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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!

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