After years of shrugging off competition from traditional ‘and online retailers, home shopping TV channel QVC is finally seeing cracks in a business model that has relied on impulse purchases by television viewers. QVC's US. sales fell 6 percent during the last part of 2016, the first drop in seven years on its home tur. It was especialy troubling that this decline extended into the crucial yearend holi- day period. The slip raises questions about the resilience of QVC as it faces growing competition from e-commerce along with the drop in eable television subscribers. Launched in 1986, QVC rapidly grew to become the largest television shopping network. Although it entered the market a couple of years after rival Home Shopping Network, the channel soon built a leading position, By 2016, its reach had extended to almost 350 million house- holds all over the world. It regularly features about 1000 products on its sites each week, leading to almost $9 million in sales (see Exhibits | and 2). Beyond the United States, its presence has grown to the U.K., Germany, France, Italy, Japan, and through a 49 percent interest in a joint venture, to China (see Exhibit 3). ‘The success of QVC is driven by its popular television shows that feature a wide variety of eye-catching products, many of which are unique to the channel. It organizes prod- uct searches in cities all over the U.S. in order to continue ously find new offerings from entrepreneurs that can be pitched to customers. During any of these search events, the firm has to screen hundreds of products. In one of its recent searches, QVC had to evaluate the appeal of such products as nail clippers that catch clippings, bicycle seats built for bigger bottoms, and novelty items shaped like coffins QVC battles a perception that directresponse TV retailers just sell hokey, Flimsy, or kitschy goods. Its jew- elry selection features prestigious brands such as Tacori, worn by TV stars. I offers clothing fom couture designers such as Mare Bouwer, who has made clothing for Angelina Jolie and Halle Berry. And it has recently added exclusive products from reality stars stich as Kim Kardashian and Rachel Zoe, who have introduced thousands to QVC, often through social media like Facebook and Twitter. “Rachel Zoe brings so many new customers it's staggering,” said CEO Michael George. + Case prepared by Jamal Share, Michigan Sate University withthe assietane of Professor Alan B, Esher, Pace University. Material hasbeen ‘awn fom published sources tobe used for purposes if cls discussion, Copyright © 2017 Jamat Shamsie and Alan B, Eisner QVC has expanded its shopping experience to the Internet, attracting more than 7 million unique monthly visitors by early 2015. It attracts customers from its televi- sion channel to its website, making it one of the leading multimedia retailers. Building on this, the firm has been creating a family of mobile shopping applications for smart- phones and tablets, Although QVC is still developing this segment, mobile applications already account for almost a third ofits sales. Pursuing a Leading Position QVC was founded by Joseph Segel in June 1986 and began broadcasting in November that year. Earlier in 1986, Segel had tuned in to the Home Shopping Network, which had been launched two years earlier. He had not been impressed with the crude programming and the downmarket prod- ucts that he saw. But hte was convinced that an enhanced EXHIBIT 1 ANNUAL SALES (In Billions of dollars) 2016 $8.7 2015 ar 2014 88 2012 86 2012 85 2011 83 2010 18 2009 74 2008 73 2007 74 2006 7 2004 57 2001 38 1998 24 1995 16 1992 09 1989 02 Source: QVC. Liberty Meda CASES: QVC C19EXHIBIT 2 Consolidated Statement of Operations ($ miions) {) Sec eT ea oe Net revenue $8,682 8.743 8801 Cost of goods sold 5.540 5,528 5547 Gross profit 32 3215 3,254 Operating expenses: Operating 606 607 618 Seling, general and administrative, including tock-based compensation 78 15 70 Depreciation 142 134 135 ‘Amortization 463 454 452 1,939 1,940 1975 Operating income 1,208 1.275 4.279 Other (expense) income: Equity in losses of investee © @ 8) Gains on financial instruments 2 et = Interest expense, net (210) (208) (239) Foreign currency gain 38 “4 3 Loss on extinguishment of debt - 21) (48) (176) (224) (292) Income before income taxes 4027 1,051 987 ‘Income tax expense (385) (389) (354) Netincome 642 662 633 Less net income attributable to the noncontrolling interest 68) 34) 69) Net income attributable to QVC, inc. stockholder $ 604 628 504 Source: QVC, Ine, EXHIBIT 3. Geographic Breakdown of Revenue ($ millions) 9 Sere a ean {in milfions) Eo United States $6,120 6.257 6.055 Jopan 897 808 908 Germany 865 837 970 United Kingdom 654 m8 730 Other countries 148 123 138 Consolidated QVC $8,682 8743 8,801 ‘Source: Liberty Media, OVC.‘TV shopping network would have the potential to attract, a large client base and produce significant profits. He envi sioned superior resources he could bring to his network, while the operating expenses for a shopping network could still be kept relatively low. Over the next few months, Segel raised $30 million in startup capital, hired several seasoned television execu- tives, and launched QVC. Operating out of headquarters in West Chester, Pennsylvania, QVC offered 24-hour, seven- day television home shopping to viewers. By the end of its first year of operation, QVC reached 13 million homes by satellite and cable systems; 700,000 viewers had become customers, resulting in shipping 3 million orders, Sales had already topped $100 million and the firm was able to show small profit Segel attributed the instant success of his company to the potential offered by television shopping, “Television's com- bination of sight, sound and motion is the best way to sell € product. It is more effective than presenting a product in print or just putting the product on a store shelf,” he stated. “The costefficiency comes from the cable distribution system. It is far more economical than direct mail, print advertising, or traditional retail store distribution,”? In fall 1988, Segel acquired the manufacturing faci ties, proprietary technology, and trademark rights of the Diamonique Corporation, which produced a wide range of simulated gemstones and jewelry that could be sold on QVC shows. Over the next couple of years, Segel expanded QVC by acquiring competitors such as the Cable Value Network Shopping channel (see Exhibit 4). By 1993, QVC had overtaken Home Shopping Network to become the leading TV shopping channel in sales and profits. Its reach extended to over 80 percent of all cable homes and to 3 million satellite dishes. Segel retired the same year, passing control of the company to Barry Diller. ice then, QVC's sales have continued to grow substan- tially, widening the gap between it and Home Shopping Network, its closest competitor. Striving for Retailing Excellence QVC has established itself as the world’s preeminent virtual shopping mall that never closes. Its customers around the world can, and do, shop at any hour at the rate of more than five customers per second. It sells a wide variety of products, using a combination of description and demon- stration by live program hosts. QVC is extremely selective in choosing its hosts, screening as many as 3,000 applicants, annually in order to pick three. New hosts are trained for at least six months before they are allowed on air. Regularly scheduled shows are each focused on a particular type of product and @ wellefined market. Shows typically lasts for one hour and are based on a theme such as Now You're Cooking or Cleaning Solutions. QVC frequently entices celebrities such as clothing, designers or book authors to appear live on special program segments to sell their own products. In order to prepare them to succeed, celebrities ae given training on how to best pitch their offerings. On some occasions, customers are able to call in and have onair conversations with program hosts and visiting celebrities. Celebrities are schooled in QVC’s “packyard-fence” style, which means conversing with viewers the way they would chat with a friendly neighbor. “They're Just so downhome, so it’s like they're right in your living room demonstrating,” said a long time QVC customer.? In spite of the folksy presentation, the sales are minutely, managed. Behind the scenes, a producer scans nine televi- sion and computer screens to track sales of featured items. “We track new orders per minute in increments of six sec onds; we can look backward in time and see what it was that drove that spike,” said Doug Rose, who oversees pro- gramming and marketing.* Hosts and guests are prompted to make adjustments in their pitch that might increase sales. A beauty designer was asked to rub an eyeliner onto her hand, which immediately led to a surge of new orders, QVC transmits its programming live from its central production facilities in Pennsylvania through uplinks to a satellite. The representatives who staff QVC's four call centers, which handle 180 million or more calls a year, are well trained to take orders. More than 90 percent of orders are shipped within 48 hours from one of QVC's dis tribution centers. The distribution centers have a combined floor space equivalent to the size of over 100 football fields. ‘An effort is made to see that every item works as it should before it is shipped and that its packaging will protect it during the shipping process. “Nothing ships unless it is uality-inspected first” said one of the logistics managers for QVC. “Since our product is going businessto-consumer, there’s no way to fix or change a product-related problem.”* All new products must pass through stringent tests that are carried out by QVC’s in-house Quality Assurance Lab Only 15 percent of the products pass the firm’s rigorous quality inspection on first try and as many as a third are never offered to the public because they fail altogether. Searching for Profitable Products More than 100 experienced, informed buyers comb the world on a regular basis to search for new products to Taunch on QVC. The shopping channel concentrates on unique products that can be demonstrated on live televi- sion. Jeffrey Rayport, author of a book on customer ser- vice, states, “QVC staff look for a product that is complex enough-or interesting enough—that the host can talk about it on air.”* Furthermore, the price of these products must be high enough for viewers to justify the additional ship ping and handling charge, Over the course of a typical year, QVC carries more than 60,000 products. As many as 1,000 items are typically offered in any given week, of which about 20 percent are new products for the network. QVC’s sup pliers range from some of the world’s biggest companies to ‘small entrepreneurial enterprises. About a third of QVC’s sales come from broadly avail able national brands. The firm has been able to build trust CASES: QVC C24EXHIBIT 4 QVC MILESTONES 1986 Launched by Joseph Segel, broadcasting {rom studios in West Chester, PA 1987 Expands programming to 24 hours a day 1988 Acquires Diamonique, manufacturer of simulated gemstone jewelry 1993 Segel retires and Barry Diller is named Chairman & CEO Launches channel in U.K. 1995 ‘Acquired by Comcast and Doug Briggs takes over as President & CEO 1996 Launches Internet site 2001 ‘Launches channel in Japan 2003 Sold off to Liberty Media 2005 Michael George is named President 2006 George takes over as CEO with retirement of Biggs 2007 ‘Ships its billionth package in the US. 2008 Launches QVCHD, a high definition simulcast in the US, 2009 Rolls out several mobile services 2010 Launches channel in aly 2012 Acquires e-commerce shopping site Send the Trend Launches joint venture in China 2013 Launches QVC PLUS as a second channel i the US. 2015 Launches channel in France 2016 Launches operations unt in Krakow, Poland, to streamline European business operation. Source: OVE, ‘among its customers in large part through offering these well-known brands. QVC relies on promotional campaigns with a variety of existing firms for another third of its sales, It has made deals with Dell, Target, and Bath & Body Works for special limited-time promotional offerings. But QVC has been most successful with products sold exclu- sively on QVC or not readily available through other dis- tribution channels. Although such products account for only about a third of its sales, the firm has been able to earn higher margins with these proprietary products, many of which come from firms that are either startups or new entrants into the U.S. market. Most vendors are attracted to QVC because they reap higher profits selling through the channel than they would by selling through physical stores. Stores typically require vendors to help to train or pay the sales force and to par- ticipate in periodic sales where prices are discounted, QVC rarely sells products at discount prices. Maureen Kelly, founder of Tarte Cosmetics, said she typically makes more from an eight-minute segment on QVC than she used to make in a month at a highend department store. QVC has been moving away from some product catego- ries, such as home appliances and electronic gadgets, which 22 CASES : OVC offer lower margins. It has been gradually expanding into new product categories that have higher margins, such as cosmetics, apparel, food, and toys. Several of these new cat- egories have displayed the strongest rates of growth in sales for the shopping channel over the past couple of years. Expanding the Customer Base QVC reaches almost all the cable television and broadcast satellite homes in the U.S. But only about 10 percent of these households have actually bought anything from the network. Still, QVC has developed a remarkably large cus- tomer base, many of whom make as many as 10 purchases (around 24 items) in a year. QVC devotees readily call in to the live segments to offer product testimonials, are up to date on the personal lives of their favorite program hosts, and generally view the channel as entertaining. “As weird as it may sound, for people who love the network, it's good company,” says Rayport.” QVC promises to deliver Quality, Value, and Convenience to its viewers. QVC hopes to attract new cus- tomers on the basis of the strong reputation that surveys indicate it has established among its current buyers. More than three-quarters of the shopping channel's customershave given it a score of 7 out of 7 for trustworthiness. Once viewers start buying from QVC, they tend to be loyal to the firm. This has led most of its customers to recommend it to their friends. QVC has benefited from the growing percentage of women entering the workforce, resulting in a significant increase in dualincome families. Although the firm's cur rent customer base spans several socioeconomic groups, it is led by young professional families who have above aver- age disposable income, and enjoy various forms of “thrill seeking” activities, including ranking shopping relatively high as a leisure activity when compared to the typical consumer. The firm is exploring an interactive service which ‘would allow viewers to purchase offerings with the single click of a remote. QVC also provides a credit program to allow customers to pay for goods over a period of several months. Everything it sells is backed by a 30-day uncondi- tional money-back guarantee. Furthermore, QVC does not impose any hidden charges, such as a "restocking fee,” for any returned merchandise. These policies help the home shopping channel to attract customers for products that they can view but are not able to either touch or feel. In 2012, QVC built on its existing customer base by acquiring Send the Trend, Inc., an ecommerce destina- tion known for trendy fashion and beauty products. It uses proprietary technology to deliver monthly personalized recommendations that can easily be shared by customers over their social networks for an assortment of prestigious brands in jewelry, beauty and fashion accessories. “The teams at QVC and Send the Trend share a passion for bringing the customer what she wants, in the way she wants it” said Claire Watts, the U.S.-based CEO of QVC! Positioning for Future Growth In spite of its success on television, QVC has not ignored opporturities that are emerging in online shopping. Since 1996, the firm has offered a website to complement its television channel which has provided it with another form of access to customers. Initially, the site offered more detailed information about QVC offerings. Since then, it has branched out to develop its own customer base by fea- turing many products that have not been recently shown on its television channel. Over the last few years, QVC has been fine-tuning its website by offering mobile phone, interactive-elevision, and iPad apps. By 2012, QVC.com, a once-negligible part of the QVC empire, accounted for about a third of the firm’s domestic revenue. CEO Michael George recently stated that 60 per cent of QVC’s new customers in the United States buy on the Internet or on mobile devices. “The online busi ness is becoming such a crucial part of the business for QVC." remarked Douglas Anmuth, an analyst at Barclay’s Capital.® Furthermore, QVC.com is now more profitable than QVC’s television operation. It needs fewer callventer workers, and while QVC mus: share profits with cable com- panies on TV orders, it does not have to pay them on online orders for products which have not been featured on the air for 24 hours. The falloff in cable television subseribers may affect QVC. QVC is not immune from shifts in technology usage and people's entertainment choices and information gath- ering habits. But for many of QVC’s loyal consumers, nothing will ever replace shopping via television. Michael George insists that QVC shoppers are less likely to drop cable services because they tend to be slightly older and ‘more affluent. These customers tune in at different times of the day or night and are érawn to the offerings. “We're going to try and find 120 to 140 items every day where we think we can tell compelting stories and inspire you to con- sider it,” he says."” The website does not offer the hybrid of talk show and sales pitch that attracts audiences to the QVC shopping television channel. Online shoppers also miss out on the interaction between hosts an¢ shoppers and the continuous urgent feedback about the time that they may have to place an order before an item is sold out. "You know, on Sundays I might find a program on Lifetime Movie Network, but whatever I'm watching, if it's not QVC, when the commer- cial comes on I'l flip it back to QVC,” said one loyal QVC fan, “I'm just stuck on them.""" ENDNOTES Stephanie Ciflord, Can QVC translate its pitch online? New York Ties, November 21, 2010, p. B7 QVC Annual Report, 1987-1988 Neve York Times, November 21,2010, p87 ia Eugene Gilligan, The show must go on, Joumat of Commerce, April 12, 2004, p. USA Today, May 5, 2008, p. 2. wid Send the Trend relaunches with QVC to ring shoppers a more personalized ecommerce experience. PR Newsvire, October 2, 2012. ‘New York ines, November 21, 2010, p. BT. 10. Paut Ziobro. QVC's strength ebbs as web retail booms, Hal Stee, Journal, January 12, 2017, . B. ewe Yo: Tins, November 21, 2010, p. BT, CASES: QVC C23,