Wednesday, February 9, 2011

The benefits of differentiating your offer for online retail


Originally published to Power Retail.

The growth of online retail is making business much more difficult for retailers who sell branded products that aren't their own. It's very hard for a retailer selling say a Canon camera to differentiate themselves. Yes, they can offer better service or a better in store experience, but for a $1000+ product those differentiators are minor compared with the actual cost of the product itself. Why would I pay $1349 for a digital camera at Harvey Norman (which I have to go in store to purchase because it's not actually available online) when I can purchase it from an online retailer based in Hong Kong for $570 (inc shipping) ? (The Canon 550D and Kiss x4 are identical cameras, the Kiss x4 is just the Japanese version). Even if the Australian government charged me 10% GST for importing it Harvey Norman is still more than double the price.

Harvey Norman, Myer and many other Australian retailers are experiencing this exact issue at the moment. They've decided to blame this on the government not charging GST on sub $1000 online retail purchases made overseas, but as can be seen from the above example that's just a red herring and isn't the real issue. A historical lack of competition in the Australian retail market has meant Australian retailers are used to operating on much higher gross margins than their foreign counterparts and now that online retail is opening up the local retail market to foreign competition, Australian retailers are suffering.

This is the danger of retailing someone else's product. When the end product the consumers want can be purchased from many different retailers, margins are going to be squeezed. That's great for the consumer and generally positive for the owner of the branded product but bad for retailers.

There are two solutions to this:

1. Differentiating your retail offer
Zappos, Amazon and Net-a-Porter are all great examples of this. They mostly sell other people's products but they've been able to build strong points of different between themselves and other retailers. For Zappos it's their extraordinary customer service, for Amazon it's convenience, fast shipping and through their operations the ability to be the lowest cost retailer and Net-a-Porter it's their online shopping experience and packaging.

2. Differentiating your product offer
Apple is arguably the best example of this. Given their rapid store roll out and the number of fanatical customers constantly in their stores Apple's retail stores must be a very profitable part of their business. Apple products are available in other stores but they can essentially control the retail pricing through their wholesale pricing. They don't need to be pushed on margins to compete, if I want to buy an Apple product I can't get it for half the price by shopping around.

Australian retailers are generally poor at differentiating their retail offer but are getting better at differentiating their product offer. Woolworths and Coles have done big pushes with their house brands 'Select' and 'You'll Love Coles' in recent years. Supercheap Auto had a similar roll out of house brands while I worked there. That said the goal of these house brands is generally to just match the quality of the major national brands but gain more control over the pricing and the brand. Because the product is not significantly differentiated Woolworths or Coles can't charge a premium on their house branded corn flakes over Kelloggs corn flakes, they actually have to charge less because it's a very similar product minus the well known and trusted brand.

We're in the good position at Shoes of Prey where we only sell our own product, and it's significantly differentiated from nearly every other women's fashion shoe sold on the market in that customers can design it themselves. While we can't price our products ridiculously, we're not pushed on margins in the same way that a retailer selling a well known branded shoe can be. If a customer wants to design their own shoe there aren't a myriad of options available to them. Ideally we'll also build Shoes of Prey into a well known, trusted, iconic brand so even if other companies enter the custom shoe market we're still in a strongly differentiated position as the only retailers of Shoes of Prey shoes.

Hopefully other Australian retailers start to move in the direction of differentiating either their retail or product offer. The issue for retailers having their margins squeezed on products that aren't their own is only going to increase over the coming years as Australians get more and more used to shopping online.

Update: On Monday Myer and Sass & Bide announced that Myer had acquired a 65% stake in Sass & Bide for $42.25m. A key component of the deal involves Myer having department store exclusive rights to sell the brand. No mention of whether that extends to online sales, but it would be a smart move for Myer's online store if it did.

2 comments:

  1. There IS a big danger retailing someone else's product. I agree. This also means that there is a danger in wholesaling your product. That is, the business model which supports wholesaling is in decline.

    As a short term measure, we state in any wholesale contracts that products cannot be offered online below the price on our own website.

    As shoppers get more savvy, the mode of purchase is increasingly becoming: 1. research online; 2. try-on in store; 3. purchase online from comparison shopping sites at the lowest price in the world. Beat that.

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  2. Great point about this impacting wholesaling as well. That raises another interesting issue in that for newer brands, wholesaling can be a great way to build brand awareness.

    I have some vague recollections of their being potential Trade Practices issues with requiring minimum prices when you supply products to others to sell, would be worth double checking into that, but otherwise your strategy sounds like a good one for the short term.

    Agree with your take on the purchase process changing. I guess the challenge for offline retailers in that 'try-on in store' phase is to be able to add value to encourage customers to make the purchase there and then. Eg. Having a great range of complementary products so if a customer were to go away and comparison shop they'd have to buy the 4 different pieces for their outfit from 4 different sites = too hard, so they buy in store.

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