reveries.com - chris hoyt

JANUARY 1997

His father was Waite Hoyt, the hall-of-fame pitcher for the New York Yankees. What's the son of a world-class athlete to do? "I thought about being an Olympic skier, but had no talent there either," Chris Hoyt says. I knew I had to turn to something on the intellectual side.

Chris Hoyt, co-marketing

The first thing you should know about Chris Hoyt is not who his father is, but that he is the father of "co-marketing" -- one of the most talked-about new ideas of the '90s. He developed the concept, named it, and has been its most outspoken champion for nearly a half-decade.

"About four years ago, I was on an airplane reading the Food Marketing Institute report on Efficient Consumer Response (ECR) and thought, 'this is horseshit'," Hoyt recalls. "Not once did the ECR document mention building volume. The thing is, you've got to be effective before you can be efficient. You've got to get the growth curve -- a strategic, predictable growth curve -- on track before you can start to think about efficiency."

Because retailer profits were down and manufacturers were also struggling, Hoyt determined that the answer was for both parties to join forces -- not fight as they had been for so many years.

Hoyt emphasizes that co-marketing should not be confused with account-specific marketing, although it frequently is. A key difference is that account-specific programs are developed unilaterally by the manufacturer, and typically presented as a "menu" of choices.

Co-marketing is a consumer-based growth strategy that develops brand and retailer marketing programming, proactively, in tandem. Marketing strategies are developed with retailers, not delivered to them.

Nothing is off-the-shelf. Co-marketing typically involves the execution of supporting advertising, promotion and direct mail events that leverage the equities of both the manufacturer and the retailer to build volume and profits.Hoyt conceived of co-marketing with the packaged goods community in mind, and the concept has since been embraced by industry leaders up to and including Procter & Gamble. Now, Hoyt is turning his attentions to the hardware/software industry. He sees many differences between packaged goods and high-tech, but also many similarities and important applications of lessons learned from the packaged goods industry.

The two primary issues fall on the supply side (achieving efficiency in the distribution system) and the demand side (growing the consumer base). We'll start with the demand side, because as Chris Hoyt tirelessly hammers home, "you can't be efficient until you're effective."

The first step is understanding the consumers who live in the area of your target stores, not just the consumers who shop the stores. The idea is to reach out, grab that consumer by the collar and pull him or her in and say, "Let me introduce you to a whole new exciting world of information, games, and add a whole new dimension to your life.
"

That's what the retailer needs to do. Get those first time-buyers into the store and have a knowledgeable person walk up to them. You want a sales clerk who understands the psychology and fear of first-time buyers and can help those buyers make the decision process to lay across the $2500 they're going to have to lay across for a computer, monitor and printer. That's a big purchase for most families.

While it's true that a second-time buyer tends to buy through mail order, in terms of importance, it's critical to reach that first-time buyer. That first sale almost always happens through a retailer.

Retailers generally do not have the time to develop marketing expertise on their own. The idea of co-marketing is to merge the resources of the manufacturing community -- the analytical and marketing resources, the advertising clout, the promotional moneys -- with the resources of the retailer, which are store location, merchandising expertise, customer count and knowledge of the local market. You've got to merge all of those resources together, and develop a long-term strategy for increasing sales and profits in the category, not just for the supplier's brands.

Co-marketing is about suppliers taking the initiative to help their retailers develop and understand a classic, consumer-based packaged goods marketing approach to their business.Most suppliers should leap right to co-marketing, as opposed to getting into all the nitty-gritty of category management as a precursor to co-marketing. If you can co-market with the top ten or eleven retailers and help them understand how to market to their consumers -- defined as helping them attract and hold new consumers, as well as sell more to present customers -- you're going to be a winner.

I was raised in Cincinnati and went to high school with people whose fathers worked for Procter & Gamble. I became interested in marketing by talking to my friends' fathers about the business.

Databases are critical to the process. Using the supplier's database to identify customers in the store's local area that have already bought products from the supplier is a huge advantage to the retailer. Merging those databases is an excellent starting point. Then you can direct mail those customers, using the store name.

The problem is, although many manufacturers are sending out warranty cards asking for information, they don't tend to group the information very well. They do ask for age and income and the reason for the purchase. They don't tend to use that information as a marketing tool, just as a follow-up tool to sell upgrades. There's a big opportunity in this business to use that information as a marketing tool.

Manufacturers should group those cards together geographically, go into retailers and say, "we can help you increase your business by using our warranty card system." The industry just isn't well-organized to do that. But let's be a little forgiving. This industry is only about 12 years old. It's done marvelously well.
But, in the absence of consumer research, the first step would indeed be grouping the warranty cards together, putting them on a database, grouping them geographically and using the data to start a co-marketing process with leading retailers.

There are a couple of obstacles that have to be overcome if co-marketing is to work for the hardware/software industry. First of all, retailers have got to be willing to share information. Because it's a tight community, hardware and software retailers have historically been unwilling to pass their point-of-sale data across the desk to another software supplier who they think may make it public or give it to another retailer. That's a normal and natural feeling, but retailers have to overcome it. It's up to the manufacturer to show the retailer a benefit for sharing the sales data.

I took a job in sales at Procter because I figured I could always get into marketing from sales, but not the other way around. My territory was Harlem and the South Bronx.

There is a Nielsen or IRI type of service in the hardware/software community called PC Data that does measure software sales. However, they're only covering about 50% of the universe. Because of the small number of retailers in the channel, PC Data has a rule where they will not release a specific retailer's data. They'll only release it by segment -- office supply superstore, computer superstore or mail order. But this segment information should be put to use anyway.

Suppliers, meanwhile, have been very parochial in talking about their own products and their business. They have not taken a category management approach. The minute one starts talking about the category, however, almost by default, you begin to cross the line from parochial self-interest into talking about what the retailer is interested in. That is, "what are you contributing to my sales and profits?" That's what the software and hardware community has to transition to in this business if they're really going to be successful in establishing firm and meaningful partnering relationships with retailers.

Companies like Microsoft, Canon, Toshiba, Compaq or Hewlett Packard -- my heavens -- if any companies are set up to do this technologically it's these companies. They can establish almost peremptory relationships with the retailer community if they take the time to set it up right and hire the outside expertise -- and this is not a plug for Hoyt & Company (editor's note: 1010 Washington Boulevard, Stamford, CT 06901; Tel: 203-352-0645) -- who have already made the mistakes to help them get there.

Most important, we've got to get a consumer focus by trade channel. We've got to understand what kind of consumer shops a computer superstore versus a mass merchandiser, versus a mail order store.From a supply-side standpoint, it's pretty easy to get to the marketplace in the hardware/software industry because you've got to call on only ten or eleven chains. You get distribution in those ten or eleven chains and you're in. Unfortunately, those chains are having massive troubles making money.

Albert Camus, in 1957, developed a philosophy, a way of living, which was right. He said that most people wear masks, but to communicate with humanity, you have to tear the mask off.

Over the next three years, while retailers -- computer superstores, consumer electronics stores, department stores, mass merchandisers, office products superstores, software stores and warehouse membership clubs -- are projected to grow by about 70%, the mail order business is expected to grow by 85-90%.

The hardware/software industry is where packaged goods was in about 1985. It is on a plateau and has to rise to another level in order to prosper. In that rise there's going to be a shakeout, even though there are only about ten retailer chains now. The margin in this business is only 2-3%. It used to be 13% ten years ago. But net profit is only 2-3% in this business.

Those are starting to look like packaged goods margins. They're going to only go down unless the hardware/software industry starts to address the cost reduction end of the business. They've got to get into the whole supply chain management end of the business.

Fixing the supply chain for hardware/software is going to be infinitely trickier than it was in packaged goods. The reason is that what we have in the hardware/software business that we did not have in packaged goods, is the distributor. Most software and hardware suppliers are not big enough, in and of themselves, to sell directly to these retailers.

There are exceptions -- Hewlett-Packard, Compaq, Packard Bell. I don't know what their volumes are, but their "names" probably could sell direct. Microsoft, for example, has the critical mass necessary to sell direct. And, of course, if Microsoft did, and was able to solve the problems with the distributor, it would further increase its dominance of the software market and capture the first-time user in the retail environment.

But most sell through the distributor community and so it's a two-step distribution process. Manufacturers do go to the end-user, of course, like Comp USA, Radio Shack or Best Buy, and make the sale there. But the merchandise is delivered through the distributor community. That's an additional cost in the supply chain. Since retailers tend to shop different distributors, it's very difficult to maintain a continuous replenishment process in the hardware and software business.

The problem is, supplier "A" will come out with a deal and distributors "A", "B" and "C" buy it. Distributor "A" may buy more than distributor "B." Well, when supplier "A" goes directly to the retailer and announces the deal, that retailer will shop suppliers "A", "B" and "C." What that does is clog the distribution system because you've got excess inventory at "A", no inventory at "C" and the right amount at "B." That adds cost to the system because we have different inventory levels at different distributors.

If we had a direct line from supplier to distributor to retailer, we would get a lot of bloat out of the system. This might be a non-solvable problem because it just might be the nature of the industry, except for the bigger companies that could ship direct.

Getting the supply chain right has to start with the shelf. Shelf movement ought to directly reflect the purchasing habits or lifestyles of the consumers who live in the area of the store. By working constantly with the shelf, a Comp USA or a Best Buy ought to understand what consumers in the area are buying. That ought to be monitored real carefully.

There are millions of wonderfully talented, creative people out there. Every human being has a little streak of genius in them. If you can identify that genius and tap in early, you will have a happy and productive life.

This can be tricky because the dynamics of software and hardware are unlike packaged goods. Software is much more akin to the publishing business than it is to the regularity of the packaged goods business. In a typical year, we have about 5,000 software titles out there at a given point in time, and typically 2,500 new titles are introduced.

Right now, except for the reputation of the supplier, there's not a lot of criteria by which to judge the long-term efficacy of any of those new products. In addition, it tends to be a one-time buy with upgrades. The purchase frequency is not as great as it is with packaged goods. It isn't like buying spaghetti sauce or other routine, repeat-purchase items on the weekly shopping list.

Consequently, the principles that apply to shelving this stuff has got to be much more like the bookseller principles than packaged goods. You will not be able to go in and apply packaged goods shelf management principles to software. But that's the starting point of the supply chain management challenge for the software business. They have got to get the space allocation right, the product configuration right, on the shelf or in the store, as a means of establishing a baseline or a benchmark.

The software industry can probably benefit from the expertise of the packaged goods community in terms of shelf management. The principles of category management based shelf plan-o-gramming are there. But one has to be very cautious or sensitive, in applying these principles to the software retail environment.

On the hardware side, the dynamics are also completely different from packaged goods. What you buy today in hardware is going to be obsolete by the time it's delivered to you. You're going to find a lower price or a different widget, almost in the ten days it takes to get it delivered. The technology moves so quickly that nothing is static. In packaged goods, it takes two years to make a decision about anything. It's a process-driven field relative to software, which is entrepreneurial and flexible.

But the shelf is the starting point. Once you have the shelf working, then you've got to calculate backward through the system -- what it's going to take to establish a continuous replenishment supply to that shelf. That's where the distributor comes in.

If I could emulate anybody it's Stephen Hawking. Not only is he the Einstein of the Nineties, he's battling Lou Gehrig's disease.

The distributor can provide a service to the supplier community by helping to establish measurement tools to keep the shelf organized. That's a function they're not performing now. Distributors are probably in worse shape than retailers because they're making even less margin. They're squeezed between the retailers and the suppliers.

Right now, the value-added the distributor adds to the system is the distribution itself. The distributor physically takes in the product, puts it on the shelf, etc., or delivers it. But in terms of providing value-added in other ways, the distributor has a big opportunity to start the application of classic category management principles to what he's doing. The first distributor that jumps on that is going to get a definite edge over the other distributors.

The last time I looked, the software industry had about 90 days of inventory on hand. Given the technology of the business, it's really only necessary to have 30-45 days on hand. There's an opportunity to reduce the cost of inventory in this business by 100% for most players.

Packaged goods has done a marvelous job of getting inventory levels down, and as a result significantly increasing profits. Last year, according to FMI, packaged goods profits were 1.14% net on the bottom line. That's the highest level achieved in the previous nine years. Although that sounds small, it's huge on a $400 billion business. It directly resulted from category management-based partnering relationships with retailers -- suppliers and retailers working together to focus on that particular issue.

Relationship-based selling got a nasty reputation in the 1980s because that's what people did when they didn't have any facts to sell against. When category management arrived, relationship-based selling was looked at in a derogatory way Relationship based selling was "out" and the only way one should sell was completely on facts.

I think it's a combination of both that works for you. When you take the time to invest your expertise into a retailer that's struggling to make one or two percent in this business, and work through his issues, even though they may not be directly pertinent to your issues, when brands are equal he's going to make the decision to push your brands. It's human nature.

When you sit there, at 11 o'clock at night, eating Chinese food with a buyer, working on a co-marketing plan -- that's his plan -- using your brands as the drivers, there isn't anything more solid than that in terms of building long-term rapport.

It is going to take the hardware and software community four or five years to focus on these issues. But we have plenty of power on both the supplier and retailer sides to make both co-marketing and category management work in the hardware/software business.