book - retail's last mile: why online shopping will exceed our wildest predictions

THE HIDDEN ENGINE OF ONLINE RETAIL

The Neglected Power of Operations in Online Success

www.jonathanreeve.com.au Jonathan Reeve

Contents

Introduction The operations challenge in online retail Three online retail mindsets Developing profitable online operations Reflection points About the author

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CONTENTS


We all talk about ‘digital’, but the biggest challenge for most online retailers lies in their ‘physical’ operations

Most online retailers face an operations bottleneck. Operations issues are driving poor service, high costs and team member frustration. These retailers are falling behind a handful of leaders who have their online operations under control and can focus on improving their customer offer and profitability. Designing and executing the optimal operational model for an online retailer is a challenge. The best approach typically emerges over time and varies by sector and geography. Throughout my work, I have witnessed the benefits of a structured long-term approach to online retail operations, one giving equal weight to customers, profitability, and execution. Most retailers have no option. If they can’t find profitable and scalable ways to service online demand they will eventually become extinct.

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INTRODUCTION


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Today, 7% of sales are through a digital channel and 33% have a digital component

INTRODUCTION

Sales Through A Digital Channel from US Census Bureau. Sales With A Digital Component based on Forrester US Cross-Channel Retail Sales Forecast: 2014 To 2018 (July 2014) and Jonathan Reeve estimates

SALES THROUGH A DIGITAL CHANNEL Ex: PURCHASING ONLINE, DELIVERY AT HOME

SALES WITH A DIGITAL COMPONENT Ex: BROWSING ONLINE, BUYING IN STORE

2000 2015 1%

7% 4%

33%

2000 2015 2030

?

2030

?


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The Internet has led to exciting new delivery options for customers, but these add cost and complexity to retailers

INTRODUCTION

Customers

Delivery

Physical delivery

Virtual delivery

Click & Collect

“Traditional” shop

Delivery

Supplier

Store Distribution

Centre


Challenge 1: The increased cost and complexity of online retail fulfilment Online is higher cost than a store…. •  Online retail shifts the cost of picking and

delivery from customers to the retailer. •  Online customers are deal-focused and

expect free shipping: higher costs are rarely recovered through higher pricing.

•  Returns are a hidden but significant cost.

…and omni-channel is higher cost than online •  Omni-channel retailers face a “double-

whammy”: more customer touch-points equals more cost and more complexity.

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THE ONLINE OPERATIONS CHALLENGE

The Internet is having a similar impact. It’s still early days and hard to know how things will evolve:

Many will not survive

TYPICAL “END-TO-END” OPERATING COSTS (% OF SALES)1

20% 25%

STORE ONLINE OMNI-CHANNEL (STORE & ONLINE)

30%

1. True “end-to-end” costs are often not reported, e.g. because online fulfilment is cross-subsidised by other areas.


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Challenge 2: The need for new mindsets across the organisation


Area From To

Store Teams Service business model Process business model

Supply Chain Satisfactory stock record accuracy Excellent stock record accuracy

Logistics Transport of cases Transport of singles

IT Legacy, reactive Agile, pro-active


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Challenge 3: The rise of online disrupters


Lockers to solve the problem of inconvenient delivery timeslots

Automated warehouse fulfilment

Amazon Dash –simplified ordering (eliminating the shopping list)

Ordering Fulfilment Delivery

Innovation examples:


Challenge 4: Many retailers lack confidence in the new world of online retail The impact of the Internet is rather like a meteor. 65 million years ago a meteor 10 km wide and travelling at 30 km / second hit the Yucatan Peninsula in Mexico. At first there were few effects outside the area hit, but gradually the earth’s atmosphere changed. Clouds of dust started to block the sun, slowly transforming the climate. Over time, only 30% of species adapted to the new climate.

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We can look at the Internet through the same lens. We’re still in the early days and

it’s hard to see through all the dust

and know how things will evolve.


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Online retail mindsets: Which one applies to you?

Mindset Approach Focus Pay-Off

Creative “We’re creating a new way for the future.”

Future 10x

Reactive

“We’re reacting to the world we see now.”

Present 4x

Passive “There’s no need to adapt or change.”

Past 1x

THREE ONLINE RETAIL MINDSETS


The passive mindset Many retailers believe they don’t need to change and only adjust their operations when they are forced to. Walmart is the world’s largest retailer. In 2003, it had no online grocery business in the US. In fact, it only started testing the idea in 2011 with one trial in its home state. Today, Walmart is making significant investments in an online grocery offering and having to solve online challenges that could have been addressed ten years ago. Meanwhile, Amazon has been making steady progress and in 2015, its stock market value exceeded that of Walmart for the first time.

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1. Walmart’s UK subsidiary Asda did start offering online grocery several years earlier than Walmart in the US. Walmart would have gained some learning from this experience, although the UK market is very different to the US and the internal challenges will be different in each organisation.


The reactive mindset The most common mindset of retailers is to respond to what competitors are doing or to short-term, internal priorities. For example, retailers are encouraged to become “Omni-Channel” which translates to serving customers whenever and wherever they want to shop. In practice, many Omni-Channel retailers are prioritising the customer offer over their profitability and ability to execute, but feel they have no option but to match their competitors1. An example is the US trend to store-based fulfilment. It has its place but is high cost and therefore will not be the foundation of a profitable long-term strategy.

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1. A 2014 survey by PWC found that only 14% of Omni-Channel initiatives were profitable


The creative mindset Some retailers shape their markets by creating an optimal model for the future. Typically, these are the start-ups or new entrants. But there are no barriers to incumbents taking this approach. In 1995, two British grocery executives attended a consulting conference. At this time, only 25% of households had computers. During the conference, a consultant predicted that one day, shoppers would order groceries from their kitchens. Attendees nearly fell off their chairs laughing. But the executives, Tesco’s then CEO and Marketing Director, saw how convenient it would be to have groceries delivered to customers’ doorsteps. As a result, they set up Tesco.com in 1996. Putting yourself in your customers’ shoes is the first step. But the secret to Tesco.com’s success was a relentless creative effort to solve two other challenges at the same time as making life better for customers: •  What is the most efficient way to get the job done? •  How do we make life simple for the teams who actually do the work?

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1. Sir Terry Leahy and Tim Mason. Story related in Management in Ten Words by Sir Terry Leahy


Model: 3 pillars of profitable online operations There are three pillars to profitable online operations: 1.  Customer offer: how could we improve the way our

customers’ needs are met?

2.  Operating model: how can we profitably deliver the customer offer?

3.  Execution: how do we make it happen? Most online retail strategies prioritise one aspect of the operations plan – usually the customer offer. It is then left to other teams to figure out how to deliver the offer to customers and make a profit. The key is to focus on all three from the start.

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PROFITABLE ONLINE OPERATIONS

1. CUSTOMER OFFER

Efficiency


1: The customer offer It all starts with the simple question: “what business are we in?” Many companies focus on improving what they do now not what their customers actually want. For example: •  Kodak invented the digital camera but did

not commercialise it •  They thought their business was “creating

better quality photos” •  Whereas what Kodak’s customers really

wanted was “to capture memories” Incumbents tend to overlook customer inconveniences that also affect their competitors.

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DISRUPTERS FOCUS ON ISSUES WITH THE MODEL: SHOPPING EXAMPLE

Incumbent focus Disrupter focus

Range Effort to write shopping list

Pricing & promotions Travel to / from store

In-store service Time selecting products


2: The operating model

Online retailers have many options to ensure customers receive their products. Every option has its own cost profile and operational pros and cons. These can change as volumes increase. Every sector has its own dynamics and the optimal fulfilment method can vary even for products sold in the same store, for example: •  Video games •  Consumer electronics •  White goods

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DIFFERENT MODELS MAY BE RIGHT FOR DIFFERENT TIMES

VOLUME

COST / UNIT

OPTION C

OPTION B

OPTION A


3: Execution A good business model design sets up an opportunity to make money. Execution makes it happen. There are three key phases in execution: 1.  Set up 2.  Manage performance 3.  Continuous improvement

The cause of many execution failures is when the Managers who build the strategy don’t think about making life simple for the teams who do the work.

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Example Webvan set out to revolutionise supermarket shopping with a direct-to-customer model. It had the backing of some of the smartest investors in Silicon Valley and George Shaheen the CEO of Andersen Consulting (now Accenture) had quit his role to lead it. Gary Sargeant, an early Head of Tesco.Com, visited one of Webvan’s warehouses when its valuation was $5 billion. Gary knew immediately the business wasn’t going to work because the warehouse design did not make life simple for the teams who had to do the work. Most of the female employees were having to stand on crates to operate the equipment. Webvan went bust just a few months later.


The hidden engine of online retail Too often I see online retail strategy focused on designing a great customer offer. The challenge of how to profitably deliver that offer is left to teams who may have had little involvement in the decisions. The best online retailers know that taking an operations perspective at every stage delivers higher sales growth, lower costs and happier team members.

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1. CUSTOMER OFFER

Efficiency


Reflection points What is your mindset around online retail? •  Passive •  Reactive •  Creative Is anyone in your market working to eliminate the key sources of dissatisfaction for your customers? What is really driving your online strategy? •  Improving your customer offer •  Increasing your profitability •  Removing barriers to execution •  All of the above

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REFLECTION POINTS

What are the jobs your customers are looking

to get done?


About the author Jonathan Reeve is passionate about helping retailers to develop profitable, stress-free, online operations. Jonathan has worked in online businesses in three continents over the past 15 years and was part of the team that developed the operating model for Tesco.com, the world’s leading online grocery retailer. Jonathan’s unique perspective comes from having both developed online strategy and led the front-line teams who deliver the service to customers. Jonathan has an MA in Economics from Cambridge University and an MBA (with Distinction) from INSEAD. His prior roles have been with Tesco, Coles, Aussie Farmers Direct, Goldman Sachs and Arkwright Consulting. Jonathan lives in Melbourne with his wife Anna and sons Leo and Max, enjoys keeping fit and has completed several ultra-marathons and Ironman triathlons.

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ABOUT THE AUTHOR


Adviser, Speaker and Author Jonathan’s soon to be released book THE FUTURE OF RETAIL helps make sense of the unprecedented change underway in almost every retail sector. Jonathan applies his strategic, academic and practical experience to explain the trends reshaping retail and how to respond to the new reality. Jonathan’s keynote presentation THE FUTURE OF RETAIL is designed for organisations looking to develop their leaders to understand and respond to the trends reshaping retail. Drawing on fifteen years of retail experience, Jonathan presents an entertaining keynote that will inspire as well as inform the audience. Jonathan advises teams at all levels and offers a range of services including strategy development and implementation, online operations diagnostic audits and one-to-one mentoring. “Benchmark Your Online Operations” is a popular option for retailers who’d like to understand how they stack up against global best-practice. This includes a leadership de-brief session as well as the feedback report. Jonathan writes a regular blog. You can sign up to this on his website or by emailing him. Phone: +61 428 537 925 Email: [email protected] Website: www.jonathanreeve.com.au

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ABOUT THE AUTHOR


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This version: 15 January 2016.