Sunday, 29 July 2012

Why bother with multichannel? - answer #1: follow the money

A challenge I am often posed when I work in less developed internet-retail markets (Romania or Ukraine being recent examples) is "why should we bother with multichannel? It is organisationally challenging and expensive, and we are doing fine right now."

The simple answer is, that's where your customers' money is going, and if your country follows the trends in others, going quickly. This is 2011 data published by Ofcom for various European countries.

Much more telling is a look at the trend in retail spending in the UK. (Data sourced from the Office of National Statistics).

One observation is obvious: the growth in eCommerce sales has been spectacular. The second observation is probably more important: eCommerce does NOT represent "new money." Overall retail sales are either down (non-food) or merely on-trend (food). What we can see is a switch in spending, not additional spending.

This is the channel customers are choosing to spend their money. If you're not on it, your competitors will be, and your customers will go there.

eCommerce now represents over 10% of all retail sales in the UK, so it is genuinely meaningful to draw such charts. The interesting question for the next few years is whether it will soon become relevant to draw similar graphs charting the growth of Mobile. Countries with well developed landline broadband such as the UK or US may be less interesting studies than those such as India where over 50% of the population has access to a mobile phone, but less than 3% of households have landlines or broadband.

Sunday, 15 July 2012

Not all channels are equal - at least in the eyes of the finance team

One of the more bizarre obstacles I have encountered when working with clients adding eCommerce as a totally new channel to an existing brick-and-mortar retail operation is the accounting treatment. OK, I'm asking for accountants to use their imagination - not always an easy stretch.

But actually the equivalences between brick-and-mortar and virtual channels are very important for two reasons. One, they are essential to properly understanding the business case. Two, they are even more essential to moving from multiple channel to true multichannel in a later phase of the strategy.

I'll start with the less controversial ones. Of course it's all a matter of opinion, but this is my starter for 10 (well OK, 6):

1. both channels probably have warehouses (strictly DCs - distribution centres - for stores, and FCs - fulfilment centres - for online). Some retailers even manage to combine both operations in one location, despite this being actually quite a tricky blend of operational processes.

2. both channels have a store operations team. In a store, there is a store manager, sales assistants etc. Online, there should be a web-site operations management team, organised in various ways. They perform approximately equivalent roles.

Now the going gets a bit trickier.

3. Brick and mortar has store fit-out. Online has a website. If you are going to compare (and eventually seamlessly blend in true multichannel) they need to be treated similarly from a business case perspective. Quite often this means equating store-fitting opex with IT capex, although as SaaS models such as Demandware increase in popularity maybe this distinction may become less acte.

4. Brick and mortar has stores. Online has delivery/fulfilment costs. In the former case, you operate places on the high street to which you distribute your goods for customers to receive. In the latter, you take them to customers' homes for them to receive. The processes are logically equivalent. Fulfilment costs are typically a high part of the cost of an online channel. Store rental is typically a high part of the cost of a brick-and-mortar channel.

And now for the really controversial part.

5. Standard delivery fee income is NOT sales. It is a contribution to your marketing budget. If you accept that delivery/fulfilment costs are equivalent to store rental costs, then delivery fee income is not a way to reduce the fulfilment budget. Imagine the store equivalent: suppose you could charge each customer a few pounds service-fee to be allowed to use the checkout in your stores. Surely you would not really treat this as "sales", (and count it into gross margins)? In the same way as free delivery is a huge driver of trade on a website, allowing your customers to checkout in stores for free does actually help persuade customers to make a purchase.

OK, you might book it into your general ledger as income. But for business-case purposes, and for targetting the web channel, don't treat it as sales income.

6. Non-standard delivery fees are somewhat different. They fall into 3 kinds. Firstly expensive charges for expensive deliveries such as for pallets or 2-man products. In this case, the fees should genuinely be offset against the delivery cost. Secondly, delivery-related services such as installation. These are sales. You have persuaded the customer to buy an extra (service) product. Thirdly options like express delivery, where you may feel it is appropriate to treat these as a (service) product with an associated cost-of-goods/service and resulting margin.

For most retailers, looking at things through this "equivalence" perspective has a number of major benefits:
  1. it allows a level playing field comparison of channels, and avoids distorting behaviour leading to artificial channel conflicts.
  2. it makes the trade-off between the different capex and opex elements of the business cases for each channel far more transparent
  3. it reduces the sense that margins are being distorted by multichannel
  4. it makes a seamless transition to true multichannel much easier to implement later on, especially for truly cross-channel activities such as click-and-collect
Even if you don't like my particular equivalences, select some that you feel are appropriate to your particular business model.

Sunday, 8 July 2012

Eastern Europe anyone? Ofcom statistics about Poland

With its economy closely coupled with that of Germany, Poland appears to have escaped the worst of the credit crunch. Economic growth in 2011 was over 4%. It should be fertile ground for retailers looking for new markets, especially with its strong links to the UK.

One of the most interesting charts produced by Ofcom recently (2010 data) is an analysis of the enthusiasm of online consumers - how often do you buy online? Poland is a very interesting edge case:

OK, spend per head is not so high, reflecting its relatively low GDP per head, the value of the Zloty, and its economic development stage. But just look at that spend frequency: second in Europe only behind the UK! (and the UK is a weird edge case anyway, nowhere else are consumers as enthusiastic about online retail). There is anecdotal evidence that other very developed E.European markets, especially Czech, show similar behaviour, but unfortunately no data.

And online customers are growing fast, as this data from the 2011 Ofcom report shows:

Already ahead of Italy and Spain (where customers seems to like to browse online but not purchase), catching up rapidly on Ireland, and showing similar growth to France.

So if you are looking to reach out to another customer market, have a serious think about translating your site into Polish... There are some other advantages to Poland too. Delivery infrastructure is well developed, with major players like DHL well established, and payment methods are less "eccentric" than some other apparently easier potential markets (e.g. Netherlands, France, Germany, Belgium or Denmark all with challenging local schemes).

There's just one snag... in some categories everyone else is there too, especially the leading retailers from Germany and France. If you fancy somewhere a bit easier but with similar characteristics, try Czech. There are only 10.2M Czechs compared to 38.5M Poles, but there's a lot less competition as a consequence. Tesco are, however, using it as their pilot country for eCommerce in E.Europe, so move fast before it's taken!

Sunday, 1 July 2012

Is taking a page out of Booker's book an opportunity for Ocado?

Another set of Ocado sales figures, another half year of no-profit growth.

The latest figures continue to underline the basic issue with Ocado's business model. Quite simply, on a cart-by-cart basis they've just about made it break-even. But on that same basis it's extraordinarily difficult to see where the profits are going to come from.

This picture tells the story:

Ocado enjoys pretty good margins for a Food retailer, but these are entirely swallowed by the costs of delivering each order. Margins are being squeezed, and delivery income is being squeezed by increasing competition.

The only way forwards is to increase cart-sizes. But year-on-year, cart-sizes actually fell  by almost £2 between 2010 and 2011 as customers cut back.

One option to increase cart-sizes to to increase the range of products on offer, which Ocado continues to do. The problem with this approach is that eventually you start to extend into categories which are not naturally part of a weekly grocery shop. Health & beauty: maybe. Consumer electronics or fashion: probably not. And as Ocado themselves observe in their analyst presentations, non-food requires a different distribution model. In other words, it doesn't really play to their strengths. Worse still, it sets them into online competition with Amazon, John Lewis, Tesco Direct, Argos, Debenhams, Marks-and-Spencer...

But while Ocado has been slugging it out unprofitably with the supermarkets, another online Food retailer has been quietly growing its online business even faster than Ocado: Booker Cash & Carry.

And while Ocado has a minimum cart-size of £50, Booker has two minimums (depending on whether you are a restaurant or corner-shop customers): £100 and £500. What would Ocado give for some £500 shopping carts? Maybe a bit of that 26% gross margin - cash-and-carry margins are inevitably lower. And e-commerce in the B2smallB sector is a tough nut to crack. These customers expect B2bigB service, B2bigB prices, and B2C charges.

But with all that automated infrastructure, you can't help wondering if there's an easier way to profitable growth than slugging it out with Tesco and Sainsburys.