Monday, 24 September 2012

Click & Collect - Calling Time On Store Space?

Philip Clarke, Tesco's CEO, made a speech last week stating that: "...we’ve called time on the old retail 'space race'. We’ve recently opened our 1,000th click and collect collection point..." Is click-and-collect really quite so game-changing?

Well actually, maybe... But it's multichannel game-changing, not necessarily traditional retail-space game-changing by itself.

Not all top UK retailers publish the data, but from those that do, we can see that customers really like this clicks-then-bricks option:

** of eligible General Merchandise sales (i.e. excluding food and impossible items like washing machines and sofas)
* John Lewis state that 34% of John Lewis sales are collected in Waitrose Stores! So actually their figure is probably higher in total. Click-and-collect was offered at 97 Waitrose's and 35 John Lewis's

The latest published data from IMRG indicates that over 10% of all online transactions are now collected in store (up from 7.4% in the previous quarter): more and more major retailers are introducing it, and the take-up is often dramatic.

Some published commentaries are also quite illuminating. First of all this quote from Halfords annual report:

"Our product mix lends itself to a multi-channel offer as customers often want further advice, a demonstration or fitting. Online purchasing patterns reflect this, with 86% of sales on reserved and then collected from a store"

In other words, these customers are basically using the Halfords website as a place to guarantee that the item they want is definitely in stock in a nearby store when the customer makes their visit. Once at the store, the store has little value as a showroom or place to transact, but very high value as a place to get added services impossible to execute online. Interestingly this tends to help validate the KnowHow based strategy for PCWorld and Currys - but it does require your products to be difficult for customers to just point-and-shoot in the first place. These Halfords customers aren't using the store-advice to choose their item, they are using it afterwards to configure it. This is a great differentiator against the online pureplays for bikes, and probably therefore also for laptops, but less good news for e.g. TVs.

Secondly, a note from Sainsburys:

"Customers use Click & Collect for about half of all online general merchandise orders – a figure which rose to 75% for the week before Christmas 2011."

Or in other words, if you could only trust the postal service, then click-and-collect might be less attractive. An alternative explanation is also possible: click-and-collect is almost always offered for free. Customers hate paying delivery charges, and faced with the option of a free collection service compared to a paid delivery, have a natural bias towards the perceived free service, even when there is a hidden travel/time cost. Of major UK retailers, only TopShop seems to be attempting to charge the same for click-and-collect as it does for home delivery. Unfortunately they don't publish statistics indicating how the take-up varies with these fees.

Another quote from John Lewis tends to suggest this TopShop approach is seriously misguided anyway. This, to me, is the most significant data point in the whole click-and-collect space:

“We are seeing about 34% of those visits translating into additional sales in shop and that number is growing exponentially at the moment. It’s typically or increasingly for purchases that the customer didn’t think they would make. So it is quite outwith whatever they were going to collect.”

Customers want to click-and-collect, and then when they do, they find themselves buying extras in the store as well. Sounds like the ultimate retailer win-win.

It's noticeable that fashion retailers are lagging behind this curve. M&S, New Look and TopShop do, but surprisingly few others. Possibly this reflects the in-store space challenges, but Tesco's 1000 Click-and-Collect points now include quite a few Express and Metro stores, especially in central London. If Tesco can fit a collection point in an Express store for awkward boxed items like PCs, then surely it can't be so hard to fit a few parcels in e.g. a River Island store. In fashion, with its high returns rates for home-delivered orders, bringing the customer to store to a) spend more; b) try on, and return or exchange in the store environment must surely make sense?

Perhaps the most interesting experiment in this area in the UK right now is House of Fraser's Buy & Collect only store in Aberdeen.

"...its new 1,500 sq ft House of shop is the first to offer purely a Buy & Collect service... The new format, merchandise-free, store has opened in Aberdeen’s Union Square. Instead of stocking goods that shoppers can take away with them, the emphasis [...] is on personal customer service. Goods ordered from the more than 1,000 brands it stocks can then be delivered the next day to either the customer’s home or to the store for collection."

Another similar shop (in Liverpool) is on the way, suggesting that the first pilot must be going pretty well. Other retailers, watch this space!

Wednesday, 19 September 2012

Ocado interim statement: not much to get excited about

The Ocado 12 week statement is out this morning.

And there isn't very much to get excited about. I argued in a previous post that the fundamental problem with Ocado's business model is that it is designed to break even, not make a profit. As the business scales up, the break-even scales up with it: the profit margin on each delivery is almost exactly equal to the cost of making it. Sales continue to grow steadily (9.9% year-on-year), but there are no obvious pointers to profit growing with them.

There are some small hints for those who want to take an optimistic view. "We have been able to preserve our margins during the quarter" is essential news for a business model so finely balanced between profit and loss. "The Hatfield Customer Fulfilment Centre continues to operate with improved efficiency... enabled us to remove all remaining... trolley picking" means that costs-per-order should reduce slightly.

More interesting is a rise in the average basket size from £111.08 to £112.44 (1.2% year-on-year). On the one hand, this is at least reversing the downward trend. On the other hand, this compares with Food CPI rise of 4.5% (in the latest available figures from the ONS i.e. March 2012). The implication is that the number of items-per-basket might actually have dropped. The quarterly interim statements don't quote this number, so we'll have to wait for the end-of-year results. If the items-per-basket figures really has dropped (again!) , this is very bad news.

For this business to ever become profitable, items-per-basket must rise. On a rough calculation, for profit to rise to a reasonable 9% of sales, average items-per-basket needs to rise by about 25 items. This is a huge hurdle, and the signs continue to point the wrong way. A drop in average items-per-basket also tends to suggest that the strategy of moving into non-food is not exactly flying. While this is not exactly a surprise, given how competitive online non-food is in the UK, it's a pillar of Ocado's published strategy and it doesn't look like it's working yet. Another key item of data to look for in the year-end figures.

So all-in-all: no news is bad news.

Sunday, 2 September 2012

The Multichannel Halo Effect: Faith or Fact?

In my last post, I reviewed some of the (many!) published data points supporting the argument that there is a Halo Effect from multichannel, or in plainer English, that multichannel customers spend more. There are claims from perfectly respectable sources that this can be as much as 300% more than single-channel customers.

As any statistician will tell you, however, the problem is that correlation does not imply causality. Is it not just as likely that your best customers prefer to use all your channels anyway? They were your best customers when you only had stores, they are still your best customers now you have lots of ways to shop.

This research study, which unfortunately doesn't say who the retailers in question were although there are a few big hints, contains a perfect illustration:


Yes OK, multi-channel customers do spend more. The trouble is they really are simply your highest spending customers anyway, and are probably spending more everywhere they shop. This tends to be borne out by the subtext of all those other data points suggesting multichannel customers spend more. If you read more closely, you will also find those same studies mention that they tend to be on average more affluent i.e. they have more to spend in the first place (notably on things like laptops, smart-phones, iPads, high-speed broadband etc which encourage them to use all those channels): the argument gets circular. These customers expect you to have all the channels available to them - and they'll start to go elsewhere if you haven't.

We need to go back to some basics. In another previous post I used data from the UK Office of National Statistics to illustrate a very important point: eCommerce (etc) has NOT created any new money in customers' wallets. These wonderful multichannel customers do not magically have more cash to spend.

Removing food from the picture (online grocery tends to distort UK data for comparitive purposes with most of the rest of the world) and looking at just non-food, this point becomes even more apparent. Take a look at the overall "growth" of non-food offline-only non-Food sales over the last 10 years:

Non-store sales have essentially remained static over that time. Any growth has come from Online. If you factor in some measure of inflation (I've used RPI because the data is easily accessible), then the picture is that non-store sales have seriously declined:

Basically, allowing for complicated effects like cheaper prices of manufactured goods from China, the big picture is of an approximately zero sum game (no magic extra money in customer's pockets), with Online taking an ever increasing share. And factoring in the "multichannel customers spend more" data, the share that Online takes is a disproportionate share of your best, and probably most profitable, customers.

I often get asked "won't setting up a new channel cannibalise our store sales?". The answer is yes of course it will. But if you don't do it, someone else will - and what's more they'll cannibalise your best customers.

It's not really a halo effect - more a set of horns and a long pointy tail effect.

Why bother with multichannel? - answer #3: multichannel customers spend more

As I mentioned in the last posts, a challenge I am often posed when I work in less developed internet-retail markets (Poland or Belarus being recent examples) is "why should we bother with multichannel? It is organisationally challenging and expensive, and we are doing fine right now."
So here's yet another answer: multichannel customers spend more. This is actually a very well documented statistic with a long history (the earliest data point I found while writing this was from 2004, but I'm sure someone will point out an earlier one).

How much more? This is rather more difficult to quantify. Laura Wade-Gery, Multi-channel director at Marks and Spencer, can be seen in today's Sunday Times (business section 2nd Sep '12) claiming multichannel customers are worth 4x store-only customers. Anecdotal figures I've heard talking to colleagues and clients are usually in the +50% to +100% range. John Lewis, generally considered one of the most sophisticated multichannel players around, seems to side with M&S appear to be quoting a multiplier of 3.5x, in this study with IDC:

"These multichannel and omnichannel shoppers: spend 3.5 times more; purchase across more categories; shop more frequently; are more loyal and have a higher retention rate"

What more could you want?

And it isn't an effect confined to upmarket UK retailers like John Lewis or M&S. A 2010 study for the US National Retail Federation found that: "39% of retailers describe cross-channel customers are significantly more profitable than single channel customers. In 2007, this figure was 18%." Of course this might be that US retailers have become better at measuring it, rather than any trend change, but nevertheless the effect is still reported consistently.

OK, these customers are more profitable, but by how much? IDC research from late 2009 apparently provides the answer: "findings show that, while multi-channel shoppers spend, on average, 15% to 30% more with a retailer than someone who uses only one channel, omni-channel shoppers will spend 15% to 30% more than multi-channel customers." Ah yes, it's those omni-channel customers again.

Accenture always likes to get in on the act, so here's the data from their more recent (Jan 2012, and European not US) equivalent study: "more than three quarters (76%) of the retailers surveyed report the multichannel customers spend more than their single-channel customer counterparts, and one third (32%) said that multichannel customers spend at least 26% more than single-channel customers."

Deloitte seems to think this is all a bit too conservative: "Multi-channel customers spend 82% more per transaction... The average expenditure for multi-channel customers across the clothing, home and electrical categories is £116 per transaction compared with £64 for store-only customers".

Everyone likes a graph, so Deloitte helpfully provide one in this report. Unfortunately it's not apparently supported by any referenced data/survey, so it's completely unclear if these figures are just plucked out of thin air. The impression from the rest of the study is that they may just be "illustrative" to use a polite word. But it's a nice graph so I'll show you it here:

Lots of nice growing bars!

Incidentally there is the ominous (if dubious) deduction possible from the Electrical bars that stores are a complete waste of time... See my previous post on this topic.

There's a nice piece of jargon for all this: the 'multichannel halo effect', which I think has made the leap from brand-marketing to retail. I rather like the pseudo-religious connotations of this term: it would certainly make convincing my clients easier if the question "why bother with multi-channel?" could be answered "because God says so"!