It s time for e-commerce to grow up

Transcription

1 It s time for e-commerce to grow up New guiding principles and tools that will help retailers resolve this coming-of-age conflict retail and consumer goods Susan Lee September 2013

2 The second half of 2013 will intensify a coming-of-age conflict in e-commerce that has been brewing for some time. Ironically, the root causes of this conflict are the same three engines that have powered the rise of e- commerce over the last 20 years: low prices technology bottom up experiments In other words, the same three engines that have shaped the e-commerce world we know today will soon become limiting factors if retail executives continue with the status quo. The stakes are high. Legacy brick-and-mortar retailers face tough decisions on how to define their opportunities in online channels and how to pursue them. Where do you place your bets? Growing up means answering these questions: Will online channels flourish to become an integral revenue source for you? Or will they remain a frustrating sideshow, with financial contributions hovering just above the realm of rounding errors? Our forthcoming ebook will introduce new tools to help you identify and specify the best roles for online channels within your overall strategy. These tools come from the extensive experience that our firm, Simon-Kucher & Partners, has accumulated over the last 28 years while helping companies both large and small achieve what we refer to as smart profit growth. They are supported by two in-depth studies we conducted on shopping trends and habits in the US, one from the perspective of consumers and one from the perspective of retailers themselves. Will online channels flourish to become an integral revenue source for you? Or will they remain a frustrating sideshow, with financial contributions hovering just above the realm of rounding errors? This executive summary introduces two tools the Omnichannel Grid and the Omnichannel Segmentation and gives you a high-level view of their derivation and application. The tools will help anyone who wants to initiate a more structured, focused debate on how to define opportunities across channels and how to capitalize on them. We are under no illusions that these tools and our accompanying recommendations are the last words in that debate. E-commerce is too dynamic for us to make that claim. But we hope they can serve as very useful first words to help you make better decisions. The coming-of-age conflict in online channels The signs of strength and maturity in online channels are clear. Sales surged by 18.4% in the second quarter of 2013, the strongest year-on-year growth rate in almost six years. 1 Internet pioneers such as Amazon.com and ebay are now older than the generation of students who entered college this fall. Over nearly 20 years, they helped make Americans comfortable with purchasing wherever, whenever without depending on a store. Simon-Kucher & Partners It s time for e-commerce to grow up September

3 The signs of uncertainty are also clear. Consumers seem to find increasingly creative ways to buy what they need, at an intensity that makes it hard for legacy brick-and-mortar retailers to keep pace. You can t read a story about shopping in 2013 without meeting those trendy social-media savvy shoppers who comb the aisles with their deal-seeking mobile devices. You also read plenty about the screen-staring folks who see no use for brick-and-mortar stores anymore and always seem to have a pile of brown boxes outside their front doors. Every now and then, you will also hear anecdotes about those traditional shoppers who just can t break the habits they grew up with. Well, it turns out that those traditional shoppers still predominate. Look beyond the buzzwords and catchphrases such as Big Data, clicks-and-mortar, and showrooming, and you will see that sales in online channels accounted for just 5.8% of retail spending in the second quarter of 2013, up from 5.1% in the previous year. 2 Amazon accounts for a large portion of those sales. According to a recent article in The Wall Street Journal, Amazon generates more sales revenue online than its top 12 competitors. combined! 3 And what about mobile? It accounted for just 0.5% of overall retail sales in the quarter. 4 Low prices, technology and experimentation the three engines which produced this current state still wield their influence. Low prices played a key role in establishing online brands and accelerating market penetration, but they have also left retailers with an oversimplified value proposition: price price price. An emphasis on technology prompted strong investment in the IT infrastructure which continues to make it easier than ever for consumers to search and buy products online. But this build-up, as necessary as it was, has emphasized driving purchase transactions rather than the overall customer experience and relationship. Low prices played a key role in establishing online brands and accelerating market penetration, but they have left retailers with an oversimplified value proposition: price price price Finally, the freedom to conduct bottom-up experiments allowed online retail teams to create, re-create, and optimize their businesses in isolation. This risks leaving many retailers with the same kind of silo environment that stifled or suffocated so many manufacturing and service companies over the last few decades. In the coming years, the most successful retailers will win using these guiding principles: It s about value, not price It s about selling, not technological sophistication It s about top down transformation, not bottom-up experimentation Simon-Kucher & Partners It s time for e-commerce to grow up September

4 The first tool we introduce, the Omnichannel Grid, forces you to ask several questions about how you are using your available and very valuable assets (storefronts, website, brand image, staff and service personnel) to establish a stronger value proposition. It shows that you have many more touchpoints with consumers than you think.. How are you consciously using each touchpoint each cell on the Omnichannel Grid to tell your story, bring shoppers in, close the sale, provide them a positive experience, and earn their loyalty and repeat business? And how are you working the grid vertically and horizontally, to integrate and reinforce your efforts? The tool is meant to facilitate a fundamental discussion about how you can differentiate yourself in a powerful way across all the ways you interact with consumers. It helps to reveal where your strengths and weaknesses lie, what priorities you should set, and what areas you should invest in. The Omnichannel Grid also makes it clear that the new definition of channel is broader than the traditional one. What you normally call a sales channel can now provide your prospective customer with much more than just an opportunity to transact. Your channels store, online, and mobile can offer your customers information, incentives, guidance, reassurance, and recommendations. AWARENESS INTEREST TRUST TRIAL PURCHASE REPEAT Physical Store Computer Mobile The Omnichannel Grid: How are you using each cell to drive your business? What do you deliver to your customers at each touchpoint? Simon-Kucher & Partners It s time for e-commerce to grow up September

5 You need to determine consciously what the correct mix is for you. This means turning your installed base of physical stores into a source of competitive advantage, combined with an online presence that actively complements the stores rather than serves as an impersonal search engine fueled by an equally impersonal, low-price transaction platform. Don t get us wrong. Price, technology, and experimentation remain critical. But they now need to serve as means to drive your value-selling efforts, rather than ends in and of themselves. It s about value, not price Price price price is a common default choice if you want a value proposition that is easy to communicate, drives penetration, and works in a market which does not appear to have a clear segmentation. The truth is e-commerce is not a homogenous market, nor is it millions of markets of one. Look closely and you will see patterns based on clear differences between consumer shopping needs and behaviors across categories. Figure 2 shows the Omnichannel Segmentation. Vanguard The New Frontier Routine Commodities Meal Ingredients e.g. books, consumer electronics, and entertainment e.g. health & beauty, toys/sports/hobbies clothing, furniture e.g. cleaning products and paper products e.g. food and beverage Purchase Frequency Need to see and touch Key online issues Shipping costs and inventory management Cannabalization and price pressure Competitive intensity Awareness The Omnichannel Segmentation: How you fill out the Omnichannel Grid depends on your segment, defined by the kinds of products you sell and whom you sell them to Figure 2 Simon-Kucher & Partners It s time for e-commerce to grow up September

6 These four segments reflect a combination of consumers need to touch and feel the product and consumers purchase frequency, supplemented with data from our two in-depth studies. Vanguard: This segment includes books, entertainment products (music and movies) and consumer electronics. This list, in fact, overlaps very well with the short list that Jeff Bezos considered in 1995 before he decided that the initial iteration of Amazon.com would focus on books. These products have both a low purchase frequency and also a relatively low need for the consumer to interact with the product before buying it. The New Frontier: This segment includes clothing, toys and sporting goods, home improvement, health and beauty, and pet supplies. Purchase frequencies are lower or more irregular, but try it out or try it on remain as standard practice. Routine Commodities: These include laundry, household cleaning products, and paper products. They also have a relatively low need for personal interaction prior to purchase, but unlike the vanguard products, they have a higher and more regular purchase frequency. This means that existing shopping habits are well established and hard to break. Meal Ingredients: Food and beverage have the highest purchase frequency and also see the greatest desire for personal interaction prior to purchase, which puts them into a category unto themselves. Consumers motivations for buying a product online differ significantly across these segments. Our interviews with over 1,000 consumers revealed that lower prices (24% of respondents) was the primary motivator for buyers of vanguard products as well as for new frontier (18%). But for buyers of meal ingredients, the top motivation was better selection (14%). For buyers of routine commodities, free shipping ranked first, with 16% of respondents citing it. Most striking, however, is that the vast majority of buyers in all segments did not cite lower prices as their main motivation. Decisions to buy products online are complex and multifaceted. Price is only one factor among many. For retailers, this creates a wealth of opportunities to influence consumers, reinforce a persuasive value proposition, convince them to buy from you, and provide them with an experience that will make them come back again. As e-commerce truly comes of age, your strategy will depend very heavily on what you sell and whom you sell it to. Within each of the four segments vanguard, new frontier, routine commodities, and meal ingredients best practices have already started to take shape. For retailers, this creates a wealth of opportunities to influence consumers, reinforce a persuasive value proposition, convince them to buy from you, and provide them with an experience that will make them come back again. Distinct sets of challenges emerge from our retailer study. Retailers who sell Simon-Kucher & Partners It s time for e-commerce to grow up September

7 food and beverages online cited Consumers are unaware of our online business as their main challenge. How can these retailers use the Omnichannel Grid to address that challenge and drive greater awareness? The survey also revealed distinct challenges for the sellers of routine commodities, vanguard products, and new frontier products. For all of these retailers the overarching question is the same: how can you use each cell on the Omnichannel Grid to overcome your challenges, build stronger connections with customers, and grow your business? Using these two tools inevitably leads to questions about integration. How do the columns work together to help you meet your objectives? How do you differentiate yourself? In our view, this is primarily a sales challenge, not a technological one. It s about selling, not technological sophistication One critical challenge for retailers is to make the traditional and the online channels work better together. Right now many companies, including Walmart, have reinforced barriers between the two businesses by organizing them into separate, stand-alone units. The approach we strongly recommend is to focus on synergy rather than separation. How can you have a strong value proposition when these two powerful sources of information, incentives, and guidance (the online presence and the traditional store) are working in isolation rather than in tandem? Simon-Kucher & Partners It s time for e-commerce to grow up September

8 Some retailers, such as The Home Depot, began that integration a few years ago, using phrases such as interconnected retail and seamless shopping experience to describe their efforts. Even their advertising supports this, with the story of a couple painting their house and using both the online and offline channels as powerful but complementary information sources. The Home Depot even links bonuses of in-store personnel to their department s overall online sales volume in their region. The sunglass retail specialist Warby Parker is making the transition in the other direction, using brick-and-mortar stores to complement its successful online business. The future of retail is at the intersection of brick-and-mortar and e-commerce, Warby Parker co-founder Neil Blumenthal told the Los Angeles Times in July. 5 And we see them converging. Some customers prefer to shop in stores, some prefer to shop online, but deeper than that, most customers like to do both. That s why we re continuing to invest a ton into [the website] but also into traditional retail. Best Buy has only recently begun breaking down the same barriers between physical stores and online, with CEO Hubert Joly admitting that the company has historically underinvested in its online activities. 6 When managers decide how to fill out their Omnichannel Grid with selling in mind, they need to ask several critical questions: Headlines which talk about price-matching are commonplace. But how often do you see headlines about valuematching? How can I use my brand equity to build an online destination? What exact role can the stores play to lead customers to that destination? How many stores what size, staffing, and assortment do I need to do that? What are the best ways for all these touchpoints to work together to help us differentiate ourselves, so that we can win and keep more customers? Again, don t get us wrong. Big Data mining and creative experimentations will still yield fresh Eureka! insights, simply because online channels are still relatively new and unexplored. But how a company harnesses and applies those insights to meet its objectives must bear the stamp of the executive team. It s about top down transformation, not experimentation Headlines which talk about price-matching are commonplace. Toys R Us is among the large retail chains which have jumped on that trend lately. But how Simon-Kucher & Partners It s time for e-commerce to grow up September

9 often do you see headlines about value-matching? Two decades of strong, price-driven growth in online retail have left an indelible mark in the minds of retail executives. Our goal is to be price competitive; it is table stakes, Best Buy CEO Joly told the Associated Press in an interview in August. 7 In a separate comment, Joly said that Best Buy loves the traffic on our site, in our stores, and we don t want to lose a customer because of price. But we don t feel that we need to be lower than (the) competition, he said. We just don t want to be beat. 8 The CEO not only has a role internally to make sure his teams ask and answer the right questions. He or she is also the public ambassador of the company s strategy. If the focus of the CEO s public statements remains price price price, it will be hard to switch the organization s energies to creating and building value. But that is a role the CEO must play. It is the job of C-level executives to make sure their teams answer the questions we have raised in this paper. Completing the Omnichannel Grid and acting on the insights it generates requires a transformation led by the top of the organization. Of course, the C-level executives don t roll up their sleeves and do the nuts-and-bolts work. Instead, the executives know that their express commitment and their increased scrutiny on any issue will exert a strong influence on their company s mindset. They can change the internal mindset on channel strategies and customer touchpoints in the same manner. If the focus of the CEO s public statements remains price price price, it will be hard to switch the organization s energies to creating and building value. In our firm s ebook on pricing power, published in April 2013, we stressed that when an executive makes pricing improvement his or her personal mission, it automatically becomes a corporate one. This translates into pricing power and profit improvement. Our firm s Global Pricing Study of over 2,700 executives and managers in over 50 countries showed that profits jump when CEO s take an active role in pricing and make pricing personal. Higher pricing power increases profits by 33%, according to the study. Furthermore, companies with high pricing power are more likely to have a stronger profit outlook, more likely to raise prices, and more likely to make those price increases stick. We recommend these three guiding principles for CEO s of retailers: Establish and enforce clear accountability Support the development of a unified organization with transparent processes Communicate their company s strategy and identity, internally and externally Simon-Kucher & Partners It s time for e-commerce to grow up September

10 That s the golden combination that allows pricing power to develop and work its bottom-line magic in today s economic climate. The same guiding principles are required for companies to successfully execute an omnichannel transformation. The Omnichannel Grid and the Omnichannel Segmentation provide a structured, focused platform for executives and managers who want to take a closer look at their own organizations and start to generate, harness, and sustain the power offered by all of their individual touchpoints with customers. What started around 20 years ago as a series of spectacular drag races has now become an endurance race. Retailers who sell value by strategically prioritizing and investing in their omnichannel touchpoints will win this race. End Notes 1 US Commerce Department data, released August 15, Ibid 3 Shelly Banjo and Paul Ziobro, After Decades of Toil, Web Sales Remain Small for Many Retailers, Wall Street Journal, August 27, Based on data released by comscore, Inc., August 27, Adam Tschorn, Warby Parker broadens its focus to include physical stores, Los Angeles Times, July 28, Don Davis, Best Buy reports strong online growth in the first quarter, Internet Retailer, May 21, Best Buy Tops Expectations on Cost Cuts, Web Sales, Associated Press, August 20, Justin Bachman, Best Buy Price-Shredding Turnaround Is Working, Bloomberg Businessweek, August 20, 2013 For more information, please see... Please kelly.moloney@simon-kucher.com if you would like a PDF version of any of these papers. Simon-Kucher & Partners It s time for e-commerce to grow up September

11 About the author Susan Lee is a Partner in the Boston office of Simon- Kucher & Partners, the world s leading pricing consulting firm. She runs the firm s consumer and retail practice in North America. Her comments have appeared in publications such as TIME, Forbes, and Internet Retailer. susan.lee@simon-kucher.com About Simon-Kucher & Partners Simon-Kucher is a global consulting firm specializing in strategy, marketing, pricing and sales. Founded in 1985, the company focuses on Smart Profit Growth SM by helping clients to boost their top line instead of cutting costs. With 690 professionals in 27 offices worldwide, our practice is built on evidence-based, practical strategies for profit improvement. What others are saying Priceless* The influence of Simon-Kucher on the prices we pay for just about everything is as little recognized as it is staggering. -William Poundstone...the world s leading pricing consultancy......world leader in giving advice to companies on how to price their products... *William Poundstone - Priceless: The Myth of Fair Value (and How to Take Advantage of It), January, 2010 Simon-Kucher & Partners It s time for e-commerce to grow up September