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Pigs might fly

By Frances Martin

Saturday 1st June 2002

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Frances Martin uncovers e-tailing's dirty little secret - it works

Chris Hart has lived out the dream of many music-mad Kiwis. Real Groovy, the record store he founded 22 years ago, has grown to become one of New Zealand's biggest retailers of new and second-hand music, games and DVDs, employing 65 people in its Auckland and Wellington stores.

Now Hart and his business partner of six years, Marty O'Donnell, seem to be living out the dream of many failed dot-com whiz-kids. Real Groovy's online store, launched in November, began making money straight away. By December, online sales were high enough to cover costs and return a profit, and by April they accounted for more than 5% of the company's turnover.

The biggest impact has been on special orders, where customers get the store to order in product from Europe and the US. "We're getting them in at twice the rate we had before the website started," Hart says.

Real Groovy's online launch coincided with the collapse of high profile e-tailer FlyingPig, the latest in a long line of e-commerce flops since the 2000 dot-com crash. FlyingPig's demise created an impression that online shopping was another expensive fad gone wrong but - surprise, surprise - online shopping is far from dead in New Zealand. In fact, it's alive and well and living in a town near you.

Upmarket marine clothing brand Line 7 is one of many retailers that, like Real Groovy, are doing very nicely from the internet, thank you. Line 7 makes official America's Cup clothing and memorabilia, and runs America's Cup stores including the online During the last regatta in Auckland, picked up 7500 orders worth $1.2 million. But Line 7 e-commerce manager Nik Burfoot says he expects sales to treble during the next racing season. "Already sales are 10 times what they were at the equivalent period leading up the last America's Cup," says Burfoot.

Interestingly, web software designer e-Media, whose customers are mostly small and medium-sized enterprises, says it's seen almost no drop off in business since the dot-com crash. "What we did see was a fall-off in the number of large companies wanting to spend on big sites," says chief executive Carl McNeil.

But niche players aren't the only ones singing the praises of the net. The country's largest e-tailer, Woolworths, has just revamped its site, while our largest listed company, Telecom, recently relaunched its home shopping mall. Neither company will reveal whether e-tailing makes them any money, but the fact they've dished out cash to revamp their sites suggests they at least smell profits down the track.

Certainly, usage is growing. Woolworths online shopping manager Richard Harrison says the site, started in November 1998, is now a multimillion-dollar turnover business, with sales doubling every year. "We're now upgrading the platform hardware to cope with the current and future growth we're predicting," Harrison says.

Though some analysts argue grocery stores aren't well suited to e-tailing, there's some international evidence to back up his confidence in online shopping. Hartford Consulting principal Daniel Vidal says that while statistics from the US show mixed results, there's strong growth in e-tailing in Europe and Canada. Data from the UK Office of National Statistics shows that in the UK e-tail sales are growing more than 10 times faster than retail sales, Vidal says. "The growth of e-tailing over the year ending February 2002 was 85.5%, while retail growth was 5.9%."

This growth seems to apply across-the-board to UK e-tail sales, in contrast with the US, where typical internet products such as travel, books and CDs dominate sales. Customers also seem to buy more when they shop online, he says. For a typical UK electronics store, the number of units per internet transaction was more than twice the typical store transaction.

In New Zealand the trend is less clear, partly because ratings agency ACNeilsen changed its questionnaire slightly at the start of last year. In 2000, about 20% of regular net users said they had bought something online, ever, while in 2001 about 17% said they'd bought something online in the last 12 months. However, the survey indicates that online shopping is becoming more popular with "decision makers", which the survey defines as people who helped make a decision for their company or employer within the last year.

So, what's the secret? Why are some e-tailers doing well, while others have failed?

Brands matter

Lesson number one seems to be that the internet works well when it's treated as another outlet for an existing, well-developed brand. The downfall of many pure e-tailers seems to have been the cost of building up brand awareness from scratch.

O'Donnell says Real Groovy was 21 years old before it went online, so already had an established brand and customer base. "From day one we had about 18,000 customers who were members of our loyalty programme," he says. The company also used incentives to encourage customers to swap from the manual membership scheme to an electronic version.

The real growth in the e-tail market is coming from traditional businesses, which see the net as a cheaper way of expanding their outlets than opening another store, says Matthew Darby, chief executive of EstarOnline, which designs e-commerce software systems. "In most cases, they're holding stock anyway and they've got established revenues, so they're not reliant on their internet operations becoming profitable quickly."

E-media's McNeil says most of the 50 or so e-commerce sites and e-tailers using his company's services have a bricks-and-mortar presence.

Play to your strengths

Telecom has a potentially powerful retailing resource in its XtraMSN site, New Zealand's most visited portal. About 800,000 people surf the site from home each month, while others tap in while at work. But Telecom sees itself as a telco and doesn't want to get sidetracked into buying and selling things like heaters and books. So, it set up a virtual shopping mall, where other retailers and e-tailers could set up "shops" to display their wares to XtraMSN's visitors.

Xtra's Matt Bostwick says about 35,000 people click into the virtual mall from home each month. He doesn't know how many buy and what they spend because customers deal directly with the retailer involved, but Bostwick says feedback from retailers shows an online presence brings benefits to the bricks-and-mortar stores. Increasingly, customers are using the net to research and compare products before going into the physical shops to buy them.

Listen to your customers

Woolworths has just redesigned its site because customers complained that shopping on the original site took as long as going into the physical store, Harrison says. "It was the single biggest reason people were using the site once and not coming back," he says. "Our value proposition was that we were making life easier, but we weren't living up to that."

Following the revamp, shoppers can simply type in a list, select a brand, then head for the check-out. The site will also remember which brand they chose and automatically suggest it next time.

Make buying easy

"You've got to remove the barriers, to the point where you just about do everything for them," says Richard Knight, co-founder of niche internet wine retailer Blackmarket. "It's got to be click-box stuff." The site has made a modest profit from day one, though not enough to let him and partner Aaron Skidmore give up their day jobs.

Last year, Blackmarket turned over wine worth $250,000; this year, Knight expects sales of up to $1 million. Blackmarket makes its margin by acting as a clearing house, offloading stock that winemakers such as Villa Maria can't sell because it has damaged labels or incorrect barcodes, for example. But the order is placed directly with the winemaker, who also takes responsibility for delivery.

Delivery matters

Getting the website right isn't enough, say successful e-tailers. Without a decent backroom operation to handle orders and delivery you won't get far. Burfoot says the biggest lesson Line 7 has learned since going online is the importance of lowering freight and fulfillment costs. Last July Line 7 installed an order processing system developed by Christchurch software developer EstarOnline. Since then, it's been able to slash dispatch costs by 50%, Burfoot says.

"I'm an accountant and I can't imagine a more efficient dispatch system. We can do 400 orders a day now. Under the old system that would have taken us a week." Burfoot says 90% of Line 7's sales are overseas and customers are extremely sensitive to freight costs. Lowering these costs was a big factor in the rise of the company's average sale value - from $160 during the last America's Cup to $225 now.

Real Groovy also uses Estar's backroom wizardry. O'Donnell says operating online doesn't cost the company much extra because its catalogue is maintained electronically, and the billing, ordering and dispatch systems are all automatic. "If you tried to do this stuff manually, you'd very quickly come a cropper."

Estar, now on the Stock Exchange's unlisted board, lost out heavily in the collapse of the Wilson Neil group, whose subsidiary FlyingPig was an Estar customer. Estar lost $141,000 last year. Of that, $130,000 was due to bad debts from companies like FlyingPig. Estar chief executive Matthew Darby says he no longer accepts pure e-tailers as customers. "Since we made that decision last year we've had 100% retrieval in debts," Darby says.

Give 'em information

For some, the website is largely a tool to educate customers. "One of our customers is a sports store selling complex outdoor equipment like mountain bikes and camping gear. Customers often take two or three visits to make a purchase, but now they can do their homework on the site and come in better informed. That saves the company money," says e-Media's McNeil.

Communicate, communicate

Communication with customers is key in any business, but customers using the web have high, sometimes unrealistic, expectations of the level of interaction technology affords them. They can be disappointed if it doesn't deliver, industry players say. Woolworths, for example, sends regular emails to customers. Blackmarket sends an email to customers every two weeks alerting them to new wine stock. Knight, who runs his company on a shoestring, says email's probably the cheapest form of advertising around, second only to word of mouth. He works both channels hard. Email's efficient too, he says, because it targets customers when they are close to their computers. People don't rush home and look up websites they've seen advertised on billboards and buses, he says.

One of Flying Pigs failings, according to a former customer, was not making use of its extensive database to hit customers up with regular information about products they might be interested in. "They hardly ever contacted me."

Informing customers about what's happening to their order is also crucial. This communication is hugely important in an environment where the public is still a little nervous about putting credit card details online. In the best systems, customers get emails at every step of the process, confirming that the order has been placed, then dispatched, or letting them know of any hiccups such as problems with their credit card or goods being out of stock.

Deal with problems, now!

If there's a problem with an order, you have to deal with it immediately, says Blackmarket's Knight. "If you don't, the customer won't come back, and they'll tell others about their experience." Word of mouth is still a powerful tool for net marketers, and customers shouldn't be trifled with, he says.

E-Media's McNeil says now the dot-com hype has died down, it's become clear that the rules of e-tailing are no different from the rules of retailing. "If an idea won't work under a bricks-and-mortar business case, it won't work online," he says.

Harrison agrees, saying Woolworths subjected its online venture to the same financial disciplines applied to its regular business. "There are no new rules for this part of the business." Technology hasn't changed the three commandments of retailing, he says. They remain: Create a market, satisfy that market and make a profit.

It's the basics, stupid

E-retailers' toughest lesson is that it's still the business basics that matter

Great brand: Some of the most successful e-retailers have well-known names - Real Groovy, America's Cup, Telecom

Smart delivery: You are going to fail unless your back-room operation is smart enough - and cheap enough - to meet customer expectations

Good communication: One of the gripes customers had with Flying Pig was that it didn't contact them enough. Deal with gripes quickly, too

Frances Martin

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