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Tuesday, 13 June 2017

The diabolical dilemma of e-commerce: losing money on your business or losing your whole business

People who follow me more closely and visited my LinkedIn page in the recent past, know that I work for a large chain of supermarkets in The Netherlands. 
And of course this supermarket chain is involved in e-commerce (i.e. online sales of groceries). As a matter of fact, I work in the team that is responsible for maintaining and improving the omnichannel webshop, including the normal webshop, the mobile webshop and the web apps for Android and iPhone.

It is a safe conclusion to state that omnichannel e-commerce as a prominent sales channel is booming. My company presented double digit growth on its online channel sales last year and this year promises to be even better than last year.

So everything is cool, right?! Well, that depends...

E-commerce is more and more turning into an arms' race between competitors in the same line of business. It is not enough for a large online store to just have a stable and reliable webshop with a proper, state-of-the-art e-commerce CMS (i.e. Content Management System) behind it, that offers a nicely looking and smoothly operating frontend webshop.

The website should be established and maintained with usage of the latest trends and insights in neuro-marketing, SEO (i.e. Search Engine Optimization), customer-tracking and behaviourial prediction, as well as continuous performance improvement for an optimal shopping experience. On top of that it should be optimized for conversion, conversion and conversion alone, in order to make it pay itself back. Everything else is ballast and loses your store money.

Letting your customer wait for 1 minute on your website or app means angry or disappointed customers; letting them wait for 3 minutes means a new customer for one of your competitors. Customer gone = customer gone forever... or at least until the moment that all your competitors scr*w up themselves and you are back in business again!

And with respect to the shipping and delivery of the ordered goods and products to the home of the customer, it aren’t delivery days anymore, but delivery hours(!) nowadays.

Being too slow in any shape or form means that you can be out of business very soon, as your competitors never sleep and are always behind you to raise the knife against you and your online store: even if these competitors come from a totally different line of business (hence: Amazon and their innovations with respect to supermarket services).

And the biggest question regarding e-commerce is: does it earn you any money?! Where that seems a straight-forward and very simple question, the answer is quite complicated in fact!

Supermarkets and large department stores are wonders of efficiency and effectivity. 

Concepts like optimal store design and optimized shelf layout, just-in-time replenishment logistics, as well as cash registers connected to automated stock control and order services and enterprise resource planning tools (ERP) have been developed to an exceptionally high level of effectivity and efficiency in most modern supermarkets and store chains. 

The choices between A-brands versus house brands for various food and non-food products and the usage of direct mail / leaflets as effective marketing tools are thought over time and time again, making the supermarket as a ‘living organism’ extremely efficient, effective and customer-guided. Also in modern department stores, logistics and just-in-time stock replenishment is a path well-trodden and optimized to a T.

Everything in a modern supermarket and department store is set up to deliver an optimal shopping experience to the customer and welcome him back every time.

Yet, e-commerce – in any which way you do it – is a whole different ball game. 

The customer does not need to visit a supermarket or department store anymore in order to know what he wants to buy. He uses the website for that. Consequently he doesn’t come over to collect his groceries or purchased products, but leaves that for the supermarket or online store to do, as quickly and accurately as possible.

This means that either (wo)men or robots must do this collection job: men and women that need to be paid an hourly fee or robots that need to be programmed and operated at quite high operational expenses. A very efficient in-store shopper might collect 4 to 5 shopping carts per hour and a shopping robot in a “dark store” (i.e. a small warehouse or distribution centre acting as a specialized collection supermarket for robots) might collect 8 to 10 shopping carts per hour. This means that the hourly fee of the human shopper or the total operational costs per hour of the robot shopper must be divided among 5 to 10 shopping carts, meaning an additional cost of €2 - €3 per shopping cart.

And then is there the delivery of goods to the home of the customer, ideally within 2 – 3 hours after the electronic purchase. About the maximum amount that the customer will pay for this delivery to his home alone is roughly €5 - €6. Otherwise the delivery is becoming too expensive for the customer from a psychological point of view, forcing him to collect his groceries himself after working hours. 

Or...  the customer may order his groceries at the supermarket’s direct competitors when they charge lower delivery costs. There are also supermarkets and online stores that do this delivery for free occasionally or even structurally, when the customer exceeds a minimal shopping amount of f.i. €25. So being too expensive is not an option for an online store or supermarket.

Ideally a store courier for an online supermarket can deliver 8 to 10 shopping carts with groceries per hour in an average city or village, but 3 to 5 is probably no exception. This depends on the distance that needs to be driven between two customers. 

This means that for supermarkets the whole delivery process from store to home takes at least two staff members (groceries collector + courier) and one (shared) delivery van per shopping cart against hourly delivery fees of (at most) €60 per hour, but often much less.

Most online department and specialty stores can negotiate special contracts with large couriers like PostNL or DHL, but small online stores mostly pay the normally pending fees for packages and mail.

Needless to say that in most cases the charged delivery fee is hardly covering expenses for supermarkets and online stores. This means that already the delivery part of the e-commerce shopping transaction is eating away the margin of the supermarket on the purchased goods...

And to a certain degree, online supermarkets have it still relatively easy in comparison with online department or specialty stores for a simple reason: unless their customers discover a flaw in their delivered groceries – damaged goods or spoilt fruit, vegetables or meat – they wil never return their goods. This makes the issue of returned goods a relatively small risk for the online supermarket operator.

However, for online department stores or specialty shops (f.i. shoe and fashion stores), the issue of returned goods is a serious extra expense for the store management. The EU obliges the online store to pay the full shipping expenses for the customer in case of returned goods. Some customers abuse this obligation by sometimes ordering 3 pairs of shoes or 3 different dresses, only to keep the best fitting ones and subsequently return the non-fitting items to the store, at the expense of the storeowner.

This is the nightmare of every online store and it is nearly impossible to prevent themselves from such unwanted customer behaviour. The largest online stores might operate their own returned goods fleet in order to save a few bucks, but most stores toothgrindingly pay the mounting shipping expenses of PostNL or DHL. 

Consequently, such extra shipping expenses for returned goods are large margin eaters: especially for shoe and fashion stores, like Zalando, that suffer from loads of returned, non-fitting goods.

And then there is of course the issue of the e-commerce infrastructure itself: a good, efficient and well-maintained omnichannel e-commerce platform (i.e. suitable for all desktop and mobile devices) with a proven, high conversion rate costs somewhere north of € 3 – 5 million per year for a store or store chain with approximately  €100 - €200 million in online sales.

This amount includes scalable hardware or cloud services, software, web design, consultancy (Search Engine Optimization(!)) and dedicated personnel. 
This means that an additional 2% to 4% margin on the sold goods is eaten away by the e-commerce infrastructure alone. Not one year, but every year...

Nowhere the expression “stagnation is decline” is more true than in case of omnichannel e-commerce platforms:

If you neglect the response times of your web services and especially your customers’ forced waiting times – impatiently looking at sandglasses and spinning wheels on their monitor – you might be out of business without you even knowing what hit you in the first place. Customer loyalty in case of brick & mortar stores is a thousandfold of online shopping loyalty. One or two bad shopping experiences and your customers skip your online store for months, years or for eternity.

All this puts high pressure on your performance, your Search Engine Optimization (“if your SEO is not optimal, you simply won’t be found on Google”), your webshop design, your product presentation and shopping cart handling, as well as on your discount calculation and weekly promotions. 

And last, but not least, on the scalability of your online store, for the days of the year that are decisive for your annual success: Sinterklaas (i.e. Dutch children holiday), Thanksgiving (in the US), Christmas and Eastern.

Summarizing, there is so many that can go wrong with one’s e-commerce platform and the expenses of keeping it up to speed and on topic are so high, eating away a large share of one’s margin, that one could wonder why he should operate an e-commerce platform in the first place and not simply stick to the old-fashioned brick & mortar store.

To be frank, when one would look at the continuity, cost-efficiency and sheer profitability of omnichannel e-commerce alone, the crystal clear message would be: don’t do it! It costs you a whole lot of money every year and yet offers a lot of uncertainty regarding the continuity of your online shop and whole business.

But 1 + 1 isn’t always 2 in the commercial services and retail industry... 

Especially in case of (not) offering e-commerce possibilities to one’s customers, the answer to this question is not a question of black and white.

This is for the simple reason that offering an up-to-date e-commerce platform costs a lot of money per annum, but not offering an e-commerce platform could put a store chain or supermarket out of business, due to being obsolete, out of fashion and not in connection with its (future) customers anymore.

The number of people that goes to B&M stores is steadily declining and – to make things worse – real-life, offline shopping is turning into a generation thing: the older generation still mostly prefers visiting the B&M stores, while the younger generation prefers doing their total shopping online. So operating a B&M store alone and no omnichannel e-commerce platform, may get you stuck with an aging customer base and a bleak future in the end.

That is the diabolical dilemma of e-commerce today: losing money on your business or completely losing your business.

And this diabolical dilemma is not only the dilemma of small, online specialty stores (“mom & pop stores”) with a limited range of exclusive products, but also the dilemma of the largest online stores (Amazon, Zalando, and supermarket chains, like the one I am working for.

Especially the logistical issue (i.e. order collection and shipping) and cost-efficient e-commerce platform maintenance, in order to keep it up-to-date and customer-oriented, are almost impossible nuts to crack: for now and for the distant (?) future. There is no self-driving courier or robotized drone that will change this conundrum soon. And also no maintenance-free website that still features all your products and articles in a customer-friendly and topical way.

And that makes that the sheer profitability of e-commerce platforms and online stores will remain dubious in years to come. That is, until customers start to pay a fair price for collection and delivery of their ordered goods and stop returning so many of them.

But abolishing the online store is simply not an option, unless you only want to serve the elderly!

Saturday, 10 June 2017

Election gamble blows up in the face of British PM Theresa May. Or how settling for an insecure coalition cabinet with a stronger opposition could become a blessing in disguise for the UK as a whole.

British Prime Minister Theresa May of the conservative Tory party had it all figured out: with the extremely tough Brexit negotiations with the European Union ahead and with the Labour party, led by Jeremy Corbyn, seemingly flat on its back, it seemed like an appropriate time to organize national elections in the United Kingdom.

According to her plan, these national elections would act like a two-edged sword.  When she would indeed have the sound victory based upon an absolutely majority that she anticipated, she would acquire a stronger mandate with respect to the EU negotiations and it would also rub her adversary Jeremy Corbyn deeper in the dirt of his own incompetence, she figured.

With the Tories as absolute majority leaders in parliament and Labour lying in tatters, she would be energized to take the tough stance against the EU that she deemed necessary to carry out the best possible results from these negotiations.

Things went... a little different:

The Tories won the elections by a small and non-decisive majority of  58 seats (319 seats against 261 for Labour, according to the latest polls) and they saw Labour gain a quite impressive 29 seats, in comparison with the last elections.

When one takes into consideration that Labour under the “clumsey leader” Corbyn seemed a lost cause  and that May seemed on her way to a landslide victory only a few weeks ago, it is clear that things went horribly wrong for Theresa May.

And the remarkable thing is that neither the Brexit nor the terrible terrorist attacks of the last few months in the United Kingdom seemed the direct smoking gun, with respect to this strongly disappointing election result.

The terrorist attacks – terribly brutal and vicious as they were – were of course condemned by all parties and it was not that the policy of either the Tories or Labour would have led to a different outcome. Besides that, all three attacks (i.e. the two in London and the one in Manchester) were executed by people living in the UK for a long time or even all their lives, so even the most restrictive policy regarding immigration would not have stopped these terrorist attacks at all.

To put it even stronger: the perpetrators were perhaps all part of the United Kingdom’s colonial heritage and not a consequence of the unhindered immigration of the recent years.

And the Brexit was not even the elephant in the room in the prelude to the elections. As Bernard Hammelburg, the savvy Dutch correspondent for Foreign Affairs of BNR Radio stated (if I recall him correctly): “the Brexit itself as an event hardly played a role in the British elections. The Brexit was a thing from the past, upon which all the important, gamechanging decisions were already taken. It was especially the unclear economic outlook and the feeling that not all would be hunky dory within the British empire after all, that drove the people – especially the youngsters – towards Corbyn’s Labour party”.

BNR Newsradio Foreign Affairs journalist Bernard Hammelburg
Picture copyright of: Ernst Labruyère
Click to enlarge
Whatever the reason was: fact is that the whole plan of Theresa May to improve her position via these elections blew up in her face.

Instead of having an absolute majority of at least 326 seats, she ended somewhere south of 320 seats. In order to find a workable majority directly after the elections, May called in the help of a Northern Irish splinter group: the Unionist Democratic Party. This party is far more populist and conservative than even the Tories would like to endorse. Nevertheless, calling in the help of this party seemed the only way in which she could continue her governmental plans at short notice.

This means that due to this UDP party participation her hands could be tied with respect to all kinds of political hot potatoes, like the Brexit (the difficult choice between a soft and hard Brexit), the open border with Ireland, immigration and the economic development in all the countries within the United Kingdom.

And on top of that she seems to have lost the confidence of many youngsters in the UK, in favour of Labour with its leader that initially “nobody wanted” and that really nobody among the powers-that-be took serious in the beginning.

Corbyn was considered a basket case, with a totally outdated political view that came straight from the Eighties of last century: a political Catweazle [Catweazle was the name of a fictious wizard from medieval times, who was transported to the 20th Century by a failed spell – EL]. 

But the tides have turned for both PM Theresa and Labour’s Jeremy Corbyn...

So what can Theresa May do, now it is probably not possible to maintain her tough stance against the EU (i.e. “a Brexit on our terms or else... no deal!”), as she is now stuck somewhere between the desires of a now very powerful Northern Irish splinter group, a strongly divided Tory party and a Jeremy Corbyn with much more power than before and with the momentum going his way?

Perhaps the best solution would be to grind off the sharp edges of her current Brexit-related policy by diluting it here and there with a dash of mildness and a spoon of compromise and humility. She knows that she has to take three totally different opinions into account (Labour, Tories and UDP) in order to get anything through the parliament in the coming years. 

She can’t always trust the hardliners within her own party for automatically voting in her favour, so she must be able to find a broader compromise than she did before.

In other words, she has to take Labour’s desires also into account to a certain degree and stick out a hand towards the man that she probably dislikes more than anyone else: Jeremy Corbyn. Will she be able to do that? Who knows?!

I think the best she can do, is creating a compromise that nobody loves, but nobody hates either. A compromise that is in the best traditions of Dutch politics with its outrageous number of (small) parties and its long, long history of coalition cabinets, that were always a difficult marriage between sense and emotion.

And probably, when Theresa May grinds off the sharp edges of her Brexit policy, the EU is also willing to abandon their plans to punish the UK for trying to leave the EU.

The toughest nut to crack will be the immigration issue, as well as the free traffic of capital, citizens and goods and services. However, even in these formerly non-negotiable areas of EU policy there might be a small opening.

Immigration already has turned into the hottest potato within the EU itself and the member states are already discovering that unlimited free traffic of citizens (i.e labour) has a series of serious drawbacks that cannot simply be ignored by the powers that be.

Politicians start slowly to discover that the EU citizens become more and more fed up by the EU’s neoliberal policy of the last thirty years, because it largely ignored the sense of security and financial / economic stability that almost every citizen requires, in order to have a decent living and raise a family in relative prosperity. That could mean a chance for the UK in the coming negotiations.

However, the most important factor will be whether Theresa May is able to sing a different tune or not? Will she be able to show the EU negotiators a little more humility than before, when she made it seem that she held all the cards and the EU leadership had to sing to her tune in the Brexit negotiations.

Even though the UK is still very much a stronghold in the financial and commercial services industry and not all financial companies are automatically choosing to leave London after the Brexit, May must understand that the UK still needs the EU more than the EU needs the UK after the Brexit. It is simple as that.

The UK is in my opinion quite vulnerable in the areas of agriculture, manufacturing and heavy industry, as well as the exports of manufactured goods, as the island cannot and will not be self-supporting in the coming years.

In some industrial areas, like the steel industry, the country still suffers from obsolete and hopelessly inefficient plants, that are no match for the cunning and efficient German industries or the heavily subsidized Chinese industries with their dumping of steel and other semifinished products. And nobody can eat or drink financial services alone.

So finding a viable and feasible compromise in the prelude to the Brexit can be a lifesaver for the UK in the end. The decision to start the Brexit can probably not be withdrawn without a massive British loss of face, but the way that it happens is very much in the capable (?) hands of PM Theresa May.

And then, this outcome of the elections, even though it will be a tough lump to swallow, could be a blessing in disguise: both for Theresa May and for the United Kingdom as a whole. And they can be a good chance for the EU to show a more friendly and humane face as well. 

A British mandate that takes the interests of more people into account is probably a better mandate in the end.