The E-Commerce Imperative for Traditional - Booz & Company

16 Pages·2011·1.66 MB·English

Perspective Harald Dutzler
Coen de Vuijst
Robbert Huisman
Michal Bohanes
The E-Commerce
Imperative for
Traditional Retailers
Letting Go of
Old Conventions
Contact Information
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Partner John Potter Riccardo Lotti Harald Dutzler
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Booz & Company
EXECUTIVE In the competition for e-commerce supremacy, few
SUMMARY traditional retailers have found a winning formula. These
companies’ offline success is in a sense their biggest
impediment, prompting them to try to replicate practices
and approaches that simply don’t 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 traditional bricks-and-mortar
businesses need to adjust to succeed in the e-commerce
space, in particular by letting go of old conventions.
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CHANGING for every $100 people spend online. on the other hand, is considerably
Among big traditional retailers, only lower. For instance, Walmart’s and
THE PLAYBOOK
U.K.-based Tesco bucks the trend, Target’s online conversion rates are 8
with an online market share in its and 7 percent,1 respectively, meaning
home country of about 10 percent, that more than 90 percent of online
compared with 6 percent for Amazon, visitors leave those retailers’ websites
its closest competitor. Tesco achieves without making a purchase.
this by integrating its online and
As e-commerce has gained trac- offline stores in some highly creative Even those online conversion rates are
tion in the past decade, traditional ways (see “Understanding Tesco’s unusually high. Shoppers for boots
bricks-and-mortar companies have Online Success,” page 4). purportedly visit an average of 12
responded with an increased sense of different sites, many of them multiple
urgency. Having initially treated the Why have the largest bricks-and- times, over the course of 13 days
Web mostly as a tool for marketing mortar sellers (Tesco excepted) gener- before closing the deal. This isn’t a big
and disseminating corporate informa- ally been unable to find comparable surprise, given the seamless way that
tion, companies are now scrambling success online? The biggest problem is online shoppers move among websites
to get into a race led by the likes their attempt to replicate brick value when doing research. E-tailers’ exit
of Amazon.com and Apple iTunes. propositions in the online world, logs show that a very large percent-
Nowadays, it would be hard to find instead of working back from online age of their traffic leaves their sites for
a company that didn’t understand shopper needs to create a unique direct competitors or for Google, in
e-commerce’s potential and wasn’t e-commerce experience for customers. many cases to perform a new search
investing heavily in it. The trouble is, for the same product.
traditional retailers still have a lot of The difference in how traffic gets con-
ground to make up. verted into sales is one of the things As long as the number of competitors
that traditional retailers have wrestled remains the same, it stands to reason
The fact that offline success doesn’t with online. Conversion rates, defined that in the easily browsed world of
necessarily translate online is evident as purchases divided by store visits, e-commerce, getting customers to con-
in the Web sales of some bricks-and- are the essence of sales success no vert will remain difficult. Traditional
mortar leaders in different coun- matter the type of store. In traditional retailers need to understand the user
tries (see Exhibit 1). In the U.S., for retail, conversion rates typically range experience and the dynamics of online
instance, Walmart is by far the largest from 20 to 95 percent, depending user interactions and reflect that
player in store-based retail but is on the type of store, with grocery understanding in the design of their
only fifth in Internet market share. In stores among the highest. An online e-commerce services. However, this
France, Carrefour takes in US$12 of shopper’s probability of completing a is a mere prerequisite to success; it’s
every $100 retail but gets a mere $1 transaction during any particular visit, no guarantee.
In the easily browsed world of
e-commerce, getting customers to
convert from visitors to purchasers
will remain difficult.
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Exhibit 1
Comparing Top Sellers’ Performance Online and Offline
Less customization, more horizontal capability built into offers from the start
Value
Proposition - Managing a higher direct (online) sales mix
- Developing and managing new strategic channel relationships INTERNET AND STORE-BASED MARKET SHARES (U.S.)
Channel/ - Emerging partners: telecoms, Web hosts, PC-based and mobile app stores Dynamic
U.S. Internet Market Share in % U.S. Store-Based Retail Market Share in %
Distribution integration
- Innovative, more flexible pricing structures: e.g., pay per use, per user (B2B), per
across
Midstream feature
Pricing - Managing SKU proliferation, and marketing clarity, with increased options activities, Amazon.com 14 Walmart 13
structures,
- Integrating typically siloed social and digital marketing, beyond demand generation skills, Apple 6 Walgreen 3
Communications and across the marketing value chain processes,
Strategy tools Dell 4 Kroger 3
- More, and more frequent, touch points with customers: more releases, usage
Liberty Media 3 Target 3
scenarios, and interaction triggers
Sales - Faster, more iterative, trial-based sales process Walmart 2 Costco Wholesale 2
- For B2Bs, more interaction with end-users, as well as with purchasers such as CIOs
Downstream Customer - Less reliance on traditional partners for sales, customer experience, maintenance, Sears Holdings 2 CVS Caremark 2
Experience and support Best Buy 2 Home Depot 2
- Integrating more service into offers Newegg.com 2 Sears Holdings 2
Post-Sales - Less or no maintenance
- Continuous opportunities for cross- and up-selling Target 2 Supervalu 2
J.C. Penney 1 Best Buy 2
INTERNET AND STORE-BASED MARKET SHARES (FRANCE)
French Internet Market Share in % French Store-Based Retail Market Share in %
PPR 9 Carrefour 12
Amazon.com 6 ITM Entreprises 7
Apple 6 E Leclerc 6
Casino Guichard-Perrechon 6
Auchan Group 5
DSG International 6
Système U Centrale Nationale 4
Vente-privee.com 5
Casino Guichard-Perrachon 4
Otto Group 3
Louis Delhaize 2
RueDuCommerce 3
M6 Groupe 3 PPR 1
Dell 2 Kingfisher 1
Carrefour 1 Schwarz Beteiligungs 1
INTERNET AND STORE-BASED MARKET SHARES (U.K.)
U.K. Internet Market Share in % U.K. Store-Based Retail Market Share in %
Tesco 10 Tesco 13
Amazon.com 6 Walmart 7
Home Retail Group 6 J Sainsbury 6
Apple 3
Wm Morrison Supermarkets 4
J Sainsbury 3
Marks & Spencer 3
Next 3
Co-operative Group 3
Ocado Group 2
Alliance Boots 3
Play Ltd 2
Walmart 2 John Lewis Partnership 2
Shop Direct Group 2 Home Retail Group 2
John Lewis Partnership 2 Kingfisher 2
Source: Euromonitor; Booz & Company analysis
Booz & Company 3
Understanding Tesco’s Online Success
Tesco.com facts:
• 2009 sales: £2.1 billion (up 14 percent), about 3.4 percent
of overall Tesco sales
• 2009 profits: £136 million (up 26 percent)
• €3.1 billion sales (fiscal year 2010 estimate)
• 20,000 employees in online business (groceries and non-food
Tesco Direct)
• More than 1 billion items delivered
• More than 1 million active customers
• Average basket size larger than £100

It’s instructive to consider the case of Tesco, one of the few leading offline
retailers that appear to have fully cracked the code of e-commerce.
This U.K. retailer—whose stores sell a huge selection of groceries,
apparel, and household goods—manages its online channel separately
and offers a somewhat different mix of products online than it offers
offline. Online, Tesco offers separate subchannels: Direct, Fresh Food &
Groceries, Wine by the Case, Entertainment & Books, Clothing, Phone
Shop, and Banking & Insurance.
Tesco Direct’s nontraditional, nonfood offering is an especially big driver
of online sales, which grew 28 percent to almost £500 million in the first
half of 2010. The Direct channel is served through a tailored operating
model that allows for in-store pickup at more than 260 “Direct desks”;
Tesco online also offers home delivery. While Direct is not yet a big
contributor to the company’s overall profits, it has a spillover effect into
Tesco’s other online channels, including Fresh Food & Groceries and
Clothing. Clothing is offered through both the Direct & Clothing channels,
underscoring Tesco’s tolerance for self-cannibalization.
Online is helping Tesco address its five strategic corporate goals: being
an international retailer; maintaining a strong core U.K. business; being
as strong in nonfood as in food; developing retailing services; and putting
community at the heart of everything it does. With respect to the last goal
in particular, the Internet—in the form of social media—has a role to play.
As former chief executive Sir Terry Leahy has put it, Tesco has a desire “to
earn customers’ lifetime loyalty.”
The company uses the Tesco Clubcard, the linchpin in one of the most
successful corporate loyalty programs ever created, to drive online traffic
and create loyal online customers.
It also uses the card to make customers’ offline and online shopping
experiences seamless. For instance, when a customer scans the card
and buys a product at an actual Tesco store, the product shows up on the
customer’s online account, allowing for online ordering and reordering.
Another example: Tesco has developed an iPhone app that allows a
customer to scan the bar code on a grocery product, no matter where
the customer is, and automatically add the product to an online shopping
basket. So the person who has just run out of breakfast cereal can scan
the bar code on the empty box and have Cheerios be part of the order for
the household’s next home delivery.
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COUNTER- To have the best chance of succeeding, customers go online, they spend their
traditional retailers must be willing money at the retailer’s own site.
INTUITIVE STEPS
to take some counterintuitive steps
TO ENSURING with their online offerings, moves that To many consumers and for many
might cannibalize their sales in other transactions, online has particular
SUCCESS
channels, result in their referring some advantages in pricing and conve-
customers to competitors, or cause nience—for example, people can shop
them to cede some control to the at whatever hour they want and get
collective that is the Internet. bulky goods delivered directly to their
homes. Selection is another potential
Cannibalize Your Own Sales advantage; some products are avail-
It isn’t possible to keep consumers able only online. Thus online retail
from doing more of their shopping allows access to new, personalized,
online, especially when they think and unique products (for example,
they will get a better deal there. A Nike shoes tailored to a consumer’s
traditional retailer’s goal should specifications).
therefore be to ensure that, when its
A traditional retailer’s goal should
be to ensure that, when its customers
go online, they spend their money
at the retailer’s own site.
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These benefits notwithstanding, From the perspective of many instance, Walmart recently began a
there are some very real barriers. consumers, the online and offline program in the U.S. called “Pick Up
For instance, the price advantages of channels are a continuum. Consumers Today” that allows customers to order
shopping online are often canceled might do research online and still buy a product online and pick it up at
out by shipping and handling charges offline, or they might see a product in local store a few hours later. Best Buy
(in the case of online companies that a physical store and search for better has said that more than 40 percent of
don’t cover these), or by the costs of prices online. In a survey, Google the products purchased on its website
returning unwanted goods. Customer found that 34 percent of respondents are picked up at the physical store by
service, in the form of a real person research online and purchase offline, customers.
answering questions, can be hard to and 12 percent research offline and
find online. And though consumers purchase online. These developments show that some
may not feel the need to hold familiar of the biggest retailers are embracing
products or brands in their hands Seeing how customers are behaving, multichannel strategies and under-
before buying them, that isn’t true of some smart companies are already stand the need for self-cannibalization.
all products. making attempts to better integrate In-store pickups of online sales are
their offline and online channels. For a first-generation attempt to give
Some of the biggest retailers
are embracing multichannel
strategies and understand the
need for self-cannibalization.
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consumers the integrated experience more and more business moves online, ing at the behavior of customers of a
they want. In the future, retailers’ smart retailers will look for ways to European retailer, Booz & Company
efforts will likely become far more let local store managers participate in found that when individual customers
sophisticated, as they play to the online sales success, such as using the moved from offline-only to multichan-
p respective strengths of the online and zip code of someone who buys online nel shopping, their weekly spending
- Developing and managing new strategic channel relationships
offline channels. For instance, not all to credit a portion of that sale to a grew 60 percent. In this case, the
Channel/ - Emerging partners: telecoms, Web hosts, PC-based and mobile app stores Dynamic
Distribution integration products sell equally well online and nearby store. retailer was selling higher-ticket items
- Innovative, more flexible pricing structures: e.g., pay per use, per user (B2B), per
across
Midstream feature offline; smart retailers will analyze online, underscoring the advantages
activities,
Pricing - Managing SKU proliferation, and marketing clarity, with increased options
structures, what’s selling where in order to Optimally, retailers will do more than that can come from adjusting the
- Integrating typically siloed social and digital marketing, beyond demand generation skills, maximize market share across chan- simply divvy up existing revenues product mix to suit the channel.
Communications and across the marketing value chain processes,
Strategy tools nels (see Exhibit 2). In addition, as across multiple channels. In look-
- More, and more frequent, touch points with customers: more releases, usage
scenarios, and interaction triggers
Sales - Faster, more iterative, trial-based sales process
- For B2Bs, more interaction with end-users, as well as with purchasers such as CIOs
Downstream Customer - Less reliance on traditional partners for sales, customer experience, maintenance,
Experience and support
- Integrating more service into offers
Exhibit 2
Post-Sales - Less or no maintenance
- Continuous opportunities for cross- and up-selling What Online Shoppers Are Most Inclined to Buy
CONSUMER PURCHASE INTENTION
(NEXT 6 MONTHS FROM MARCH 2010, GLOBAL AVERAGE)
Books 44%
INTERNET AND STORE-BASED MARKET SHARES (U.S.) Clothing/Accessories/Shoes 36%
Airline Tickets/Reservations 32%
U.S. Internet Market Share in % U.S. Store-based Retail Market Share in %
Electronic Equipment 27%
Tour/Hotel Reservations 26%
Amazon.com 14 Walmart 13 Cosmetics/Nutrition Supplies 22%
Apple 6 Walgreen 3 Event Tickets 20%
Computer Hardware 19%
Dell 4 Kroger 3
Videos/DVDs/Games 18%
Liberty Media 3 Target 3 Groceries 18%
Walmart 2 Costco Wholesale 2 Music 16%
Sporting Goods 13%
Sears Holdings 2 CVS Caremark 2
Toys/Dolls 11%
Best Buy 2 Home Depot 2 Computer Software 11%
Newegg.com 2 Sears Holdings 2 Flowers 8%
Automobiles & Parts 7%
Target 2 Supervalu 2
Baby Supplies 7%
J.C. Penney 1 Best Buy 2 Alcoholic Drinks 6%
Sports Memorabilia 5%
Car Hire 4%
Other 7%
I do not plan to make an online purchase in the next 6 months 18%
INTERNET AND STORE-BASED MARKET SHARES (FRANCE)
French Internet Market Share in % French Store-based Retail Market Share in % Source: Nielsen “Global Trends in Online Shopping,” 2010 (hk.nielsen.com/documents/Q12010OnlineShoppingTrendsReport.pdf); Booz & Company analysis
PPR 9 Carrefour 12
Amazon.com 6 ITM Entreprises 7
Apple 6 E Leclerc 6
Casino Guichard-Perrechon 6
Auchan Group 5 Booz & Company 7
DSG International 6
Système U Centrale Nationale 4
Vente-privee.com 5
Casino Guichard-Perrachon 4
Otto Group 3
Louis Delhaize 2
RueDuCommerce 3
M6 Groupe 3 PPR 1
Dell 2 Kingfisher 1
Carrefour 1 Schwarz Beteiligungs 1
INTERNET AND STORE-BASED MARKET SHARES (U.K.)
U.K. Internet Market Share in % U.K. Store-based Retail Market Share in %
Tesco 10 Tesco 13
Amazon.com 6 Walmart 7
Home Retail Group 6 J Sainsbury 6
Apple 3
Wm Morrison Supermarkets 4
J Sainsbury 3
Marks & Spencer 3
Next 3
Co-operative Group 3
Ocado Group 2
Alliance Boots 3
Play Ltd 2
Walmart 2 John Lewis Partnership 2
Shop Direct Group 2 Home Retail Group 2
John Lewis Partnership 2 Kingfisher 2
The bottom line: Cannibalization is AdSense program, presumably with a buying anyway, and not from the less
not necessarily the enemy. A vendor’s financial upside. than 10 percent who would have made
offline customers also shop online. By a purchase? Mostly it has to do with
developing online capabilities and a Underlying this trend is a unique the state of mind of someone prepar-
customer migration strategy, tradi- characteristic of Internet-based ing to click on a sponsored link; there
tional retailers can interact with their commerce: the speed with which a is a self-selection bias in such links,
customers through multiple channels, shopper can get from one store to which attract most of their clicks from
increasing each customer’s value. another. In the physical world, getting users who have already decided the
from one store’s shirt rack to another’s current offering has low value.
Serve Advertisements for Competitors can take a few minutes even in a large
Visitors to Walmart’s website are mall with boutiques next door to In addition, the risk of generating
familiar with something that other each other—and much longer on the these exit clicks from users who are
e-commerce providers might consider High Street. Online, this trip can be already far down the purchasing
an odd proposition: On search result reduced to seconds or, as is the case funnel—that is, who are on the verge
or category pages, Walmart displays with price comparison sites, eliminated of buying—can be mitigated by smart
so-called sponsored links—paid ads altogether. ad placement. A common practice
served by Google. Those links connect among e-tailers using sponsored links
the user to other e-tailers selling the Knowing this, an e-tailer may is to place them at the very end of
same product the customer searched legitimately conclude that it makes a long product list. This means that
for. When users click on a link, sense to monetize consumer behavior only those users who reach the bottom
Walmart receives a small payment (site roaming) that it is unable to of the entire list of products will see
from the advertiser, with Google prevent or control. In so doing, the an exit to a site they were probably
taking a cut. retailer is in effect turning its site into already navigating toward. (Target is
a media asset, earning ad revenue from an exception; it places its ads on the
Why do Walmart and others provide any company that values its traffic top left of its search results page.)
links to their competitors? Because enough to pay for it.
evidence suggests that the revenues How much money can retailers hope
they earn through ad sales outweigh How can the e-tailer know that the to make by running ads? The answer
the potential sales they lose. Target, shoppers who click on an ad will be varies from one retailer to the next. A
Best Buy, eBay, Tesco, and many other from the more than 90 percent of users little data, however, may help clarify
retail leaders are now part of Google’s who would have left the site without the potential. Click-through rates on
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