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!

Clearly 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.


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