The Internet sector is bracing itself for a second tidal wave this week as other companies are engulfed in the downturn in Amazon shares. The move is also likely to stiffen the high street retailers’ resolve against a major push online.
Many of the UK’s most well-known retailers – the likes of Laura Ashley, Marks & Spencer, Iceland, WH Smith and Kingfisher – have recently tried to appease the City by adopting a “clicks and mortar” strategy, although most are pursuing a “wait and see policy” to protect short-term profits.
But it is not just the dot-com shake-out that explains this air of caution. Earlier this month, Somerfield scrapped its Internet shopping division, 24-7, after only ten months. The scheme, which was hailed as a cornerstone of the ailing supermarket chain’s recovery programme, was axed after the retailer admitted two of its three distribution centres received fewer than 15 orders a week.
And long before C&A announced its departure from the UK high street, it pulled the plug on its e-commerce operation, preferring instead to concentrate on boosting sales in its beleaguered stores.
The problem for retailers has been getting the timing right. Too much investment, too early, could incite the same criticisms of over indulgence and arrogance hurled at Boo.com, following its sudden demise. But the absence of an e-commerce strategy could be considered tantamount to retail suicide.
Laura Ashley, the struggling fashion and home furnishings chain, could have found the retail equivalent of a third way. Last week, its share price rose 13 per cent to 19.25p, after announcing it was to launch an Internet shopping service in October. Armed with an existing mail order infrastructure, the retailer is hoping to keep costs down by entering a profit-sharing agreement with e-solutions company Blueberry.net.
Retail analyst Verdict believes retailers should be making such moves now to prepare themselves for the year 2004/05, when it predicts five per cent of sales across the sector will be made online. And a report by Foresight for the Department of Trade & Industry predicts the UK e-commerce market will be worth more than £2.5bn by 2003.
But Retail Intelligence senior retail analyst Richard Perks believes the Net retail revolution is a long way off. “While some products may begin to sell online in the near future, the Internet has a long way to go before it’s good enough to be a mass market channel of distribution.” Perks believes a market share of five per cent is unlikely to be reached for another decade.
While the likes of Iceland and Sainsbury’s – not to mention Somerfield’s failed 24-7 – all made the decision to invest heavily in distribution centres, others, most notably Tesco, have opted to minimise investment by using existing stores as distribution points.
Sainsbury’s online division marketing director Nick Adderley claims: “Tesco’s approach will work in the short-term but could cause problems in the future. It’s simply not efficient to deliver to a store, fill the shelves and then take products back off and load them onto another van.”
But David Hobbs, retail consultant at Cap Gemini Ernst & Young, which works for Tesco, believes this is why the chain is the leading online grocer in the world – because it has set realistic targets.
The retailer claims Tesco.com generates £125m in sales a year and, as Hobbs points out, that is the equivalent of the annual sales of only two stores.
While about £20m is thought to have been earmarked for M&S’s e-commerce strategy, decisions on how it will be spent will not be made until current trials are completed. “We have yet to make a decision on which direction we will go,” says an M&S spokesman. “We are trying to establish what customers want© and reflect the brand values of M&S in our online operations.”
A major deciding factor on a retailer’s investment is the online demand for its products. Mike Godliman, retail analyst at Verdict, says: “If you’re a high street retailer in one of the burgeoning online sectors, such as computers or books, and you haven’t got a clear strategy in place, you will find it hard to survive.”
WH Smith’s high street arm is a case in point. Godliman says that despite announcements to the contrary and the existence of many online competitors, including the world’s biggest e-tailer Amazon, WH Smith has a notably low-key online strategy. “It will need to make substantial investment if it is to get the market share it is after,” he says. “Marketing has been a major problem.”
According to one WH Smith insider, the company has spent only £2m marketing its online services. It spent £1m on a radio ad campaign leading up to Christmas and has just spent another £500,000 on a summer radio push.
But Lesley Saville, marketing director of WH Smith’s online division, insists its Internet operation must be balanced with making a return for its shareholders.
She adds: “We will not be spending £11-£12m like our competitors. Instead we will be using our stores and brand to aim for 60 per cent year-on-year growth.”
To date, few retailers have gone to the extremes of rebranding their stores around an online brand as Iceland has. Most seem content to ride the e-commerce wave on customer loyalty and existing brand recognition.
As Godliman points out, retailers are unlikely to be planning aggressive marketing campaigns to get their customers to switch online. He says: “Following the fate of many standalone e-tailers, most high street chains will be feeling confident of survival – they know they haven’t got the first hurdle of building brand awareness to jump.”
Retailers’ adoption of ‘clicks and mortar’ strategies