Redefining The Economics Of E-Commerce

Sean McKee is an experienced retailer who progressed through a range of operations roles including store, regional and divisional management at Schuh, before getting into E-commerce in 2010. Sean is a long-time advocate of integrating bricks and clicks in the pursuit of an optimum retail experience. In his current role as e-commerce and CX director at Schuh, he has driven growth through mobile optimisation and driving a clear-sighted cross-channel strategy. We chatted with Sean to deep dive into one of the most pressing questions in UK retail today: How can we redefine the economics of e-commerce?

The current economics of e-commerce

Let me do my best to give you an overview of what the current economics of e-commerce is. If you think about the challenge that retail businesses face, multichannel retailers have a store estate and we have an ecommerce vehicle. The historic economics of retail where there is a store estate mean that you pay rent, you pay rates, you pay utility bills – you have a lot of costs sunk into your investment in that physical location. What e-commerce has done is disrupt a model that worked very well which was you bring people to a shared, busy location, they shop your physical premises. Those fixed costs were entirely manageable because you could grow the sales in that physical space year on year.

What e-commerce has done is reduce the people coming to the physical space, making growth more difficult, but you still have to contend with those physical costs. As such, our financial models are built around what you can call a four-walled view of the world. It is a physical view of the world where what happens in that physical investment is how you understand the P&L of that physical investment. Of course, e-commerce has really changed that picture.

The digital disruption

 

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First of all, customers are going somewhere else in a sufficient number for it to be a disruption. So, to contend with this challenge retailers are working to make these two channels – the physical and digital – speak to each other on a systems level, allowing the customer to get the most out of, and ideally make use of both channels. That in itself comes with some economic challenges. How do you credit the work that physical retail does to fulfil e-commerce business? Whether that’s stock or handling returns or being a showroom for your website. At a very obvious level there is a need to rethink the economic model that in a way keeps us away from the consideration of the purely physical and allows for customers that are in one or two channels to be accounted for appropriately.

This is actually quite challenging because business is typically set up around last-click attribution – which means I have a till, what goes through that till? It isn’t instinctive to do things like allocate sales by postcode to stores, based on your e-commerce sales. It’s easy to see the first steps, like charge your e-commerce business for any refunds that take place in store. Those things you can certainly do, but what it does not do is address the fundamental shift in the industry. What it does do is pragmatically address the transition, but it’s still flexing around the old model that retailers made for themselves.

So we are faced with a situation in which stores are under pressure and e-commerce is the growth vehicle. However, when physical stores are performing well they are extremely profitable because they have broadly fixed costs. But when it comes to the e-commerce side of the equation, the costs tend to be accrued at the point of sale. So you don’t have to pay rent and rates, but you do have to worry about the costs of marketing, packaging, and other variable costs that come at the point in which you sell the product. What that means is that e-commerce is less flexible, and it cannot be leveraged in the same way that stores can be leveraged when they are buoyant.

Redefining the store and the value it presents

 

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The cost of marketing and logistics are at the heart of why e-commerce costs money. You also have to think about what the definition of the store is, within this context. The store is a distribution centre, a showroom, a physical and living embodiment of your brand.The health of our ecommerce function requires that we have access to the stock we hold in store. So every store is already a distribution centre. The question is when should it be the distribution centre? When should we rely on local and when should we rely on the central distribution centre? We need to get our head around that because the costs of fulfilment from in-store versus fulfilment from the distribution centre are quite different.

On the experiential side of the physical side, of course, if stores aren’t more interesting places to go you are going to struggle to persuade people to come into your stores. By definition stores are going to have to be more experiential. What does a store do? A store is where the brand lives. It’s where your staff and your culture and the physicality of your brand have manifestation, and you can’t do that on your website with any kind of the same authority. So yes, the physical space is experiential, but we haven’t quite figured out what that means yet. Does it mean more technology in the store environment? Does it mean more activations with your brand? What we still see is that the customers fundamental needs haven’t changed which is they need a very clear level of certainty on the availability of the product and they need a level of service to get that product really quickly with a great attitude. Those things haven’t changed.

Whilst we don’t know the answer to some of these questions, we do know that we’ve had our fingers burned a number of times doing things that just haven’t worked. Having large screens in store, making stock information very available to the consumer on the ground, and you know, sometimes what the customer tells you in research and what they do on the ground can be quite different things. So the big headlines going forward from a store perspective is yes ; what is the experience that is able to command a visit? How physically large does that space need to be? Does the footprint of the store need to change if we are flexing the function of the store? What square footage do you need for showroom and what square footage do you need for the distribution parts of the operation? Fundamentally, do you need bigger stock rooms and smaller sales floors? I suspect you might.

What a future economics of e-commerce looks like

 

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This brings us to how we can go about measuring the value of e-commerce and what a future economics of e-commerce could look like. Click and collect is the easy one. Its clearly attributable to the physical store. It just needs will and some redrawing of the way you present finance by location. But what I’m focused on at Schuh is around our website which has typically been a pretty agnostic vehicle focused on customer convenience and conversion. Once we get you on the website, we broadly treat every customer the same way. I would advocate we change this position. I know there are high value customers and customers who visit you less frequently. I’m not referring to that. What I’m thinking about is having a clear view of the different services we offer the customer and the profit we can generate at the level of the choice the customer makes. What is the profitability of the click and collect customer and the profitability of the next-day delivery customer, and have the clearest view of what that is.

Additional to that, where is the customer? At the minute it is entirely feasible that you could stand on your mobile 50 feet outside our store in Oxford Circus and our website would sell you a premium delivery to be delivered to your house. But that clearly isn’t right because we have an investment in estate and we should, as a priority, be taking you into that estate. And this is for good reasons, not just the sunk cost and the brand experience, because they’re important, but because if we can get you through the doors of the store there is a 4 times improved likelihood of conversion. In-store conversion rates are much better than online conversion rates. I want to move our website away from an agnostic environment to an environment that is actually quite curated based on where the customer is physically located. If they are within a store radius, we want them in store – we don’t want a website conversion necessarily – we want a store visit.

Secondly, if you’re outside that radius and can be considered a traditional website customer, then we will have a very clear hierarchy of preferences of the sort of services we might want to sell you. We might like a delivery contribution from you, or we are looking at the product you have selected and the profit margin of that product might refine the types of delivery options available for you. If, for example, a customer orders a pair of winter boots and the profit margin on the winter boots is higher than a pair of sandals; then the winter boots customer might expect a wider range of delivery options than the customer ordering the less profitable product. We might also apply this to full price versus sales.

Now, we won’t stop you from doing anything you want to do, but we will use persuasion and the representation of the site to emphasise the optimum path onsite. This will allow us to drive the profitability of e-commerce in a very explicit way. On the one hand, if you are beside a store, we won’t be attempting to both bite the same cherry – we should give the store the customer that is appropriate for the store. We will back that up with marketing activities that has a local orientation that gets people in the vicinity into those locations. Secondly, we will be quite considerate about the choices you’ll get above and beyond that.

This is quite different from where we’ve previously been. Previously we’ve given the customer all their choices and then become passive and said, “here are all your choices. What would you like to do?” And what that has done is create a situation where 65% of our customers get a free delivery which might not actually be appropriate anymore where e-commerce has taken a greater share of the overall business and is the growth-driver in the business. We have an obligation to the business to be extremely focused on the profitability of what we are doing at the level of each transaction.

Profit versus value and the market forces driving change

 

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On the broader philosophical level, when we think about the economics of e-commerce we also think about the profit-driven, shareholder-driven business model. We see retailers who are accountable to shareholders possibly prioritising profit differently to privately-owned businesses. This makes us question whether this business model is sustainable in the long run. Are retailers going to need to shift their focus to become more value-driven enterprises to remain sustainable? Are market forces going to push competitivity between retailers to a point where profit margins are simply too thin to be sustainable?

Now, if you think about the rule of retailers, their function is to sell things at a profit. Fundamentally, the market will decide. In the UK, market forces are very strong and if you are weak it is very difficult to be in that market and the customer is driving a particular form of value for themselves. I don’t see retailers moving to a value model because it doesn’t chime with what retail fundamentally stands for. Retailers want to do things really well and delight their customers, but at the heart, retail is not a philanthropic exercise, it is a profit-generation exercise. But that doesn’t mean we should not do it very well, do it ethically, have a great attitude, and add value. What concerns me more is some of the things like the pressure on department stores. If flagship stores disappear from a market, what does that mean for the market? I think retailers can shift their perspective in that the boom times of retail are not available in the foreseeable future, but retailers must remain profitable at the end of the day.  

Want to dive deeper into Schuh’s e-commerce strategy for the coming years? Then join us at Savant eCommerce where Sean will be sharing further insights into the economics of e-commerce! Get tickets here: https://www.savant-events.com/event/savant-ecommerce-london-2018/

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