From McJobs to iJobs

My attention was drawn last week to two intriguingly opposing articles. First of all, the usual gloom and doom on the high street message, this time articulated in terms of vacant properties etc, published by the Centre for Retail Research.

The direct correlation between the growth of online sales and the decline of high street sales is spelt out. The article demonstrates a reduction in the proportion of consumer spending on the High Street from 50% to 40% coinciding with a rise in consumer spending online from 0% to 12.7%.

Once again we see a key principle – online retail does NOT create extra money in consumers’ pockets, it just represents a spending shift. Figures in the UK are distorted somewhat by the existence of a large online grocery sector, unlike anywhere else in the world. But if we focus only on non-food, the picture is quite clear:

 

 

As the research goes on to state, national coverage now requires far fewer stores. A truly multichannel strategy to reach all customers via a properly blended online/offline offer does the job just as well. The key quote: “retailers with a strong web offering now need just 70 high street stores to create a national presence compared to 250 in the mid 2000's”.

And what about those retailers with the strongest web offering of all – the online pureplays? Well that’s where the other articlecomes in. It seems a pureplay isn’t really a pureplay after all, you need a showroom. If you can do like Amazon and use brick-and-mortar retailers as your showroom in a kind of parasitical price-scalping mode, then this is undoubtedly extremely efficient – you get the showroom, someone else gets all the costs of the stores. If you can’t, what can you do about it – seems like the best thing to do is… open brick-and-mortar stores. OK, maybe not traditional stores, more, well… showrooms.

In many ways we’re already familiar with the concept. What more is an Apple store really than a high street showroom? OK, you can buy the products there, but they are much more places where you can look at the product, get service on it, and get someone to explain it to you.

To do that, of course they need a different kind of staff. No longer are the staff there primarily to perform the mundane tasks of shelf-filling and cash-taking. The essential requirement for a staff member in an Apple store is to know more than the customer. And not just any customer, but a customer who has spent time researching the product already online – an expert customer.

What these two articles taken together suggest is that we can expect another strategic shift on the high street – from McJobs to iJobs...

 

 

 

Social Media Explained...

I've just come across this while hunting for something serious to write about for my next post, and I can't resist reposting it here!

Social Media Explained

 

 



Amazon IT capex - spending like it's gone out of style

Another interesting figure in the Amazon 2012 10K filing: capitalisation of IT expenditure:

"Capital expenditures included $381 million, $256 million, and $176 million for internal-use software and website development during 2012, 2011, and 2010."

There are a couple of points of interest in these numbers. Firstly, how small they are! There's an old Forrester benchmark for retail IT expedenditure which roughly suggests that, for a "traditional" retailer, 1% of revenue is spent running the show, and a further 1% enhancing it. And then they suggest that for a digital business, this latter number could be anything up to 8%.

By contrast Amazon's capital expenditure as a % of revenue looks like this:

Although it sounds odd to observe that $381M of IT capex is a small sum, when viewed against overall revenues it really is. You might actually argue that Amazon is underinvesting in IT... Given that it also makes a loss and has a growth strategy, this looks quite odd. What might they spend any extra on?

Well improving the online experience for fashion would be a good start. One of the "features" of the Amazon site is the extent to which it is one-size-fits-all. Essentially it still sells books, and if the product isn't a book, the user experience can be quite peculiar. (Take a look at the utterly bizarre online grocery beta in the UK or Germany for an example of really really peculiar).

Fashion is evidently something they want to push. Although my home page is doubtless heavily personalised, the fact that fashion is even worth personalised banner space is indicative:

And yet the site doesn't really tackle the whole issue of variants - sizes and styling - at all well. It's trying to bend a books-based system into clothing. Try this part of the UI/UX for a shoe product (I'm currently working for Dr Martens so shoes are front-of-mind right now!):

What the hell does that price mean? And what's with the size selector? A clear case of - to be honest - not spending enough on the IT to adapt it for footwear. Take a look at how Zalando handles this same challenge (much better, cutting a long story short).

Anyway, the other point of interest in the IT spend is that it is increasing, both as a % of revenue (from 0.5 to 0.6) and massively in absolute terms. And given that it doesn't seem to be on the "products" side of the business - or at least not on selling shoes - then it seems reasonable to guess that it might just be on services.

This would be reasonably consistent with another interesting note in the 10K - a comment on gross margins:

"Gross margins increased in 2012... primarily due to service sales increasing as a percentage of total sales." 

Gross margins increased from 22.4% to 24.8%, a hefty hike. Services sales increased to $9.4Bn from $6.1Bn in 2011 and $3.4Bn in 2010. Suddenly the IT spending numbers start to make a little more sense. If that increase in IT spending has been primarily to support increased services sales, then an extra $200M of IT spend to support an extra $6Bn of services sales - 3.3% - looks much more like the kind of benchmark numbers suggest by Forrester.

But then it makes the "other" IT spending look even more woefully inadequate...

Amazon results 2012 - Logistics is still the new marketing?

So, Amazon publishes its full year results - a loss of $39M - and everybody is happy that their strategy is still on track. Would this work for your business?

Anyway, in a series of brief posts, I'll take a bit of closer look at some of the obscurer numbers buried in that 10K filing. First of all, my favourite "logistics is the new marketing" figures.

Net shipping costs fell as a % of sales apparently from 2011 to 2012, from 5.1% to 4.7%. Amazon overall sales grew from $48Bn to $61Bn, but $3.3Bn of that growth was services (up to $9Bn). So if you assume shipping only applies to the sale of goods and not services, actually those numbers adjust to 5.5% in 2012 versus 5.8% in 2011.

This doesn't appear to be driven by any improvement in shipping costs, despite lots of hype in the 10K about how they manage their fulfilment and delivery partners. Outbound shipping costs were a painful 9.9% of goods' sales(!) in 2012, compared to 9.4% in 2011. It's a bit unclear whether Kindle downloads count as goods or services, but assuming they are "goods" then this suggests a rather alarming trend - shipping costs are significantly up on a unit basis, despite a presumed increase in non-physical goods in the mix.

They actually make a reference to this: "We expect our net cost of shipping to continue to increase to the extent our customers accept and use our shipping offers at an increasing rate, our product mix shifts to the electronics and other general merchandise category, we reduce shipping rates, we use more expensive shipping methods, and we offer additional services. "

Then comes the interesting contradiction. The reason net shipping costs have fallen, despite this increase in outbound shipping costs, is that they are charging customers more for shipping. Shipping income is up from 3.6% to 4.4% of goods' sales. And this is what Amazon has to say about this:

"We believe that offering low prices to our customers is fundamental to our future success, and one way we offer lower prices is through shipping offers."
 
So, interestingly "lower prices" appears to include charging more for shipping...

For consumer electronics retailers it's quite difficult to make the business case for home-delivered eCommerce add up once shipping costs get included: the margins on most consumer electronics won't stand it. I can't help wondering if Amazon is actually finding the same issue - only in Amazon's case they can afford to cross-subsidise heavily from very profitable categories like media/books (and presumably Kindles)? They are very careful to evade margin questions other than a general note that gross margins are up overall but they don't believe it's the right way to measure the business.

Not only is logistics the new marketing, but a loss appears to be the new profitable...

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).

The Multichannel Retail Handbook

Apologies for the radio-silence on this blog. Not only have I been busy with a couple of clients, but I've also just been finishing off "The Multichannel Retail Handbook, a guide to planning, implementation, operation and enhancement".

It's now out on Kindle: http://www.amazon.co.uk/dp/B00B0J8070 or http://www.amazon.com/dp/B00B0J8070 ; and I'm just waiting for the paperback version to make it onto Amazon's listings. You can find it anyway by searching for ISBN 978-1-300-65266-3.

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...