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"!

Why bother with multichannel? - answer #2: it's where the growth is

As I mentioned in the last post, a challenge I am often posed when I work in less developed internet-retail markets (Romania 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."

A second answer is that, even in a rather stagnant economy, multichannel just keeps on growing. An interesting illustration comes from Office retailers in the US. Both Staples and Office Depot sell to a mixture of B2C and B2B customers. Although they have each had varying fortunes, non-store sales as a percentage of total have just continued to grow and grow:

At over 40% of total sales, non-store is pretty important!

Perhaps even more significant, however, is a closer look at recent numbers from Staples, comparing sales via brick-and-mortar with sales via online:

As the credit crunch hit, store sales actually declined by almost 7% between 2008 and 2010. But online sales grew by 32% in the same period, more than enough to ensure that overall Staples kept on growing.

Office Depot is something of a horror story in general:

But at least online sales declined by only 16% compared to a whopping 30% of brick-and-mortar.

Why bother with multichannel? - answer #1: follow the money

A challenge I am often posed when I work in less developed internet-retail markets (Romania or Ukraine being recent examples) is "why should we bother with multichannel? It is organisationally challenging and expensive, and we are doing fine right now."

The simple answer is, that's where your customers' money is going, and if your country follows the trends in others, going quickly. This is 2011 data published by Ofcom for various European countries.

Much more telling is a look at the trend in retail spending in the UK. (Data sourced from the Office of National Statistics).

One observation is obvious: the growth in eCommerce sales has been spectacular. The second observation is probably more important: eCommerce does NOT represent "new money." Overall retail sales are either down (non-food) or merely on-trend (food). What we can see is a switch in spending, not additional spending.

This is the channel customers are choosing to spend their money. If you're not on it, your competitors will be, and your customers will go there.

eCommerce now represents over 10% of all retail sales in the UK, so it is genuinely meaningful to draw such charts. The interesting question for the next few years is whether it will soon become relevant to draw similar graphs charting the growth of Mobile. Countries with well developed landline broadband such as the UK or US may be less interesting studies than those such as India where over 50% of the population has access to a mobile phone, but less than 3% of households have landlines or broadband.

Not all channels are equal - at least in the eyes of the finance team

One of the more bizarre obstacles I have encountered when working with clients adding eCommerce as a totally new channel to an existing brick-and-mortar retail operation is the accounting treatment. OK, I'm asking for accountants to use their imagination - not always an easy stretch.

But actually the equivalences between brick-and-mortar and virtual channels are very important for two reasons. One, they are essential to properly understanding the business case. Two, they are even more essential to moving from multiple channel to true multichannel in a later phase of the strategy.

I'll start with the less controversial ones. Of course it's all a matter of opinion, but this is my starter for 10 (well OK, 6):

1. both channels probably have warehouses (strictly DCs - distribution centres - for stores, and FCs - fulfilment centres - for online). Some retailers even manage to combine both operations in one location, despite this being actually quite a tricky blend of operational processes.

2. both channels have a store operations team. In a store, there is a store manager, sales assistants etc. Online, there should be a web-site operations management team, organised in various ways. They perform approximately equivalent roles.

Now the going gets a bit trickier.

3. Brick and mortar has store fit-out. Online has a website. If you are going to compare (and eventually seamlessly blend in true multichannel) they need to be treated similarly from a business case perspective. Quite often this means equating store-fitting opex with IT capex, although as SaaS models such as Demandware increase in popularity maybe this distinction may become less acte.

4. Brick and mortar has stores. Online has delivery/fulfilment costs. In the former case, you operate places on the high street to which you distribute your goods for customers to receive. In the latter, you take them to customers' homes for them to receive. The processes are logically equivalent. Fulfilment costs are typically a high part of the cost of an online channel. Store rental is typically a high part of the cost of a brick-and-mortar channel.

And now for the really controversial part.

5. Standard delivery fee income is NOT sales. It is a contribution to your marketing budget. If you accept that delivery/fulfilment costs are equivalent to store rental costs, then delivery fee income is not a way to reduce the fulfilment budget. Imagine the store equivalent: suppose you could charge each customer a few pounds service-fee to be allowed to use the checkout in your stores. Surely you would not really treat this as "sales", (and count it into gross margins)? In the same way as free delivery is a huge driver of trade on a website, allowing your customers to checkout in stores for free does actually help persuade customers to make a purchase.

OK, you might book it into your general ledger as income. But for business-case purposes, and for targetting the web channel, don't treat it as sales income.

6. Non-standard delivery fees are somewhat different. They fall into 3 kinds. Firstly expensive charges for expensive deliveries such as for pallets or 2-man products. In this case, the fees should genuinely be offset against the delivery cost. Secondly, delivery-related services such as installation. These are sales. You have persuaded the customer to buy an extra (service) product. Thirdly options like express delivery, where you may feel it is appropriate to treat these as a (service) product with an associated cost-of-goods/service and resulting margin.

For most retailers, looking at things through this "equivalence" perspective has a number of major benefits:

1. it allows a level playing field comparison of channels, and avoids distorting behaviour leading to artificial channel conflicts.
2. it makes the trade-off between the different capex and opex elements of the business cases for each channel far more transparent
3. it reduces the sense that margins are being distorted by multichannel
4. it makes a seamless transition to true multichannel much easier to implement later on, especially for truly cross-channel activities such as click-and-collect

Even if you don't like my particular equivalences, select some that you feel are appropriate to your particular business model.

Eastern Europe anyone? Ofcom statistics about Poland

With its economy closely coupled with that of Germany, Poland appears to have escaped the worst of the credit crunch. Economic growth in 2011 was over 4%. It should be fertile ground for retailers looking for new markets, especially with its strong links to the UK.

One of the most interesting charts produced by Ofcom recently (2010 data) is an analysis of the enthusiasm of online consumers - how often do you buy online? Poland is a very interesting edge case:

OK, spend per head is not so high, reflecting its relatively low GDP per head, the value of the Zloty, and its economic development stage. But just look at that spend frequency: second in Europe only behind the UK! (and the UK is a weird edge case anyway, nowhere else are consumers as enthusiastic about online retail). There is anecdotal evidence that other very developed E.European markets, especially Czech, show similar behaviour, but unfortunately no data.

And online customers are growing fast, as this data from the 2011 Ofcom report shows:

Already ahead of Italy and Spain (where customers seems to like to browse online but not purchase), catching up rapidly on Ireland, and showing similar growth to France.

So if you are looking to reach out to another customer market, have a serious think about translating your site into Polish... There are some other advantages to Poland too. Delivery infrastructure is well developed, with major players like DHL well established, and payment methods are less "eccentric" than some other apparently easier potential markets (e.g. Netherlands, France, Germany, Belgium or Denmark all with challenging local schemes).

There's just one snag... in some categories everyone else is there too, especially the leading retailers from Germany and France. If you fancy somewhere a bit easier but with similar characteristics, try Czech. There are only 10.2M Czechs compared to 38.5M Poles, but there's a lot less competition as a consequence. Tesco are, however, using it as their pilot country for eCommerce in E.Europe, so move fast before it's taken!

Is taking a page out of Booker's book an opportunity for Ocado?

Another set of Ocado sales figures, another half year of no-profit growth.

The latest figures continue to underline the basic issue with Ocado's business model. Quite simply, on a cart-by-cart basis they've just about made it break-even. But on that same basis it's extraordinarily difficult to see where the profits are going to come from.

This picture tells the story:

Ocado enjoys pretty good margins for a Food retailer, but these are entirely swallowed by the costs of delivering each order. Margins are being squeezed, and delivery income is being squeezed by increasing competition.

The only way forwards is to increase cart-sizes. But year-on-year, cart-sizes actually fell  by almost £2 between 2010 and 2011 as customers cut back.

One option to increase cart-sizes to to increase the range of products on offer, which Ocado continues to do. The problem with this approach is that eventually you start to extend into categories which are not naturally part of a weekly grocery shop. Health & beauty: maybe. Consumer electronics or fashion: probably not. And as Ocado themselves observe in their analyst presentations, non-food requires a different distribution model. In other words, it doesn't really play to their strengths. Worse still, it sets them into online competition with Amazon, John Lewis, Tesco Direct, Argos, Debenhams, Marks-and-Spencer...

But while Ocado has been slugging it out unprofitably with the supermarkets, another online Food retailer has been quietly growing its online business even faster than Ocado: Booker Cash & Carry.

And while Ocado has a minimum cart-size of £50, Booker has two minimums (depending on whether you are a restaurant or corner-shop customers): £100 and £500. What would Ocado give for some £500 shopping carts? Maybe a bit of that 26% gross margin - cash-and-carry margins are inevitably lower. And e-commerce in the B2smallB sector is a tough nut to crack. These customers expect B2bigB service, B2bigB prices, and B2C charges.

But with all that automated infrastructure, you can't help wondering if there's an easier way to profitable growth than slugging it out with Tesco and Sainsburys.