Many years ago, someone at Starbucks realized the company could save a significant amount of money simply by reducing the quality of the toilet paper used in its store's washrooms, from 2-ply to 1-ply. The suggestion was brought to senior management for consideration, but they quickly rejected it; they understood that part of the reason people paid such a premium for Starbucks coffee was for the Starbucks Experience, and that a cheaper toilet paper would cheapen that experience... and ultimately damage the brand.
Starbucks decided to be less profitable in the short term so they could maintain their premium experience and be more profitable in the long run.
Choosing the long-term is a decision too many companies have difficulty making.
In fact, short-termism is a problem every business that aspires to be great eventually faces: how do you do what needs to be done today without hurting your future success?
I'm a significant fan (and an insignificant shareholder) of The Walt Disney Corporation, so it really pains me to write what I'm about to write. But Disney's recent decision to close its retail stores is an excellent example of short-termism, and should never have been made.
Without question, 2020 was a challenging year for Disney; in their own words, "COVID-19 and measures to prevent its spread impacted our segments in a number of ways, most significantly at Parks, Experiences and Products where our theme parks were closed or operating at significantly reduced capacity for a significant portion of the year, cruise ship sailings and guided tours were suspended since late in the second quarter and retail stores were closed for a significant portion of the year."
But what was the size of that impact, exactly? Disney's Fiscal Year 2020 Annual Financial Report indicates the Parks, Experiences, and Products division only generated $16.5 billion in revenue in fiscal 2020, down 37% versus the prior year. The financial statements indicate "Merchandise licensing and retail" accounted for 25.4% of that figure ($4.1 billion), but the expenses for each division aren't specified in the same way they are for revenue; investors are told only that the entire "Parks, Experiences, and Products" division suffered an operating loss of $81 million.
That's a lot of money to lose in a single year, right? Sure... but let's consider the following:
According to the notes provided in the annual report, revenue for retail stores was down just 4% in 2020, "driven by the closure of retail stores for a significant portion of the fiscal year as a result of COVID-19." In other words, although Disney's retail stores were closed for a significant portion of the year, the company still managed to earn 96% of the revenue generated in the prior year when the stores weren't closed at all. That certainly wasn't the case for most retail stores in 2020.
Even if the entire $81 million loss was attributed to the "Merchandise licensing and retail" division (which is highly unlikely given how expensive it would be to run theme parks and cruise lines), that would equal less than 2% of that division's $4.1 billion in revenues... a fairly insignificant figure.
Despite the pandemic, Disney (as a total company) still managed to earn revenues of $65.4 billion, down only 6% versus the prior year.* Granted, the company had an overall loss of $2.8 billion, but this was not a typical year, and there's no reason to expect this is anything other than a COVID-19 hiccup that will pass once the global pandemic is behind us.
Sales were down last year, and Disney lost money. But this is a temporary situation that was experienced by most retailers in 2020, not a cause for short-termism.
Let's pretend you were a senior decision-maker at Disney... and your background was not in marketing. You might see the massive success that Disney+ has enjoyed since its launch in late 2019, and understand the company's primary focus for entertainment going forward is streaming. You might look at that $4.1 billion in revenue generated by the "Merchandise licensing and retail" unit and realize it represented only 6.4% of total company revenues, already less than the annual revenue generated by Disney+.** You might know that real estate tends to be quite expensive and that COVID-19 has accelerated consumer adoption of e-commerce. You might consider all this and decide that Disney Stores are no longer necessary for the company, and provide the following quote to a business publication:
“While consumer behaviour has shifted toward online shopping, the global pandemic has changed what consumers expect from a retailer... Over the past few years, we’ve been focused on meeting consumers where they are already spending their time, such as the expansion of Disney store shop-in-shops around the world. We now plan to create a more flexible, interconnected e-commerce experience that gives consumers easy access to unique, high-quality products across all our franchises.”
The person who provided the quote above is Stephanie Young, listed in the article as the "President, Consumer Products Games and Publishing." If you happen to wonder (as I did), what position she held before assuming this role, according to her Linkedin profile it was "SVP, Revenue Management & Analytics."
Congratulations, Ms. Young: you just switched to 1-ply toilet paper.***
How much money a Disney Store makes for the corporation is important... but it should never have been the primary objective of a Disney Store.
The primary objective of a Disney Store should have always been to create a magical experience for everybody who walks through its doors.
To reinforce the love that children have for the colourful characters they first meet in theatres or (increasingly) on Disney+ and let them spend their allowance and birthday money on costumes and action figures that indulge their imagination.
To give parents who might not be able to afford thousands of dollars for a Disney cruise or a trip to a Disney park a more accessible way to share the magic of Disney with their families.
To build brand love, and create brand champions.
Because all of that ultimately drives far greater revenue for the company than what Disney's retail stores could ever hope to drive on their own.
Ms. Young said, "The global pandemic has changed what consumers expect from a retailer." But that isn't quite accurate: what consumers expect, and have expected for the past few years, is an exceptional omnichannel experience. That doesn't mean physical stores aren't necessary or important: they can still play a vital role for a brand, especially one as experiential as Disney. It means that consumers also want the option of enjoying a great e-commerce experience... which arguably isn't something the company offers today.****
To a consumer looking to purchase Disney merchandise, Disney's decision to announce store closures before being able to execute on an exceptional e-commerce experience is frustrating. To a shareholder, inexcusable might be a more appropriate word.
Of course, sometimes a company has to make unfortunate compromises in the short-term to ensure there is a long-term for the business: you don't need to worry about the quality of the lighting in your store if you can't pay the electricity bill to keep the lights on.
But this doesn't look like one of those unfortunate compromises. I don't have access to the specific figures to know for certain, but Disney's annual report seems to indicate their retail stores aren't a significant financial burden for the organization. Perhaps it's true that closing these stores will result in a better balance sheet in 2022, but Disney can certainly afford to make less money today if doing so represents an investment in its future.
And that's a decision they should always choose to make, without hesitation.
Let me be clear: Disney's decision to close its retail stores isn't a tragic mistake that will result in the death of the company... not even close. It's probably not even a "New Coke" type decision that will be written up as a case study and studied by future generations of marketers as an example of what never to do. (Or if it is, the answer may not be as obvious in hindsight as it was with the Coke fiasco.)
But it does represent a missed opportunity. An opportunity to see its retail stores not as product-pushers, fulfilment centers, and short-term profit-drivers, but as experience-centers designed to create positive memories and long-term fans of the Disney brand.
Short-termism at its finest.
As a father, I'm disappointed the magical Disney retail experience will no longer be available for my children to enjoy.
But as a marketer and shareholder in it for the long-term, my disappointment is much worse.
* Arguably, the tremendous success of Disney+ was a large part of the reason 2020 wasn't much worse for the House of Mouse. Launched in late 2019 in what turned out to be a feat of perfect timing, Disney's direct-to-consumer service has acquired 100 million paying subscribers around the globe in just 16 months of operation... a feat that Netflix took 10 years to achieve. It's also worth noting that when the service launched, Disney predicted it would have "60 to 90 million subscribers by 2024"... which means it surpassed the aggressive end of its target three years earlier than anticipated. The latest projection is that Disney+ expects to hit 300 million to 350 million in total subscriptions by 2024. Given that Netflix and Amazon Prime both have just over 200 million subscribers, their new targets might prove more challenging to beat.
** On page 47 of Disney's 2020 Annual Report, we're told they were 73.7 million subscribers as of October 3, 2020. On page 48, we're told the average monthly revenue per paid Disney+ subscriber is $4.80. The rest is math: 73,700,000 x $4.80 x 12 = $4.245 billion. And although we know that today Disney+ has over 100 million subscribers, we don't know if acquiring those extra 26 million customers drove down the average monthly revenue (as it would if free-trial offers or significant discounts were employed), so I'm using the figures in the annual report to be conservative. If I wasn't, the figure would be $5.76 billion. (Wowza.)
*** Admittedly, this line is for dramatic effect and serves to drive home a broader point. I'm sure Ms. Young is a very talented executive who's seen, done, and learned a lot during her significant tenure with Disney, and I'm not even 100% certain she's the person ultimately responsible for this decision. But she's the one rationalizing the decision to close Disney's retail stores in the article, and generally, when an executive is quoted in a business article, it's because that executive was closely linked to the decision being reported.
**** As an aside, a great e-commerce experience isn't something Disney Retail currently offers, at least to Canadians. I visited the ShopDisney.com website, put a $12.99 Captain America Sam Wilson Action Figure in my cart, and proceeded to the check-out...
You might notice that with shipping and handling, that $13 action figure would have cost me $37.49. And that amount is in US dollars: ShopDisney.com doesn't have a Canadian site. So that new Captain America figure would actually cost me $46 CDN. Ouch.