The detail on e-tail

Monday 29th May 2000

The headlines make for grim reading. "Most E-tailers Face Imminent Demise". "Online Costs hit 'Toys R Us' Earnings"; "E-tailing Fails to Deliver Cost Savings".

The stories inside are no better. US retail chain Toys R Us faces a class-action suit for allegedly "knowingly and deceptively accept[ing] orders for Christmas presents the company knew it could not deliver". Online rivals eToys and Toys R Us faced major network overloads in the lead-up to Christmas that saw site traffic increase an estimated 10- to 20-fold. As if e-tail's first real Christmas didn't disappoint enough customers and e-tailers alike, now US research house Forrester Research is predicting many e-tailing ventures will fail and most will disappear by 2001.

Ouch.

Along with fellow doomsayer, Gartner Group, Forrester blames the expected decline in e-tailing on a combination of mergers, failures and the simple fact that a large number of retailers are staying away from e-tailing altogether. It says the slowdown will come in three waves - the consolidation of major players, the failure of those sites selling "undifferentiated products at razor-thin margins" and the stabilising of highly branded sites, like fashion sites (see www.forrester.com for more).

You can tell it's not all beer and skittles by the fact that a seasoned retailer like America's Wal-Mart has totally revamped its three-year-old Web business, starting again with new management, new partners and new premises - in Silicon Valley. In New Zealand, The Warehouse and Briscoes are still mulling over their plans to move into e-tailing. The Warehouse is spending its large technology budget not on the Net, but on improving its ol' bricks'n'mortar business.

"We'll only do it if we can see returns on our investment and, so far, they aren't there," says The Warehouse chief executive Greg Muir. In fact, Muir's not even sure if the New Zealand market will ever be mature enough for his company to launch an e-tailing site.

Fact is, e-tailing is proving far harder than many thought. Ask the big mouths across the ditch. In November, Australian e-tailing giant Dstore announced plans to invade and dominate the New Zealand market, but the truth of the matter is it isn't even talking to its New Zealand partners, let alone launching a business. A goer, yes?

But e-tailing has to be a goer, right? Right. According to a Boston Consulting Group (BCG) report, released in April, New Zealand e-tailers sold $57 million worth of goods in 1999 - and e-tailers' revenues grew 200% in the Asia Pacific region. That's just a tiny fraction of the total retail spend. Online penetration still has a long way to go: Australia and New Zealand e-tailers only have 0.3% of the retail market; in the US it's four times that - though still way below 2%. From the consumer's end, International Data Corporation (IDC) estimates that New Zealanders will spend roughly $305 million in the year 2000 (that includes sales that are generated from a Web site, but not necessarily completed online). Internet forecaster Jupiter Communications picks 85 million Americans will be buying online by 2003; 90% of those sales will be products people used to buy offline.

The numbers make the e-tail market look promising for the prospective New Zealand e-tailer, particularly if the biggest in the business aren't coming our way for a while yet. "To most of the US e-commerce players, the rest of the world just isn't a justifiable market at the moment," says BCG's New Zealand director, Rick Boven. Most of the top 10 US e-tailers simply won't sell or ship products to non-US customers.

"To a US company, it makes better sense to gain market share domestically and get that side of the business sorted out before even looking offshore."

There is overseas evidence growth will come. BCG's figures show online retail revenue per capita is a paltry $US19.90 in Australia, and that's the largest spend in the region. New Zealand is in fourth place with only $US7.90. The US figure is a staggering $US134.20. Each online US customer spent an average of $US450 last year.

State of e

New Zealand's largest e-tailer, Flying Pig, claims already to have "a couple of hundred orders each day," according to co-founder and former Whitcoulls' boss, Stefan Preston. That's the equivalent of a medium-sized Lambton Quay or Queen Street store. Let's say the average sale is about $30 (it sells mostly books and CDs), that's just over $2 million in revenue a year - pretty small fry for a national retail outfit. Mind you, the company's largest sale to date was worth $5000. Industry insiders estimate Woolworths' online sales as similarly tiny: they guess it has between 1250 and 2500 regular customers and processes about 200 orders a day. Woolworths didn't get back to us by press time for comment.

Despite the problems, Stanford-trained Preston is optimistic in the quiet fashion of someone who knows he's on to something big. "It's really still very early in the life cycle," he says. "It took about 13 years for cellphones to reach the level of use they're at now. E-tailing is at the very beginning of its curve." He believes it could take up to 10 years before users are as comfortable shopping online as offline. Which makes life tricky for an early entrant like Flying Pig. Added to that is the problem of differentiation. Already the e-tail world is dividing into categories and geography.

"Some product groups fall easily into the global category," says BCG's Rick Boven. "Music is one example - you'll end up with one or two sites that sell to just about everyone. The question is, do you want to go up against a player in a market with so few winners, or do you want to aim for a niche or local end of the chart where a number of players can co-exist side by side?"

Auckland fashion shop Double Exposure is one such niche player. "We've basically tripled if not quadrupled our turnover," says owner Maria Williams. Double Exposure has been a staple of the Auckland fashion scene for 15 years, selling "previously owned" designer clothes. Williams travels the world buying clothes and accessories that, in most cases, have never even been worn. Until last October she would ship them back to her 650m2 Newmarket store and sell them to those in the know.

That all changed when she launched Designer Exposure, the dot-com equivalent of her real-life store. "I didn't want to set up stores all over the world or anything like that, but I did want to expand." Turning to the Web, Williams spent six months learning how to put together a site and launched at the same time as an American Vogue article on her business. Williams now has offices in Los Angeles and Sydney; a third, in New York, will open as soon as she has a moment free. The site itself (www.designerexposure.com) will have a makeover in the near future and Williams says to expect an IPO within 18 months.

Another niche player is Jenniferann.com, the online lingerie shop that convinced its hometown of Pokeno to change its name to the Web site for a year.

Jenniferann.com's founder, Jenny Hannah, says it's all about having fun. "It's about branding, about standing out from the crowd." She says the only way she can compete successfully with the likes of US lingerie giant Victoria's Secret is by being different.

"That's why we got into the whole renaming Pokeno thing - it's fun and people remember it."

It seems to be working. Since launching in September, it claims to have up to 150 orders a week averaging at $60 to $80 per local transaction and $US60 to $US80 per overseas transaction. With fairly low set up costs ($150,000 compared to Flying Pig's $1.3 million), the business is now breaking even and expanding into cosmetics.

That fits with the Forrester predictions: e-tailers selling branded and specialist products will survive the coming shakedown.

But, say you can't wait for the shakeout and want to invest in e-tail now or start an e-tail site yourself. What do we know so far?

Rule one: Don't be a sook

The first rule of e-tailing is simple: you are going to make mistakes, so be brave. "Learn to minimise your failure costs because you will fail," says Dr Yuval Lirov, a senior vice-president at Wall Street investment bank Lehman Brothers. He should know - Lehman Brothers shied away from the online trading market and has been forced to play catch-up in an area that is now worth over 30% of the total market.

"Plans and budgets cannot be formulated because you don't know anything about this market," he says.

Flying Pig can attest to that - when it first launched, the interest was so great users couldn't actually log onto the site to see what was going on. "We underestimated the amount of capacity we'd need," says Preston. Looking back, Preston says this is probably the most important lesson he learned during the initial start-up phase.

"The cost of the technology is very high. Everyone gets caught by the overwhelming demand."

But don't let that put you off. Preston compares e-tailing today with the car industry.

"In 1905 the horse and cart was dominant and the car was the new kid on the block - it was slow, noisy and broke down a lot. There was nobody to repair it and no gas stations. It was expensive and there were no roads to drive on." These technical problems have all, one by one, been solved and today nobody would consider a horse and cart as a viable alternative to the car.

Rule two: Deliver on time, every time

Getting customers to the site is one thing, delivering is another. Bricks and mortar retailers have no such problems; you are the delivery mechanism. Failure to deliver caused eToys to give away hundreds of $US100 vouchers to disgruntled consumers.

Australia's transport industry is only now starting to grapple with models for delivering goods that better fit the needs of electronic commerce. The usual delivery delays of up to a month may be acceptable to mail-order customers, but delivery constraints are one reason mail-order revenues make up only 3.5% of total retail sales in Australia, according to Unlimited's sister publication The Industry Standard.

The good news for New Zealand e-tailers is New Zealand Post. The former state monopoly has the kind of infrastructure the Aussies are 18 months away from. "We're investing heavily in two distinct areas - the electronic capture of information and the physical supply chain itself," says Post's electronic business to business (B2B in geek speak) manager, Peter Miskimmin. Each package can be tracked through every step of the delivery process.

Delivery times are also short in New Zealand. BCG figures show 75% of New Zealand deliveries reach their destination within five days. That's the best record in Asia Pacific.

The delivery headache is compounded by the issue of returned goods. In the mail-order business, consumers reportedly return between 18% and 32% of orders. Setting up efficient, customer-friendly order return mechanisms to cope with that level of activity is something every e-tailer simply has to do.

Rule three: Make customers comfortable

"Concerns about security remain high right across the board [of e-tailers]," says Boven. According to BCG figures, 44% of consumers listed security issues as the main reason for not giving out credit card information online.

Former Visa country manager Daniel Jeffares says the perception by many people is that there is a danger in sending their credit card details over open networks of the Internet - even though he claims to have never seen a case of fraud from a credit card number being intercepted over the Net. "The possibility of that happening is extraordinarily low."

Valid or not, consumers' worries must be addressed by e-tailers. There are a number of initiatives presently being trialled to combat this problem. Giving merchants more information about the credit card user is one area banks are looking at. They're also looking at smart cards and electronic money, like e-cash. The last two have yet to emerge as serious options.

Rule four: Do it differently

"So you've set up a Web site to sell products. Who cares?" says Preston. "You have to add something to the mix or nobody's going to bother even looking for your site." For Flying Pig, Preston says the reasons to visit and buy from the site are quite clear. A huge range of titles is only the starting point. "If you're a general store on Stewart Island, you'll stock things that everyone wants. Gas, food, clothes, things like that. You're not going to stock Tiffany earrings on the off chance that someone wants to buy them, but that doesn't mean nobody on Stewart Island will ever buy Tiffany earrings." Preston doesn't stock Tiffany earrings either, but he can get them. This "reach" factor is the key reason to shop online, according to Preston.

But there are others, such as "richness" or the personal, one-on-one experience.

"The Net consists of two opposing forces - the belief that you're completely anonymous and the ability to offer rich, one-on-one transactions," says Internet Research Centre director Peter Grey. He believes successful e-tailers will be those offering a higher-grade personal experience for the shopper.

"I was looking for some books by an author whom I collect. I couldn't find them on Amazon's site, so I emailed them asking if they had any." An email response duly arrived, but Grey was dismayed to discover it pointed to the Amazon search facility and told him to look there.

"They missed the opportunity to really cement our relationship." As a counterpoint, Grey offers his search for an antique clock. "I checked out a site and emailed in details of what I was looking for. I got a response from the owner telling me he had nothing in stock but now he had my requirements, he'd let me know when something came in." For Grey, this kind of interaction is what the Net is all about. Designer Exposure's Maria Williams agrees.

"It's key to my whole operation," she says. "In the next version of the site, a virtual me will guide shoppers around. They need to know they're dealing with a human being and not some faceless company."

Rule five: Don't rule out alternative models

So far, at least four models of e-tail businesses have emerged, but none have yet proved to be an outright winner.

The pure Internet e-tailers like Amazon and eToys have some obvious advantages. They don't own expensive, shop-front real estate and all marketing efforts go into one channel: the Web. The fact that New Zealand has only one serious pure player, Eforce, indicates the biggest problem with a pure online play: cost. Amazon may be a household name, but the cost of launching a successful consumer brand from ground zero will prove prohibitive in the case of Eforce, reckons marketing expert Stephen Pearson, director of direct marketing agency Lowe Lintas. Eforce accepts it will need 50,000 active customers to succeed - the equivalent of an over-capacity crowd at Eden Park.

Which is why the multichannel or clicks and mortar approach is more popular, especially down under. Existing retailers like Woolworths already have brand awareness and customer loyalty. Others, like Beauty Direct and MyPharmacy (owned by Unichem Remuera), have physical shops where customers can try out products in real life.

After it launched, Beauty Direct bought a Wellington outlet and intends to develop a chain of physical stores throughout Australasia. "Customers want to be assured they can go to a real shop to try out products and colours and so on," says Beauty Direct founder Bronwen Evans. "It's just another channel for customer service. We'll also be developing a print catalogue. There are multiple ways to service the customer."

One problem with existing retailers going online is the confusion over how e-tailing really works. Woolworth's first iteration, in the form of the Great New Zealand Shopping Mall, was a failure as the various partners didn't understand just what it takes to run an Internet business.

US retailer Sears was also somewhat reluctant to tackle the online world. "I was a serious sceptic for a long time," says chief executive Arthur Martinez in Fortune. "I saw this as the domain of fanatics." Now Sears' online budget is rumoured to be as high as $US100 million a year as it fights for market share. Re-engineering the entire supply chain is a costly business.

The hybrid model tries hard to avoid those costs by letting someone else carry them. Flying Pig is this kind of company - an entirely separate company that piggy-backs off a real-world equivalent's infrastructure. Let someone else worry about building and managing a warehouse and the suppliers' side of the chain, you concentrate on increasing brand awareness and perfecting the online shopping model.

The danger with the hybrid model, reckons Grey, is you'll fall between the cracks and end up with the worst of both worlds - someone else controlling your incoming stock while you haemorrhage money trying to keep up with online orders and soothe ruffled customer's feathers.

It's too early to say which model will win.

Rule six: Don't force it

The fourth model is perhaps the most intriguing - the offline store. Why stay offline while the rest of the world moves to the Net? "It's an item that has to be on the agenda, but the complication is, just how we go about it, whom we go about it with, and what has to take place before we trust someone with our brand name," says Rod Duke, owner of both Briscoes and the New Zealand arm of Rebel Sport.

In Australia, Rebel Sport has signed a deal with e-tailer Dstore - a self-styled "online department store" - to act as the real-world point of contact for customers. In March, Dstore announced it would be battling with Flying Pig for the New Zealand market, but Duke says he has not met with the Dstore management "for some time" and is cautious as to just how he will move into online retailing. He's not alone either - The Warehouse has announced it won't be setting up an online store unless it can see a reason for going online. "There may be a market for stationery but that's about it, as far as we're concerned," says Muir.

He believes a much-aired rule for the US market, that retailers have to be first online or the venture will fail, doesn't apply here. "We've come to the view that, in New Zealand, being first up is not necessarily a huge advantage, so we'll wait for a real opportunity." Muir also doesn't believe any company is making money out of Internet retail in New Zealand. "We're just old fashioned enough to want to make a profit and we don't see one there at the moment."

Duke is similarly sceptical, seeing the ability of the Net to access geographically isolated customers as the only real advantage. "It would be silly for me not to be part of it, but it would be equally silly of me to develop my own Web site as well."

Instead, Duke is looking at a partnership with a seasoned Net campaigner. Why re-invent the wheel? "It's smart to partner with someone who's got the technology under control but can't afford their own warehouse and so on."

Quite how these models will pan out once users are more comfortable with e-tailing is unclear - there are no obvious winners in the mix.

Rule seven: It's a business, stupid

One thing is clear, however - retailers will need an online presence or face extinction. "There's talk that the PC market will top out at 60% of the population, therefore, e-commerce must also top out at 60%. I think that's based on faulty logic," says Boven. He points to the expected growth in non-PC devices that will connect to the Web in the near future - cellphones, PlayStations and so on - as evidence that e-commerce is more than just PC-based. "Look at the phone - you don't strictly need one to be in business. You can always get in the car and go and visit your customers, but that's just not as efficient. The Internet is the same thing - it's simply a more efficient way of conducting business."

Beauty Direct's Bronwen Evans agrees. "People say we're an Internet stock as if that makes us different. We're not. We are not even a retailer. We are a direct marketing business that uses the Internet as one of its channels. Until people understand that the Internet is a direct marketing channel, they just won't get it."

This isn't rocket science - according to Preston, online commerce is nothing new.

"There's all this talk about a New Economy - it's bullshit. You buy products for less than you sell them and your costs have to come out of what's left over. That's all - it's the same on the Web as it is in the world." The key to online commerce seems to be just as simple: get the basics right. For Preston, it all comes back to that simple idea.

But there is a word of warning in all this - New Zealand may simply be too small to maintain a full-scale e-commerce economy. BCG's report on e-tailing in the Asia Pacific region contains this sobering thought:

"For New Zealand, the small population base limits the potential for local e-commerce offerings and has consequently slowed the pace of development." After all, if Gartner Group is picking 98% of US e-tailers to either fail or be bought by bigger fish (and it is), what does that mean down here?

Paul Brislen is a regular contributor to Unlimited
paul_brislen@idg.co.nz

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