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. 

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: 

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.

German retailers, of course, have dealt with this complexity from the get-go. Here's a screenshot taken from www.idealo.de, 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!

Coda

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:

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

Amazon: the first chink in the armour?

OK, I know I'm probably a bit slow with the flow here, but did anyone else think that the announcement by Amazon that marketplace sellers - in the EU at least - will now be able to sell their products cheaper on their own site than on the Amazon marketplace is more strategically significant than it might look at first reading? (See for example the story as reported on the BBC news site).

The trouble with Amazon is that too much of it looks more and more like a play on price alone, albeit one powered by the cash-cow of its awesome core media/books business. It looks more an more like 4 separate animals, although of course being able to leverage a single CRM view has to be a huge boost:

1. cash cow media/books; even here it is obsessed with being the cheapest. When did you last see a seller listing cheaper than Amazon itself, assuming Amazon holds the title at all? Or take a look at the royalty rates for publishing on Kindle; basically there's a massive incentive to keep the title at < $10, and you absolutely have to commit to being cheaper than the print version
2. 2nd rate (and generally expensive for Sellers) marketplace; eBay, Allegro (in countries where eBay hasn't made it) are usually the #1
3. Reasonable IT services business, into which it is pouring investment
4. Retailer outside media/books: totally a play on price, and dominated by the nightmare category of consumer electronics. The website isn't even that good at selling presenting this stuff (OK it is evidently good at selling lots of it). Margins, given how coy Amazon is on the topic, are evidently a big issue

Now that the "last man standing" multichannel retailers are starting to fight back properly - viz Dixons making a profit again at last, or Best Buy making proper price promises - then maybe, just maybe, price price price can't continue to be the be all and end all of Amazon's business. It certainly wasn't where it started in books.

It's just had to back down in a very small way. Is this the thin end of the wedge? Maybe the fact that it is preferring to invest in the services side of the business in preference is a sign that Amazon itself is reading the tea-leaves the same way.

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"!

Are shrinking stores inevitable in consumer electronics?

"Dixons to scale back high street presence."

"Best Buy has set plans to reduce its store square footage by 10% in the next five years."

The continuing threat to the business model of consumer electronics retailers posed by the internet seems to have elicited a consistent response: "honey I shrunk the stores." Or in the case of Comet/Kesa, sold the stores.

These retailers are determined to protect margins. Protecting margins means that price-based competition from pureplays eats into store sales. Ergo, fewer/smaller stores.

Protecting margins is rather understandable when you look at the panicky 15.5% drop in the share price of BestBuy when margins took a 0.9% hit during the last holiday season.

And yet curiously gross margins are historically quite high. US GAAP helpfully forces retailers to publish true gross trading margin figures. And Best Buy's margins look like this:

Pretty steady in other words, and despite the recent drop due to trying free-delivery for the holiday season, historically really rather high. Take a quick look at the longer historical trend:

In other words, since the dawn of the internet age (and of course the dawn of the Chinese manufacturing age), Best Buy has enjoyed historically high margins.

Dixons and Comet are rather coy when it comes to stating gross margin figures. When they are down, they tend to say things like "significant margin pressure" while when they are up they crow about "0.4% increase in gross margin". Solid data is rather absent, but a trawl through the financial reports for the last few years seems to imply a reduction of somewhere between 2% and 3%, recovering slightly recently, hardly a disaster.

Dixons and Comet's sales, of course are another story (although this doesn't - yet - seem to be such a problem for BestBuy). Effectively they've traded preserving margin for lost sales. But is this the only approach?

German giant Media Markt-Saturn thinks not. OK, they've got an extra problem - their stores are partly owned by franchisees, so announcing a programme of store closures is not really an option. Instead they've decided to go straight to the heart of the matter, and announced that they will reduce prices... by 5%-6%.

In other words, they've decided that they are actively going to try to protect sales (and their franchisees), by accepting a loss of margin instead, and planning for this strategically.

It has to be said that they've had a rather torrid time trying an alternative approach. This horror-story is from their 2010 pilot in Austria (where they tried it out before risking their core German market):

My online customer journey:

1. I'm attracted to MediaMarkt by their slogan "I'm not stupid, (because I shop at Media Markt)"
2. I go onto the site, where I have to declare my home store (instant loss of 50% of customers)
3. I find that a) prices are cheaper at a different store; b) their online price is not cheap at all
4. I decide I am indeed stupid because I shop at Media Markt. I go somewhere else, probably online
5. I decide that Media Markt are also stupid, because their pricing strategy is a disaster area

The net result of this monsterpiece was the departure of the CEO and Finance Director, and a fresh think.

And now they've had a fresh think, they've reached a completely different conclusion from Best Buy. Quite simply, they have recognised that store price = online price is mandatory, (which is a conclusion all true multichannel retailers eventually reach: the customer experience is just absurd otherwise.) And then they've drawn the logical consequence from this - prices will have to fall:

You can find the full presentation at this link.

The summary is actually quite simple:

1. we have to have one price across all channels
2. in order to do this credibly, we have to reach down to median internet price or lower
3. to do this prices have to fall, by about 5% from shelf price, and 3% from customer price (customer note: it's probably worth trying to negotiate a bit in a MediaMarkt or Saturn store)
4. in order to make this possible, we will reduce the cost base (but not the store base) and also simply accept lower margins

It will be interesting to see if BestBuy follows suit. And if so, what it does to their share price if a 0.9% margin drop can reduce the value of the company by 15.5%... But then they are currently enjoying historically distorted high margins!