Friday, 23 May 2014

Wholesale in an Online World

I've written a Whitepaper for IMRG , sponsored by Maginus , entitled "Winning in Wholesale in an Online World".

You can find it here

It takes a look at what Wholesalers in particular, and B2B players in general, need to do to succeed online. For those familiar with B2C eCommerce, the B2B eCommerce world can be a surprising place!

On the other hand for those B2B players still stuck in the "pre-eCommerce dark-ages", it seeks to dispel myths such as "our customers aren't ready", and help the management team depicted in the cartoon below decide what to do next!

We need to rethink our strategy of hoping the internet will just go away

As always in anything to do with the online world, starting by picturing their customers is probably the best idea:

B2B clients at work are B2C customers at home

Monday, 21 April 2014

Tesco says Halo

In a previous post I took a look a whether the so-called "multi-channel halo effect" is real or not. The proposition of the halo effect is rather simple:

Argument A: Angels with Halos
1. your multi-channel customers can be proven to spend more - in total across all channels - than single channel customers
2. therefore being multi-channel increases overall sales, because your customers will spend more

The trouble with this logic is that it assumes that correlation implies causality. The whole argument can be turned around:

Argument B: Cannibals
1. your best customers spend more with you
2. these same best customers are more likely to want to reach you via multiple channels
3. if you don't offer these additional channels, they'll go somewhere else

In this logic, it's still a good idea to be multi-channel, but it isn't really increasing sales, just preventing falling sales. Or put more succinctly, cannibalising yourself is preferable to being cannibalised by someone else.

In fact in some countries and/or verticals - probably most - the argument can be taken one step further:

Argument C: Cannibals with Halos
1. richer customers spend more
2. richer customers are more likely to have access to the internet, and/or to own multiple devices for accessing the internet - smart-phone, tablet, laptop, home PC, office PC etc
3. therefore customers who spend more are more likely to be multi-channel customers
4. if you don't offer these additional channels, they'll go somewhere else

Now, buried in Tesco's February strategy presentation to analysts ("Winning in the New Era of Retail" - I'd post the link to the PDF if I could find it again on the website. Fortunately I downloaded it at the time), they present the following interesting data:

The black figures are mine, and are obtained by the not terribly scientific approach of counting the height in pixels of the bars, so you should be wary of treating them as exact data measurements: the point is in the general trend, not the precision. (Tesco says it measured 2M clubcard customers, so the sample size is pretty impressive!).

So which Argument does this actually support? There's a confusing bubble attached to the right-most column on the original slide that says: "similar growth across all affluences", but the way this is presented implies not that richer and poorer customers behave the same way when it comes to the halo effect, but that Tesco is seeing growth in the number of multichannel customers across the spectrum of affluence i.e. that a higher percentage of its customers now sit in that right-hand bar in every demographic. Nevertheless it could just about be possible to stretch this to imply that 'Argument C: Cannibals with Halos' is not supported by Tesco's data.

Digressing for a moment, the problem for Tesco is that their figures say that only 4% of its customers do actually sit in the right-hand bar, and that this has grown by 17% YoY: so following the logic through, 17% of 4% of customers have increased spending from an index of 2.04 to 2.98 (=46%). When you do the maths, that represents around a 0.3% increase in overall sales - not bad if you are as big as Tesco, but not exactly an overwhelming endorsement of the Halo Effect.

It's much more difficult to dismiss 'Argument B: Cannibals' or sustain 'Argument A: Angels with Halos' on the basis of this data. Online Grocery by definition is skewed towards more affluent customers. There's a delivery charge, which OK if you are careful and accept your delivery at inconvenient times, you can minimise. (Currently click-and-collect is on promo so is free, but the standard charge is £2). And you need a front-door so if you live on the top floor of a tower-block it's less likely you'll be using the delivery service. Moreover grocery shopping, of course, is unlike other shopping. Many online grocery shoppers will order their bulky/heavy regular staples online, and then go buy fresh or top-up in a store.

What the data probably most effectively shows is the value of Clubcard, in two ways. Firstly someone who shops online at Tesco is more likely to choose Tesco for their offline shopping too, and vice versa. You can't help feeling all those loyalty points have something to do with that. Secondly and far more importantly, Clubcard lets them measure and present this kind of data to analyse, tracking their customers effectively across all their channels, something that is otherwise notoriously difficult to do.

Unfortunately the graphs also show one more thing: a very small bar in the top RH corner for their non-food online...

Saturday, 12 April 2014

C.O.D. - Care of the Devil?

Speaking about International eCommerce

International eCommerce seems to be a hot topic right now. Retailers, and most especially Brands, who have invested in their online capabilities for their domestic market, see an opportunity to leverage this investment by extending their offer to the whole world. I presented recently on this subject at at RBTE Expo 2014 at Earls Court (as well as being on the panels at eCommerce Futures in both London and New York) and I plan to use it as the basis of another short series of posts.

It's always rather challenging trying to select material from such a broad subject in order to fit into a short presentation. At RBTE I was given a longer-than-usual 30 minute slot (typically the best/longest slots inevitably go to the sponsors of course!) which gave me a chance to cover a wider range of areas than usual. What's always particularly interesting about speaking at these events is to see which topics or slides get the strongest reaction from the audience.

And then last week I had the opportunity to work onsite with a client in Kiev Ukraine, a consumer electronics retailer interested in learning the lessons from Amazon vs BestBuy / Amazon vs Currys history to make sure that they don't go the way of Comet. Online retail in the Ukraine is probably around 8-10 years behind the UK or US, which creates lots of opportunities for them to study the mistakes western retailers made in failing to adapt fast enough and avoid repeating them. (And yes, although Amazon are not in Ukraine, local online pure-plays are trying to learn lessons from Amazon themselves and make sure the local brick-and-mortar players make the same mistakes as Comet did...)

Cash on Delivery

What's been particularly fascinating about having these experiences close together was that the same slide got the strongest reaction at both events - this one, about the percentage of eCommerce transactions that are completed in cash. 

Percentage of eCommerce transactions completed in cash

My Ukrainian clients found it difficult to believe that so many UK consumers would be prepared to pay for goods in such large numbers before physically seeing them, even from reputable retailers. By contrast: yes, UK and US readers, that means actual folding money handed over on the doorstep.

For western retailers thinking about trying to sell into say Russia, Romania or Ukraine, this presents some interesting issues. On the one hand there actually some advantages to transacting in cash. For one thing, the checkout - normally the most complex part of a website - is rather simple. You just get some basic contact details from the customer, telephone them to sort out delivery (oh yes, this is also standard practice by the way, so start employing some more local language speakers than you planned just for after-sales calls) and that's it. No messing around with multi-step checkouts and all those complicated "what happens if they press the back-button" type questions.

On the other hand - quite apart from the challenge of handling cash anyway - your entire after-sale standard operating procedures, and probably your finance policies, are going to need a rewrite. The problem, simply stated, is that the sale takes place spread over time. If you take credit card payments, then the payment, stock movement, general ledger posting and GAAP compliant booking of the sale are more or less simultaneous. And if there's a problem with the order during shipping, your call-centre knows it needs to cancel/refund the payment: 
Pay on order

By comparison, paying on delivery smears this transaction across time. And now if there's a problem during shipping, then no refund is needed. But of course, if your customer decides not to be at home, or doesn't like the goods on the doorstep, then you just took all that shipping cost and received no money for it.

Pay on delivery

German retailers, of course, have dealt with this complexity from the get-go. Here's a screenshot taken from, a German price comparison site:

"Nachnahme" - cash on delivery - with its inherently higher risk of non-completion of the order, is going to cost you a a good bit more than paying upfront. Notice that they really don't want you to pay by expensive (for the retailer) methods like credit card either. Cash up-front or bank-transfer up-front please!


I'm writing this on 12th April 2014, and of course the situation might change. But I'd like to just take the opportunity to quote from an email invitation (I'm sure the author won't mind) I've just received to do another piece of consulting for a different client in Kiev:

"P.S. Perhaps a helpful note, given the increased media attention to Ukraine these days: Kiev, the capital, is peaceful and safe, despite popular protests in the east of the country."

Since I was there myself at the time I received this particular email, I could see for myself whether this was true. And it was. A little bizarrely the centre of the protests in Independence Square has become a tourist attraction with former protesters selling souvenirs such as spent bullets:

Independence Square

Independence Square Kiev

And Kiev really is a beautiful city, especially as the exchange rate has just improved by 50% due to all the uncertainty:

Friday, 4 April 2014

Grocery click and collect article

Well I was about to publish an article for this blog about click and collect grocery when someone rang up and offered to pay me to do exactly the same thing as I was already doing for their magazine...

So of course I sold out :-)

Here's the outline link, although you'll find you have to subscribe to their magazine to see the actual article. I guess at a safe distance in time they'll open up the link.

Monday, 17 February 2014

Amazon 10K 2013 - a profitable services company with a loss-making retailer attached? Amazon through the looking glass.

Another year, another Amazon 10k, another conjuring trick

So Amazon have published their annual report (10K) for 2013. I've looked in previous posts at some of the numbers and trends, especially their ongoing treatment of "free shipping" type offers as a marketing expense.

As usual, they confuse the data by presenting shipping as a percentage of total revenue instead of only applicable revenue (i.e. by including services such as AWS, instead of excluding them and looking only at product sales fulfilled by Amazon). Once you strip out the obfuscation, then shipping income has risen in 2011-2013 from 3.7% of sales to 5.5% of sales: a pretty hefty 37% hike over 2 years. Shipping costs, meanwhile have risen from 9.5% of sales to 10.9% of sales (a huge number). Net shipping costs, after a dip last year, have stayed constant 2011-2013 at 5.8% of sales.

Just to put these numbers into context, the cost of subsidising shipping has come down from 49% larger than the marketing budget to a mere 12% larger than the marketing budget.

Where it all gets a bit more interesting is when you start to strip out the effects of shipping and consider Amazon as a retailer of products only i.e. exclude their services. According to their 10K, "product sales represent revenue from sales of products and related shipping fees". So presumably, deduct the shipping fees and you find out what their true product-only sales are.

Similarly, cost of sales apparently includes shipping fees, so we should strip these out to get to actual "product" figures only. If we do this, we end up with gross profits of $10.26Bn on sales of $57.81Bn, or a gross margin of 17.7%.

Look no margins!

The first thing to note is that this is significantly less than the 27.2% mentioned in the 10K, although to be fair they do point out that gross margin is not a particularly sensible way to measure their overall business. No it isn't, but it is a fair way to measure their business purely as a retailer.

The second thing to note, is that these figures are gross margins: they exclude variable (i.e. non-fixed) operating costs. Being very kind and treating marketing, I.T., content and admin costs all as fixed costs, then we are left with the costs of fulfilment as a variable operating cost.

What happens then when we try to calculate an operating margin excluding services and (temporarily) excluding shipping fees and income: operating margins on product sales suddenly look quite sick: 6.4% in 2011, 4.4% in 2012, and a mere 2.9% in 2013. Wafer thin in other words. Once you figure in net shipping costs (fees minus costs) of 6.1% it all starts to look a bit sick.

It's all rather "Amazon-through-the-looking-glass". Suddenly we see a loss-making (and barely break-even prior to 2013) retailer effectively acting as the traffic-driving operation for a very profitable marketplace and services business.

One day, when they finally get big... NOT

And before the standard cry of "wait until they reach their full scale" goes up, then I should point out that this excludes anything that might be considered a cost that reduces with scale. It's all directly variable costs - shipping, fulfilment, cost-of-goods on which scale has no effect at all.

What then is the biggest threat to Amazon? No it isn't BestBuy getting their act together, it's eBay (and its equivalents in other markets such as Allegro, Rakuten and TaoBao) getting theirs together instead. If you really want to scare the life out of Amazon, open a marketplace with half their fees. Because their retail operation isn't the part that makes the profits, it's just their visitor source.

No wonder the BestBuy's of this world have a few problems. They're up against a retailer that  isn't particularly interested in making a profit from their retail operations!

Tuesday, 28 January 2014

Summertime at Tesco? Next time I'll leave my bikini at home...

These pictures seem to sum up what's gone wrong for Tesco somehow...

I'm doing an assignment near Wellingborough Tesco Extra, and decided to grab breakfast on the way by. And here is their welcoming carpark.

Having ignored the sign, found somewhere to park, and then hurried across the carpark in a bitter cold wind, here is what it says at the entrance:

Damn it, next time I'll leave my bikini top at home then.

OK, I know this strictly has nothing to do with multichannel. What I actually intended to do was photograph the grocery collection area (which does have quite a lot to do with multichannel and I was going to use in a blog post), but somehow I got distracted. Maybe it's all a cunning plan to increase sales - I will now have to make another visit to that store to take the photo I had originally planned.