Fundamentals 101: How Merchants Are Driving Themselves Bankrupt

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Recognize this guy?

It’s Vince Lombardi. He’s largely considered the greatest coach in the history of sports. In his short tenure as head coach of the Green Bay Packers he led the team to three straight NFL championships and five total championships over a seven-year stint before he passed away from colon cancer. The NFL has since named the Super Bowl Trophy the Vince Lombardi Trophy in his honor.

When asked about his stunning achievements, Vince frequently responded with something so banal its commonly overlooked:

Excellence is achieved by mastery of the fundamentals.

Vince’s point was that no amount of fancy trickery would work if you didn’t execute the fundamentals well.

Fortunately, we have brick and mortar merchants who ignore this advice so we can write an article!

Brick and mortar merchants are legendary for chasing “growth” at any and all costs. A great quote we once heard is:

Merchants will step over a dollar to pick up a dime

Look no further than the prevalent merchant tools to prove this point. Groupon’s merchant arrangement was so one-sided that Groupon consumers would need to return 14 times at full price in the same calendar year for the merchant to break even on their daily deal… that’s as frequent as the loyalest of customers. But that mathematical reality didn’t prevent Groupon from having a queue of 30,000 merchants who self-enrolled to run a daily deal.

It’s the same for Grubhub. Here’s a company charging uneconomical commission fees, claiming their service delivers “incremental customers”, yet we haven’t seen any case study to prove it. Doesn’t that strike you as odd? If something produces great financial returns for customers, wouldn’t the data be available? Analysts love to extrapolate Grubhub’s potential to the incremental customers being generated by online ordering at pizza companies Domino’s and Pizza Hut, but these two merchants aren’t paying 15%+ for each online order!

Here’s a look at YUM Brands’ (owner of Pizza Hut) profit margin. You think they’re eager to knock 15% off the top? If they did they’d never be profitable.

We bring this up because these tools would never pass muster in any other vertical. If you told anyone with a brain the below, they’d laugh you out of the room.

Hey, we’ve got this awesome tool that’s going to bring you customers. You only have to pay us 5x your margin to use it… oh, and by the way, we keep customer records and won’t share any of that with you so you can’t prove if our solution works or doesn’t…

But not merchants! They’re tripping over each other to grasp at marketing solutions that are going to make them the first trillion-dollar company ever, overnight – just ask them.

Crazy, right?

Here’s why merchants behave like this.

The fundamentals are not sexy. They require diligence, work, and are directly proportional to the rigor you put in. If you don’t want to put in the effort, or you’re simply not smart enough to understand the fundamentals, you’re going to struggle.

Marketing, on the other hand, is like playing high-stake craps with some else’s (i.e. shareholders’) money. You’re throwing big bets on things you’ve traditionally not been able to measure. If it wins, you look like a savant. If it fails, you can always quote John Wanamaker and blame the elusive nature of marketing:

Half my advertising is wasted, I just don’t know which half.

So there’s very little downside when drinking from the marketing slush fund.

Fundamentals are not so wishy washy. As any decent private equity group or consulting firm would tell you, fundamentals are very well understood and should be consistently measured. Labor costs. Inventory costs. Standard operating procedures to make sure customers get quality products and good service. It might be surprising to learn that doing the fundamentals well can increase revenue more than marketing.

What?

Yes, running solid fundamentals can actually drive increased revenues.

Mind. Blown.

But don’t tell merchants this. Their actions say they have no desire to fix the leaky holes in their ship before setting sail to marketing land where gold sprouts magically from the ground. Who cares that their ship might not be afloat by the time they arrive, or that it won’t carry the weight of the gold (if there is any) and crew back home. All that matters is that it looks cool, right?

Outside of brick and mortar, profits matter. Fundamentals matter. They’re not sexy, and they’re undeniably a direct reflection on your operating ability… but they can produce big wins. Ask the late Coach Lombardi if you want proof.

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