Interview: How can retailers run a successful e-commerce business?
It’s about a disruptive transformation in e-commerce: Retailers have to go at it with the same claim as a digital disruptor. And that means doing things in a big way in order to meet this claim.
Internet World 2017, the major German e-commerce industry event, was held in Munich at the beginning of March. What makes trade fairs so fantastic is not that you can fill your pockets with free pens and gummy bears, but rather that you can have the opportunity to discuss an industry’s current topics, trends and developments. This was the case at Internet World, which is why we first want to say thanks for the great discussions and stimulating exchange of ideas!
For those who were not there, we selected a particularly interesting topic from the exciting content and discussions: “Get rid of the chaotic mess of figures: e-commerce needs reliable data.” In a panel discussion, Gerrit Heinemann, among others, talked about the problem of unreliable information with respect to online sales: As there are no clear definitions of what is included in the calculations, the result is incorrect statements about trends. Heinemann, Head of the eWeb Research Center at Niederrhein University of Applied Sciences, has thus been promoting the discussion of the problem for years. We met Mr. Heinemann for an interview at Internet World.
Mr. Heinemann, what you mean when you refer to the chaotic mess of figures?
When it comes to the sales data for online retail and e-commerce, there is a real battle of figures regarding the amount of sales actually generated online. The range of figures mentioned can vary by up to 70%! Why is that? To get to the bottom of this, you have to ask questions such as: Which business model is being considered as retail? Are marketplace sales being taken into account? Are cross-border transactions being included in the calculations? Let’s look at the example of marketplaces such as eBay or Amazon. If only the commissions instead of the actual trading volume are counted, then 15 billion euros of online sales in Germany are suddenly missing. Cross-border sales are also increasing dramatically. Very few people are aware of the fact that half of the offers on the Amazon marketplace come from abroad. And as a final example, the sale of tickets: Although ticket sales are included in over-the-counter retail revenue figures, online such sales are considered as service revenues and are not counted. 15 billion in sales are generated by service revenues such as tickets in Germany alone. This therefore results in differences between the very concepts of e-commerce and online retail.
What is the difference between online retail and e-commerce?
I try to address this topic in the following way: Online retail is the trading of goods (without pharmacy sales and automobile trade), and is classically considered to be retail trade. Everything else, i.e. hotels, tickets, etc. is e-commerce. Even online banking and applicable account fees could be included in this category. And it is very important to add that this is pure online sales and not hybrid sales – which one should actually also include. These are sales that are made in over-the-counter retail, but where the customers’ buying decision was made on the internet. There is after all also the rather restricted definition of saying that sales only take place where the corresponding payment is made.
What are the implications of these differences in figures?
This confusion results in headlines such as “Online growth is over.” I consider such statements to be extremely dangerous, because the opposite is actually the case: We are once again seeing accelerated growth. We would grow even faster if structural impediments didn’t slow down growth.
The growth is far from over. My conservative estimate is that you can expect at least another doubling over the next decade.
That is why I am making a wake-up call: Statements about the end of the online growth are dangerous. They result in people seeing themselves confirmed in not taking any actions. However, precisely the opposite has to take place.
What has been the response of vendors to date?
There is always the option of doing nothing and burying your head in the sand. But this means you will cease to exist one day. Some vendors, however, perhaps do too much and too soon. The right timing is also an aspect. Many simply start doing something and then call it digital transformation.
What would you call for now?
Uniform standards at both the national and European level. We need specific definitions of what is included in the published sales of an industry. Let me give you an example: Is animal feed actually food? Is tobacco or alcohol food or not?
The associations or chambers could be the mouthpiece here. But I’m afraid there are still a lot of representatives who – according to the principle of hope – are determined not to present things the way they really are. The truth can hurt.
You are advocating clearer definitions to counter the chaotic mess of figures. Are people aware of the problem?
Let me put it this way: If the mess of figures is now the topic of a panel discussion here at the Internet World fair, there must be a reason. Other people seem to be investigating it as well.
Let’s talk about online trading. The book trade was the first industry that started selling online. Why did it work?
Indeed, Amazon started with books in a garage and it also took some time until it worked. But Jeff Bezos was convinced.
I think the success also has something to do with the fact that books are relatively easy to ship. They don’t have to be cooled and they aren’t too fragile. Mail-order book sales also have a long tradition. Amazon, for example, deliberately located their logistics centers next to the logistics centers of book wholesalers in Germany at the beginning.
I find it exciting to observe at this trade fair that more consulting-intensive industries are also selling online. You can observe this in optics, hearing acoustics or bicycles. These are consulting-intensive products that should actually not be possible to sell online. But it nevertheless works very well.
Is that also because the approach to consulting has changed thanks to digital communication?
Definitely. I would go even further: Recent studies show that 7 out of 10 customers believe they are better informed than the store personnel. I think that speaks for itself.
The example of the book shows what kinds of structural conditions are required to run successfully e-commerce businesses. What are the stumbling blocks or obstacles involved with digitizing trade?
Yes, there are many reasons, such as the digital network infrastructure. Although this is quite a catastrophe in German-speaking countries, it is being intensively worked on. In the OECD comparison of future networks, German broadband coverage comes in even behind that of Greece.
The second obstacle is the offering, which is still being built up in many industries. In the case of furniture or food, for example, the offering is still not sufficient – which is also why revenue cannot be generated yet. An additional problem here is that many over-the-counter retailers offer the smallest range of products in their online shop, i.e. only a fraction of the range offered in the store. This is often an attempt to deliberately discourage online shopping.
The third point is surely functionality: Things are often don’t work as they should with online shops. We have noticed that many customers try to support small, local retailers with the best of intentions. They try to buy online there, but it simply doesn’t work well. Online shoppers are tabooed or sometimes even seen as a consulting thieves.
The fourth reason is related to functionality: Customers want to buy something online only to find out in the online shop’s check-out that their preferred payment method is not available. This is still payment on account. Many retailers however still believe that online customers are not only consulting thieves, but also do not pay. Yet purchase on account can be shown to cause 40% more sales – if it is offered.
There you are, and this list of four reasons provides only a few of the factors involved.
What else is there?
There are also poor delivery services as a brake to online retail. Why are bundled deliveries or fixed and agreed delivery times not offered? Many customers would also appreciate it if the delivery service would stick around for at least long enough to give them a chance to look into the package so they could give it back straightaway in case of any defects. In the store, I am also given the opportunity to look inside the box. This is all in the process of development at the moment, but it is another reason why online retail is not yet going as well as it could.
Why are over-the-counter retailers hesitating?
They obviously have a digital allergy. They are against it as a matter of principle; they find it terrible. In the words of a book dealer from Paderborn: “Internet is the work of the devil.” This is what I call a digital allergy. Small retailers seem to be particularly affected by it. I can’t understand local retailers whose business is located so near to their customers. I would drop off the suit at the customer’s place in person and even make sure it fits. We’re talking about enormous service opportunities here. But retailers somehow find it incredibly difficult to leave their store.
If retailers nevertheless manage to overcome their digital allergy and take on the challenge of online retail, what approach would you suggest?
That is a very difficult question. I think we need to clearly differentiate: Is this a large chain store or local retailer?
Let’s first take a look at the local retailer. We have developed a seven-step program in a pilot project in Mönchengladbach:
The first step is desensitization. The aim here is to make the basic decision of saying yes to the idea.
The second step is a matter of fulfilling the conditions. This often means installing an SME-compatible ERP system.
The third step is about creating a digital online presence without selling. This means that the printed brochure can already be optimized for mobile use and digitized so that customers can also view it on their smartphone.
The fourth step: Practice selling online. This generally means an established online platform, preferably an SME-compatible platform. If the practice run was successful, you can start planning step five: Your own online shop. After that comes professionalization in the sixth and seventh steps.
And what is your suggestion for chain stores: Digital transformation or digital disruption?
I have a completely different approach for chain stores. Let’s look at the example of Media-Markt and Saturn, with whom I’ve been in discussion for nearly 15 years. Fifteen years ago they said: We don’t need to go online, we are market leaders. Although they still haven’t completely renounced this arrogance and ignorance, today they have at least progressed to the point of saying that they have to get involved in online retail. But what does that mean? I measure the readiness for successful e-commerce by the amount of digital investment.
And to answer your question: I feel that the concept of digital transformation is already misleading. If there is a digital disruptor, I can only catch up if I understand it as my benchmark. A better term would thus be disruptive transformation: To go at it with the same claim as a digital disruptor. And that means doing things in a big way in order to meet this claim. To put it frankly, other than one or two exceptions, nobody has made it to this stage yet.
Where should the digital investments go to run a successful e-commerce business?
The online shop must become my flagship store. The shop must be mobile, with the online shop as positive collateral damage – the whole thing should be technically state-of-the-art and kept that way. That is the basis. Then I must also understand that an over-the-counter lead channel can’t work because totally different metrics and rules apply for it. If I claim to operate a stand-alone-enabled online shop, then I have to start taking a different approach to customer acquisition: That means an entirely different kind of marketing and CRM. Many over-the-counter retailers above all don’t have the latter on their radar. They may be familiar with the concept of the customer card, but have no idea what a customer account is.
Disruptors revel in this. Catching up requires changes at a cultural level; the organization needs to evolve. A disruptive transformation amounts to hardcore reorganization that I undertake voluntarily, that costs me a lot of money and effort, and that I even have to conjure up out of nothing. Only a few do so voluntarily, but there is no way around it.
Thanks for the interview, Mr. Heinemann!
Retail expert Gerrit Heinemann is professor for economics at the Niederrhein University of Applied Sciences in Mönchengladbach. Heinemann research focuesses on e-commerce, online retail and multi-channel-retail. Before his academic career, Heinemann was CEO of a department store and working for Douglas Holding AG as central CEO as well as central area manager. He was also working as consultant.