Red Zebra Business Centre - Management Memos
September 2010 Making Measurably More For Your Business Since 1985!

MaxProfile
Be Alert to Possible Alternative Strategies!

Max Williams, Principal Consultant

Our focus in both August and September, is the responses small retailers can make to the so-called 'threat of the internet'. Get it? The "threat"!

For decades, we have heard about "S.W.O.T." analyses - the review and consideration of Strengths, Weaknesses, Opportunities, and Threats. Fair enough to consider the strengths and weaknesses, and even the opportunities. But what about the 'threats'.

The first response to a threat - is defence. When a business gets 'defensive', it begins to turn downhill. That's why we focus on challenges instead of threats, and.do a "S.W.O.C." analysis. We look at not only the strengths and weaknesses of the business, but its external opportunities and challenges too. The first response to a challenge is attack.

That's the key difference. See something as a 'threat', and you get defensive, introverted, and cautious. See the same thing as a 'challenge', and you get aggressive, creative, motivated, and dynamic.

When it comes to the internet, our first-sight response to such a new and all-pervasive technology, is to suggest that you see it as a challenge, and an opportunity - not a threat.

The problem is to see the challenges in the first place.

There are lots of things to do in running a business. "If it ain't broke, don't fix it!" is sound advice. So you don't go looking for work that doesn't need doing, and you don't mess with things that are going along just fine.

But one qualification for running a successful business is the ability see around corners. A week or so ago, I was driving down 'Macquarie Pass' in New South Wales, a piece of road noted for wavy surfaces, narrow shoulders, steep grades, and tight curves.

By looking ahead, and around the upcoming corner, I could see the truck/trailer combo travelling too fast to take the corner tightly. It swung wide, as predicted. I cleared it easily, but without looking around the corner I would have finished up a head-on statistic.

Same in business. Things going well, heh?  Great! But is there a truck/trailer combo coming around the next corner? If there is, and you didn't predict it, do you have an alternative strategy?

In this context, the question relates to your plans to drive your business in an era when the internet and the 'big box' retailers are driving on the same road. You wouldn't want ahead-on, would you? And you don't want to be become just another statistic!

When it comes to 'bricks and mortar' retailers tackling the internet, and evolving a response to it, the real question is "Is this an adequate response, and what alternatives are there?" Sadly, the responses are often not adequate except in the narrowest of terms, but worse, there is no alternative strategy in the pipeline. There is no room in the strategy to avoid that head-on collision.

In this issue, we are quite simply suggesting that small business people, and in particular, small retailers, consider a range of alternative strategies. Having a variety of responses allows considerable flexibility in the face of rapidly changing circumstances.

What seems best today may not seem best tomorrow. Being prepared with several different approaches will give you lots more resilience.

And lots more scope to change your direction if that proves necessary.




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RetailConflict

SMALL RETAILERS CAN FACE SERIOUS CONFLICTS BETWEEN e-TAIL AND RETAIL



W

hile the whole internet trading routine, 'e-tailing', is quite complex in its own right, the basic elements are simple enough. That simple stuff is not the real issue.  The real issue is how to manage the potential conflicts between the demands of e-tailing, and regular in-store retailing.



This edition of 'Management Memos' features the second of two articles on this topic.
To see the first article in the August Edition, Click Here.


Here and Now Tactical Responses

Looking at the previous article in the August edition, you can see that the long term response is a fundamental and strategic one. In the short term, though, some tactical responses are available.

First option: Make the on-line offer relatively less attractive so you can get the retail sale - while you are developing your strategic responses.

For instance, a customer can buy a spare part for their washing machine on-line. But then it has to be installed, tested, commissioned, and the work has to be warranted. You can offer a 'package deal' for the product with all of this work included. Note, however, that the package will be sold at less than the all-up price you would normally charge. You will lose margin. That's inevitable. However, you still get some gross contribution, and that's better than nothing.

Second option: Keep it simple and just match the price. It is commonly held, and usually wrongly so, that you can't afford to match the price. True if the sell price is lower than your buy price, but otherwise not true. You can't build a business that way, but this is a temporary holding pattern for occasional sales, while you work out your final strategy. And you must insulate these low prices from the rest of your business - or you'll head south!

Third option: Almost match the price. Use your market presence and good reputation to show increased value in buying from you. Works for the twenty percent of customers who make up eighty percent of your profit - but in the long term you can't grow a business this way!

Fourth option: develop an on-line presence that does not clash with your retail store. Lots of ways to do this, and some succeed. Too big a subject for consideration here. Be sure you get good advice!


The Longer Term Strategic Response

Remember 'transaction cost' from last month? It has to be reduced for you to remain viable in the face of all kinds of competition. Revenue for e-tailing transactions is lower than the revenue for an equivalent sale in-store. Simply, this means that your transaction cost has to keep going down.

How can transaction costs can be reduced in your business? This is a special consideration that cannot be considered here. Each case is different. That does not mean that it cannot be done.

Driving down your current transaction cost is one key part of your long term strategy. The other is to develop your own e-tailing strategy.

First, consider the likely cost of your web transactions. Fixed costs for a serious e-tailer are not inconsiderable. Then there are the other costs of doing business - accounting, stocking, freight, and staff to name a few. Don't imagine an on-line store can run without staff! Maintaining inventory, meeting fulfilment obligations, and tracking deliveries are costly and time consuming imperatives.

For many existing retailers, the incremental costs of accounting and stocking really are negligible. However, fulfilment costs will not be negligible because of the staff involvement, while freight can either be charged separately, or included in the 'freight-free' price.

The lowered costs of web trading can help drive down the transaction costs for your whole business. This is a good start, but it is scarcely enough, and it is far from certain.

If you look at some of our larger businesses, (see the Myer interview in the next column), you see that developing a compatible internet business to run alongside your existing store can be done. It must be made to generate substantial volume though, or it cannot be profitable, and it will cost you dearly.

Significantly, developing an e-store is a major project. In the Myer case, comparable with creating a whole new department store. And both must run alongside each other!

Think strategically about your cost structure, and how you will develop an on-line store to run alongside your existing store. That will be challenging! You may need some outside advice.

So you think a 'service based' business is immune to e-tail threats?

Service businesses are usually focussed on personal delivery of time and skills, often in association with delivery of a product, to the buyer. It's hard to do that over the 'net.

Surely one of the most personal of services is the prescription and delivery of spectacles. Now, an on-line spectacle maker aims to change all that!

eyeglassesClearly Contacts, which is "part of the world's largest online optical store", celebrated its fifth birthday with an Australian glasses give-away that it said "marks a major tipping point in the Australian eyeglasses and contact lens market", reported Australian retailing newsletter "Inside Retailing"

Clearly Contacts VP of sales, Steve Wallace says, "People are now aware that brick and mortar optical vendors are overcharging consumers and creating huge mark-ups on products that Clearly Contacts can offer at a fraction of the price."

It's beginning to look as if there is no hiding from the power of the internet and e-tailing, even on high service items like eye glasses.

To see the full 'Inside Retailing' article, Click Here


Timely Review: Myer CEO on e-Tailing

Right in the middle of this series on e-tailing, Myer CEO Bernie Brookes was interviewed by Alan Kohler on the ABC 'Inside Business' program. Timely indeed!

Asked by Kohler, "... what sort of sales growth do you expect to get from online shopping?", Brookes replied:"... at the moment we (sic) got an iPad application, iPhone application and online e-commerce plus a fairly large digital component to our business."

He went on, "But in talking of that, we're doing only a few million dollars at the moment online. We're then doing a fairly sizeable business in bridal and gift giving online which is another sort of equivalent to one of our department stores."

"We think going forward this year we can build that to be equivalent of one large department store and let the consumer come along with us," Brookes said.

Bernie Brooks, Myer Group CEO
Myer CEO Bernie Brookes

The Myer CEO went on to explain, "We've only just managed to increase our range to over 4,800 products online and we're starting to see some significant growth; 39 per cent alone in the last month in growth in that area so we're looking for some sizeable increase in business online."

That look like good growth, but it appears to have come after a range building exercise.

Brookes also said "There's no doubt it's a very high cost of entry. Having the operating base, having the fulfilment mechanism in place, but the answer to your question is for us it's one of our three or four big drivers going forward."

Brookes said Myer would carefully invest in its online business, unlike some e-commerce retailers that had "dug a hole and poured money into it".

See the full transcript of interview: Click Here




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