Making E-Commerce Work for Traditional Retailers December 2013

1. Executive Summary
In the recent past we could view retail as mainly bricks and mortar stores connected to wholesalers with a component of small, medium and large retailers. Each of these sectors would and could in the main deal with changes as they occurred. These changes were normally based around new products, cheaper products, the change in value of the Australian dollar, or a change in government policy. Changes would also happen at the local level as a large local employer downsized or expanded operations. In most cases these changes would be limited to one or two sectors or would have a long lead time and the industry or sectors would have time to prepare for changes (the GST being a good example). The government could also respond with adjustment packages or assistance with retraining. During the last 20 years the internet had some impact on bricks and mortar retailers but that impact was manageable and the change was slow. Retailers had time to refocus their business. The impact was on certain sectors, particularly music, and was not an industry wide phenomenon. However recent changes have been more dramatic and rapid. The internet is having a profound effect upon the retail industry and the way consumers purchase their goods and products. The acceptance and embrace of online shopping and the internet as a business strategy has been purported to be relatively slow for Australian bricks and mortar stores and behind our United States, United Kingdom and EU counterparts. The slow uptake of e-commerce by domestic retailers is due to a variety of factors such as concerns about product cannibalisation between sales channels, impacts on pricing models, complexity in establishing new business models, updating logistics and implementing new marketing and advertising strategies. A lack of digital innovation amongst larger retailers has also contributed to the weak uptake of ecommerce. 1 Few traditional retailers appear to have found a winning e-commerce formula. These companies offline success is in a sense their biggest impediment, prompting them to try to replicate practices and approaches that simply dont work online. The first requirement for these retailers is to understand how online retail and traditional retail differ, as well as how the two can reinforce each other. That will give bricks and mortar retailers a foundation for transforming themselves into successful multichannel players, with greater overall market shares. No one size will fit all. Each retail company faces a unique challenge, born of its own particular history and market circumstances, and must devise its own strategy if it is to earn the right to win online. Indeed, for many companies, the ability to adopt a new mind-set will be essential. This Perspective explores how Australian traditional bricks-andmortar businesses can adjust to succeed in the e-commerce space, in particular by letting go of old conventions.

Bullas, J. 2011, Is Online Retail About To Explode In Australia?, Infinity Technologies.

2. Changing the Playbook

As e-commerce has gained traction in the past decade, traditional bricks-and-mortar companies have responded with an increased sense of urgency. Having initially treated the web mostly as a tool for marketing and disseminating corporate information, companies are now scrambling to get into a race led by the likes of Amazon.com and Apple iTunes. Nowadays, it would be hard to find a com pany that doesnt understand e-commerces potential and isnt investing heavily in it. The trouble is, traditional retailers still have a lot of ground to make up. The fact that offline success doesnt necessarily translate online is evident in the Web sal es of some bricksand-mortar leaders in different countries. In the Australia, for instance, Big W is the largest player in storebased retail but is only seventh in Internet market share. Among big traditional retailers, only U.K.-based Tesco bucks the trend, with an online market share in its home country of about 10 percent, compared with 6 percent for Amazon, its closest competitor. Tesco achieves this by integrating its online and offline stores in some highly creative ways (see Understanding Tescos Online Success, below). Understanding Tescos Online Success Tesco.com facts: 2010 sales: $AUS 3.4 billion (up 14 percent), About 5.4 percent of overall Tesco sales 2010 profits: $AUS 434 million (up 26 percent) 20,000 employees in online business (groceries and non-food Tesco Direct) More than 1 billion items delivered More than 1 million active customers Average basket size larger than $AUS 170 Tesco is one of the few leading offline retailers that appear to have fully cracked the code of e-commerce. Tesco stores sell a huge selection of groceries, apparel, and household goods manages its online channel separately and offers a different mix of products online than it offers offline. Online, Tesco offers separate sub-channels: Direct, Fresh Food & Groceries, Wine by the Case, Entertainment & Books, Clothing, Phone Shop, and Banking & Insurance. Tesco Directs non-traditional, non-food offering is an especially big driver of online sales, which grew 28 percent to almost $AUS850 million in the first half of 2010. The Direct channel is served through a tailored operating model that allows for in-store pickup at more than 260 Direct desks; Tesco online also offers home delivery. While Direct is not yet a big contributor to the companys overall profits, it has a spillover effect into Tescos other online channels, including Fresh Food & Groceries and Clothing. Clothing is offered through both the Direct & Clothing channels, underscoring Tescos tolerance for self cannibalization. The company uses the Tesco Clubcard, the linchpin in one of the most successful corporate loyalty programs ever created, to drive online traffic and create loyal online customers. It also uses the card to make customers offline and online shopping experiences seamless. For instance, when a customer scans the card and buys a product at an actual Tesco store, the product shows up on the customers online account, allowing for online ordering and reordering. Another example: Tesco has developed an iPhone app that allows a customer to scan the bar code on a grocery product, no matter where the customer is, and automatically add the product to an online shopping basket. So the person who has just run out of breakfast cereal can scan the bar code on the empty box and have Special K be part of the order for the households next home delivery

Why have the largest bricks-and-mortar sellers (Tesco in the UK excepted) generally been unable to find comparable success online? The biggest problem is their attempt to replicate bricks and mortar value propositions in the online world, instead of working back from online shopper needs to create a unique e-commerce experience for customers. The difference in how traffic gets converted into sales is one of the things that traditional retailers have wrestled with online. Conversion rates, defined as purchases divided by store visits, are the essence of sales success no matter the type of store. In traditional retail, conversion rates typically range from 20 to 95 percent, depending on the type of store, with grocery stores among the highest. An online shoppers probability of completing a transaction during any particular visit, on the other hand, is considerably lower. For instance, in Australia, Targets online conversion rate is estimated to be 7 percent, meaning that more than 90 percent of online visitors leave Targets websites without making a purchase.2 Even these online conversion rates are unusually high. Australian shoppers for clothing purportedly visit an average of 12 different sites, many of them multiple times, over the course of 13 days before closing the deal. 3 This isnt a big surprise, given the seamless way that online shoppers move among websites when doing research. E-tailers exit logs show that a very large percentage of their traffic leaves their sites for direct competitors or for Google, in many cases to perform a new search for the same product. As long as the number of competitors remains the same, it stands to reason that in the easily browsed world of ecommerce, getting customers to convert will remain difficult. Traditional retailers need to understand the user experience and the dynamics of online user interactions and reflect that understanding in the design of their ecommerce services. However, this is a mere prerequisite.

2 3

Macquarie Equities Research 2011a, Target early adopter in a laggard market, 9 March. MacGowan, I. 2011, Online Shopping in Australia, IBISWorld Industry Report X0004, May.

3. Counter-Intuitive Steps to Success

To have the best chance of succeeding, traditional Australian retailers will need to take some counterintuitive steps with their online offerings, moves that might cannibalise their sales in other channels, result in their referring some customers to competitors, or cause them to cede some control to the commons that is the Internet.

3.1

Cannibalise Your Own Sales

Australian retailers cant keep consumers from doing more of their shopping online, especially when they think they will get a better deal there and calls to introduce GST on online purchases below $1000 is akin to the Dutch by putting his finger in the dyke. A traditional retailers goal should be to ensure that, when its customers go online, they spend their money at the retailers own site. To many consumers, online has particular advantages in pricing and convenience. Selection is another advantage; some products are available only online. Thus online retail allows access to new, personalized, and unique products (for example, Nike shoes tailored to a consumers specifications). Nonetheless, there are some real barriers. The price advantages of shopping online in some cases are cancelled out by shipping and handling charges, or by the costs of returning unwanted goods. Customer service, from a real person, is missing. And though consumers may not feel the need to hold familiar products in their hands before buying them, that isnt true of all products; for example in the late 1990s automotive retailers rushed to embrace e-commerce only to find that few consumers were willing to buy a car without kicking the tyres. From the perspective of consumers, online and offline channels are a continuum. Consumers might do research online and still buy offline, or they might see a product in a store and search for better prices online. In 2010, Google found that 34 percent of Australian respondents research online and purchase offline, and 12 percent research offline and purchase online. 4 Seeing how customers are behaving, some smart companies are already making attempts to better integrate their offline and online channels. In 2011, Walmart in the United States began a program called Pick Up Today that allows customers to order a product online and pick it up at local store a few hours later. More than 40 percent of the products purchased on its website are picked up at the physical store by customers.5 These developments show that some of the biggest retailers are embracing multichannel strategies and understand the need for self-cannibalisation. In-store pickups of online sales are a first-generation attempt to give consumers the integrated experience they want. In the future, retailers efforts will become more sophisticated, as they play to the respective strengths of the online and offline channels. For instance as shown in the chart below, not all products sell equally well online and offline; smart retailers will analyse whats selling where in order to maximize market share across channels.

4 5

2010, Google Australia, The Behaviour Traits and Characteristics of Australian Online Shoppers 2012, New York Times, Wal-Mart Changes The Game Again

What Online Shoppers Are Most Inclined to Buy

CONSUMER PURCHASE INTENTION (NEXT 6 MONTHS FROM MARCH 2011, AUSTRALIAN AVERAGE) Books Clothing/Accessories/Shoes Airline Tickets/Reservations
Electronic Equipment Tour/Hotel Reservations Cosmetics/Nutrition Supplies

44% 36% 32% 27% 26%

22% 20% 19% 18% 18% 16%

Event Tickets Computer Hardware Videos/DVDs/Games Groceries Music Sporting Goods Toys/Dolls Computer Software Flowers Automobiles & Parts Baby Supplies Alcoholic Drinks Sports Memorabilia Car Hire Other I do not plan to make an online purchase in the next 6 months
Source: Nielsen Australian Trends in Online Shopping,

13% 11% 11% 8% 7% 7% 6% 5% 4% 7%

18%

In addition, as more and more business moves online, smart retailers will look for ways to let local store managers participate in online sales success, such as using the post code of someone who buys online to credit a portion of that sale to a nearby store. Optimally, retailers will do more than simply divvy up existing revenues across multiple channels. In looking at the behaviour of customers of an Australian on-line book retailer, Nielsen found that when individual customers moved from offline-only to multichannel shopping, their yearly spending grew 60 percent. 6 In this case, the retailer was selling higher-ticket items online, underscoring the advantages that can come from adjusting the product mix to suit the channel. The bottom line: Cannibalization is not necessarily the enemy. A vendors offline customers also shop online. By developing online capabilities and a customer migration strategy, traditional retailers can interact with their customers through multiple channels, increasing each customers value.

Nielsen Australia, 2012, Nielsens State of the Online Market: Evolution or Revolution?.

3.2 Serve Advertisements for Competitors

Visitors to Walmarts U.S.website are familiar with something that other e -commerce providers might consider an odd proposition: On search result or category pages, Walmart displays so-called sponsored linkspaid ads served by Google. Those links connect the user to other e-tailers selling the same product the customer searched for. When users click on a link, Walmart receives a small payment from the advertiser, with Google taking a cut. Why would Walmart and others provide links to their competitors? Because evidence suggests that the revenues they earn through ad sales outweigh the potential sales they lose. Target, eBay, Tesco, and many other retail leaders are now part of Googles AdSense program, presumably with a financial upside. Underlying this trend is a unique characteristic of Internet-based commerce: the speed with which a shopper can get from one store to another. In the physical world, getting from one stores shirt rack to anothers can take considerable time. Online, this trip can be reduced to seconds or, as is the case with price comparison sites, eliminated altogether. Knowing this, the online retailer may conclude it makes sense to monetise consumer behavior (site roaming) that it is unable to prevent or control. In so doing, the retailer is turning its site into a media asset, earning ad revenue from any company that values its traffic enough to pay for it. How much money can retailers hope to make by running ads? The answer varies by retailer, however click through rates on Google AdSense (the number of clicks per page view) usually range from 0.2 to 2 percent, depending on ad placement. The CPM (cost per thousand page impressions) ranges from $AUS1 to $AUS10. A midsized retailer with 30 million monthly page views, of which roughly half are search results pages, could expect annual gross payouts of $300,000 to $3 million, of which it would keep 51 percent, 7 per the revenue-sharing terms of AdSense for search The bottom line: The fluidity and lack of obstacles in the online shopping experience challenge the conventional retail wisdom that says shoppers must be enticed to remain on the premises in order to increase the probability of their making a purchase. While e-tailers should, of course, strive to improve their sites conversion rates, even the best sites have limits. If an e-tailer cant complete the sale, then the next best thing is to go after the advertising revenue.

3.3

Surrender Control to Social Media

Retailers have spent years learning how to use their power to their advantage: in negotiations with suppliers, in getting their share of trade spending, in shaping how their brands are perceived. In the area of social media, however, traditional retailers need to be willing to give up controlsomething that does not come naturally to them. Still, this counterintuitive move is essential to capitalising on social medias immense promise in the areas of sales conversion and customer retention.

3.3.1 Customer reviews

One obvious place for e-tailers to start is by creating a platform for customer reviews and ratings, which can play a huge role in a shoppers decision-making process. Nielsens 2011-2012 Australian Online Consumer Report found that almost three quarters (73 per cent) of the 5000 Australians sampled read other consumers opinions about products and brands via social media, close to half (43 per cent) discussed or commented on brands, products or services online and one third (33 per cent) posted online reviews 8. A study, by Razorfish 2010, showed that twothirds of shoppers spend more money online when following recommendations from their online community of friends.9(Even negative reviews can be beneficial to e-tailers, allowing them to make adjustments to product and service featuresor simply to clarify policies or respond to customer complaints.) Customer reviews also increase website content and add relevant keywords, thus increasing the sites relevance and leading to better listings in
7 8 9

The AdSense Revenue Share (Google Inside AdSense Blog, May 24, 2010). Nielsen, 2011, Nielsens State of the Online Market: Evolution or Revolution?. Razorfish, 2011, The Ride of the Sophisticated Online Shopper;

search engines like Google. In addition, consumers will often search for product reviews in the search box, so having a review platform will generally bring more traffic to the retailers site.

3.3.2 The Facebook and Twitter factors: Using independent social media to drive sales
Social networking communities are equally important. If social networks give people a mechanism for posting information about what theyve purchased, the value of shopping search is likely to increase by an order of magnitude. Already as seen in the chart below Facebook and Twitter are becoming important brand and product information sources for Australian consumers.

Use Facebook to follow retailers

% of consumers that use Facebook
Use Face book to follow retailers

Use Twitter to follow retailers/brands

% of consumers that use Twitter 100% = Retailer only Brand only Both 100 7 11 6 100 6 12 5

20%

34%

Do not use Facebook to follow retailers

80%

66%

Neither

77

76

AUS 2011 US 2011

AUS 2011

US 2011

eBay, Online Business Index Survey of Australian Ecommerce Business, (March 2012)

One recent survey, suggests that shoppers who like a brand on Facebook or follow it on Twitter are far more likely to buy. Other retailers are so convinced of the selling power of social networks that they have built e-commerce services right into their Facebook fan pages. The poster child for this strategy is 1-800-Flowers.com; Facebook fans can place an order without ever leaving the website. In the US, Best Buy, while currently just linking from its Facebook page to its own website, is planning to follow the 1-800-Flowers example. The bottom line: Social networking platforms offer great rewards to those who accept the need to relinquish some control. Retailers need to do that on the basis of a clear, integrated social media strategy.

4. Conclusion
Integrating offline and online stores in a multichannel approach has immense potential for traditional retailers. Pureplay online retailers can do nothing of the sort, since they lack the bricks-and-mortar storefronts needed to build an integrated offering. The catch, of course, is that very few bricks-and-mortar retailers have yet mastered online commerce. Their small online market shares are a reminder that the capabilities necessary for online success are different from those that win in traditional retail. From an operational perspective, retailers online and physical stores should be separatemanagerially, organisationally, and tactically, on matters like pricing. Strategically, however, traditional retailers should have a mutually beneficial and reinforcing presence online and offline, each channel adding value to the other. Traditional retailers bring formidable assets to this new battle for market share. However, they must also bring new thinking and capabilities to an area where past truisms dont apply. For many, that starts with adopting a new mind-set. In doing so, they will come up with additional counterintuitive moves that are appropriate to their circumstances and enable them to succeed in both the offline and online worlds.

For more information on how Navigate can help you optimise your e-commerce strategy, see our website at www.navigateconsutling.com.au or contact John Gregg on (+61) 0402 493 278 or at johng@navigateconsulting.com.au