The eNova Partnership: A pan–European multi channel advisory group

Welcome to eNova's December 2011 newsletter

Welcome to eNova’s December 2011 Newsletter. In this packed edition we reveal our thoughts on the much-awaited Portas review, officially launch a new index called the Multichannel’O’Meter, give you the latest update on the click-and-collect market which is evolving at an ever increasing speed, and share our thoughts on the importance of online this Christmas. Our multichannel quarterly market summary will give you a glimpse of the innovations that have characterized the past few months. As we already had too much to talk about, we will report on the world of virtual pop-up shops, QR code walls and innovative fulfillment solutions in our next newsletter, once early results are known next year.

In the meantime, best wishes from us all at eNova, and we hope that this Newsletter will provide a touch of freshness and good news to this difficult trading season.

Please share your feedback with us at sophie@enovapartnership.com or andy@enovapartnership.com.

 

Contents

Our thoughts on the Mary Portas Review
The Multichanne’O'Meter
The latest on click and collect
The importance of online this Christmas
Multichannel quarterly market summary

Stat of the quarter

"Nearly one in six shops stands vacant"
(Source The Portas Review, original source “Understanding high street performance” from the Department for Business, Innovation and Skills/Genecon and Partners - 2011)

 

Our thoughts on the Mary Portas Review

The hotly anticipated Mary Portas review on the future of UK’s high street is out. Whilst there are some good, micro-level ideas, Mary shies away from addressing the supermarket and online issues head on. And misses some tricks along the way for doing so.

In her review Mary Portas correctly identifies the sources of the poor shape of the high street: the rise of out-of-town shopping, the impact of online, the recession, and the dominance of supermarkets in food and non-food. But goes on developing her recommendations almost independently to these mammoth trends which in our opinion, need to be addressed head on for an effective solution. In the problem lies the solution.

There is no point beating around the bush. The unstoppable rise of supermarkets, in food and non-food, further fueled by their out-of-town, convenience, and now online presence, is probably the single biggest reason for the demise of the high street. The hemorrhage cannot be reversed, but it can be contained, and there is only one way, which is dramatically tougher planning development rules. Mary flirts with the idea in the report but dismisses it as “unrealistic and unhelpful” in the current economic climate.

The second biggest reason for the current shape of the high street is online, which has taken £1 in £10 of customers’ spending. Where the real opportunity is missed in the report however, is not spotting how online can be a big part of the solution. In a multichannel world, retailers need less physical space: that is a fact. However there are just as many weekly announcements of online retailers coming back to the high street as there are of high street retailers reducing the number of shops. As proven by eBay with their shop on Oxford Street, Simply Be who is opening physical stores, or Net-a-Porter and their virtual pop-up shops, online retailers are demonstrating that the high street is in high demand, for a very simple reason. It offers something that online can never replicate: theatre and physical communication, and something that online can only replicate at the expense of prohibitively high marketing costs: traffic. So we were full of hope when we came to the very last pages of the report to read a paragraph entitled “virtual high streets”. However, Mary’s recommendation is not around innovative solutions like online showrooms, virtual shopping walls or QR code shops, but simply a High Street online community forum with joints offers and loyalty card. People will come for offers, sure. But community websites work for topics people are passionate about – cycling, their pets, or gaming. I’m afraid we’re quite far away from a utopic world where high street communities are buzzing on an online forum.

The trick is a different one: to use some of that vacant space for online and multichannel retailers to counteract some of the shortcomings of online retailing: the ability to touch and feel products, free traffic, and convenient collection points.

The best idea of the whole report is buried on the page before last in a short paragraph. Mary calls it “The New Post Office”. We call it “Online collection points”. One of the biggest trends in the online world at the moment is around solving the last mile challenge. Failed home deliveries cost UK businesses £1bn per annum and consumers many headaches. So whether it’s Amazon’s collection lockers, or Collect +’s network of collection stores, the industry is working hard trying to find solutions to a very expensive problem. The first thing high streets could do is encourage as many of these pick up locations for online orders, to be on the high street. With click and collect penetration typically between 20 and 80% of online orders, that would bring instant, relevant traffic.
Thinking more radically, one could imagine the creation of a collection point for multiple online retailers – collection point gets a fee from retailer for every collection, retailer removes the cost of failed deliveries, consumer can pick up their parcel at their convenience, high street gets traffic, everyone wins. If you had one of in each of the 5,200 High Streets identified by Mary Portas in her report, that would be half of the 10,000 shops lost on the high street over the past two years. A small step in the right direction.

Finally, as Mary Portas rightly identifies, it is key to bring flexibility back to an industry that is burdened by inflexible leases and cumbersome rules on space usage to name a couple of examples. Some of the reasons why the online industry took off so quickly, were low setup costs, and the agile and refreshing, no-rules attitude of some of its players. This has allowed niche online retailers like ASOS or Wiggle to take over entire market segments in a matter of years at the expense of traditional retailers. Many of the differences between online and offline are structural, and none of this can be reversed overnight. But through changes to upwards-only rent reviews, lease terms, and flexibility of use of retail space including for temporary use, we could bring a bit of that online “je-ne-sais-quoi” to the high street. It is no surprise that the online industry, far less regulated, is winning over the high street. If we learn from that rather than shy away from it there might be a point where niche retail can thrive again on high streets in the same way it is thriving online.

The Multichannel'O'Meter

Just as the Economist’s Big Mac index started out as a humorous way of measuring purchasing power across the globe, a small index that we started as a casual way to spread our multichannel message a couple of years back, has continued to surprise you, and us, with its accuracy. So we decided to give it a name and announce the launch of the Multichannel’O’Meter!

The Multichannel’O’Meter simply measures the number of times a retailer’s annual report mentions the word multichannel, homonyms and synonyms (lovers of the fine print please contact us for the recipe). Our broader “e-Meter” includes all words related to online and multichannel e.g. “online”, “multichannel”, “internet”, “Click & Collect” and all homonyms, synonyms and equivalents…Whilst it does catch the odd anomaly, e.g. investor relations online tools, the findings reflect surprisingly accurately the state of this much-talked about market and of its movers and shakers.

We have chosen 10 of the UK’s top retailers by sales, who are either publicly quoted, or like the John Lewis Partnership, consistently publish long form annual reports.

The results speak for themselves in demonstrating multichannel’s growth and deep entrenchment in retailers’ every day lives and strategies.

 

The conclusion? The Multichannel’O’Meter has reached 132 in 2011 and the broader e’Meter 437. It means that on average, our panel of retailers have each used the word multichannel 13 times in their 2011 annual report, and eCommerce related words, around 44 times!
The Multichannel’O’Meter has been growing by 46% per annum since 2007, a figure remarkably close to our estimate of annual market growth of this segment of retail, outstripping pure e-tail growth.

The winners?
Halfords wins the 2011 prize hands down, with 39 mentions of the word multichannel and 123 e-related words. That compares to 136 mentions of the word “retail”, which we are ready to bet will be overtaken next year!

The clear winner for the 5-year trend is The Home Retail Group who was pretty much the only true multichannel advocate in 2007 with over 70% of multichannel mentions, and has continued to spread the multichannel word consistently ever since, educating consumers and the market alike.

The players
eNova’s Meters leave leaders and followers nowhere to hide – HRG’s recognized dominance in the multichannel field is the most evident (Argos won once again in 2011 the Multichannel Retailer of the Year award). The grocers’ late entries can also be observed (Tesco with a timid 1 “multichannel” in 2010, catching up in 2011; Sainsbury’s with none even though click and collect trials are taking place). And the Meters are also a good illustration of individual retailers’ aggressiveness and, dare we say, success - Halford’s and M&S’ multichannel push over the past two years is “not just words” as both retailers have exhibited exceptional multichannel growth. In an industry growing at 15%, Halfords’ online sales have grown 36% in 2010-11, and most importantly in a multichannel world, have benefited offline sales as well with 86% of web transactions involving a store visit and additional purchases. As for M&S, they are still on track to reach their £1bn target for multichannel sales by 2013/14 having grown by 31% in 2011 to just over half a billion.

Below the surface
Digging deeper into the analysis reveals some other interesting trends, for example the fact that the fastest-growing word is “Click & Collect” and variations (e.g. Reserve and Collect, Reserve online Collect in Store), with growth of close to 80% per annum since 2007. So it is no surprise to us to see retailers announcing the launch of click and collect in hordes over the past few months with New Look, Reiss and Ted Baker a few examples.
The word whose growth is slowing down the fastest is the word “online”, with only 4% growth between 2010 and 2011. Once again, pretty accurate pointers of market truisms: it’s not just about online any more (with the exception of a handful of pure plays), it’s about multichannel, and for those who can, click and collect has been a formidable tools for well-above-market growth.

Our bets for next year
Let us have a go at betting the trends in the MC’O’Meter for next year. New Look, who before 2011 was on track to be one of the winners, is sure to reappear in full Multichannel swing in 2012 as it launches click and collect in 600 stores nationwide. The pace of growth should slow down for Halfords and HRG, more mature multichannel retailers, whilst we expect the grocers, with Tesco and Sainsbury’s in particular, to make a big jump.

Where do you stand?
We surprised ourselves at how accurate two apparently simplistic indices were in portraying a market and its players. You might be surprised yourself…How about checking where you stand on the Multichannel’O’Meter?

The latest on click and collect

This article was also published by Internet Retailing on 11 November 2011 (click here for original article)

It is official: Click & Collect has made it to the forefront of the retail scene. No longer an optional extra to boost eCommerce growth, it is finally taking the pivotal role it deserves in retailers’ strategy, with the likes of New Look announcing it will be “the biggest driver of sales within the next three years”.  Not only is click and collect take-up accelerating at an unprecedented rate, but it is evolving and venturing into new categories as more and more businesses aspire to reap the rewards of one of the most effective tools in staying at the forefront of the growth pack. A world of challenges and opportunities await for retailers as they embrace, adapt and enjoy the rewards of this deceptively simple concept.

In an increasingly challenging retail environment, the uptake of C&C should not come as a great surprise. Argos, the first to introduce the service a decade ago, with click and collect sales of around £1bn, is no longer the only example of success. Halfords, John Lewis and M&S are some of the many businesses who now have the sales figures to demonstrate that it is one of the most proven ways to embrace multichannel retailing.

The bug is spreading amongst UK retailers with many big brands announcing they will be launching the service to their customers. High Street retailer New Look has announced it will be pushing Click & Collect out among 600 stores nationwide next year, top UK department store John Lewis is doubling its Click & Collect collection points with an additional 60 Waitrose stores to pick up from, and fashion retailer Reiss has announced it will launch just in time for the peak Christmas trading period.

Whilst click and collect success stories abound, the simplicity of the concept hides a minefield of nuances and complexities. Firstly, from a customer point of view: ensuring that the pick up location is clearly identified, that the collection process is smooth and staff informed, and that returns are processed effortlessly. Secondly, from an operational point of view: store or central warehouse fulfilment, online or in-store payment, staff training and sale attribution to name but a few, are to be carefully thought through for click and collect to succeed.

Now the trend is spreading wider than clothing and goods. Marks & Spencer has become the second retailer in the UK to venture into Click & Collect for food, after Tesco launched its own service for groceries over the summer.

This takes the concept of Click & Collect to a whole new level. It is no longer simply wrapping up a dress or finding a place to store a television ready for collection: food presents a whole host of new complications. For example, where to store fresh or frozen products, how long to store items for, how to deal with substitutions.

On paper, click and collect for food is as good an idea as it sounds. With online food retailing representing over £5bn of sales and click and collect penetration typically between 20 and 80%, the numbers speak for themselves. But in practice, will it work? The complexities associated with food C&C could get in the way of the customer experience which, in the short term, could prevent these services from achieving the success they would deserve on paper.

Both Tesco and Marks & Spencer’s services operate on a scheduled time-slot basis. You have to be at your collection point (Tesco has a drive-thru area at the back of its stores so customers don’t actually have to go into the shop) within a 1.5 to 2 hour timeframe or you run the risk of your order being either unavailable, or returned to the shelves. If you are ordering something very specific, like a birthday cake, and the key to your satisfaction is availability as opposed to convenience, then click and collect with a time-slot might work for you. If you’re doing the weekly shopping, however, is a fixed pick-up timeslot a great service or a hindrance?

The fact customers are asking for ever-tighter fixed delivery slots for home delivery doesn’t mean that they would want the same for click and collect. In fact I would argue that home deliveries and Click & Collect work in diametrically opposed ways: as a customer opting for home delivery you want a tight timeslot because you don’t want to be sitting around at home all day waiting for your groceries. Click & Collect works for the opposite reason – the convenience of knowing you can pop by at any time of your convenience and your product will be there waiting for you.

The substitution issue inherent to food remains for C&C orders. Tesco put all substituted items into different coloured bags so you can decide there and then what you want to do with them. But it poses the question: what’s better – processing a refund, parking your car, going inside the store to buy new substitutes yourself, or going in store to make these choices by yourself in the first place? The M&S offering, limited to themed ranges and a very tight dining offering, removes that headache – there are no substitutes.

Then comes the issue of costs. Tesco charges a minimum of £2 per food Click & Collect order. There is of course no doubt that having orders individually picked and separately refrigerated costs extra time and money, but will the customer who is used to picking up all his non-food items for free understand this?

Click & Collect can be, and will be, a phenomenal driver of sales and customer satisfaction, but as with everything in retail, it’s all about the detail. It needs to answer customers’ convenience demands flawlessly with any disappointment hurting disproportionately in the digital age. From that point of view, to venture into food C&C is brave and Tesco and Marks and Spencer should be applauded for trialing it.

Food C&C is in its infancy and will no doubt one day follow the successful path of its non-food counterpart – For this to happen though, customer demands will need to win over any internal, logistical or financial constraint driving customer experience. And there is no doubt it will over time, as once it does, customers will not even consider the alternative.

 

The importance of online retailing this Christmas

Every year as Christmas approaches, a record is broken: that of the biggest-ever online shopping day. And every year, there is much talk about when this day will fall – was it the last Monday of November, dubbed “Mega Monday”, or the first one in December? The debate around timing is a distraction compared to the fact  online retail growth is about the only piece of positive news to the retail industry, and signals a fundamental shift in customers’ habits.  Online is no longer a trend, it’s structural to the retail industry and missing out on the opportunity in the crucial Christmas season could have dire consequences in the harshest trading environment of the post-war era.

Last year, estimates for online growth over the festive season were between 15 and 25%. This year, similar prognosis is being made based on early results from the US. But whether it’s 15% or 25% matters less than the fact that it is both above online industry growth, and infinitely above the 2%1 decline predicted for the high street.

There are simple reasons why the growth of online at Christmas is disproportionally high. Consumers shop online for two main reasons: convenience, and price. At Christmas, these reasons are exacerbated. Convenience means avoiding crowded shops, finding inspiration for presents, and fitting-in the Christmas shopping with busy family and working lives. Last year, when heavy snow prevented many from reaching the shops, convenience became even more of a priority providing online with an extra boost. Price is about the ability that online offers to research offers and the best deals on specific products.  This year, as the weight of the economic downturn takes its toll on Christmas spending, I predict it will be the focus on price, not seasonal weather, which will provide online with the additional boost it needs to reach the higher end of the growth forecasts.

Either way, ignoring online as a game changer is not far from suicidal in this difficult festive season. Studies estimate around 90% of customers will use the internet to buy some or all of their presents this year2, and that over 25%1 of spending on gifts, Christmas travel, food and decoration will be online.

The trick to make the most of online is not to see it as just a purchasing channel. It is when it’s used smartly and in conjunction with stores that online retailing reveals all its potential:

• First, it is easy to forget that the most important role played by the online channel is not purchasing, but information and research. 90% of consumers’ cash is still spent in physical stores. What over 60% of these consumers will systematically do though, is research their purchases online before setting foot on the high street. Using the online channel to present products to their best, helping people choose presents smartly within our world of infinite choice, and giving customers relevant reasons to come to stores, might the most profitable strategies of them all.
• Second, the online channel has a flexibility that high street stores operations do not have. A product is out of stock? It comes off the home page. A promotion doesn’t work? Switch it off. Leftovers from what was supposed to be a best-seller? They’ll be perfect in a “bargains of the week” tab without looking miserable piled up in a shop corner. No point of sale material to print, shelves to manage, pricetags to change.
• Finally, the online channel makes retailers’ most difficult bet each Christmas much easier to manage: choosing when to turn sales on and off. Every year, retailers try to resist the temptation of early discounting. In 2011, no retailer can pretend they will resist. This Christmas will be one of the most promotional ever witnessed with many retailers displaying constant discount banners both online and in store in a trend I believe is only expected to increase. Informing consumers, surprising them, and presenting discounted products, is significantly easier through the online channel. Promotions appear “cleaner” online with less of the sense of desperation that brightly-coloured in store banners and shelves of unsold products can often give.

 

Online will once again break records this Christmas. What will be different this year, is not how online will fare, but how retailers who miss out on the online opportunity might never recover.

Sources:
1 Kelkoo study by Centre for Retail Research, 2011
2 HSBC Christmas spending survey 2011

Multichannel quarterly market summary

The recent retail news has been polarized between on one hand, the toughest retail trading conditions in living memory, with reports of high-profile businesses in dire straits such as Peacocks or La Senza. And on the other hand, some islands of good news and thriving businesses, mainly in the luxury (Burberry and Hermes) and multichannel spaces (ASOS, Amazon, John Lewis).
There is no doubt in our minds that this Christmas will sadly see a high level of retail casualties as the industry not only has to battle with some mammoth structural issues discussed in our article on the Portas Review, but also with a this-time-it’s-for-real consumer spending slowdown.
Peacocks and Ann Harvey are the last two retailers on our list of those announcing store closures, 200 for Peacocks and 20 for Ann Harvey, sadly we suspect probably not as a result of a well thought-through multichannel strategy.
Our lists of e-tailers opening physical shops this quarter includes cycle retailer Chain Reaction, and its rival Wiggle whose stated strategy following its acquisition by Bridgepoint includes the opening of large-scale destination stores.
Bets are on and flying all over the press as to how retail and online will fare this Christmas, with the broad consensus that retail as a whole will be down by 1 to 2% and online up by anything from 15 to 25%. John Lewis announced their record online day and a decent online growth year on year. The first figures from IBM on “Cyber Monday” trading were up 22% v. last year in the US. As discussed in our article about Christmas, we are not fans of trying to second-guess how customers will behave on which day and prefer waiting for January consolidated results to comment on how our industry fared over the festive season. Our bet though, is that differentiation and multichannel will be the two ingredients of success to separate winners from losers.
This quarter has simply been fascinating to watch in terms of innovation. From  eBay’s Christmas high street QR code boutique, to John Lewis’ digital product wall in Waitrose, to Debenhams’ virtual pop up shops, to Tesco’s augmented reality tests with home products, there was too much to discuss in this newsletter so we will come back to the topic early next year when we can get our hands on the results from some of these trials. The idea of the year has to go to Amazon, though, for using mobile technology to pay customers so they don’t spend their money in physical stores. Sneaky or brillant? More in our next newsletter….
In terms of Multichannel innovation, Aurora has come up with an idea which is worth considering, fulfilling online orders from stores instead of warehouse when its website bestsellers are out of stock. We’d like to believe that the IT, staff and customer journey implications mean that this cannot be anything other than a temporary strategy for a much-needed boost over Christmas, but we thought it was worth mulling over as an idea.
There has been a revival of US eCommerce growth throughout 2011, with the mature market, which had firmly gone down into single-digit growth territory for a few years, boasting double-digit growth levels for the past consecutive quarters. In Q3 2011, US eCommerce spend went up by 13% y-o-y, reaching UK market growth rates. As the US is typically a crystal ball into the performance of the UK 3-4 years down the line, this might bode well for the already bright future of UK eCommerce.
Meanwhile, France follows in the footsteps of the UK eCommerce maturity curve, with continued growth around 20%.
Talking of France, Marks and Spencer opened its much anticipated French website alongside an upcoming hero store on the Champs Elysees. With a well-executed local website, we hope this multichannel international expansion strategy will be a model to follow for retailers wishing to combine the powers of online and offline to establish an international presence.
Carrefour meanwhile is following in the footsteps of its UK giant supermarket counterparts with a burgeoning online non-food strategy, with a website selling electrical products managed by Pixmania. A lot of work needs to be done still - Try shopping for champagne, flowers, and a small electrical gift in the same basket…unfortunately no better than UK counterparts with disjointed food and non-food offerings.
Back in the UK, ASOS posted the most disappointing results it had posted in a long while with flat Q2 domestic sales, which Nick Robertson blamed on competition from an overly discounted high street. We partly disagree with that explanation. Even though the high street giants’ size and margins probably allow for steeper discounts, online is a far easier and more flexible tool to reach out to customers with relevant promotions. To be fair though we don’t believe ASOS needed to justify themselves in the first place anyway with such a remarkable performance internationally – for a company who started its international focus in 2007 to boast close to 50% penetration for international sales and the “third most visited fashion website on the planet”, is quite simply remarkable.

The new Debenhams boss emphasized multichannel as a key pillar to the group’s strategy going forward, laying out his vision to “make the department store a leading international multichannel retailer”. We’ll be checking out on Debenham’s performance on the Multichannel’O’Meter next year...