Lessons from the carnage? After the sale.

The BBC has helpfully published this list of UK high street retail failures in the last 12 months: Republic, Blockbuster, HMV, Jessops, Comet, JJB, Clinton Cards, Aquascutum, Ellie Louise, Game, Peacocks, Pumpkin Patch, Past Times, Hawkins Bazaar. Actually the BBC list goes on back into 2011, but 12 months of depressing news seems enough for one paragraph. Is it possible to derive any general lessons from the list?

The first group is fairly obvious: Blockbuster, HMV, Clinton Cards, Game. In all these cases, the high street business model is simply obsolete, overwhelmed by the internet. Why rent a DVD from the tiny selection in a Blockbuster store when you can choose from practically every film ever made online? Why buy music or a video-game in store when you can download it cheaper - or more likely unofficially free - track by track? Who wants a bog-standard greetings card when you can design your own online?

A second group is more interesting. Retailers such as Hawkins Bazaar  and Past Times are (or rather were) primarily plays on unorthodox assortment. In theory unorthodox assortment should be relatively immune to the depradations of internet retail. In practice, this is only so if your products are genuinely unique - and you are the only stockist. Otherwise, online is the natural place nowadays to start hunting for unusual items. Almost certainly you will find a much wider choice online, and non-unique products will probably be cheaper there too.

A third group - JJB, Peacocks, and a number of smaller players - simply drowned in debt following ill-conceived refinancing. Online isn't really responsible, although it's probably a contributing factor.

A fourth group - Republic, Ellie Louise, Aquascutum - goes to prove that a fashion retailer still needs to sell stuff that people actually want to wear. Although there's no evidence to support this, I can't help feeling that the continued growth of Asos, whose outstanding site makes it extremely easy to find something you really want to wear, is a contributing factor. It is steadily becoming a category killer, and you could argue that these are the early signs of it doing some killing. Asos can't be the only factor though, and what then of Comet or Jessops? How come Dixons Group is posting its first real profits for years while Comet is going bust? Or Jessops (a specialist photography retailer) - seemingly doing the right strategic things - good service, plausible prices, online channel doubling sales in the past year? Why is Waterstones (books) still trading at all?

One possible answer lurks in the announcement that John Lewis, still a case-study for successful multichannel retail, has appointed the former CEO of Collect+ as Multichannel Director. John Lewis appears to be making a statement here: they've appointed an expert making stuff happen for the customer after the sale.

Back to Asos for a moment. Yes, their website is very good, their assortment excellent, and their marketing outstanding. But their prices are nothing special, and if you start looking for testimonials online - trawl the blogosphere for example - what do you typically find? Tributes to their Returns process/policy. I know this isn't a very statistical data point, but try it for yourself. Once again, it's all about after the sale.

Dixons' (PCWorld) "KnowHow". Yes, their increasingly predatory sales-floor staff do appear to know their stuff, but KnowHow itself - it's an after sale proposition.

What about all those coffee shops? There's one just opened in my nearest PCWorld, there's a Costa in the local Waterstones, and don't forget how long this has been a successful formula: anyone know the date the first IKEA restaurant opened? Actually it was 1960. Do you actually go into an IKEA restaurant first, before going round the store? Thought not. You view your main purchase-under-consideration, collapse into the restaurant/coffee-shop, and then suitably fortified return to the store to make a purchase. Maybe not the main item, but still a purchase.

Developing my "Logistics is the New Marketing" theme a little further, perhaps it should be "After Sales is the New Marketing".

And if you are a small high street retailer, feeling the squeeze and wondering how anything in the Portas report is relevant to you, maybe stop reading it and start using the time more constructively calling your customers a few days after they bought something to check it's all OK.  And if it isn't, pop round and fix it. That's a service that Amazon are never going to offer.

What does it mean for the bigger retailer? After Sales is complicated and difficult to train in a purely process way. The situations that arise are more unique to each customer. Which means, inevitably, that you need more sophisticated staff, operating under more flexible policies. Goodbye McJobs, hello iJobs (or should that be Steve Jobs).

Some more ratios - and why does wikipedia need my donation?

Having started to delve into the annual reports / 10-K for Amazon and Asos for my last post, I thought I'd extract and compare a few more data points from their published information. Firstly their fulfilment centre density.

Asos have just opened a new 1.1M sq ft facility (for metric readers, 1 square metre = approx 10.7 sq ft, 1:10 is an easily memorable ratio). According to their published figures, they expect to be able to serve £1.2 Bn of sales from this warehouse: a ratio of £1090 per year per sq ft. This fairly high figure presumably reflects the relatively high price points of clothing.

By contrast, Amazon publishes (non-services) sales of $42Bn from 44M sq ft of warehousing (although it is not clear how much of this warehousing space is already open, and how much is secured/under construction for the future). Converting the currency, this is equivalent to around £600 per year per sq ft. Interestingly this figure is remarkably close to the ratio for Ocado, the online only grocer, at around £630 per year per sq ft; this either reflects very well on Ocado - typical price points for grocery are around £1 per item - or rather badly on Amazon.

(It's also interesting to compare with sales / sq ft / year in a typical supermarket of around £1000 in the UK, although less than half that in the US.)

 

 

Secondly, sales per visitor. Asos also publishes visitor numbers in its annual report, based on comScore data. Most online retailers seem rather reluctant to publish these numbers, but comScore occasionally publishes data points for huge sites like Amazon (282M visitors in June 2012 worldwide) which can be used for estimation. With these caveats on the reliability of the numbers (and some allowances for seasonality), it's possible to estimate revenue-per-visitors figures.

 

 

Assuming the data is reaonably trustworthy, it becomes more evident why Amazon is such an effective machine: the cash it extracts per visitor to its website is quite spectacular. Almost 5 times what Asos manages, and treble eBay - and the eBay figures include the income from paypal. (Note that this is eBay's revenues, not the total value of transactions on eBay).

 

Although this is nothing to do with multichannel retail, on another tab I am now looking at yet another appeal from Wikipedia for donations. Why? I know it is supposed to be a wonderfully pure site, unsullied by commercial interests, unbiassed in its editorial approach. Would it, I wonder, be compromising its principles too far by becoming the biggest Amazon affiliate in the world? Most Wikipedia entries (should!) have a list of citations and sources; many of these are books. Would it be a commercial step too far to advertise just the books that are specifically in the citations; a wikipedia citation is almost an advertisement anyway? And Wikipedia has visitor numbers that make Amazon look really rather pathetic - at least double. Just a thought...

 

 

 

 

 

Asos vs Amazon; Delivery vs Marketing

In the P.S. to my last post on delivery charges, I highlighted the gem in the small print of Asos's latest annual accounts: reclassifying delivery costs as a marketing expense. This seemed an interesting enough idea to take a look at what Amazon does, and in fact to generally compare the two. (Especially in the light of rumours that Amazon is considering making a bid for Asos, presumably along the same lines as its Zappos move a couple of years ago).

So, a trawl through the latest Amazon 10-K, and sure enough, Amazon also makes a similar comment:

"While costs associated with Amazon Prime memberships and other shipping offers are not included in marketing expense, we view these offers as effective worldwide marketing tools, and intend to continue offering them indefinitely."

Slightly different approach, but basically the same statement: free/discounted shipping is a marketing cost. How big a cost? Helpfully Amazon provides the information. In 2011, income from shipping fees was USD 1.5 Bn, and shipping costs were USD 3.9 Bn i.e. the net cost of this "marketing tool" was an eye-watering USD 2.4 Bn worldwide! Compare this with the actual spend on marketing of USD 1.6 Bn. Shipping offers cost Amazon 5.1% of turnover (up from 4% the previous year), compared to marketing at 3.8% of turnover. In reality, 5.1% actually understates the figure, because the turnover includes a substantial slice of income from services and fees (such as marketplace and hosting); with these excluded, the shipping offer actually represents almost 6%.

A look at the same numbers for Asos reveals shipping fee income of GBP 10.7M, 2.2% of sales compared to Amazon's 3.5%. Asos doesn't actually directly break out the cost of its shipping, but it is possible to estimate it from the other numbers published, to be around GBP 25.5M, around 5% of turnover. So the net cost to Asos of treating shipping as a marketing expense is GBP 14.8 M, or around 2.9% of sales. Not quite as startling as Amazon, but certainly comparable. However Asos spends a slightly higher percentage of revenues on "true" marketing, around 4%, so it has not YET reached the point like Amazon where free/subsidised shipping is its primary marketing tool. Judging from the statements made in the accounts regarding ongoing developments in this area, however, it won't be too long before this is so.

Of course the other big difference between the two is that Asos can afford it! It is genuinely profitable - net profits are around 8.3% of turnover, despite continuous investment in overseas growth, new IT systems etc i.e. all the excuses that Amazon seems to use to explain its perpetual hovering around the boundaries of break-even: profit was 1.7% of turnover in 2011, and it actually made a loss in 3Q12.

Obviously this difference is not unconnected with the difference in gross margins. Asos has gross margins of 49%, Amazon only 22%, a situation it dismisses with the explanation:

"We believe that income from operations is a more meaningful measure than gross profit and gross margin due to the diversity of our product categories and services."

While this is probably plausible, measuring gross margins for an online (or mail-order for that matter) business is not meaningful in another way; I believe the right measure should anyway be delivered margins i.e. including delivery fees, shipping costs and returns processing. And given Amazon's mix of categories, the underlying implication in these numbers is that quite possibly Amazon is operating some categories below break-even delivered margin.

Getting off-topic a little, investors seem to still believe in the Amazon go big or go broke strategy, and don't require it to make reasonable profits, presumably on the assumption that if it eventually stops investing in growth then actually the underlying business is profitable. If you are the punting type, you might fancy a bet on the dual scenario that the US as a whole follows the trend in some states to put purchase taxes on an even footing between offline and online, and then that BestBuy (and others) accept the logic published recently by Media Markt (see my previous post) and go for a big cut in gross margins themselves, thereby putting themselves on a more even footing on price with Amazon. Whither then Amazon?

What then should a true multi-channel retailer do with regards to this whole "shipping as marketing" idea? Firstly, take a look at this photo, taken in a London Underground station recently:

Amazon Locker, Hammersmith Station

Yes, it's one of Amazon's attempts at click-and-collect. But... there's no in-store additional sales to help the business case along. As I suggested recently, customers like click-and-collect, but retailers like it even more because it leads to incremental sales. And a certain lack of convenience doesn't seem to hamper customer take-up: Marks-and-Spencer stores, for example, are not exactly handy in general - they tend to be in town-centre locations not residential areas, especially outside of London.

My proposition then, is that multi-channel retailers should reinforce click-and-collect, using the same mindset that leads Asos and Amazon to treat fulfilment as marketing cost, but focussing on stores as a competitive advantage. The most obvious way to do this is some sort of coupon/voucher that is valid for further spending when associated with a collection. I'm not aware of this being done yet, but I'm sure someone somewhere is already on to it - the results will be interesting.