There was a time when a lot of people I spoke to didn’t think much about e-commerce. E-commerce was small and while it might grow, it was something to be concerned about at some non-distinct future time. Now it appears that e-commerce is being roundly acknowledged as being definitely ‘now’. Even those countries where e-commerce is still pretty small, people are seeing it as imminent. And yet the challenges and risks that it brings seem to be poorly understood. E-commerce, it appears, is ripping apart many of the ways we do business, and perhaps too many organizations are a little too optimistic about the treasures it will bring. Let’s consider the dangers of Channel Strategy in the age of the Digital Shopper.
E-Commerce probably isn’t a growth driver
This recent article suggests that e-commerce is a growth driver, then goes on to justify this by saying that e-commerce is growing fast. Growing fast is not the same thing as driving growth. I don’t end up using more toothpaste when I buy it online versus in a supermarket! For the most part e-commerce is just switching transactions from one channel to another, not driving growth. Yes, I’m sure that in some cases the efficiency of replenishment at the point of consumption might lead to more consumption, but on the contrary, the opportunity to up-trade a shopper in a store, or get them to switch to a more premium brand may well be diminished. So there is little guarantee that e-commerce will actually drive growth.
E-commerce is driving costs
So e-commerce isn’t driving growth, so it must, surely, be doing something to efficiency, right? Well, not exactly. Amazon deliver fabulous prices, sure, but they do this because they are funded differently to their bricks and mortar cousins. Just take a look at their margins. Retailers with shareholders can’t hope to deliver so little to their owners. Amazon, following a ‘last man standing’ strategy, funded by VCs, can. Their goal is to crush competition with an unsustainable business model – not deliver shareholder value today. In this interesting video, take a look at the costs that ‘free delivery’ is driving for Amazon. They charge around US$3 billion in shipping fees to shoppers, but their actual costs are well over US$6 billion. That isn’t efficiency at all!
E-commerce can’t stand on its own
It is apparently hard to be a pure play online retailer. Even Amazon have started opening physical stores. Last year many online-only retailers opened physical stores. Shoppers have been promised omnichannel heaven and they quite like the idea! But there is a problem with omnichannel. Online operations cost money, but so do stores. Conventional retailers are seeing profits squeezed by e-commerce in two ways. The costs of setting up e-commerce are high, and yet existing stores are less profitable because they do less business because shoppers are buying more stuff online. This model of fragmented shopping is driving far more cost than value currently, and while shoppers like omnichannel (see below) they don’t seem particularly keen to pay for it.
Shoppers are falling in love with an unsustainable model
And as for shoppers, well they can’t be blamed. Who wouldn’t like free delivery? Who wouldn’t want same day pick-up? Who wouldn’t want a tech-enabled store that was a joy and a pleasure to shop, and staffed by helpful, empowered shop assistants. But at what price? Every article I read on the topic talks about how shoppers want this and shoppers want that: very little is about what shoppers might be prepared to pay for anything. The reality is that much of what is being offered to shoppers is unsustainable. Omnichannel is unsustainable. The old status quo is gone for sure, but what part of the omnichannel dream is desirable, or possible?
E-commerce demands that we think differently about all channels
Consumer goods as an industry is at a crossroads. Brands and retailers need to decide which shoppers they really value, and deliver real value to them. Omnichannel is leading us all down the path of everything to everyone all of the time. If Amazon can’t afford free delivery, who can? If Tesco are struggling to make stores profitable, who can? If Wal-mart’s UK subsidiary is so strapped for cash that they are cutting free tea and toast to those very same associates who are apparently going to deliver a differentiated shopping experience – well.
The costs of servicing e-commerce channels are significant (I’ll be writing about this shortly, so don’t forget to subscribe so you don’t miss it), and need to be managed carefully to ensure that the business will be profitable in the long term. At the same time traditional channels need attention. As shoppers switch channels then the rules of investment must change. They have to change. If e-commerce doesn’t drive growth, then every dollar of investment in e-commerce needs to be reflected by a reduction in investment in other channels. Managing this is going to be one of the most challenging changes to have occurred in consumer goods for, well, possibly forever.