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The Drum Network does retail: Retail and e-commerce in focus - friends or foes?

August 19, 2016 | 10 min read

James Hammersley, founding partner and chief exec of business consultancy Good Growth, explores the issues the retail industry is facing, as more and more of us are purchasing online, on a screen and on the move.

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Across the UK many senior retail leaders are seeking to address specific issues associated with effective multi-channel performance. Most have invested heavily in supporting technology to operate in the online channel, often including a raft of resources whose job is to drive e-commerce performance.

Research by Good Growth on the top 10 UK online retailers; Argos, Tesco, Marks & Spencer, Asda, Currys, Next, John Lewis, B&Q, Boots and Debenhams reveals that only half of these retailers have the core tools of any good e-commerce team: analytics, insight and split testing capabilities.

With e-commerce being the most significant driver of inward investment in the UK, business leaders and shareholders should be seeing a step change in revenue performance and, if not, they should be asking serious questions of their e-commerce and marketing teams.

An acceptable return on investment?

While there has been considerable investment in e-commerce, a review of the UK’s top 10 multichannel retailers provides a revealing story. Every retailer has seen an increase in search traffic over the previous twelve months. However, looking at the source of that traffic (paid, organic or both), 6 out of the 10 retailers have reduced their paid advertising campaigns over the same period. Why? Have they made a strategic choice to direct their marketing into different channels, or is it because they cannot generate the return on investment (ROI) required to sustain the campaign? Interestingly, half of the companies whose paid investments have decreased do not have the full suite of software required to run an effective channel (Tesco, M&S and Debenhams). Irrespective of the commercial challenge, these companies are reducing their ability to make choices that will drive a better commercial outcome.

The true measure of e-commerce success is a company’s ability to pay to attract customers. Fundamentally, successful e-commerce teams can only outbid competitors in the long term if they also outsell them. From a commercial point of view, the ability to secure the number one position in paid advertising also disproportionately rewards the bidder.

If you look at the same selection of retailers and compare their paid performance against their direct competitors, the story is more complex. Only Argos, Asda and Boots are able to outbid their competitors consistently. Multi-channel players on the whole are struggling.

This performance issue is reflected more broadly in the commercial world with several of the UK’s leading retailers reporting lower than anticipated Christmas trading figures last year:

  • Sainsbury’s fell 3.9 per cent, its first Christmas
  • decline in 10 years.
  • Argos fell 2.2 per cent, despite a digital boost.
  • Sports Direct fell 5.8 per cent, following a warm autumn and company controversy.

It’s the organisation, stupid.

Econsultancy have reported that many companies say they failed to capitalise on their investment due to a lack of resources. We are more challenging of this assessment: having researched and worked with some of the UK’s largest retailers, in our view the issue is rarely a lack of resources but the leadership and application of those resources to the commercial challenge. This isn’t mismanagement but ‘misorganisation’.

In e-commerce, misorganisation results in significant investment in capital and resources in order to achieve commercial goals being fed into platforms, web design, sales execution and performance analytics that fail to deliver. In traditional channels, organisations would have acted swiftly to change activity, processes or people at the first sign of persistent under-delivery; in digital channels we seem to be more willing to make the same mistakes again and repeat the cycle with the same inevitable outcome. Expertise only takes us so far. What differentiates the superior performers is that they have realised that their digital channel is the same as any other.

The five drivers of misorganisation:

Failure to engage the customer

We use the word ‘engage’ here carefully. Many businesses ask their customers to rate them, like them, follow them and give them feedback. Far fewer engage them in a way where they can understand what they are saying and why. What this leads to is the establishment of a ‘customer agenda’ that isn’t really a customer-set agenda, but one that is established internally on information of variable quality. Good Growth transform e-commerce performance through their trade-marked business process – which includes customer insight, testing strategies, conversion rate optimisation and capability development. Their proven track record of producing superior commercial returns is why brands such as The Economist, Samsung, Manchester United, O2, Barclays and Sky engage them for their original thinking.

Constant changes to sales execution

Changes to sales executions are in themselves neither good nor bad; they can however be costly, time consuming and they definitely will have a commercial impact. Many e-commerce teams seem to make changes against an internal agenda or even as a response to competitor activity. While once in a while these might get lucky and deliver a commercial improvement, many will have no impact on the top line and some may well accompany a decline in revenue.

Failure to test and learn

Not having the right insight is unfortunate; not testing proposed changes to see if there is or is not a positive impact, is downright careless. And just because someone tells you they are testing, does not mean that they are testing effectively. We have come across all sorts of testing strategies, few of them really effective. Testing internal ideas is better than nothing but, unless you are testing against real customer insight, then it will not drive your business forward to its full capability.

Inflexible and slow IT change processes

It would be unfair to single out IT here as a blocker to e-commerce effectiveness; however some of the processes and structures the function has adopted to help deliver a stable and 99.9 per cent reliable systems platform, do not necessarily help an organisation that needs to respond rapidly to changes in the marketplace. LEAN and ‘agile’ and other standards have their place, but ensuring you have as much flexibility and responsiveness for small changes and a way of fast tracking successful testing outcomes into full operation are critical for success.

Poor returns on investment

You might initially think this is an outcome from the four above and in one sense it is. It is the consequence of not having an effective e-commerce operation but, once it exists as an outcome, it becomes a driver of misorganisation in itself. Frustrated commercial senior leaders faced with continuing underperformance will do what they always do under these circumstances and push for greater and faster change. This puts the system under pressure and encourages short cuts which mean that the responses are less likely to be based in deep customer insight and even less likely to be tested.

These five drivers work in combination to create a vicious circle in many e-commerce organisations that damages morale in the team and confidence in the business. For example, the longer the sales execution fails to deliver expected revenue, the more business leaders want to see it changed. If IT change processes are restrictive and inflexible, pressure for change builds up and, when changes are finally made (no doubt at some cost) - and they still fail - so the pressure increases for change even further. These changes fail because they, in turn, are not being driven by insight into customer interactions at point of transaction; or by poor quality insight and they have not been put through a rigorous process of testing prior to implementation.

The data suggests that, to drive a better return on investment, the dominating theme is how to get organisations to respond to the customer, especially in digital channels. Being able to understand what customers want is essential to surviving as a business and, now that e-commerce is at the forefront of global retail, it is critical that organisations are listening to the voices of their customers and understanding and responding to why customers do and do not buy.

Many successful retail businesses - having grown successfully in their sector - are asking increasingly challenging questions of where to focus next to sustain the performance. For them the problem is not ‘digital’ but organisation: how do you ensure large, successful teams can agree on the key priorities to change and invest to acquire and retain more customers? We think effective e-commerce can provide the insight that can help businesses to listen to the customer. The quickest and easiest way to do this is to build an agreed way of working that breaks through and places the voice of the customer at the heart of the organisation and its leadership.

Having a world-class e-commerce execution enables you to beat your competitors and gain market share through building deep customer insight. This competitive edge comes from four key areas:

  • Being able to establish a shared understanding of facts that underpins all key sales and marketing decisions.
  • An agreed and common set of criteria for decisions associated with meeting and fulfilling customer needs.
  • Clear commercial measures for success for e-commerce based on profitability.
  • An agreed process for testing ideas and driving change based on deep customer insight rather than ‘expert’ opinion.

This will ensure that businesses will only invest in marketing communications, promotions, sales executions and fulfilment changes where marketing and digital teams have demonstrated a measurable and replicable increase in revenue and margin. Without this there can be no sustained, profitable growth.

This article appeared in The Drum Network magazine supplement on 17 August 2016.

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