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How would an E-Commerce Company get into Retail? – Part 2

There are so many disastrous results of Companies going into Retail. It usually starts this way: How difficult can it be to sell Merchandise in Stores? Rent a proper sized Space at a good Location, arrange the Merchandise nicely, get some Processes for Payments and Logistics in place – et voila! Then repeat that multiple times by scaling the number of Stores and there you have it, your own Chain of Brick and Mortar Stores.

After all, Shops and Shopkeepers have been around since time immemorial, it’s not exactly Rocket Science, is it?

Doom follows. The new Chain is not turning out a Profit, as Customers do not show up in the store and if they do, they do not buy enough. So Companies start to tinker with the Store Design,  different Products, different Locations for certain Products inside the Store,  they vary the Assortment Size, the Number of Products in the Store, Sales Approaches,  Trainings, they exchange Leaders, they try different  Store Locations, new Marketing Initiatives etc.

While tinkering, come up with apparent Revelations, for example: Oh, if I increase the Assortment Size, I get more Revenue. Apparently, the Customer wants more choice! So they order even more Stuff, creating an Inventory Surpluses which increases the number of Items displayed per Square Meter in the Store as well as to clog up the whole Supply Chain, thereby, in turn, increasing Working Capital, decreasing Profits further.

Some Companies even to scale out of the Profitability Gap by adding more Stores. Economies of Scale to the rescue! Thereby the problem is compounded – if you scale a Store Format that is not performing you end up with a nonperforming Chain of Stores. Your Problems just increase. If you scale Shit you are going to end up with an even greater Pile of it.

What is so difficult about building up a Retail Chain?

Retail is different

Building an attractive, profitable Store is hard.

Scaling – the process of adding Stores and thereby Expenditure en Masse – is even harder, as the Entrepreneur has to learn to rely on Processes and Standards. The owner simply can’t be everywhere at the same time.

For a Company that originated in E-Commerce, this can be hard. After all, the Transparency of the Online Store is hard to replicate in a chain of Brick and Mortar Stores. People and Processes are notoriously harder to change than coding on a Web-site.

So how should an E-Commerce Company strive to build up Retail Stores?

The one unifying Concept

A Business should be more than the sum of its Parts. Each Part should strengthen the other part. Each Part does not need to be unique, but the Combination of all Characteristics of a Company has unique value to the Customer.

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Let’s have a look at an Example which is based on a real live Retailer. I have modified its business model in several key aspects for the sake of privacy.

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First, comes the Choice of which Market to enter. In the words of Harvard Professor Clayton Christensen, the challenge is to find out the job to be done.

Let’s explore the example Workwear Retailer above. The unifying Concept could be described as follows:

With the rise of the Service Economy,  the Self-Awareness Craftsmen in small Businesses changed. These Professionals are knowledgeable, dynamic and proud Individuals. They seek not only function in the Things they are wearing, they seek some Style too, above the gray and black Work Suits of the Past. That is the Job to be done: To offer passionate Craftsman style which is not only serving their self-esteem but is perceived by their Customers to be professional looking, too.

Everything else follows from that:

  • The Product: Fashionable Workwear
  • Customer Experience: Function, Fashion & Nudges to buy other Merchandise (e.g. that Elite hand tool everyone hold in awe) displayed in curated Environments for limited times only
  • Sales: Dynamic, open, personal and honest communication of the Sales Staff to Customer
  • Store Design: Big enough to allow some Space to be set-aside for “Gigs”, i.e. limited time displays of Merchandise in visual attractive Spaces, but small enough to allow the Sales Representative to be close to the Customer
  • Real Estate: Relatively inexpensive Locations on the Periphery of Cities, yet on the Traffic Arteries that are passed by Craftsmen every morning and evening on their way into and out of the city
  • Logistics: Able to handle own Merchandise, 3rd party Deliveries and to organise “Gigs”
  • Sourcing: Always on the look-out for the better and new on the Market. No own branded Merchandise, but the promise to provide the Best of the Best Merchandise that is available on the Market- always
  • HR: Focus on hiring Craftsman to do the Sales, in order to share the Clients Language and Culture
  • Finance: The Financial model is dominated by Curation, allowing inventories not to be held by the Retailer, but by its Suppliers. The Business thrives on the improved return on Capital, not so much on margin, as the Target Demography remains price sensitive

The Hedgehog Concept

This focus on a simple, unifying Concept is the key Requirement of any successful Business. Jim Collins has named this, in the classic book from 2001 “From Good to Great“, the Hedgehog concept. 

Focus on one simple, unifying concept. Everything else is irrelevant.

A Hedgehog is inferior to a Fox in so many aspects. But he does one thing well, which makes him unbeatable.

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To find the Pillars of Success, to orchestrate them in a way that all those Pillars support one another is key to any Business, not just Retail. Let’s take a harder look at Retail next.

The heart of Retail: Excellence of Execution

After finding out, what the unifying, “Hedgehog”, Concept of the Retail Business will be, the next Task is to turn the Concept into Reality.  A Reality that is physical: There are Stores, there are lots of part-time Workers, there are logistic Operations with a lot of Concrete Buildings and Automation Equipment, there is the never-ending task of Store refurbishment.

Optimal Execution is about setting Standards, fostering Discipline and creating a sense of Responsibility in all parts of the Business. But,  more and more in our digital Age:

  • some old Truth remain valid, e.g. the Product must be excellent
  • some Truths get even more true, e.g. the Customer has always been key, but now there are even more ways to serve a Customer than ever before
  • and there are new Truths, e.g. Customers are not limited to maintain a Relationship to the Seller, modern Media enables Customers to get engaged with other Customers very easily

The Consultancy Boxwood has put that very nicely in a small Model:

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  • Leadership: Great Leadership has been visionary already in the days of Caesar or Napoleon. But with Digital Technologies, engaging has been made much easier and there are new Ways to engage up to a level that Employees can be empowered with Autonomy, never known to salaried Workers before
  • Operating Model: Focus has always been the Hallmark of a successful Company. But with the options of Companies vastly expanding and the Rate of Change ever increasing, a Company needs to stay capable of coping  with the Complexities of, for example, Omnichannel while at the same time preventing  Processes to get so varied and improvised, that Efficiency will never allow the Company to create a Profit. The Ability to translate Insights gained by Data Analysis into Action is a vast Game Changer
  • Change capability: Changing is dangerous. There are Uncertainties and Costs associated with any attempt to deviate from an existing Practice. Retailers scrutinize and Test every move they make in Detail, before exposing their whole Network of Stores to it. Trying one thing in a limited number of Stores, while trying something else in others, is even more important in the Digital Age. The new Truth in all of this is, that the Speed and the Number of Tests need to increase considerably, compared to the old, hierarchical way of initiating Change. There is a Trick to learn from Agile Organisations here.

 

The future of Retailing

Moving into Retail from E-commerce needs

  • very deep Thought on the one unifying Concept in order to come up with…
  • a Business Model that can be tested before…
  • scaling the number of Retail Store with execution excellence

All the “new Truths” in the Boxwood Model point toward e-Commerce Companies having an advantage over traditional Retailers. After all, the Nature of E-Commerce businesses is Agile, is Data-centric, the Work Culture is more empowering and dealing with user communities via social media or affiliates is daily Business.

But it is no home run. The old Truth of Retailing remain true and even more true than ever. There is no faking in Retail: 10 years rental contracts, physical refurbishment, huge workforces etc. are for real. Scale too early and with inferior operational Skill and Disaster will follow.

Few E-Commerce Companies do venture into Retailing, yet. Amazon seems to be gearing up (How would an E-Commerce Company get into Retail? Part 1/2) and the Gig-Economy is on the rise.

Chances are, that Technology will be a lever that E-Commerce Companies will use not only to go into Brick & Mortar but to disrupt it for Good

Like this one:

 

 

 

 

1 comment on “How would an E-Commerce Company get into Retail? Part 1/2”

How would an E-Commerce Company get into Retail? Part 1/2

Up to now, only a few pure online Shops dared to venture into Brick and Mortar Retail. But there is increasing Evidence for this long-expected Move:

  • Amazon continues to invest heavily into In- Store Technologies. With the opening of the first Amazon Go Concept Store on 7th Avenue, Seattle and numerous Stores still to be opened, Amazon is aiming at the 92% of Retail Volume still sold through Brick and Mortar Stores

E-Commerce and Brick and Mortar are blending into one. The Customer does not seek a “Sales Channel Experience” – she seeks a superior brand experience, instead.

The Clumsy Moves of Brick and Mortar Retailers

Brick and Mortar Retailers have been venturing into E-Commerce for Years, on the whole rather clumsily. They build up independent E-Com Organisations, treated E-Com as “just another store”:

  • Allocate Merchandise, give someone Responsibility for the Sales and everything else will follow
  • Hire a Host of Fulfillment Service Providers to handle those nasty Aspects as Accounts Payable in a Business to Customer  Setting, Single Item Ordering and Returns
  • Manage e-Com as a Sales Channel, but effectively treat it as a Store for all operational Purposes

The Results? Mediocre.

  • Revenue growth has underperformed overall E-commerce Growth
  • Profits have been negligible
  • Customers find it hard to understand why she can not return Goods bought online in stores or vice versa. They wonder about difference in price, discounts and assortment. Thereby the credibility of the brand itself is undermined

All Brick and Mortar Stores try to improve. Every Chain is hastening to roll-out “Click to Collect”, “Return anywhere” or “Order from Store” Service Offerings to the Customer. But these services are mostly build on hastily developed, flimsy Processes and Systems.

The quality of Services is usually pretty low, as Organisations and Systems are not set-up for such Models. The Sales Channel is what dominates the internal Structure of a Retailer. Not the Customer. All Organisational, Process and Logistics are based on the premise to serve a Sales Channel. The Customer is all but an Afterthought.

How an E-Commerce Pure Play approaches Business

E-Com Pure Play and Brick and Mortar retailers have a very different outlook on their business of selling merchandise.

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Mindset: Explorational

These differences stem largely from the Point of Sales. E-Commerce Companies have the luxury of having a lot of data available in real time in their shop system.With this data, the all important visit and Conversion Rates can be scrutinised in every Detail: Where did Customers come from? How long have they been on the Site? What did they View? What kind of Customer is it – or even better who exactly has been the Customer?

E-Commerce Companies invest a lot of time in analysing Data.  As a Result of this they are experimenting by constantly, changing their Site to conduct A/B Testing, offer different Landing Pages, tweaking the Recommendation Engine, tweaking check-out and check-in Processes etc. Change is constant and everything happens in Real Time.

Brick and Mortar Retailers, on the other Hand, experience much less Change. A Store Location is fixed, internal refurbishments are costly and should be done not for one but for all Stores for the sake of Standardisation, Scale, Manageability and -finally- efficiency. The Time Horizon is the Interval, the daily Sales Report in the morning.

The physical Structure of the store determines the mental Agility needed by the Organization. Once a good set of reliable KPI’s has been found there is no need to revisit these again and again. These are fixed and stable.

For a traditional Retailer Data Analytics is Routine Work.

For E-Commerce Pureplays it is Exploration. 

This is an extreme inherent disadvantage in the mindset of a Brick and Mortar Retailer.

 Growth, Sales and Marketing: It is the Customer, stupid

An E-Commerce Pure Play is not inhibited by physical Stores as a go-between between the Company and Customers. Its communicates directly with the Customer via the Web Shop, not via Sales Representatives. Sales Representatives are influencing any Message that a Retailer wants to get to a Customer. It is not difficult to see, that this Message is changed via this relay, especially in an Environment of lots of temporary and part-time Workers.

Marketing is done in Ways to seek Conversations with Customers directly – where else Brick and Mortar Retailers are limited to anonymous Mass Marketing Channels.

Growth in a store can be influenced directly by Marketing and to a lesser extent by an increase in the Assortment. In a store, the physical location of a store limits the amount of what Marketing can achieve: No matter how much Money is spend, if the Store is too far away for a customer, she will not come.

In addition to that, Assortment Sizes can’t be increased indefinitely: There is only so much physical Space available in a Store. The Relationship between Sales and the Number of Items per Square Meter of a Retail Store follows a Bell Curve. If there is too much Stuff, the Customer won’t find the Things she needs.

Purchasing and Fulfilment: Where Mind and Matter collides

Let’s take a look at the Balance Sheet of a traditional Retailer: Usually, the Costs of Goods Sold (COGS) of a Retailer amount to 40 to 60% of Sales of a Fashion Retailer, for a Food Retailer this number is usually at 70 to 85 %. This Block  far outweighs all other Costs: Personal Costs should be at 20 to 25% for a Fashion Retailer, at 5 to 15 % for a Food Retailer, closely followed by Rental costs.

The basic Profit Proposition of a traditional Retailer is to sell high and buy low. And if Sales are more or less fixed because of the physical Configuration of Stores, Profits are to made from squeezing Suppliers. This is exactly what traditional retailers did for Decades, Centuries and Millennia.

E-Commerce companies think different. The Purchasing Price still needs to be good, but in a global Marketplace with global Sourcing, this is only a modest Challenge. Good Craftsmanship in Purchasing will suffice. Globalisation means that there is a Buyers Market out there – Suppliers, on the other hand, are abundant. Purchasing must be done well, but getting the attention of the Customer to come to your Site and convert him to buy  is the main Challenge.

E-Com Pure Plays think Traffic & Conversion – Retailers think Purchasing.

That is where Mindsets collide.

Physical Matter is obstructing the move of traditional Retailers to eCommerce, as Processes, Systems and Warehouses have been set-up to serve the Store Network with scheduled Supply Runs. Business to Customer, Single Item Delivery in Real Time has never been foreseen in the evolved, rigid while efficient Supply Chains of Brick and Mortar Retailers.

In contrast: E-Commerce Pure Plays have everything in their physical arrangement of Process, Systems, and Warehouses arranged for the Customer.

Retailers have arranged every Supply Chain Process for the Retail Store.

E-Commerce companies have arranged it for the Customer.

Beware of the Market Entrant, Retailer!

If every factor is weighed, I come to the conclusion that to expand from E-Commerce to Brick and Mortar Stores should be much less difficult to do than going from Brick and Mortar Retail to E-Commerce.

While traditional Retailers still need to re-build their Organisations, Processes, Systems and (most important) Mindsets to put the Customer first in every operational Aspect of their Doings – not just the usual Customer centric Gibberish uttered by CXO’s – E-Commerce Companies are already there. They “just” need to learn a new trick, handling physical Stores.  Of course, they need to adapt Organisations, Processes, Systems and Warehouses, too.  But they are starting from a much better starting Position. In their Business, the Customer is already the central Element of everything that they are doing.

So is it just a “Craft” that E-Commerce Companies need to learn? The Craft of Handling Stores? And think there is more to it..

How should an E-Commerce Company enter into Brick and Mortar Retail?

The optimal approach for an E-Commerce Company should evolve along the following considerations:

  • Experimentation: Maybe traditional Retailing, with its intense needs of capital and rigid physical Store Network is more and more a thing of the past. While the physical proximity of Goods and Services to Customers remains important, there might be other ways to fulfil this need, e.g. Temporary, rented “Pop-up” Stores or Brand Centers focused on the Goods Experience without Stocks while Delivery is done directly to Customers Homes.
    In any Case, Experimentation of Formats should be done excessively
  • From Zero to One: How should an optimal single Store look like? Size, location, layout, supporting processes. How should the Customer be served and Sales be done?
  • Self-reinforcing Feedback Loops: How can each Element of the Design be set up in such a way to support the other Elements? No Parameter of Store Design is independent of another: Square Meters, Assortment Size, Personal Customer, Customer Experience, Capital needs are all interconnected
  • Scaling: To scale reliably and efficiently is not a Skill that most E-commerce Organisations are accustomed to, esp. not if the Element to be scaled is physical Infrastructures, whose build-up involves Rental Contracts over 10 and more years in costly Locations. Planning and Standardisation over a long time horizon are key. This is a Challenge experienced by a lot of former Start-ups, too, eg. Tesla or Apple. Some “old economy” Skills are to be integrated into the Culture

Let’s explore the question how the enter into Brick and Mortar Retail in a second post in detail, especially the notion of self-reinforcing feedback loops.