TWO LITTLE BOYS HAD TWO LITTLE TOYS

One of the most successful “Big Box” retailers in the world: Toys R Us, filed for bankruptcy in the USA in the summer of 2017. It has been in existence for over sixty-five years. This represented the nadir of this type of retailer. Similar retailers such as Blockbuster, Circuit City and Sports Authority also ran into difficulties and faced a similar exit from the retail scene.

I suppose we should not be surprised by such a development. I have always argued that the retail sector is a fickle one. In some cases the retail life cycle can be very short.  Some commentators argue that every fifty years or so retailing goes into a major shift in disruption and revolution. Perhaps the developments over the past few years in technology and changes in shopping behaviour have caught up with retailers such as Toys R Us.

“Big Box” retailers or “category killers” as they are sometimes referred to became very successful in the 1980’s.  Very large physical retail spaces allied to a focus on one category of product has worked well for category killers. Essentially they set out to be the recognised place to go for the particular category of product that they sold: in this case toys. This focused approach allowed such retailers to offer lower prices, due to being in a strong bargaining position with suppliers. They also offered a far greater selection of items in that category; thereby making it a “one stop shop” for customers making their seasonal or holiday purchases for their kids. It positioned its value proposition as being the “authoritative toy retailer.

It focused on a combination of price and quality, linked to a very comprehensive selection of items across all categories of toys. In essence: “the place to shop for toys”. Such a strategy was designed to put the small independent toy retailers out of business. In many ways this worked very well and we saw the demise of many favourite, traditional toyshops in the United Kingdom.

Category killers operated successfully for over three decades or so. However in the last ten years we have witnessed major changes in the value proposition being offered by new entrants to different retail sub-sectors. This combined with the growth in online retailing and the adoption of apps, smart phones and social media platforms, has fundamentally altered the way in which shoppers engage with retailers.

Some commentators argue that Toys R Us committed the classic mistake of well-established and successful businesses: they were too slow to adapt and the brand lost its relevance. Certainly they cannot blame economic variables such as recession for their decline. In the USA for instance holiday sales have grown by over six per cent in 2015.

It attempted to respond to these developments in 2014 when it launched what it called the TRU strategy. This was supposed to take it back to the customer in terms of relevance. It focused on clearer pricing strategies in the store, improvements in simpler promotional offers and a better and more relevant in-store experience.

Significantly it was very slow in developing its online retail business and more critically also slow to integrate both physical and virtual platforms. This has led to the criticism that it failed to recognise in time the fact that consumers have largely become hybrid shoppers. In other words they use a number of platforms to engage with a retailer throughout the purchasing process (problem recognition, search, evaluation, purchase and post-purchase).

Our old friend Amazon since its pioneering inception has conditioned and educated shoppers world-wide to engage in this hybrid shopping behaviour. Contrast Amazon’s approach with Toys R Us. In the case of the former it provides flexibility, speed in ordering and delivery of the item(s) and above all adaptability across its management of all aspects of its supply chain.

Category killers such as Toys R Us on the other hand are still frozen in the mind-set of cluttered stores and queues at check-outs.

More critically retailers such as Amazon, Target and WalMart have crossed over and across to many categories of product: including toys. As a consequence the “big box” concept has come under serious threat – perhaps a fatal one.

To be fair to Toys R Us it has plans to radically change the in-store experience. This has concentrated on focused interactive and engaged initiatives for parents and kids when they visit the store. For instance Geoffrey, the iconic Toys R Us mascot will greet shoppers as they enter the store. Shoppers can also point their smart phones at selected items on the shelves. By doing so this will activate a personalised experience. Barbie will tell her story to the shopper.

Augmented reality features are also being introduced to heighten the engagement and interaction. Live toy demonstrations will be provided by trained staff. They will also be given more freedom to take toys out of their wrapping and packaging to encourage kids to interact with them.

Critics might say that these initiatives, while welcome in terms of making the retailer more relevant and responsive to shoppers is too late. Large toy retailers such as Hamleys in the UK have been doing these things for a number of years.

Critical challenges involve slashing the levels of debt that it has sustained in recent years. It will also have to face the harsh reality of having to improve pay conditions for its staff.

Integrating its digital content into its stores is also at an early stage in its development: competitors have addressed this already.

The pessimist would say that it has “missed the boat”. For instance do we really need such a large physical space any more to sell items? Other retailers have redefined the purpose of physical space. Now such areas are used to build relationships with shoppers, provide solutions to their perceived problems and offer services to them. It does not matter whether they buy items within the store. Effective loyalty programmes allied to a solid reputation for customer service can direct shoppers to buy from their other retail channel platforms.

Arguably Toys R Us should go the way of other retailers such as IKEA.

In this case IKEA has begun to introduce smaller “showroom and display” physical spaces. Maybe Toys R Us should open up small playrooms and allow kids (and parents) to play in there.

Currently Toys R Us is undergoing a major rationalisation of its physical stores. It is closing around a dozen such outlets in the UK.

To its credit we should acknowledge that it has recognised (eventually) what the problems are and has plans to address them (as discussed in earlier paragraphs in this blog). The major concern is the levels of debt which it has incurred and the high volume of depreciating real estate which lies at the centre of its operations. It is a huge millstone that is tied around its neck and is likely to push it down and into oblivion. It faced a looming deadline of having to pay back $400 million of its overall $5 billion long-term debt.

Let’s see what happens in the coming months.

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BACK TO THE FUTURE

Occasionally in these blogs I focus on what might happen in the future by way of issues that are currently trending in the social media and press. Many of the big issues have already been aired in previous blogs such as the potential demise of physical stores and the impact of drones.

I was interested in a recent article that I read which put forward the view that we could see the end of supermarkets over the next ten to fifteen years or so*. This intrigued me as a retail commentator because it would suggest that one of the longest-standing and most successful business models in retailing might be under threat.

Let us explore this further.

The article suggests that technology once again is at the forefront in this potential threat to the established supermarkets. It would not appear to be built on wild speculation as various concepts are currently being tested.

The gist of this new concept is based on new online shopping technology that could see prices to the grocery shopper fall ultimately to around one-third of what they currently pay.

Major grocery suppliers such as Unilever, Mars and Reckitt have agreed to sell some of their big brand items directly to consumers via a high street digital channel which is scheduled to be launched sometime in 2018.

This will envisage hundreds of brands such as Walls ice-cream, Durex, Dettol and Dolmio sauces being made available at bargain prices.

This website will allow the branders to decide their own prices using blockchain technology to connect shoppers directly to the products.

The potential “win” for suppliers is that if this business model takes off it will mean that they no longer have to engage and negotiate with supermarkets over price. This has always been a contentious issue and as we have discussed in the text, can lead to confrontational and combustible relationships.

Effectively this model eliminates the supermarkets. We have seen this happen in many sectors over the years, most notably in the travel and airline business and also in the insurance sector.

The model is built around an online shopping portal channel. This is supported by an outsourced network of third party operators that deal with management of the inventory in various distribution centres and delivery drivers who will provide the last mile of the supply chain strategy,

Customers will be charged the wholesale price plus additional extras to cover storage and delivery. If we factor in the absence of supermarkets in this business model, we can see how the shopper is likely to benefit from considerable savings. Typically the latter raise the price by as much as fifty per cent to cover such costs and their profit margin.

This model even allows the potential for manufacturers to charge wholesale prices than they would with supermarkets. Remember supermarkets, because of their power, leverage a large degree of pressure on them to comply with their needs and requirements. This usually revolves around squeezing them as tightly as possible to get the best possible price.

The use of blockchain technology allows for a continuously updated digital database of who and where shoppers are and what they are buying. Unlike traditional shops they do not need to be managed by a central administrator; the database automatically updates and manages itself.

Like the typical online retail channels shoppers sign up for such services.

So what are we to make of this new retail business model? Is it likely to be a game-changer?

Let us consider some of the pros and cons.

Firstly it would appear to eliminate what has become for many shoppers out there, a very boring and tedious task. In Britain this amounts to the traditional weekly visit to the supermarket: consisting of spending around an hour in the store, getting bashed by trolleys and noisy kids, loading up the car and getting in and out of the store – usually with the inevitable parking difficulties.

Secondly many of us are now acclimatised to shopping online. Some of us rely on online shopping with supermarkets via their respective online retail channels. This proposed model would appear to be a further extension of ordering groceries online.

Convenience is clearly a critical issue for many grocery shoppers: we live in a pressured environment and could be labelled “time-poor” as a consequence.

The lure of lower prices, particularly to the extent that is being speculated in the press is also attractive to many shoppers.

In terms of value we can see convenience and lower price coming together to offer a potentially attractive shopping proposition for customers.

The adoption of apps such as the one being developed by US technology firm INS create just such a convenient environment. If it can deliver prices at around one-third the current ones then what’s not to like about the model?

The model employed by supermarkets arguably has not changed over the decades: large volumes of product sold in large physical spaces. This is costly in the context of the move towards online shopping.

What are the potential difficulties associated with getting this model accepted in the market-place?

Firstly supermarkets are large and powerful players in grocery retailing. They are likely to respond with fury and employ aggressive counter-strategies to ward off this threat. Their margins, although relatively low in general terms still allow for price reductions. They can offer the largest grocery suppliers further attractive deals in order to discourage them from becoming involved in such an arrangement.

Secondly many shoppers still prefer to engage with the physicality of visiting stores, inspecting items on the shelves and interacting with them. This is unlikely to disappear anytime soon. The trends with respect to online grocery shopping suggest that this will take some time to win over everyone to this mode of grocery shopping.

Companies moving into this space where they eliminate the need for supermarkets will need “deep pockets” in order to fight off the anticipated and sustained response from the supermarkets. They will have to dangle” a number of carrots” in front of suppliers in order to encourage them to participate in this initiative.

Arguably only companies such as Google, Facebook or Amazon would have the financial capability to fight the supermarkets over a prolonged period of time.

Shoppers are changing. It is possibly that this model may gain some traction looking ahead to the next decade to fifteen years. I personally doubt that we will see the disappearance of supermarkets anytime soon.  None the less it is likely that we will see a number of initiatives in the area of grocery shopping which will increasingly be built around the challenge of reducing the dependence on supermarkets.

(* Morley, Kate (2017) “New online shopping technology could see the death of supermarkets”. Daily Telegraph, 1/11/2017).

HIGH NOON ON THE HIGH STREET

In this blog I revisit a favourite topic of mine: the future of the high street. In a previous blog (Time to Say Goodbye) I reflected on attempts by various individuals and organisations to revive the high street. The general thrust of this blog was that it was becoming increasingly difficult if not impossible to achieve this task.

Perhaps the most focused approach emanated from Mary Portas. She has established a reputation for flair and entrepreneurship in the retail sector and in the early part of this decade also achieved some fame as a TV personality, running her own programmes about analysing current retail businesses and providing advice as to how they might be turned around.

A natural follow-on from such programmes was an invitation to carry out an investigation and come up with a report on how the high street might be turned around.

The context for this initiative was clear. Since the 990’s and noughties, the high street appeared to be in irreversible decline. The inexorable growth of internet shopping clearly playing a significant part in this development. No longer did “time-poor” shoppers have to drag themselves with the same frequency as before, to physical shopping units in the high street. Instead of visiting shops during their lunch-time, they could place their orders from the comfort of their office, home or on their way into and from work.

The large retailers, across the different sectors: food, clothing, electronics, furniture, toys and so on, continued to beat the smaller shop on key factors such as price and range of merchandise. Put simply smaller shops, typically to be found on the high street could not cope very well with such threats, apart from offering a more personalised and intimate shopping experience. This advantage was in danger of being eroded further as lower prices continued to drive shoppers away from the high street to the internet and to out-of-town shopping centres.

A walk up and down the typical UK high street in any typical town or central business district area would typically identify the following characteristic. Betting shops, charity shops and boarded up, derelict outlets and a general atmosphere of poverty and hopelessness. This was the case a decade to fifteen years ago. I made the same walk around my high street recently and it is even more prevalent and hopeless. If anything it has got worse.

This is despite the fact that we are told the recession of 2009 is finally ebbing away and that more and more people are in gainful employment.

Mary Portas came up with a report which made a number of recommendations.

The government made available a sum of £1.2 million to spend on twelve towns in the UK in order to implement the initiatives proposed in her report. I go into more detail about some of these ideas in the earlier blog so I will avoid going over old ground.

Her main themes revolved around making the town centre / high street more attractive as a destination for people to visit and shop. Something akin to the Christmas markets (very popular in parts of Europe) was highlighted. This would allow interesting outlets and pop-up stands to emerge, selling unusual or “craft” oriented items.

She strongly recommended the abolition of parking charges. From her investigations she realised that a major “turn-off” for shoppers visiting town centres was: inadequate parking, exorbitant charges, the ever-presence of traffic wardens, only too happy to issue tickets and the reality that five minutes at most would be available to visit a shop and make a purchase in order to avoid a fine.

She argued for more realistic approaches to rents. Many landlords operated a policy of upward only rental agreements, in some cases annually. This made many rents unrealistic for small, independent retailers.

Business rates were also seen as being prohibitive.

The problem for small retailers was exacerbated by the arrival of the large retailers in the high street. Many actually launching new concepts which had the appearance of being independent retailers but were actually part of the major retailer’s operations. Such retailers could afford the rentals and this only served to push the costs higher and higher.

Five years or so on from this report and its recommendations what has happened?

The news, (if you are a supporter of high streets and their rejuvenation) is not at all positive.

Across the twelve towns which participated in the study, a net loss of around 969 outlets was recorded. This is graphic evidence that the initiatives introduced by Portas were ineffective.

In addition to the long recession and rental issues, other factors such as a rise in the living wage and spiralling property prices have made even large retailers such as Next struggle on the high street. They are forced to rethink their property portfolio in light of the increasing growth of online channels.

The major reason for the failure of the initiatives in my view has to be put down to a lack of commitment from the government. During this period they reviewed the business rates and this led to a substantial increase (for many retailers) in what they would have to pay. This attracted major criticism and the government attempted to “water down” the effect of this by allowing them to appeal. However as with most appeals, it became tangled up in bureaucracy and delays. The net effect is that some retailers could not absorb such increases – leading to more of them disappearing off the high street.

This lukewarm approach was also reflected in the attitude of government to doing away with parking charges. Instead they supported initiatives such as “ten minute grace periods” and a more lenient approach by local authorities of the towns. Of course in practice this had little effect. Local authorities have become increasingly dependent on income from such sources. Without adequate support from the national government it was never likely they would embrace such recommendations with enthusiasm.

The sum of £1.2 million was also in my view very little if some of the more ambitious elements of the Portas report were to be implemented. Even recruiting a sufficient number of retail experts (which was not feasible, given the budget) still meant that volunteers would still have to play a major role in implementing the initiatives.

So where does that leave us and more importantly the high street?

Some high streets have improved. Those that fall into this category have succeeded because of a partnership approach between all of the key stakeholders such as retailers, landlords, local authorities and developers. Treating the high street as a form of leisure destination is probably the way to go in the future.

We always say in marketing that any product has to have a point or a couple of points of differentiation. Otherwise why would anyone purchase such as product? Likewise with the high street. It has to offer something that is different from the value proposition that a shopper can experience on the internet or at an out-of-town shopping centre. Unusual craft and artisan type outlets in a pleasant setting (live music, eateries and coffee shops) can go some way to providing this different type of shopping experience.

Unless we see greater flexibility on the part of local councils we will not see much progress in these directions.

Politicians and local council members in my view have no understanding or appreciation of how small independent retailers operate. Their approach to business rates appears to reflect the view that this is a major source of revenue: it does not take into account the practical realities of having to deal with the harsh realities of spiralling costs in an environment which is ever more competitive. The opportunities for entrepreneur to make a living a sinking by the day.

While some exceptions will always occur, we have most probably seen the death of the high street.

OMNIPOTENT

OMNIPOTENT

We discussed the concept of omnichannels in the text in various chapters. This has become a very “hot” topic since the book was published in 2015. I thought it might be relevant to revisit the topic and consider any further research or comments that might have emerged in the literature since then.

Let us recap what this term means.

Essentially companies have to address the changing behaviour of customers (both B2B and B2C) in the market-place. Yet again technology and data have combined to materially influence the way in which customers in all sectors engage in the purchasing decision-making and buying process. This is particularly so in the case of the retail sector. Traditionally shoppers visited the physical, “bricks and mortar” store to make get advice, browse, compare different brands and make a purchase.

Online channels and developments in mobile technology (for instance mobile apps) and social media have revolutionised the way in which customers engage with retailers across all points in the buying process: problem recognition, search, evaluation of alternative options, and the decision on which item to buy, purchase and post-purchase considerations.

Put simply, shoppers “duck in and out of” different channels during this purchasing process. For instance social media platforms may stimulate me to consider buying a new TV set, I may visit some blogs and discussion forums to pick up some “pearls of wisdom” from people who have experienced some  of the brands out there such as Samsung and LG. I may then visit an electrical retailer such as Curry’s. I may finally make that final purchase online. Post-purchase if I have any queries I may ring a call centre to get advice or guidance. In this case I have used a number of different channels.

Initially during the late noughties and the early part of this decade, some of the experts in the retail sector were predicting the eclipse of physical stores and that shoppers would sublimely migrate to the new channels. However evidence suggests that this is not happening to the extent highlighted in various reports. Physical, “bricks and mortar” stores play a significant role for many of us. Indeed retailers in general have responded by redefining what a physical store should deliver in terms of the shopping experience.

The challenge for the retailer is to ensure that I, as a customer, should enjoy an integrated and seamless experience across all of the channels every time I engage with the retailer.

In theory this sounds perfect in terms of managing customer’s expectations and improving the experience.

In practice however it is a challenge.

The following quotation is from a recent article published by McKinsey Consultants *

“Mapping its customers’ journeys confirmed the suspicions.   Four out of five potential loan customers visited the bank’s website, but from there, their paths diverged as they sought different ways to have their questions answered. About 20 percent stayed online, another 20 percent phoned a call center, and 15 percent visited a branch, with the remainder leaving the process.

The channels’ differing performance pointed to specific problems. Ultimately, more than one-fifth of customers who visited a branch ended up getting loans. But in the online channel, less than 1 percent got a loan after almost 80 percent dropped out rather than fill in a registration form. Finally, in call centers, a mere one-tenth of 1 percent of customers received a loan—perhaps not surprising, since only 2 percent even requested an offer

To integrate digital and traditional channels more effectively, the bank had to become more agile, with the understanding that its one-size-fits-most processes would no longer work. Complex registration forms were simplified and tailored to different types of customers. Revised policies clarified which channel took the lead when customers moved between channels. And new links between the website and the call centers enabled agents to follow up when online customers left a form incomplete. Together, these types of changes helped increase sales of current-account and personal-loan products by more than 25 percent across all channels.” (Full reference at end of this blog)

This lengthy quotation (apologies) serves to highlight the practical problems that a retail bank faces in terms of implementing an omnichannel strategy. Existing processes and procedures have had to be adapted or changed in order to ensure that customers and the bank benefited from the concept.

Building digital capabilities is key to the ultimate success of the omnichannel experience. It is not simply a case of adding on extra digital channels, for instance a new and improved app. In order to understand customer preferences retailers have to invest the time and energy in mapping out the journeys that individual shoppers take when engaging with it during the buying process.

In the book I discussed some typical obstacles to implementing an omnichannel strategy. This included variation with respect to inventory across the different channels e.g. an item being available in some, but not all stores, while at the same time not being available at all on its online channel. This in turn damages the reputation and brand equity of the retailer. It also can result in disgruntled shoppers taking their business elsewhere.

Further obstacles identified in the McKinsey article include the following.

  1. A bias toward bigness. Part of the reason is a misplaced belief that omnichannel’s massive implications require equally massive actions, such as an entirely new IT platform or organization structure to bring all channels together. Too often that “silver bullet” mentality leads only to a massive misallocation of resources.
  2. Disregarding diversity. In our experience, most companies tend to build their digital and omnichannel experience believing that most customers have basically the same needs and follow basically the same journeys. In reality, customers are far more diverse, not only in their needs but also in how they want to meet those needs.
  3. Curbing cooperation. But the need for greater flexibility usually bumps into a hardened reality. Despite decades of discussion about conflicting channels, many companies still operate each channel as a separate organization, expecting it to optimize its own performance and service model while showing its own results. Incentives ostensibly designed to encourage performance unintentionally reinforce the channels’ isolation—such as revenue-generation targets that push each channel to increase its own sales volume regardless of any impact on sister channels.

Most of these obstacles actually tend to emerge because companies have pre-conceived notions of how shoppers behave. In order to address them senior management needs to adopt a change in mind-set and get back to basics.

In the next blog I consider some of the practical ways in which companies can employ to overcome these obstacles and help to ensure that a smoother path to omnipotent success is achieved.

Reference.

Bianchi, Rafaella, Cermak, Michael and Duskek, Ondrej (2016) “Omnichannel not omnishambles”. McKinsey Quarterly, December.

PRETENTIOUS MOI?

Are there no limits to the expansion and developments plans of Amazon? This company has been rightly hailed as one of the major “game-changers” of the past fifty years or so. It arguably has made the most significant contribution to changing the way in which businesses engage with customers, anticipate and shape their demands and expectations and come up with a value proposition that addresses the needs of many of us.

Five years ago if you carried out a vox pop with people on the typical “high street” and asked them what do they associate with Amazon, the vast majority would respond by mentioning terms such as “books” and “CD’s”. Clearly both Amazon and the perceptions that people hold about them have moved on considerably since then.

I was forced to revisit the case of Amazon (a company that features extensively in previous blogs of mine) recently when I learned about their move into the area of fashion, specifically womenswear and menswear.

While this has not necessarily surprised me (when will Amazon move into the challenge of getting people to planet Mars?), I thought initially that might be a step too far. Why? Well its success has been built on selling products that are not involved in the “emotional” space in the mind of the shopper. Buying books and electronic items does not have the same emotional resonance as buying fashion items. To use an analogy, if Manchester United set up a basketball team to compete in the European Basketball league, people might raise doubts in their minds about the credibility of such a move. However on a deeper appraisal, many would come around to the conclusion that their financial resources would enable them to develop a capable team reasonably quickly.

The same possibly applies to Amazon. With their considerable financial reserves and muscles is it not reasonably to expect that they can become a major player in the fashion clothing sector?

Let us examine their entry into this space more fully.

In September 2017 Amazon announced its move into fashion by launching a concerted marketing communications campaign via billboard advertising, digital marketing and on its own webpage across the United Kingdom, Germany, Spain France and Italy.

This campaign was built around its new own-label fashion brand Find.

Its basic value proposition is based on the principle that it will offer around five hundred womenswear and menswear items that are “trend-developed” i.ee that closely follow current fashion trends and “street styling”. A red, floral wrap dress and hot pink sock boots featured prominently in its initial “visuals” in its communications strategy.

Prior to the major launch in September it launched some basic and cheap items in April to allow them to put the “toe in the water”.

Jeff Bezos, the founder of Amazon sees the September launch as a “learning process” in the company’s quest to generate overall revenue of over $200 million from the fashion sector in due course/

This is no idle boast or threat. As indication of the intent of Amazon, it recently acquired Europe’s biggest photography studio in London with the specific aim of being able to produce state-of-the-art “visuals” of its fashion collection on its websites and digital communications platforms.

Earlier this year Amazon launched Amazon Echo Look, the first AI (artificial intelligence) fashion assistant. This device captures pictures and videos of clothing and provides advice to the shopper about their suitability and compatibility. The pictures and videos are “fed into” a “lookbook” and this device generates the “advice”.

In addition to the Find brand it launched another one called “Iris & Lily, which focuses on lingerie items.

In the North American market it has been much more active in the past couple of years: launching seven own labels including: Goodthreads, Amazon Essentials, Paris Sunday, Mae, Elle Moon, Buttered Down and Lark & Ro. All of these brand are targeted at their Amazon Prime customers. As discussed in an earlier blog, such customers pay a monthly subscription and receive a number of benefits included free delivery of selected items.

Who is it targeting?

In the online fashion retail space its main protagonists would appear to be Asos, Boohoo, Missguided, Yoox and Zalando.

In the case of Manchester-based Boohoo it has generated much success recently, recording a 97% increase in profits as of March 2017 of £30.9 million, with overall sales rising from £100 million to 294.6 million. It also recorded an increase of 20% on its active customer base (5.2 million users).

Missguided also experienced an increase in sales of 75% to £206 million in 2017. Interestingly, in a genuflection to the concept of omni-channels, it opened a flagship store in Stratford (21,000 square feet).

In the context of “bricks and mortar” retailers, Amazon is positioned somewhere between Primark, H&M, Topshop and Dorothy Perkins, with its prices ranging from £8 to £64.

On what basis therefore is it reasonable to assume that Amazon can make a serious dent in the fashion sector?

Firstly it has arguably a captive initial market in its Prime customers. Same-day free deliveries provide an incentive to buy own brands such as Find from Amazon.

It has a very strong footprint in the areas of customer service and delivery and thus has strong credibility in the all-important challenge of delivering value to shoppers.

Brand credibility in the fashion sector is arguably more problematic. While it is one thing to sell books, food and electronic products, selling fashion requires something else.

It also runs the risk of antagonising key fashion brands such as Ted Baker who use Amazon to sell their products. Over 350 branded collections make use of the Amazon channel to engage with and sell to their customers. If it starts to undercut some of these brands on price, it runs the risk of them pulling away from using Amazon. Can it run the risk of using its own channel to promote its brands, thereby disadvantaging other brands? It risks losing the commissions it earns from these sales.

International supply chains are in some cases suffering from pricing issues, shortages and delays. Amazon has a strong ability to control its own production, design and marketing. This leaves it in a strong position.

Online fashion retailing continues to grow. Many sceptics initially felt that it would be too difficult to overcome the need that many shopper have to touch, feel and try on items. One-quarter of all sales takes place via online channels. Arguably rises in inflation may also encourage shoppers to consider online shopping in order to potentially benefit from lower prices.

Amazon is not selling clothing items at the “cheap and cheerful” end of the market. As stated earlier it is launching “trend-led”, fashionable items.

As a further sign of its intent in this space Amazon was awarded a patent in the USA in 2017 for an on-demand automated clothing factory. This would enable it to create custom-made garments to the exact fit and specification of an individual shopper. The patent extends to textile printers, pattern cutters and assembly lines.

Let’s see how this foray into fashion pans out for Amazon. I am not betting against it failing to succeed! Is it a pretentious strategy? Not in my view.

I’M STILL STANDING

In the text-book we looked at franchising as a mechanism for expanding a retailer’s operations both in a national and international context.

One of the most challenging aspects of retail strategy revolves around the issue of how to achieve a critical mass in terms of the scale of operations. How quickly can you grow the business in terms of the number of outlets?

We are all probably aware of the potential benefits. The larger the scale of operations then the more likely it is that a retailer can benefit from getting better discounts and deals from suppliers. A retailer can also spread the cost of doing business across the outlets and benefit from synergies and so on.

Franchising is seen as a quick and relatively low-cost way of achieving such a position.

The traditional franchise model is based on two key features: an initial “up-front” payment by the franchisee (the individual who wishes to become a partner / member of the franchise arrangement) and an annual percentage of sales that is paid to the franchiser (the company / individual who has established the original business idea and developed it into a successful investment proposition). The success of the concept is based on the belief that the franchisee benefits from the established brand proposition and the expertise of the franchiser in terms of help and support provided by the latter. It also works on the principle that it gives the franchisee the opportunity to own his / her business and a clear incentive to work hard to make it work. The franchisor benefits from gaining access to a wider geographic region and thus begin to benefit from a larger scale of operation.

I was brought back to this topic recently when reading an article about Majestic Wine: the largest specialist wine retailer in the UK. Originally established in 1980, it has expanded to over 200 stores in the UK and two in France. In 2015 it acquired Naked Wines to enable it to expand its operations.

Let me stress that it does not currently operate a full franchise model: none of its stores are franchised out.

However it has begun to introduce what its CEO Rowan Gormley refers to as a “franchise – light concept. Gormley was previously the CEO of Naked Wines and when this was acquired by Majestic Wine he subsequently became its overall CEO.

In his new role he embraced the philosophy of putting the customer and his staff first.  In response to the customer he developed a multi-channel strategy with “click and collect” and online sales, simplify the pricing strategy and improve the design of the store to make it more “customer-friendly”.  In response to the staff he felt that it was necessary to create a climate which could better incentivise his store managers.

Motivating store managers was seen as a particular challenge. In 2015 around twenty-three per cent of them left: mainly due to the restrictive nature of bonuses (they could only earn up to a maximum of £1000 and were earning a salary of £28,000.

This raises a more general question of the challenges of retaining staff in a sector which is pressurised to manage costs and salaries in order to remain competitive, particularly in the face of the ever-present threat of discounters.

The traditional “command and control” model is predicated on the practice of everything remaining in the hands of top management: where decisions on strategy are passed on to middle and junior management for implementation with little or no consultation.

Gormley challenged this approach by introducing what he termed the “Majestic Partners Programme” in 2016. This is based on the principle of allowing store managers to take responsibility for more control over the management and day-to-day operations of the business.

This is reflected in the store managers making decisions on issues such as staffing levels, opening hours, which product line to carry, discount levels and tasting products for use within the store.

Such a strategy can potentially allow them to earn around £50,000 based on performance. This is a significant improvement on the average earnings of £30,000 for the typical store manager.

This “franchise light” approach buys into some of the underlying features of a traditional franchise model. For instance it passes over some of the operational decision-making to individual store owner. By taking responsibility for areas identified earlier the manager is in a position to directly influence his / her income from the business.

While not having any responsibility for overall strategic decisions, never the less it can be argued that such responsibility can act as a major incentive and provide a strong indication that the store manager has an influence on the future of the individual store and by implication the overall business model.

It also provides a major incentive to stay with Majestic Wine and grow the business.

More importantly (for the store manager) it means that no up-front fee is required in order to participate in the business model. Thus one key element of the traditional business model is ignored.

One of the criticisms of the traditional franchise model is that there is conflict between what the franchiser wants and what the franchisee gets.

The franchiser does not want an entrepreneurial individual who typically likes to take some risks and above all resents being told what to do. In short they want someone who will diligently follow and embrace the underlying value proposition that has been embedded in the business.

However people who might invest in such a business (particularly if they have some independence and flair) find it difficult to operate in a situation where there is no “wiggle-room” for introducing new ideas or behaving in an innovative way.

The “half-way house” approach introduced by Gormley at Majestic Wines possibly overcomes this dilemma. It enables store managers to increase their income levels while at the same time broadening their range of management and customer service skills. In the longer term this arguably makes the overall business of Majestic Wine more profitable and sustainable.

As against that it can be argued that some of the successful store managers will most likely move onwards and upwards or even establish a rival business proposition.

On balance I like the approach adopted by Majestic Wine as it avoids some of the pitfalls of the typical franchise arrangement. It should certainly improve the qualities of the store manager.

Gormley expects to have around fifty to sixty per cent of the store portfolio operating the “franchise-light” model over the next year to eighteen months.

He recognises that not all store managers would be keen to participate in such a framework and be burdened with the responsibility for such decisions.

Successful managers who improve the business are likely to seek further reward by gaining promotion. If such a procedure or opportunity is not available then they will move to another company.

Gormley’s overall philosophy revolves around the “test and learn” model. Let’s keep an eye on this business over the coming years.

THE PRICE IS NEVER RIGHT

THE PRICE IS NEVER RIGHT

We have examined the issue of retail pricing strategy extensively in one of our chapters in the text. I was drawn back to this topic recently when I read an article recently (True cost of Amazon pricing revealed: The Times; 9th September 2017, p7, Andrew Ellson).

This article addressed the general issue of dynamic pricing, something which I hasten to add is not new. Service sectors such as airlines and hotels have used the practice for a number of years in an attempt to get the balance between supply and demand more in their favour. Where a company is selling a perishable product (i.e. it cannot be stored or inventoried), such a strategy, based around changing the price of the service constantly – sometimes upwards, sometimes downwards, can help to optimise sales and the margins.

Amazon, our old friend, which is usually in the forefront of pioneering endeavours, has arguably taken the practice of dynamic pricing to another level. This is reflected in the practice of changing the price of items much more frequently than is the case with hotels and airlines. The author of the article mentioned above cited a study which suggested that the price of an item could change very dramatically over a period as short as a week or a day. In the case of one item the price varied by as much as forty-five per cent over the course of a week.

Further details of this study revealed that over the course of a one-year period and based on a random selection of one hundred items including books, DVD’s and so on, prices fluctuated by up to as much as two hundred and sixty per cent between the highest and lowest price points.

As we might expect prices changes tended to be linked to certain events that related to the items. For example if a film was a success then the price reflected that level and degree of popularity. Seasonal events such as the onset of summer, Halloween and Christmas also played a significant part in the re-formulation of prices.

In essence it is the disparity in the price changes, the frequency of such changes and the scale of the change (on a wide range of items) that has taken dynamic pricing to a new level. You might say that such bewildering change only serves to confuse and potentially annoy shoppers. Ellson quoted the example of a Waeco fridge that featured on the Amazon website. On August 3rd 2017 it was priced as £400. On August 6th it was advertised at the price of £580. A week on from that date it had dropped back to a price of £398.

On average the one hundred products that featured in the study changes price every five days and in the case of one item the price changed by as much as 300 times during the year.

What are we to make of this from the perspective of retail marketers and as shoppers?

From the perspective of businesses in general and retailers in particular the ultimate challenge is the charge the maximum that people or companies are willing to pay for the product or service. Reality intrudes and suggests that this is not always possible or indeed desirable at certain times.

For instance retailers entering new markets or new product categories may have to engage in some promotional or discount pricing in order to make inroads in that market. Some retailers target a particular segment such as the low-income sector. This inevitably means that high prices are a “no-no” and low prices / high volume is the order of the day in terms of the cornerstone of the retail strategy.

However dynamic pricing in the context of changing prices frequently on the basis of market conditions and on the amount of data that is captured on an individual’s purchasing and demand patterns can enable retailers to maximise their revenue and margins.

As mentioned earlier we see this with airline tickets and hotel rooms. Uber, the taxi company bases its business model on charging customers what they think they are willing to pay, weather conditions, time of day and driver availability to name but a few influences.

At music festivals, where people are dehydrated and suffering in the heat, you can charge as much as £5 – £10 for a large bottle of water and not too many will complain. The need to quench their thirst overcomes any misgivings about paying such a high price.

For the shopper one inevitable conclusion is that they have to become more “savvy” and more precise in terms of how they go about monitoring prices on the web. If you lean towards this type of practice then it can be argued that you can benefit from the effects of dynamic pricing. If you can identify the occasions when prices are likely to drop then you can take advantage of such market conditions to benefit from lower prices.

However human nature and consumer behaviour suggests that many of us at best do not have the time or inclination to engage in such disciplined practices. Many of us are lethargic about such matters and only engage in purchases when we need to. By that time the price will most likely have taken a hike.

Think about how you purchase an airline ticket. How many of us plan ahead and buy a ticket three to four months ahead of the flight time? I thought so. In my case I tend to leave it to a week or so before I intend to fly. The software and algorithms used by airlines to analyse demand patters will ensure that prices are on an upward trajectory at this stage in the purchasing cycle.

Again we see the confluence of big data and technology. Amazon has long been the pioneer in this area and once again we are witnessing it driving forward the boundaries.

While many commentators argue for clarity and transparency in the area of pricing, it can be argued that Amazon’s approach is opaque and confusing.

In the fields of sport and entertainment, organisations are embracing dynamic pricing with some degree of enthusiasm. Fans are faced with a bewildering rate of change as they are presented with differing prices by the day and by the hour.

It can be argued that price leaders such as Amazon are in the ideal position to develop dynamic pricing strategies. I would make the observation that they are no longer applying such a strategy indiscriminately. Using big data and sophisticated software they are adopting a more targeted approach to individuals and with product categories. Analysis of shopper interest metrics such as sales performance and online abandonment rates, can provide retailers like Amazon with prescient data upon which to activate focused dynamic pricing strategies.

There is no doubt that shoppers will have to “acclimatise” to further and more extensive applications of this pricing approach. Those of us who remain in the lethargic and disinterested category are likely to end up paying more for items than those who adopt a more disciplined approach.

We can debate (and we have done in earlier blogs) the efficacy of dynamic pricing. As retailers equip themselves with ever-more sophisticated software and gain access to increasing amounts of big data, it is likely that they will be able to further improve their profitability.