Sharing the credit - the enemy within

Continuing my series briefly looking at organisational impacts of multichannel.

In a previous post I took a look at the basic stages of organisational development as a retailer becomes "more multichannel". On of the first aspects of this journey that typically needs attacking - and realigning - is the question of incentives and KPIs. Put more crudely: "whose sale is it anyway?" This is part of a wider topic of avoiding "channel conflict" i.e. ensuring that your channels collaborate and not compete. Incentivising appropriate behaviour throughout your organisation forms an essential part of a channel conflict avoidance strategy.

Firstly, let's take a look at how NOT to do it. Apologies for a screenshot in German, but I think it's pretty clear what's going on:

Ah yes, we have stores. And it's not fair if the website "steals their sales" so let's make sure that we show a more expensive price online than for the stores, and so defeat this invading enemy. Plausible, except that our brand slogan is "I'm not stupid" (because I shop here and it's great value); and now you can see quite how stupid you would be to shop online. And in fact, the site let you change your home store and see that the price was different in Vienna than in Salzburg. As you can imagine, this concept (Media Markt Austria in early 2010) didn't last all that long.

I'm not entirely sure why they needed expensive consultants to tell them this wasn't sensible, and in fact that the answer was fairly simple: whenever a sale gets made online, a store should get the credit. Different clients I've worked with use slightly different rules, but the basics are always the same: online sales are split, usually geographically by delivery postcode, and the benefit from those sales, either directly as increased sales/margin or indirectly in some sort of "commission", is allocated to the nearest store.

This has the benefit of neatly dealing with all those cross-channel stories too. Online sale, return to store? No longer does it make the store look bad, because the store "got" the sale in the first place. (OK, you might have to increase the acceptable KPI for stores because online sale typically generate proportionately more returns, especially in categories like fashion). Similarly collect-in-store is dealt with. Whose sale was it? Obviously the store where the collection took place.

Such approaches do need a little bit of dexterity in back-end accounting. Typically this is done by treating the website sales as "virtual". In other words, any ecommerce team-members that might be targeted on online sales still get credited for their efforts by accumulating the sales which pass through the website, but these sales are not rolled-up into the overall P/L (because the store sales are used for this), they are just tracked for KPI purposes.

Overall, it's another big change from traditional brick-and-mortar only: store managers and store staff need to really care about the website and regard it as their friend not their enemy.

Delivery pricing

Firstly a big thank you to those who sent me feedback on my last post about click-and-collect (and especially to those who "liked" it or forwarded it to all their contacts in turn)!

And now, a warning...

You cannot proceed because you have not reached the minimum order value of €19. Eh?? And this is only the German site. If you want to try the same thing in Belgium, then it's €25.

Congratulations to C&A on possibly the most unorthodox way of avoiding "sticker-shock" at checkout I have yet seen! Doubtless they can be extremely confident that their online customers are not going to abandon their carts due to being unhappy with surprise delivery charges. And on the other hand, delivery is free if you spend more than this minimum. But this does seem a very  strange way of emphasising their very strong "free delivery" message - by hiding it competely on the site homepage, and then jumping on you later if you try and checkout.

Better (best?) practice is demonstrated here by John Lewis. This is the top-left on their homepage (the red circle is my addition):

 

The free delivery message is considered so important it takes pride-of-place just below the navigation and above the hero product offer.

The C&A "alternative shock" approach seemed unusual enough to prompt a bit more research, and at least validate that my shock was not reflective of some British bias. I've taken a quick look at a few top British, French and German sites:

 

And no, nobody else is trying this "minimum cart size achtung" approach! No surprise there then... However the first surprise is how hard it is to find this information. Consumer unhappiness with delivery pricing is THE top reason for cart abandonment (assuming you have a basically clean-functioning site). From Forrester's 2010 cart abandonment reasons study:

 

And the top consumer expectation of a website is that pricing and shipping information is clear:

 



So why hide it? Customers demand this information. No points to Next.co.uk, whose help pages were simply not working (it's a priority guys, not an annoying bit of the website that doesn't matter much). But particularly on the German sites, it is remarkably difficult to find the facts. A standard footer would be a strong recommendation (example from John Lewis again);

Second surprise is how few sites (and not just top sites) offer free delivery above a threshold level. Free delivery over threshold is a very good idea for a few reasons:

1. checkout conversion rates are known to be lower at psychologically critical price points (it's the old $9.99 thing again), especially at the critical 3-digit point in dollars, euros or pounds. If you want those €95 carts to convert - a figure remarkably close to the average cart size on many sites - don't slap a delivery charge on which takes it over the €100 mark.
2. customers will add an extra article to their cart to get above the free delivery threshold. Set your free threshold to just above your typical cart size!
3. any free delivery message is a very powerful messaage
4. turning away orders (like C&A) is turning away all distress-purchases. Given that a primary driver for customers to use online is convenience, eliminating all those potential customers having a panic-buy moment for that item they desperately need for their summer holidays is a big loss of trade. OK, servicing small orders is expensive, but customers will pay for this convenience. Make the charge standard, waive it over any reasonably threshold.

The ubiquity of delivery charges also implies another misconception (I see this quite often when I work with clients new to online): multichannel is not free, and is no more/less profitable than stores. There is a cost to having stores: expensive space in town-centres and shopping malls, presentable staff, distribution networks. The customer comes to this expensive space. In effect you have paid a high cost per unit sale to have the customer come to you. In a non-store/online model, you pay a cost per sale to take yourself to the customer - fulfilment centre, picking/packing, shipping. The costs are (or should be) comparable per unit sale.

Very small online orders do need a delivery charge to be applied, because they are disproportionaly expensive to handle. The cost per unit sale for larger online orders is most likely comparable or lower than the cost of the equivalent store sale. Attempting to pass this cost onto customers, when they would not have paid the cost in store (has anyone tried charging a customer £3.95 to take their purchase through the store exit door?) is an artificial charge that is costing you sales.

This conclusion is starting to become particularly clear when you look at the cost of delivery for large articles such as white goods. To ship a washing-machine to a customer costs around £30-£35 in the UK. John Lewis charges nothing for white goods articles over £50, Tesco Direct charges a flat £7. Customers won't tolerate having the high cost of shipping passed through to them: it's not added in store, why should they pay it online? Sites such as Carrefour electricals (France: €59.99 (!!)), Baur (Germany: €39.95), MediaMarkt (Germany: €34,95) need to rethink their model sooner rather than later.

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!