Tuesday, 26 June 2012

Are shrinking stores inevitable in consumer electronics?

"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!

Saturday, 23 June 2012

Fix cross-functional before you try do cross-channel

Having singled-out River Island rather unfairly in the last post, another interesting site issue in which they appear to be in rather elite company.

Their home page featured a rather nice promotion "after dark":

Maybe I'm just not your typical customer, but I did an obvious thing and typed "after dark" into the search box.:

and there it is... no search results. Sloppy, but is this just River Island, who to be fair are hardly a top 10 internet retailer? Let's take a look at a few who are.

Marks and Spencer, for example. Here it is, big banner for an event named "shwopping":

But apparently the M&S search doesn't believe in this nonsense. Instead it thinks I've mistyped the word "shopping" and, better still, helpfully offers to sell me a dictionary to help my spelling:

Maybe this is connected with having their site running on Amazon's system. I'm going to spare you the screenshots, but Amazon is currently running a "summer of sport" promo on my version of its homepage; entering "summer of sport" in their search just offers me some obscure Kindle-only book with this name, followed by a digital camera.

Debenhams goes one better, or rather worse, by apparently not believing in the existence of its own sale event. Here's the home page...

and here are the search results for "half price sale":

"Did you mean halo price sale?" Well no I didn't actually. And I certainly don't want to see a pathetic 2 items, both on discounted promo but neither at half price.

The point of all this is that these sites just don't seem to have their internal teams working together. In most retailers online merchandising and marketing, search, and product data admin are owned by separate functional areas. A typical set up would be to have these three tasks owned by web-merchandising, IT and category management respectively, although it varies in each retailer I've ever worked with. And quite clearly in River Island, Debenhams and M&S, they aren't speaking to each other.

By contrast lets look at a couple who get it right, in two different ways. First of all John Lewis's clearance event. Homepage banner:

And search results for "clearance":

Very simple and effective: the search just drops you straight onto the clearance page. Minimum  site maintenance effort, maximum customer journey coherence.

Finally, Tesco Direct, which goes the whole hog. Again first the banner:

and now the search results for "summer of sport":

Someone has gone to the effort of tagging every one of these 73 products in their product master data with "summer of sport", their search algorithm has been adjusted to prioritise the phrase, and the whole thing coordinated with site merchandising. Full marks for both effort and results, for getting the basics right, and evidently for having a proper cross-functional team managing (and testing!) it all.

Full marks also for recognising that site & search admin is a time consuming, labour intensive task and managing it. It's analogous to refilling the shelves and sweeping the floors in your brick-and-mortar stores: difficult to automate, human-intensive, but an essential success factor.

Thursday, 21 June 2012

No Man is a River Island

Or "how to forget the basic hygiene factors when trying to do international ecommerce".

Today River Island has a special international free delivery offer on its site. Special enough to be the banner on its homepage, and in fact to potentially cost River Island £7 or more per order.


So what happens if I try to take advantage of this offer?

Well, first of all I have to register. Why? Why is there no anonymous checkout option? If English is not your first language, have you ever tried to follow in the instructions on one of these forms that insists on a strong password with a weird '*&!()***' character and a number in it? If English is your first language, try registering on a French or German site now, and see how you get on...

In countries which are more nervous about data protection than British consumers, Germany for example, or Holland which is one of River Island's core target markets, this has already cost them at least 25% of their potential new sales, possibly more.

To be fair, they then jump the next hurdle successfully: the site at least manages not to demand a UK postcode/housenumber combo for customers who indicate they are not based in the UK.

But then, they lose the next 25% of the potential overseas customers with one simple, glaring error: you can't enter an international phone number! Their phone number field only accepts the digits 0-9. So if you try to use the standard international convention of +countrycode, your number gets rejected, and you can't proceed any further. Game over.

                "! we think you've mis-typed your phone number - please try again"

No I haven't, I'm just trying to take advantage of your free delivery offer, but my phone number looks like this: +44 (0) 1234 567890.

Then I'd like to pay. River Island has stores in the Netherlands and Belgium, they are key target markets for its international offer. Google for "River Island .nl" and you get directed to the UK site. Fair enough. But...

Dutch customers like to pay using a scheme called Ideal. In fact >50% of all eCommerce transactions in Holland are conducted using Ideal. Does the River Island site support Ideal? Of course not.

Now of course it's quite challenging to incorporate all the possible local schemes into a website checkout, even if you have a worldwide payment gateway. In most of western Europe, however, there is a quite reasonable alternative: PayPal. However their site doesn't support it, and in fact goes so far as to provide a separate help page explaining that no, they don't support PayPal.

Yes, of course they support MasterCard and Visa. But European customers are much less likely to be prepared to use such a card online than the British are, even if they have one (in a country like Belgium, another core River Island market, they possibly don't).

I wonder if River Island's payment gateway has a default fraud-prevention rule in it blocking non-British card BIN ranges! Lots of retailers do this automatically. Given how little else seems to have been tested, I wonder if they've tested this.

It takes more than adding an international delivery address-box and an international parcel-courier to be ready for international eCommerce, and River Island unfortunately falls at the second and third hurdles. Nul points.