Couponing and Cash for Clunkers.

One of the biggest lessons I learned about marketing came at the expense of The Hudson's Bay Company in Canada. It's the oldest company in the continent dating back from the discovery of North America, and as one of the very first trading post companies it has been in operation since the year 1670.

It is still in operation today but under American ownership as a result of numerous management mistakes and fiduciary failures which needed to be corrected by someone with deeper pockets and a better management team. I'm not 100% sure that their owners (the holding company that owns Lord and Taylor's) are necessarily that team, but they will certainly do no worse.

How does the Hudson's Bay Company of Canada have anything to do with our government's Cash for Clunkers program? Good question. I have a great answer.

The Hudson's Bay Company (HBC) went through tumultuous financial times in the 80's and 90's like most retailers. They tried to buy a number of other chains in order to diversify their market reach and expand market dominance of the hard-fought department chain consumer market and to reposition their products for re-sale as they went through their product aging cycle/ Clothes that were unable to sell in HBC would be sold at a discount through their lower cost Zellers subsidiary and so on.

So far so good. But things go off the rails in this story right about....now.

The department store industry during this era was faced with a massive change in consumer spending thanks to the evolution of box stores and mass market retail sales clubs. Now the all-in-one stop department stores were no longer competitive on pricing and their product lines were being put in direct competition with good quality, low cost substitutes. Throw in a recession or two in Canada and you have the makings of financial disaster.

Right about then there was a management philosophy that was prevailing over experience and common sense in businesses around the world that hit the company in several key and devastating ways. Over time I'll go into other aspects and applications, but one of them was inflicted on/by their marketing department in specific that applies to this story.

There are certain words that will always draw attention in any piece of advertising: New, Sale, Half-Off. Those kinds of things always get attention and almost always draw in customers looking for a great deal.

The new philosophy at the marketing department was implemented post-haste. Once a month the company would have a blockbuster sale and advertise it extensively using each of those key, top-draw advertising bell-ringers.

Inventory flowed, sales figures climbed, Hallelujah's were said. Monster sales volumes occured as thousands thronged to get the best deals of the season. Profit margins were low, but volume made it profitable.

Then sales trickled off. No one seemed to need the products they had just bought in such massive quantities once the sale wore off. Sales figures for the rest of the month were down, but since they had had such a great sale to start the period, their overall numbers still looked good. The sale to start the next month again was a huge hit - throngs came by the thousands and staff simply could not keep up with demand. Again, a big success and a big sigh of relief as the month started off so well.

But again the numbers for the rest of the month were off. They still were not gaining any real market penetration and the overall numbers were still down as they kept losing marketshare to the box stores and Walmarts that kept popping up all over the place.

Well, if it's working on a monthly basis, let's see if it will work on a weekly basis?

So they did. The big sales started to show up every weekend, tailored to meet the needs of their biggest customers - the families who needed the one-stop convenience that a department store offered.

Again the company was rewarded - the public loved the idea of being able to go get stuff every weekend at huge discounts, and for a few months the volumes on the weekends soared outrageously, even leading the company to believe that they might be able to recoup some of that lost marketshare and start gaining it back.

But the company next noticed a horrible trend - no one was shopping during the week! The customers now shopped only on weekends - literally! Some stores that ordinarily would do $50-100 k in business on a weekday would be lucky to do $1000 for the entire store in total. But the costs of running the stores stayed constant - they still had to staff every department, keep the inventory on the floor, clean the facilities, etc because of the long term rental agreements that the malls they were located in had included in their rental contracts. And the properties were far too valuable to give up. So those stores *had* to lose money 5 days a week so that they could make money on the other two. Hmmmm.....not so good.

And then came the kicker - the consumer had learned the drill. They now knew that HBC would continue to offer these sales days because they had to in order to move inventory and keep from financial crisis from lousy cash flow. Now the consumer could relax their spending and only shop for the quantities they needed in the short term and only on sales days.

HBC's sales volumes plummeted, even on their big sales weekends. And now their customers were trained by the company not to shop the rest of the week either and sales volumes there were almost non-existant. What idiot would pay double for a fridge, shirt, lawn mower or vacuum on a Monday when they could go one day earlier or 5 days later and buy it half-off?

Worse still, they had sold the customers all that the customers would need for months to come in advance and now they didn't need the store anymore. They *could* shop, but there was no incentive that said they *had* to shop.

The company was in panic mode. It was so stressed out it took little time to learn the lessons of the day then and went straight to desperation mode. If the customer was driven by sales prices, then that must be where the solution lay. Now once a month 80% off days showed up. Couponing, discounting, desperation set in. The company was heading straight to disaster.

Sooner or later the day came when their maximum discounts were no longer enough to lure in customers. Combined with crippling overstocking of unmovable inventory the company faced financial collapse. Stores were sold off, the company shrank in desperate cost cutting measures...layoffs, angry creditors...you know the drill.

Again, the question applies - how does this apply to the Cash for Clunkers deal?

Car sales to domestic manufacturers have been sliding for years. The big three did all the financing and discounting deals they were prepared to do and again had spikes and collapses in sales that left them holding millions of vehicles in inventory and empty bags of profit. The solution? A huge discount to drive a selling spree, in this case sponsored by the federal government. And as soon as that incentive ends, just precisely when do you expect anyone will need to buy a car again? The drought that follows the big sale may just be the last nail needed to seal the coffin on our domestic car industry the way improperly planned sales spikes nearly destroyed the oldest company on the continent.

Add to that an energy tax that will punitively increase the cost of gas and a requirement to increase the manufacturing cost of vehicles to meet the arbitrary mileage requirements of new legislation concerning vehicle manufacturing and the pitifully weak domestic industry as a whole faces extinction.

There is no doubt that the industry needs a boost or faces catastrophic failure, but so did the department store industry in Canada in the 80's and 90's. The solution wasn't to spike sales at the cost of future sales then any more than it will be for our car industry today.

The solution is finding the right products that people want to buy and offering them with better wuality and better pricing. Oh, and get rid of the dealerships that are eating up your profit margins and giving the industry a perpetual black eye. Make car buying a thing people want to do, not something people abhorr more than having a root canal and quadruple bypass 2-for-1 special. In other words, run your business properly and you won't need to have the massive sales except when you have surpluss inventory that you need to clear out. Which is what sales were designed for in the first place.