Critical issues and trends for the future of mail order.

A look at today's most pressing marketing issues, including privacy, environment, image, news media and more.

"At no time in this twentieth century has the dynamic and changing character of retail distribution been more in evidence than is the case today. This character of American distribution

The most interesting point to be made about McNair's statement is that it was made nearly 40 years ago in a text titled, "Significant Trends and Developments in the Postwar Period." Yet, it would be difficult to find anyone knowledgeable with direct marketing who does not agree that the statement concisely summarizes and accurately describes the economic and competitive environment of mail order today.

One method of trend analysis starts with a review of the issues that have been historically critical to marketers. Over the past decade, a short list of the top issues and trends for direct marketers would include:

* consumer privacy

* USPS: postal increases and deliver ability

* environment

* international marketplaces

* house file development and analysis

* service bureau usage

* alternate media

* computerization and automation

* personalization

* fragmented domestic markets

With some fine tuning, this historic list could be representative of the issues and trends that will impact the future of mail order. This article focuses on five of the critical issues and trends that will take direct marketers to the end of the decade--the year 2000:

1. The Image of direct marketing

2. Direct mail and the environment

3. Mergers, acquisitions and consolidation

4. Strategic partnerships

5. Alternative media and an interactive marketplace

The Image

Probably the most critical and global of all marketing issues and trends is the continual need for direct marketers to maintain and improve upon their image in the minds of consumers, businesses and government. For the most part, regardless of the positive contributions that marketers make to society (i.e. efficient and cost-effective methods for marketing and selling goods and services), they are often looked upon as intrusive, wasteful and even unethical.

"Information Warfare," by Winn Schwartau, defines "chaos on the electronic superhighway" and examines privacy, national economic security and industrial espionage. In this text, direct mail users and telemarketers, and their use of personal information, are thrown in the same classification as narcoterrorists, small time criminals, organized crime and mercenaries: "They want to know exactly who you are. They want to know, before they invest a dime in a phone call to you..."

"Privacy For Sale," by Jeffrey Rothfeder, details "how computerization has made everyone's private life an open secret" and describes the innovative methods that direct marketers use to obtain and employ information about consumers. As the editor of Privacy Times puts it, "You go through life dropping little bits of data about yourself everywhere. Following right after are big vaccuum cleaners sucking them up." Are marketers and their suppliers simply vaccuum cleaners? Unfortunately, in the minds of many consumers, businesses leaders and government officials the answer is "yes." Marketers must overcome these perceptions if they want to continue prospering.

"Future Shop," by Jim Snider and Terra Ziporyn, describes "how future technologies will change the way we shop and what we buy." A reader of this text might expect to find details on how technology will assist the shopping behavior of customers that do not have time to shop, need more information for purchase decisions and are more price conscious. Although the strong outlook and benefits of home shopping are discussed toward the end of the book, nearly an cntire chapter near the front is dedicated to how mail order companies "bait and switch the legal way." Whether or not the various fraudulent techniques described by the author are representative of mail order is of little significance. The only thing that matters from this example is the relative value the author believes mail direct marketing will contribute to the future, which is more negative than positive.

There are three broadly visible aspects of mail order that companies need to collectively improve upon in the minds of consumers, businesses and government: privacy, environment and business ethics. Only by continuing to take these issues seriously, developing industry-wide standards of conduct and developing and implementing positive public relations efforts will marketers continue to grow unhampercd by public misconceptions and government regulations.

Direct Mail and the Environment

The environment is an issue direct marketers have taken seriously for the better part of a decade. Mailers continue to refine their targeted mailing techniques, have begun using soy-based inks and have implemented in-house mail preference services for those consumers who wish to be removed from their mailing lists. Yes, direct marketers have made strides to improve their image by becoming "green" marketers, reducing waste and implementing self-policing environmental programs. Not surprisingly, a 1990 DMA Environmental Task Force survey indicated over one-third of all direct marketers (and nearly 50 percent of companies with sales greater than $50 million) believed their organizations were actually having a positive impact on the environment.

However, in 1993, there were nearly 70 billion pieces of unsolicited direct mail delivered to mailboxes across the country--50 percent of which was reportedly never read. That's 70 billion pieces of direct mail--nearly 400 pieces per year for every U.S. adult and some executives report receiving up to 60 pieces of unsolicited mail a day.

This obvious waste has drawn the attention of numerous consumer and environmental groups. Although direct mail represents only 3 percent of solid waste in the U.S., the issue of "junk mail" is the topic of hundreds of feature articles in local and national newspapers. While marketers may believe their operational strategies for reducing waste and improving their environmental image are working, in the end, it's the volume of unsolicited mail that ends up in the trash that drives tighter environmental regulations.

However, mail order marketers may have actually outlasted their environmental critics. A recent issue of The Kiplinger Washington Letter began, "Keep an eye on the environmental backlash that's building up..." and continued with an analysis of how consumers, businesses and property owners are becoming increasingly burdened with costly rules and regulations at the local, state and federal level. Stringent environmental regulations are leading to more taxes, higher prices and lost jobs. As a result, courts are beginning to side with businesses and landowners on pollution cases, and even Congress is taking a step back to look at the costs and benefits of new environmental regulations.

Seventh Generation, the $7.2 million environmental products cataloger that filed an IPO at the end of 1993, is even toning down its "hard core" green positioning in favor of a more balanced product line. At the same time, however, other companies are breaking new grounds in green marketing. For example, Times Mirror Magazines, together with The Discovery Channel, has recently become a media partner with the Smithsonian Institution's four-year exhibition "Ocean Planet."

A growing environmental backlash is expected; however, this is not to say that new environmental regulations, including those that impact mail order, will not be forthcoming. It is just likely that the new rules will be more balanced, with considerations made in favor of both businesses and environmentalists. Through the end of the decade, although environmental awareness will continue to grow, direct marketers can expect the impact of this awareness to be of lesser significance.

Mergers, Acquisitions & Consolidation

One of the most significant issues that is beginning to impact direct marketing is the increasing number of mergers, acquisitions and related activities. In 1993, according VG&C Publishing's recently released "Direct Marketing Mergers, Acquisitions & Strategic Activities Yearbook," there were 171 mergers, acquisitions and buyouts that involved companies which are involved in direct marketing--an increase of 38 percent from 124 deals in 1992, and up 50 percent from 114 transactions in 1990.

There are several underlying factors that explain this tremendous upsurge in activity. The principal reason is the realization by companies of all sorts that direct marketing is the most cost effective and efficient means for targeting specific audiences and developing long-term customer relationships. Therefore, there is an increasing interest from companies both inside and outside the industry to further penetrate the direct marketing marketplace with acquisitions, alliances and other forms of partnerships. Institutional investors, working with their own proprietary research, have also determined that direct marketing is an area to invest for the future. According to a recently published Mergers & Corporate Policy newsletter article, a top LBO fund has identified direct marketing for strategic acquisitions of "companies with revenues in excess of $100 million" and has hired an investment bank to find such targets.

Secondly, while direct marketing is attracting new players and investors, it is also at a stage where a certain degree of consolidation may be beneficial to all of those involved. The key to the direct marketing game is new customers. However, acquiring customers is becoming an increasingly costly burden to all growing, as well as many mature, direct marketers that sell products and services. Therefore, if new customers may be gained via a company acquisition, merger, joint venture or alliance, then it is more likely to happen today than ever before.

As the companies that sell products and services via direct marketing continue to attract attention, grow and consolidate, the service companies that support these firms will continue to do the same. Agencies, list companies, printers and other suppliers are also going through various stages of growth and consolidation.

The trend toward consolidation is going to only get stronger as more non-traditional direct marketers and institutional investors realize the opportunities offered by direct marketing and develop plans to enter into the industry via acquisitions. In addition, as postal, production and operation costs continue to increase, direct marketers and service suppliers will continue to merge and acquire other direct marketers to achieve economies of scale that are the result of a larger, stronger firm. Both of these factors will contribute to a continuing trend toward consolidation in the industry through the end of the decade.

Strategic Partnerships

Even more significant than the rate of consolidation is the proliferation of joint ventures and strategic alliances among direct marketers. According to The Yearbook, in 1993 there were 86 of these transactions--up 79 percent from 1992 when 48 transactions were recorded.

This strong trend is representative of the significant degree of change taking place. Alliances and joint ventures allow direct marketers to leverage their competitive advantages and make use of the strengths of another company. Companies selling goods and services need to constantly develop additional sources for customer names. Alliances, affinity and relationship marketing programs with other direct marketers help these companies to expand their customer base.

New alternative and electronic forms of marketing have given rise to a wave of alliances and joint ventures among both users and suppliers. The jury is still out on the future of most of these media; however, direct marketers are positioning themselves now to take advantage of these new forms of media as soon as they become viable for generating new prospects and sales.

Acxiom Corporation quoted from BusinessWeek in their 1993 Annual Report: "Today's joint ventures, strategic alliances and outsourcing represent only the first trickle of what will become a torrent of spontaneous partnerships." In the direct marketing industry, certain companies are already involved in numerous strategic alliances and joint ventures including Time Warner, Regal Communications, R.R. Donnelley, ADVO, QVC and US Order. As the 1990s progress, many more direct marketers will follow this trend as a strategy for doing business.

Alternative Media and An Interactive Marketplace

Many of today's partnerships are centered around the development of new alternative and interactive marketing technologies that will allow direct marketers to become involved in the "information superhighway." These technologies run the gamut, from established electronic shopping systems to yet-to-be-developed networks that provide full interactivity. CD-ROMs, online PCs, interactive television, in-flight ordering systems, PC diskettes, screen-based telephones, photo advertising, audiotex systems, infomercials and home shopping programs are among these new electronic and interactive media formats.

As varied as the new formats for media are the opinions and expectations of when the future interactive marketplace will actually occur and what it will look like. Currently, the total aggregate sales of existing electronic shopping formats (including home shopping programs, infomercials and online PCs) is approximately $4 billion. Forecasts range from $383 billion by 2010, according to a recently released Price Waterhouse report, to "most technology talk is bull 1993. One of the most far-reaching forecasts for the information superhighway is John Sculley's early 1993 prediction printed in USA Today: "A high tech, digital world where TV, telephones and computers merge into one mega-industry that could be $3.5 trillion in annual revenues in a decade." Of course, this would represent at least 50 percent of the U.S. economy.

Seller Buyer

Aegis Safety Holding, Inc.
(20 percent interest)                  Hanover Direct

Brights Creek, Inc                     Harbor Creek Marketing, Inc.

Brylane
(60 percent interest)                  Freeman, Spogli & Co.

C.O.M.B.                               Damark International

Cahill & Co                            Rivertown Trading Co.

Company Store                          Hanover Direct

Earthcare Paper, Inc                   Real Good Trading Corp.

Gander Mountain                        Goldman Sachs & Co.

Gumps, Inc                             Hanover Direct

Hear Music                             CML Group

International Beauty                   Nature's Bounty, Inc.

Mac's Place                            Egghead, Inc.

New Hampton, Inc                       Spiegel, Inc.

Peper Direct, Inc.                     Deluxe Corp.

Phelan's Equestrian, Inc.              International Capital Investment Co.

Pinnalce Orchards                      Mission Orchards, Inc.

Power Up! Software Corp                Spinnaker Software Corp.

Promises Kept                          Worthington & Tuthill

Queblo                                 Stationery House

Rytex Co                               C.R. Gibson Co.

Ryker Dental Corp                      Bio-Dental Technologies

Serengeti Wildlife                     Catalog Ventures, Inc.

Smith & Hawken Ltd.                    CML Group

Territory Ahead (majority interest)    Lands' End

Tweeds, Inc.                           Hanover Direct

(Source: Vos, Gruppo & Capell, Inc.)

Whatever the future holds for the information superhighway, one point is relatively certain: "content"--whether it is information, entertainment or products and services--is the key determinant in the highway's success (or failure). Taken a step further, no form of media has ever survived without a respective form of advertising that allows companies to sell products and services. Interactive marketing, in any form, is an outgrowth of the direct marketing process. Therefore, as the capabilities of interactive media grow through the end of the decade and into the next century, so too will direct marketing.

In The Impact of Interactive Media research study, soon to be released by VG&C Publishing, direct marketing executives were surveyed regarding their expectations for interactive media. Overall, direct marketers are relatively optimistic in their outlook for new forms of marketing. More than 25 percent of the respondents were currently using or testing interactive media (i.e. online PCs, screen-based telephones, interactive TV) and 90 percent expected to test or use within 10 years.

However, the extrapolated forecast for when actual revenue streams will develop from interactive media were quite conservative compared with forecasts being made by telecommunication and cable companies and their suppliers and consultants. Direct marketers' expectations for sales revenues that will result from interactive media through 2004 were typically 25 percent to 75 percent less than the projections made by their RBOC and cable company counterparts.

Most interesting about these results is that the survey was conducted in January 1994--at the peak of interactive superhighway hype! Bell Atlantic and TCI were merging; QVC was attempting to acquire Paramount; and Cox Cable and Southwestern Bell were forming a joint venture. Since then, all of these deals have collapsed. Yet, direct marketers were able to see through the hype and make projections that are likely to be attainable. Smart direct marketers, who are a critical component of the content mix that will eventually drive the information superhighway, should begin testing alternative media and preparing for eventual roll-outs that will provide the critical mass required to generate significant revenue streams near the end of the decade.

As marketers approach new interactive technologies, they have to be aware of their image among consumers and the electronic community. Users on the Internet network, for example, grossly despise unsolicited promotions and will gladly let an advertiser know their opin-ions--in such high volumes they will crash and shut down the computer systems of the unsuspecting advertiser, as was the case with Shadow Information, which marketed a thigh-thinning cream on the Internet, and Canter & Siegel, a law firm that sent self-promotions.

I propose the DMA and responsible marketers will eventually develop Interactive Preference Services (IPS) to complement their Mail and Telephone Preference Services. The IPS files will include consumers and businesses who desire to remove their electronic mail box addresses and yet-to-be-developed "addressable interactive television identification codes" from the solicitation lists of direct and interactive marketers.

There's More to the Future

This article does not begin to address all of the critical issues and trends that direct marketers need to monitor, analyze and understand in order to prepare for the future. There are dozens of additional strategic topics that need to be explored. The following are also key issues for direct marketers:

1. Demassification of the consumer audience

2. Development of international marketplaces

3. True competitive advantages of direct marketing

4. Affinity and relationship marketing

5. Database marketing and publishing applications

6. Competition around every corner: from competitors, suppliers and customers

7. Role of agencies in an interactive future

8. Preparing for the future of direct marketing

As C. F. Kettering stated in "Seeds for Thought," "I am interested in the future because I will spend the rest of my life there." Whether your company is planning to grow via acquisitions, alliances or internal product development, the continual monitoring, analysis and interpretation of direct marketing issues and trends will help in preparing for a future, where we will all spend the rest of our lives.

1993 CATALOG CLOSINGS

Competitive Edge CompuAdd Corp. (retail div.) Editor's Choice Him Inmac (overseas direct marketing operation) Phelan's Equestrian, Inc. Sears, Roebuck & Co. (catalog div.) Weebok

(Source: Vos, Gruppo & Capell, Inc)

1993 CATALOG BANKRUPTCIES

CompuAdd Corp. Mindware New Hampton, Inc. Old West Outfitters

(Source: Vos, Gruppo & Capell, Inc.)

Michael Petsky is senior vice president and director of research for Vos, Gruppo & Capell, Inc., investment bankers and advisors to direct marketers. Under his direction, Vos Gruppo & Capell conducts, publishes and maintains research including an historical transaction and competitive intelligence database, industry sector studies and the annual "Direct Marketing Mergers, Acquisitions & Strategic Activities Yearbook" and "The Impact of Interactive Media on the Direct Marketing Industry." In addition, he provides information services for the Direct Marketing Association's DIRECT LINK database project, which he designed. He can be contained at Vos Gruppo & Capell, Inc., 470 Park Ave. S., New York, NY 10016--212/481-7000.