The best strategy to ensure business survival is to invest for growth - Blog

The best strategy to ensure business survival is to invest for growth

12/07/2011

I’m no cliché king by any manner of means, but I do think that the old football expression, ‘the best form of defence is attack’ is a very relevant strategy for the current business climate. And the retailers who are prospering are continuing to innovate and reshape their value propositions.

We all know it’s an extremely tough economic climate right now, and a whole host of household name retailers have recently gone to the wall. And according to PWC, at least 15% of retailers are in imminent danger of going out of business.

And while I’m not here to discuss each specific scenario, and why each retailer failed, it would seem pretty clear that many retailers have gone out of business because they simply didn’t have a compelling enough customer proposition. Their business model just didn’t work, and in some cases they had been dying slowly for years without realizing it.

I would also argue that there aren’t too many retailers that have gone to the wall that I’m aware of who truly understood that the rules of the game had changed and the balance of power now lies with the customer, and it is they who choose the channel of engagement, not the retailer. The web is about immediacy and convenience, and the retailers who have shaped their business model around these requirements are the ones who are prospering.

There’s not much we can do about those who have already fallen by the way, however, I feel compelled to share my thoughts on some of the issues around the multi channel investment strategies of retailers who have so far managed to trade their way through the recession.

Most retailers now recognize that over the coming years, much of the growth in their business will come from e-commerce and m-commerce. And as a result, they are closing poorer performing stores and focusing more on the distance selling channels.

However, they still appear to be making a disproportionately low investment in the development of these channels.

Many fashion retailers will think nothing of making a £500k to £1m + investment in a shop fit. Yet there are very few fashion retailers who would think about investing more than £500k in their e-commerce platform. Now don’t get me wrong, spending above a certain level isn’t a fixed requirement, nor is it a guarantee of success. But the level of investment should be driven by the requirements that have been defined and by the sales potential of the channel.

The problem is that a lot of retailers struggle to define both the requirements that will deliver the biggest bang for their buck, and determine a realistic scope of opportunity for the distance selling channels.
The effect is that all too often they decide to make a lower level of investment and sacrifice some functionality that would have driven a good ROI.

And some of the functionality that retailers choose to either ‘park’ or ‘add to the long term roadmap’ includes things that have a fairly significant uplift in sales performance. This often includes technology that drives dynamic merchandising, cross selling and on site search, personalization, customer ratings and reviews, live chat and so on. It also often leads to a de-scoping of other initiatives including localization for key International markets and the move to cross channel (Multi channel integration).

Now if this logic was applied to the store channel and specifically the shop fit and the operation of a store, it would be a little like saying “we won’t bother with merchandising the store, we’ll just display products randomly.” Or “we’ll ignore customers when they ask for our help, and refuse to help them find a relevant product and we’ll just take the chance they can find something they like by themselves.”
And of course this would never happen.

No one should be ‘dipping their toes’, cutting corners or cutting back on the investment in their web channel. There are more than enough stats to support the current and likely future value to a retailer’s business.

But this is only part of the picture; the web is not only about the generation of incremental sales. It also has a huge impact upon store sales.

Multi channel retailers with a large store portfolio can expect the web to drive a lot of in store sales. It varies by sector and by product, but for every 100 people that land on an e-commerce site, the average number that will buy across all retail sectors is just over 4 (Average UK conversion rate is 4.23% source: Coremetrics), but at least 3 times as many will choose to buy in store having researched online in the first instance. And in fashion this can easily be a 1 to 5 ratio given that there is a higher propensity to want to try something on before buying.

Yet almost all retailers only take web sales into consideration when determining the level of investment to make in the development of their web platform and the operation behind it. The impact on store sales isn’t given any consideration what so ever.

And so subsequently, the other big issue is around headcount and resource. Or should I say, a lack of it.

95% of the retailers I speak to have too little resource in their e-commerce teams. Yet most retailers want e-commerce to be their biggest store and if anything many have already reached that level.
And again, even from a resource and headcount perspective they are not really taking into consideration the impact of the web as a sales driver on the store business. If they were, they would add headcount and resource to the team to fuel this additional offline opportunity.

From an operational perspective, there are an awful lot of tasks involved in running an e-commerce channel.

Let’s do a quick comparison of what it takes to run a store and who does what compared to the web.

In a retailer’s store channel, the staff in store have to mainly focus on keeping the store tidy, ensuring products are neatly displayed, ensuring shelves and rails are well stocked and selling to customers. Different departments at the head office take care of supply chain, merchandising and allocation, range planning, visual merchandising, customer service, marketing and customer acquisition/driving footfall, and of course ensuring that the EPOS functions effectively.

In the web channel, they have to do almost all of this within the e-commerce team (The exceptions sometimes include range planning, merchandising and supply chain). And of course the e-commerce team also has the additional complexities and opportunities around business intelligence and analytics, content creation and management (Visual merchandising), customer retention and customer service.
I should say that there is no one size fits all. There is no perfect team size or structure. Each business will need to determine what works best for it based on how much of the above is controlled directly by the e-commerce team.

All of this said, there are some great examples of retailers who are actively using each channel to support and drive sales through other channels. Aurora Fashions are one such example. They have recognized the opportunity to drive sales in store through the web for Karen Millen, Coast, Oasis and Warehouse and to also use the store business to fulfill demand from web customers who want to reserve online but pick up in a store that’s convenient for them. They also use the store channel to fulfill demand for the ‘delivery in 90 minutes proposition’.

And from a resource perspective, they created a multi channel director role to drive this growth and innovation.

So the moral of this piece is that if retailers are serious about the web, and they recognize that it will play a significant role in the long-term viability of their business (And if they don’t, then their future may well be in question), then they really need to step up their investment into technology, marketing and people/resource around the web.

And they can do so in the knowledge that it will also continue to drive significant levels of sales across their store portfolio.