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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.
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.
3.1
4 5
2010, Google Australia, The Behaviour Traits and Characteristics of Australian Online Shoppers 2012, New York Times, Wal-Mart Changes The Game Again
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,
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?.
3.3
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.
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.
20%
34%
80%
66%
Neither
77
76
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