a different size of detergent that they will blithely buy at Target.

Furthermore, I question the soundness of a differentiation strategy on national brand items for consistently delivering great prices.  In my experience with CPG companies, exclusive items typically fly in the face of lower costs.  The products require special packaging, smaller runs, more changeovers at the factory, special inventory, and so on.  All of this increases costs to the manufacturer and in the end to Target.  Finally, I question if Target can get additional features that are really meaningful to consumers.  After all, if the feature or benefit was truly a compelling, manufacturers would launch it nationwide.

Consumers are pretty sharp.  Give the consumer some credit, and focus on making Target a the best place to shop for what consumers want to buy there.  Perhaps Target needs to charge a membership fee to shoppers.  Maybe it should post competitive prices in the store to demonstrate to shoppers what a great deal Target offers.  Or it could focus on converting "showroom" browsers into buyers of other products that don't lend themselves to online purchases.  What do you think?

As a reformed Starbucks addict, I understand the appeal of a morning visit to the esteemed coffee retailer. I enjoyed the physical benefit of the caffeine jolt, and the emotional benefit of the morning ritual.  Starbucks reinvented the way I, and much of America, drink coffee, and now the company is redefining the gift card.

An article in yesterday's Wall Street Journal highlighted the importance of Starbucks gift cards in an article titled "Starbucks Sees New Growth on the Card."  Card transactions account for a 27% of Starbucks' domestic sales.  Consumers who register a Starbucks gift card online get perks.  The perks improve when the card is used for more transactions.

Starbucks started with an instrument that is typically used for gifting and re-purposed it so that consumers buy it for themselves.  For the customer, the benefits are smoother transactions (per the company's website, "The Starbucks card is the fastest way to pay at Starbucks.") and the program perks.  For Starbucks, the benefits are also substantial:

• Customers are more likely to indulge in a more extravagant drink, a larger size, or add an item to their order.  According to the great behavioral economist Dan Ariely, people spend more freely with credit cards than if they are using cash.  I suspect that using a gift card loaded with a credit card leads to even more free spending, as the transaction is one step farther removed from cash.
• Starbucks has a wealth of data to evaluate the behavior of its customers.  Most importantly, it can assess the purchases of its best customers.  This provides insight into what's working and what isn't in its stores.  As cards must be registered, Starbucks can use email, coupons, or other tactics to influence the behavior of card holders.
• Starbucks receives the cash from the sale of gift cards immediately, although it doesn't recognize the revenue until customers spend gift cards.  In 2011, gift cards accounted for almost 30% of the revenue from domestic sales prior to the sale--more than $2B!

Starbucks allows consumers to pay with the Starbucks card using iPhone and Android apps.  Starbucks apps have gotten more traction than other retailers, per the Wall Street Journal.  My hypothesis is that this works for three reasons:

1. Frequency of visits--Starbucks loyalists visit at least once a day almost every day of the week.  The implication is that the app provide real convenience for the user.  I don't see the same level of convenience from an app at a store that a consumer visits weekly or bi-weekly.
2. Low risk--based on Starbucks' website, the average reload to a card is $24 and the average transaction size is $5.  Even if something goes haywire with the account, this is a tolerable risk.
3. Starbucks consumers--I'm guessing that they are comfortable with technology and that they are never far from their smart phones.

In short, the Starbucks card is the currency that both loyal customers and Starbucks value.  Unlike traditional gift cards, customers buy themselves the Starbucks card to prepay for purchases and earn rewards.  I can't see a grocer, big box retailer, or department store replicating Starbucks' success with prepayment.  I question whether fast food and QSRs have the right customer profile and the loyalty needed to be successful with this strategy.  I would love to hear your thoughts! 

I love a bargain!  Almost everyone does!  This brings up an intriguing question--what is a bargain?  I define it as getting something for less that it is worth.  Pretty vague, right?  It's exceptionally difficult to assign a value to merchandise without context clues.  Freakonomics Radio illustrates this point in the podcasts "Do More Expensive Wines Taste Better?"  The answer is, yes.  http://www.freakonomics.com/tag/wine/  Essentially, the beautiful label and the critics' praise for a vintage influence the drinker's perception of what is in his glass.

Just like when we enjoy a bottle of wine, we look for context clues when shopping.  What should a t-shirt cost?  How do I know if I am getting a good deal?  One way to assess this is to evaluate the original price (what an item is purportedly worth) compared to the current retail.  The original  price, or MSRP (manufacturer's suggested retail price) is the anchor price.  I evaluate the fairness of the price I will pay relative to the anchor price.

Kohl's has mastered this strategy of anchoring a high price and aggressively discounting, resulting in tremendous success for the mid-priced retailer.  The store is full of percent-off and discount signs, and the newspaper often boasts additional discount coupons.  Frequent shoppers (VIPs) can save even more by stacking additional discounts and earning discounts on future shopping trips.  Consumers generally evaluate the fairness of the current price through the lense of the original retail.

For instance, a t-shirt is priced at $20.  I note it is 50% off and am excited to purchase it for $10.  I may even tell people what I great deal I got.  However, if the original retail was $10 I may have passed over the shirt with the assumption that a $10 shirt won't hold up.

I read a study recently that awarded Kohl's the distinction of consumer's favorite place to shop for baby and kid's clothes.  When I compare the Kohl's shopping experience to Old Navy and the big box discounters (other top destinations according to the study), I suspect Kohl's use of high anchor prices combined with aggressive discounting has been the key to their success.  The ability to create the perception of a higher value product for a fair price is their competitive advantage.

JC Penney announced last week that going forward each item will be tagged with its current retail.  Currently signs indicating percent-off discount clutter the store.  Shoppers have a hard time deciphering what an item will cost.  I am interested in how JCP will execute this and what impact, if any, it will have on shoppers' value perception at JCP.

I have a half dozen Target gift cards floating around in my wallet.  In December, Target had a great promotion:  with a printable coupon, spend $50, get a $10 gift card.  This was all over the deal message boards.  It got me into Target several times!

This is a brilliant promotion when traffic is slow or competition is intense.  Here's why:

• The coupon drives traffic by getting folks into the store.  It entices consumers to come to Target and buy stuff that they could have bought other places (Wal-Mart, Toys-R-Us, grocery stores, etc)
• The terms of the coupon require one to spend $50.  If this is more than the average person spends, Target is incenting behavior that is driving incremental sales.  
• Giving a $10 gift card for a future shopping trip ensures that the consumer will return to Target, so that the promotion drives traffic in the future.
• The promotion only rewarded those who knew about it and bothered to print out the coupon.  Target didn't give a discount to everyone who spent $50, making the promotion much more efficient.

Some clever folks on the message boards figured out that you could use this coupon to purchase $50 worth of Target, Amazon, and iTunes gift cards.  Thus my plethora of gift cards! 

kick off!

Retailing these days is a cut-throat, zero-sum game.  As consumer confidence waivers in the face of a tenuous economy, retail has become a zero-sum game in which retailers are duking it out to win a market share point or two.  

Part of the challenge of retail is traffic--getting footsteps into your stores or onto your website.  For the consumers who shop at a retailer already, what will entice them to visit more often?  The other half of the retail challenge is building the basket.  For the consumers who are already in a store, what will make them buy or buy more?  

I'll use this blog to examine what I see in the marketplace.  We'll study what retailers are doing, what's effective and the principles of consumer behavior underlying each strategy.