Why the BooHoo story tells us more about e-commerce than we’d like to admit, plus other inconvenient truths…

It seems that covid-19 has reinforced the thought that e-commerce IS the saviour of retail as we know it and that the future (or today for some commentators) is purely an e-commerce world (i’m being extreme here). The implication being that if you don’t have that capability then you’re dead (again extreme). DTC brands “dominate” the world and the old fusty shops (and brands that utilise them) are dying a death. Hopefully this post will clear all that up or at least provide a clear point of view backed up by some recent events and data to suggest that, like with many things, it depends….

So lets begin, to start with, its clear that e-commerce has benefitted from Covid-19 (if you can call e-commerce a separate “thing”). Many retailers went 100% e-commerce during the period but; its worth remembering that their physical retail was closed…. so obviously… The following chart does show that covid-19 has sped things up quite considerably (US of course but there is reason to suggest it is little different to the UK) and this is the key, things have sped up, in the direction of an un-predetermined end. We don’t actually know what that end is yet (some people think they do) but i’d hazard a guess that 100% e-commerce is neither appropriate for most OR desired by many still. It should also be noted that through necessity, lifetime penetration of e-commerce services has increased, new people have used it and some barriers are likely to have fallen as a result. This means that we won’t go back to the levels of pre-covid but how far will we slip from an almost perfect situation?

Brands, businesses (and consumers) all over have certainly changed to embrace new opportunities and safe guard their futures which is why i think this innovation under pressure has actually benefitted the economy in the mid-term as it puts it in a better place , due to the expansion of physical and digital availability (both recent blog posts here).

TL:DR, essentially the supply capacity of the market has increased through a shift in the curve leading to a higher potential equilibrium point vs pre-covid 19. To put it another way, is your local coffee shop going to stop offering take-out burgers on a Friday night? Probably not. It allowed them to earn whilst shut and there are only operational costs associated, what is the margin on burgers after all (don’t ask GBK although this seems to be due to onerous leases and too rapid expansion).

Anyway, i think we can agree that e-commerce as an offering has increased during lockdown and has also seen an increase in consumer uptake (and penetrations ) through necessity but; is it a replacement and are we going to see a permanent change at this level? I think there is plenty of evidence that suggests no (at the levels seen vs an elevated level vs pre-covid) and whilst also pointing to an unwelcome element too, the first place to look is in the good old UK grocery market.

We’ve just had Q1 results for Sainsburys and Tesco https://theeqplanner.wordpress.com/2020/07/06/tesco-sainsburys-q1-a-good-covid-response-but-underlying-challenges-persist-hankinshottake-retailweek/ and Ocado came out this week with a blockbusting 27% revenue growth (retail only) with UK retail Ebitda rising a whopping 87%! However let’s deal with Tesco and Sainsbury. They both posted remarkably similar figures for the growth of e-commerce i.e. doubling. Its worth remembering that grocery penetration in the UK for online grocery shopping pre-covid was only 5% so with the similarity (the two biggest players totalling over 40% of the market) we can hypothesise that its now about 10%.

Each brand was up roughly 8-9% yoy with much of that driven by a reduction in discounted items (we’ll return to this point in a bit) plus a tiny bit of stockpiling (and it was tiny, most supermarkets run on JIT and market planning so even a small deviation can cause havoc, just 3 extra days shopping is nearly 50% extra in the basket!). So far, so category effect. No one really changed shopping brands, some changed how (if they could) but we’re still talking 90% of grocery done in store, thats quite a lot of physical shopping still.

Ah, i hear you gasp, what about Ocado, those figures are way up. Well yes, but also something else is going on. Ocado stopping accepting new customers. So all that revenue growth was from current customers and they maxed out capacity. Bigger shops and fewer drops increased efficiency which is good but we missed the key point. They were at capacity and couldn’t grow anymore. £200m extra and that was it. Admittedly they did grow 0.2% market share over the period but we’re not talking earth shattering and that’s because its expensive to scale if you’re tied to distribution centres which have a clear physical limit that can’t be scaled easily (I suppose they could’ve done a Tesla and built a production line-esque development in 168 days or less). This vs. the combi store picking/dark store model of the big supermarkets which can be scaled very quickly indeed (Tesco hired 4000 extra temp drivers) and it’s no wonder that Ocado are looking into positioning themselves as a tech fulfilment business!

So lets continue the story. Part one is that e-commerce isn’t as scalable or flexible as people think, fulfilment is really tough to do well and there is a BIG player whose business sets precedents that are hard to replicate (thanks Amazon!). It’s so tough that Sainsburys spent £1.3bn on Argos’ “hub and spoke” distribution model (you didn’t think they just paid for the general merchandise element did you?) just to buy in expertise. It’s also really expensive to run this fulfilment engine. In fact Simon Wolfson has talked about this at Next. Online sales actually have lower margins despite selling more full priced goods. Yep that’s right, Next sell a greater proportion of full price goods via their website https://www.nextplc.co.uk/~/media/Files/N/Next-PLC-V2/documents/2019/annual-report-and-accounts-jan19.pdf. The problem is it costs them more to run and do the distribution. Thats not ideal is it. Especially when e-commerce is the future because its “more efficient”!

Then this came around on twitter which shines a beautifully powerful light on the whole situation (note that Ocado are building out their Micro-fulfilment centres and you can see why!)

So actually all this e-commerce stuff is really really expensive (and tough to do well & scale). Back to clothing and we can see why Primark, despite a £650m a month black hole, still refuse to get involved with e-commerce, although there are some tentative noises about Click and Collect in the pipeline. For Primark it just doesn’t make financial sense. Even with C&C you can imagine the additional costs of having to having to hire store pickers to fight their way through the “jumble sale” like floors to source clothes and then they have to reserve an area in store for C&C and staff it permanently plus the digital infrastructure that needs to patch into the current merchandising systems so that stock is replenished. This is from a brand at the lower end of the market competing with price points such as TU, F&F and George. They simply don’t want to be giving away margin needlessly, especially as it’s the star of Associated British Foods (all their other activity is commodity led)

Quick summary again. E-commerce is difficult to scale, its complicated to do well and its expensive and margin draining. OK, so what’s this all got to do with BooHoo? Well BooHoo, after posting some very healthy numbers, Revenue up 30% in the UK and 45%+ globally, they got into a little bother with their suppliers, based in Leicester (note the firewall and the legal complaint made against the Times).

Now traditionally many of the big clothing manufacturers looked to the far east and the Indian subcontinent for garment supply but this makes responding to trends in an Insta-friendly world pretty hard because of the supply chains. Inditex (the worlds biggest clothing manufacturer including brands such as Zara and Massimo Dutti) subverted this norm and pioneered a local approach in Spain with 54% supplied via the region surrounding A Coruna, the rest are from Portugal, Turkey and Morocco (all very close nearby). Boohoo and the private (and recently loss making natch ) MissGuided have copied this approach in the midlands (over 50% is supplied) allowing them to grow rapidly and face off against the older (but bigger) ASOS (i’ll look at ASOS another time) and steal a growth march.

In BooHoo’s case they have also been buying up other brands such NastyGal, PLT, MissPap and a raft of distressed assets which point to a desire to broaden their base to include an older more affluent audience via Karen Millen, Oasis, Coast and Warehouse.

Its an interesting strategy as it’s clear that they are trying to avoid the audience growing (and earning) their way out of their “brand stable”. This is a phenomenon that has plagued Shop Direct over the years (Very and Littlewoods now but i’m sure some will remember Kay&Co and Marshall Ward if you’re of a certain age) , you can’t be 21 forever!

Anyway, i digress. The issue is that to deliver the clothes on time and on budget it looks as though Boohoos supply chain management protocols have forced them into a scenario where oversight isn’t what it could be. A whopping £3bn was wiped off their value in a couple of days in early July (not long after they’d announced a huge £150m bonus for their leadership) due to this issue, whilst big brands that sold their product (next and ASOS) distanced themselves (lets forget that less than 5% of their clothes are sold this way, it’s the point that counts) and this leads to the another issue with e-commerce. The need for the low low prices and the rapid turnarounds demanded can lead to some unfortunate circumstances. You can’t beat the system and in some cases it looks as though someone needs to be cheated to get it to that level.

To hammer home this point some fine chap on Twitter looked at that the financials of Gym Shark, the cool e-commerce led brand of sexy gym wear. The suggestion was that it had over £50m in the bank. I mean, its possible for a brand that makes £14m per annum but it only started 2012 so its been putting away a tidy amount every year since (still possible, just. although remember the cost of e-commerce!) but; its a lot of money and closer inspection by the analyst suggests that with Accounts payable stipulated at 163 days plus accounts receivable at 30 days plus existing inventory stock we have a business that is essentially holding cash for a significant amount of time. Great for Gym Shark but pretty awful for their suppliers whom i imagine are in a pretty inelastic situation when it comes to what they can do with such a large party requesting their goods. Some will argue that this is business but surely if some businesses are waiting 1/3 of a year for payment then its not quite fair (especially as the money is available).

Once again someone loses out in a pretty bad way to fund this e-commerce only jaunt.

This is becoming a long post so i’ll wrap it up now. Essentially e-commerce isn’t the be all and end all. Its hard to do, expensive and difficult to scale , lowers profitability (if you can even make it pay, i may do a DTC post on the make-up market at a later date) and in some cases doesn’t just work on its own unless you try to game the system (don’t tell Prof Galloway). This isn’t, of course to say that e-commerce isn’t a major part of the future, its just to put some perspective out there. Its not a quick fix, at least doing it properly isn’t. It requires thought and a proper strategy. In addition to the growth of platforms like Shopify (only half an e-commerce solution) An interesting development is the emergence of “Fulfilment to let” systems. Inditex and IKEA are to begin offering it but essentially its the usage of their distribution platforms. A neat new opportunity in market for them to earn revenue and a quick way of piggy backing on a well made and well run logistics platform. Either that or buy a ready made solution, like Sainsburys. The key thing to remember here is that delivery drivers are still Key Workers too.

So, what do you do? Well, i hate to say it but Omnichannel is still a thing and in the purest sense its about spreading risk and maximising physical and digital availability so that people can buy (profitably) wherever they can, even Amazon are opening physical shops now. Develop an approach (that should properly included some e-commerce functionality however its executed) and build out with the above elements in mind, eyes open. You can’t just magic e-commerce success into being (even with seemingly simple off the shelf solutions), the financials of retail make that difficult. I know i sound pessimistic and i’m not say we’re going to reverse to pre-covid levels (almost certainly not) but its worth adding a bit of realism to the debate and i’m not the only one. Raconteur published this over the weekend (with specific relevance to DTC brands), it says basically suggests that BIG brands will benefit more from this shift, if they respond well, due to their in-built Omni-channel and mixed model and THAT, i believe, is the future. Simon Wolfson and Next have an interesting model (and having made c£750m profit over the last few years they really are worth looking at) and if you’ve got 30 mins or so this document paints a picture of the next 15 years.

You’ll note that physical stores are still present but they are smaller and leases are a lot closer to residential or office space (we’re seeing this equalisation at the moment). It makes sense if 80% of returns come that way and adds incremental revenue opportunities once you have them in store, so have fun and hopefully this has been interesting.


We need to talk about Byron Sharps availability issue

Yes, that is a little bit click-baity and this could be a blog post about how we should call out unpleasant behaviour, views and general rudeness (having a different opinion is fine though) from those in positions of influence but; its not (well that bit was, just a little). Its more about his contribution to the world of marketing science and that is a point that is inarguable. Yes there are elements in HBG that were originally discovered by Andrew S Ehrenberg but Mr Sharp reminded us of them after the industry seemed to forget it all for 20 years.

The other thing that Sharp did was create the simple heuristic couplet of Mental and Physical availability to sum up How Brands Grow. Every Tom, Dick and Planner throws these words around with aplomb and as much as i’m sure many would prefer these concepts to just fade into the background they are here to stay and a good thing too, in my humble opinion.

But (there is always a but), whilst Sharp “hates” behavioural economics and is highly scornful of the work of Khanaman and Tversky and Thaler and Sunstein its worth applying some BE thinking to these two (very) broad categorisations because they can be problematic to those who don’t truly understand what is meant by them.

That’s what this blog post is all about. The unintended consequences of their general labelling for the vast majority of people who could and should be using them to help grow their businesses and brands. What this post aims to do is add an element of nuance and easy directional language to improve these concepts and their understanding and consequentially their application.

I am well aware that Mr Sharp would hate this and dismiss it as pandering to the ignorant. He may even point such individuals to his book and suggest they read it because if we look at the precise definitions, there is NOT MUCH WRONG.

First lets start with those definitions –

They are pretty precise and all encompassing, so far so good. But, in my opinion it’s the Physical Availability categorisation that i believe has a Framing problem and its the use of the word “Physical”. It conjures up physical stuff, like stores and retail and bricks and mortar but; it means so much more and this is a problem because this is where confusion can potentially start.

Think about PPC (generic terms) or Affiliates. Both are often considered advertising and for the uninitiated they could be classed as driving “Mental Availability” (clue: they’re not) but if you consider that you, the marketer are using Googles shop or Awins network of affiliates to sell your product for you, what is the difference between them and Tesco? The phrase “digital shelf” is bandied around and whilst it has specific relevance to e-commerce listings and SEO optimisation its worth considering what we’re saying when we use that term. PPC and Affiliates aren’t about improving the probability of a consumer remembering your brand, they’re about breadth and depth of distribution. As a marketer you’re putting your product up for sale in more places, they just happen to be digital.

At this point you can see where i am going. These are Physical Availability channels but aren’t always considered as such because of the Framing of that word Physical. I propose a build and the build is an additional categorisation called “Digital Availability”. Some (including Byron, probably) will rail against this as admittedly the original definition is broad enough to include digital distribution but; we’re in the communications industry and words are powerful. By adding a subset and finessing the definitions themselves we become more precise and its easier to understand.

So what is Digital Availability? Well its the obvious things such as an e-commerce website, its media channels such as PPC (generic) and Affiliates (as previously stated), its SEO and online supermarkets, its anywhere digital where you are placing your product for sale. Its distinct from Physical Availability because of the framing effect and its more directional and precise. It helps us communicate with clients and ultimately the best way to Help Their Brands Grow is to make our recommendations crystal clear.

One BIG implication is on budgets and structural issues. Physical/Digital Availability has much more in common with Merchandising. Thats a different skill with different outcomes and requirements. Would you take budget from Physical store merchandising to invest in TV? The same with Digital Availability. You cannot compare a Google Shopping link or an Amazon listing with a TV advertisement. Whilst both under the auspices of Marketing (in the 4 P’s sense) they’re not even in the same ballpark. This isn’t Long vs Short even , its discipline and specialism vs discipline and specialism.

As to proof of concept I’ve been using this for a couple of years with clients and it helps them distinguish what they’re doing and manage stakeholders effectively internally. Its also helped with budget management and ring fencing. It does work, even if some may prefer it not too. Its worth remembering that we’re trying to make these concepts understandable and useable in the real world not just in “planner world”.

#Tesco #Sainsburys Q1 A good covid response but underlying challenges persist #Hankinshottake #retailweek

So; this is the first of what i hope will be many “analyst style” notes that i will produce. I’ve tended to publish under the #HankinsHotTake label. Its a bit corny, i know that, but its an attempt to cut through some of the “fluff” out there and provide a little insight into what can be quite dry, sometimes vapid content. The last week has been particularly busy and the ambition is to get these notes out a bit quicker and contemporaneous, couldn’t be helped but; to that end I’ve bundled Tesco and Sainsburys together. I don’t do every update and whilst i skew Retail, Tech and Media i do sometimes look at other businesses that interest me. There is also a UK focus typically although I will mention International implications if relevant

I like to follow a simple format

Headlines – These are the topline performance figures taken from various reports. Its easy to find this stuff so i don’t dwell too much

Statement – This is a digest of the various accompanying news excerpts of validating information

Implications (the HOT take) – This is my view on the strategic implications and context of the headlines and the statements.

Tesco Logo transparent PNG - StickPNG

First up is Tesco

Headlines = +9.2% up as a group. +9.1% (UK and Ireland) +6.1% Booker. Like for likes were up 8.7% in the UK whilst Booker was up 0.6%

Statement = A positive update, bursting with can-do attitude and CSR nods in line with the prevailing cultural winds. Big outtakes include positive switching from ALDI for the first time in a decade, a significant shift away from promotions (28% to 14%) and a clear split between Food (+12%) and GM (-20%). Worth noting that incremental costs are expected to contribute some additional -£300m (when business rates relief of c£500m is taken into account)

The Hankins Hot Take = It all looks rosy for Tesco at the moment in the final months of Dave Lewis’ reign. The near 50% increase in delivery is certainly impressive and this was done without the help of the urban distribution centres that are currently under development. The positive shifts against ALDI are also to be welcomed although this is probably as much a function of ALDIs weakness in e-commerce and a store set-up ill suited to social distancing than anything fundamental by Tesco. In fact when looking at Kantar Worldpanel data its clear that Tesco actually lost share during the period going below 27% for only the second time as far as this data goes back with this slipping to the smaller players.

The shift to “everyday low prices” is an interesting strategic choice although it fits the simplification approach that Dave Lewis has applied to the whole business so is to be expected. It will certainly help in the next few months if the economy slips further rather than V-bounce in line with the BOE estimates. There should also be concerns about the Booker business. The majority of its growth was driven by acquisition and whilst its wholesale business was up, supplying as it does the local store network of brands (Budgens etc) that witnessed positive share growth in lockdown. The catering business, perhaps unsurprisingly was down significantly.

With all this in mind Ken Murphy is likely to come in with a few jobs on his hands. Accelerating the ongoing distribution capex is the big one, whilst the other the shorter term impact of the flight to local which was the biggest impact on share. The discounters aren’t going away and have a significant slate of openings planned and with no such expansion for Tesco there needs to be a concerted effort to drive demand and maintain the net movement switching from them into the mid term.

Media tool kit – Sainsbury's

Headlines – 8.5% up and 8.2% LfL. Grocery sales up 10.5%, Online sales up 87% and Argos up 11%

Statement = Another positive update (like Tesco) with some remarkably similar figures. Doubled e-commerce (this aligns with a category doubling), a large cost implication of £0.5bn broadly covered by business rates relief and some positive shifts in price perception. This being Simon Roberts first real chance to communicate there is an argument that it couldn’t have gone much better.

The Hankins Hot Take – The immediate thing to notice is the negative trajectory that has been reversed for Sainsburys. Last year was a bit of a shocker for the business with profit and sales down along with significant declines in share. This was reversed at Christmas and the Covid effect on the category has benefited all. The jewel in the Sainsburys crown so far has been the significant growth of ARGOS. Its telling that whilst Tescos saw a decline here, even with stores closed, ARGOS performed well. Its renown “hub & spoke” distribution network eminently suitable for lockdown.

I suppose the BIG insight is that nobody seemed to fcuk up in grocery over the covid period. All have pulled out the operation stops and delivered meaning that no-one has really outperformed the market. Even the estimated costs are proportional to size meaning they’ll all have the same “asterisks” attached come full year. What this means is that the same challenges persist. Sainsburys has a clear strategy to utilise its square footage but how to guarantee growth? Mike Coupes gambit with ASDA failed and hes now gone. There are no attractive other mergers on the horizon and with L4L’s under pressure last year I’m sure we’ll see that return. Sainsburys typically do well at Christmas as a function of the “scale-up” phenomenon, they are a seen as a step up from Tesco and the discounters but they need to create a clearer proposition in consumers minds to stand a chance of growing.