ASOS vs BOOHOO who got the best deal?

Some big moves on the High street recently with the purchase of Debenhams (as a brand = no stores/warehouses etc) for £55m by BooHoo and Topshop, Topman, Miss Selfridge and HIIT (a small brand within the Burton stable) for est. £265m by ASOS.

Debenhams had circa 125 stores in the UK whilst the other brands had around 300, whilst we’re talking nearly 200 globally and 500 respectively. In terms of staff we have an estimated 7,625 at Topshop and Debenhams employed around 12k. So a fundamental impact on the high street, and a huge impact on available employment for disproportionately young and female workers. So not great, really. On the other side you have two doyens of the modern UK fashion industry (although BooHoos crown has slipped a bit recently with allegations of modern day slavery in Leicester) looking to hoover up interesting brands and assets whilst also feeding the city some bumps in valuation (although neither have ever paid a dividend, natch!).

With this is in mind, who do I think got the best deal and what are the strategic implications? Many have written about this deal already and its only a week or so in. Mark Ritson is pretty clear that BooHoo will benefit most however; lets look closer…

I suppose the best place to start is the official statements.

John Lyttle (the ex Primark boss now CEO of BooHoo) said the following –

“The acquisition represents an exciting strategic opportunity to transform our target addressable market through the creation of an online marketplace that leverages Debenhams’ high brand awareness and traffic through the development of beauty and fashion partnerships connecting brands with consumers.”

Interestingly enough you used to be able to buy Debenhams brands on ASOS, i imagine this will stop. The key element here is that the ambition is to turn Debenhams into an online marketplace so more like Zalando than the ASOS e-tail front. This is an interesting move and whilst all the information is not available the suggestion is that the scale of the Debenhams brand is what enables this. This is where it becomes interesting. The number “300m visitors is thrown around” a lot but similarweb estimates around 180m per annum (not uniques of course) which is half what ASOS get and 70% what Boohoo.com gets (the brand not the group) according to the same platform. This isn’t a great starting place i.e. its relatively small. Some will say “oh but you only need 1,100,000 to spend £50 a year and you’ve paid back”, yep thats true but thats still a lot. So headline level we’re already asking questions…

…Reviewing Debenhams published accounts prior to their purchase by a banking conglomerate (their accounts are filed in Jersey which makes anything later than 2018 impossible to see) gives us further insight.

Debenhams was a big retailer. It did nearly £3bn worth of revenue in 2016 and PBT (profit before tax) of £114m, however the trajectory was negative and in 2018 it was down to £2.2bn (-25% in two years) with only £35m PBT. At this point in time it was estimated that £530m was coming via the website (so 24%). In 2018 there was also a non-cash write down of c£500m. £300m of this was goodwill i.e. value of the brand and a few other things leaving a book value on the balance sheet of £500m plus there was a debt pile of £312m.

Now of course Boohoo haven’t bought all this, they’ve bought the brand and website (remember that £500m goodwill book value). However this data is 2 years old. If it had continued at the same trajectory with the same proportions then you could argue that the business is doing around £1bn revenue (factoring in Covid) of which maybe £300m – £400m via the website (generous although corroborated by a non-sourced article in the FT). This is where we can get a bit creative with analysis…

How have I got this figure? well Next deliver around 49% of income via online currently (although naturally that’ll has gone up to circa 60% + this year, suggestive that Debs has only done £600m this covid-year) and back in 2018 they did 46% (which is nearly double what Debs were doing at the same time) so i’m being very generous with the 30% – 40%. Also note that online does half the profit (see Next) that offline retail does (we’re back to how hard it is to do e-commerce) .

Back to that goodwill value on the balance sheet, Next currently put a book value of £40m on intangible assets. In 2018 debenhams had a £500m value against intangibles. Next was worth £4bn back then and Debenhams £2.2bn. Admittedly i’m not an accountant but something doesn’t really add up does it, especially as intangibles are usually amortised over 10 years or so. Why is this important? Because it’s an attempt to put a value on the “brand”. Intangibles usually include strategically important assets like trademarks, software or “goodwill” (an ephemeral cost associated with purchase price of assets) and often represent significant value over and above fixed operations and stock. Its worth noting that intangibles are usually amortised over a 5-10 year period on the balance sheet.

OK, so there are clearly some “unknowns” here.

Let’s delve a bit deeper, because ultimately purchase price isn’t the only cost that needs to be reviewed here. BooHoo have to turn Debenhams into something it’s currently not. An online market place. Assuming that current customers will just carry on visiting is a very poor assumption after all.

Admittedly for £55m and in the context of BooHoos cash pile, (£190m + £92m profit this year), it’s not going to put a huge dent but; it will still require significant investment to convert it into the type of marketplace that BooHoo envisage. The marketing approach that has been used in the past for the rest of the BooHoo brand stable won’t be appropriate here. I’d suggest that it needs to be BIG and broadcast and consistent (Next don’t do this because they have store presence, a clear strategy, excellent execution and don’t need resuscitating). I’m thinking £20m+ a year for starters, absolute minimum, in addition to the digital availability stuff that needs to be done to establish a marketplace (double or triple that on top = £40m) and thats £60m per annum.

For context remember that Debs last registered accounts suggested £2.2bn revenue with a £35m pbt. Estimates now put that at £600m (of which maybe half is online)… with a less profitable online operation.

A review of Boohoos accounts doesn’t give an exact insight into marketing costs but we do know its bundled with adminstrative costs which have grown by nearly £100m to £292m in 2020. The importance of marketing in driving growth through endorsement and social media is repeatedly mentioned throughout all Boohoos company reports so further educated guesswork would intuit a large proportion of these admin costs, especially as we’re talking about multiple brands. I’d guess that £80m is not out of the realms of possibility (just for comparison ASOS spent £120m on a single brand, globally, for a business some x3 the size but hey…)

There are a few more things to take into account and they are the category elephants in the room, Beauty and Homewear. These are huge potential prizes at stake (according to many commentators who seem to mistake offline retail with online seemingly). In beauty you have the The Hut group at this price point (doing £300m in the UK), the remaining department store (John Lewis, where it contributes significantly to profit margins) plus the emergence of players like Sainsburys edging in (i say edging but we’re talking 134 stores now). You also have a raft of unprofitable DTC brands that play in this sphere with very strong brands, hunting for a buyer.

From my perspective the immediate future/opportunity for this type of mass premium make-up market is grocery because with 87% of sales coming via traditional stores (weekly shop exposure to beauty is therefore heightened), its certainly not another marketplace. You’ve also got Boots Walgreens as a huge player (divesting of the pharmacy offering is an excellent move) who have the pure size to really dominate if they get the premium element sorted. Beauty is a category in flux, because of the reduction in barriers to entry and is atomising not aggregating, that said, atomisation causes confusion. Most people just want it easy and historically thats meant retail halls, something which (a small reminder) Debenhams won’t have. That means building out e-commerce capability and experience online, which as we know is not easy or cheap, adding further cost to the change. Beauty is not fast fashion.

The second elephant is Homewear, despite its profitability, a very difficult transfer to online only (its also not really a historical strength or area of importance to Debenhams as demonstrated by its aggregation as a depart with Fashion). The mid-low end of the market is already well catered for by IKEA, ARGOS, Dunelm and smaller players like MADE.com delivering high quality design at reasonable pricing with decent fulfilment networks in place. Building out that sort of capability is very hard and again very different from dresses and jogging bottoms, even if Debenhams is a pure intermediary marketplace. Also why would you come to Debs here when you can get the products elsewhere and they are a single click away, what would the value proposition be without the presence of the physical stores?

BooHoo mention those well known brands like Principles (hey the 90’s called), Maine (yes 90’s Dad) and Mantaray (Who??) that they’ve also bought and that they will stock in the marketplace. Now don’t get me wrong but when Debenhams was doping its best work was during the “designers at debenhams” era. Nobody was specifically going “yep, the debenhams brand is ace, such hidden gems” it never had the M&S own-brand cache and it never had the BHS “Lighting” specialism either (did you know BHS still exist and they even have to pay for a 1st page google search mention so they’re obviously doing very well for an ex retailer going digital)

Even if product isn’t the ultimate aim this feels like a Johnny-cum-lately proposition. Next have a marketplace for other brands (worth £500m a year and growing at 20%+ a year) whilst The VERY group is exactly this and has been in doing it for a long time (with a highly profitable finance engine behind although admittedly some big financial problems beneath the surface). Do we need another? Is it worth it?. Are th Debenhams brand clothes that strong (and the 90’s cast-offs too) to drive visitation? especially if you can get the rest of the stuff elsewhere online. The recent move towards owned brand by department stores and owned distribution (Nike) is actually in the opposite direction. It’s also the opposite of Boohoos modus which is buying in brands to enhance its offering and extend its demography.

To aid contextual analysis its worth reviewing the old Debenhams strategy (as of 2019) which was to apparently turn shopping back into a social trip (they were in the process of dialling up all the experiential parts of the stores) and you have a lot of problems to overcome (note that post-covid its likely that we will see a return to this behaviour as people do their best to “go back”). If Debenhams was previously all about the social aspect then what happens if you go in the other direction?

I’m sounding very negative now but the other element worth considering is Mike Ashley offered a reported £125m in October. Mike owns 27% of debenhams (and had built up a £150m position that is now worthless). I appreciate that the golden quarter was awful for Debenhams the existence and reality of the £55m sale (admittedly without the back end) vs the x3 price offered 3 months earlier says everything about the financial performance of the business and the costs that were mounting for the owners.

Some of you will be aware of my work using Share of Search and i’ve previously analysed the department store market as follows i.e. its a good proxy –

©Vizer consulting

Note that Debenhams underperforms vs SoS (i.e. its actually bigger than you’d expect), the hypothesis is that its presence on High street is what has driven success i.e. physical availability is the strong business lever vs mental availability. However; that’s not the only point. A quick look at the current positions shows just how far Debs have fallen. The following shows Share of Search over time. M&S is a bit unusual because what you now get is a combination of GM and Food vs. pure GM a few years ago (this makes it slightly complicated when directly comparing).

© Vizer consulting

Reviewing this data in context we can see that Debenhams comes in at around 12% market share vs. these chosen competitors (this isn’t full market share obviously but its useful for benchmarking). We know that Next (c30%) have expected profit of 50% value vs last this year but in revenue terms its reasonable to expect a 40% drop for full year at £2.6bn. Applying that ratio to Debenhams reinforces the estimate that the business is (at best) barely a £1bn business (with the majority done at stores, not online, which are the biggest driver of usage) and supports the above rationale that Boohoo are going to struggle to revive the Debenhams brand, even as an online marketplace, without significant investment which puts a lie to the “cheap” nature of the acquisition.

To summarise, Boohoo have paid £55m for a brand that appears to be of little value from an operational perspective due to a web portal that is heavily reliant on its store footprint to drive usage and is also in traffic freefall. Simply put, take away the stores and does the Debenhams brand still exist meaningfully? The profit angle is also worth looking at here as online is significantly less profitable and whilst Debenhams were running to Gross margins of 11% in 2018 thats a world away from the 54.7% BooHoo currently report (this is definitely going down by the way). Add to this the costs required to actually doing all of this, the marketing and operations, and I would be very cautious as to whether the numbers actually stack up meaningfully in a reasonable period of time.

As i’ve been writing this I’ve tried to think of other brands that have done similar things and the two that sparks are the Very group (Shop direct back in the day) and Mike Ashleys Frasers group. From a Very perspective, they bought the Littlewoods brand in 2005ish, it was a catalogue biz up until 2012-13 when it shifted full web based and its done significant revenue (VERY is really about the finance offering though). They also bought Woolworths in 2009 but closed it in 2019. So two scenarios where a brand was bought (with zero retail) and used as a direct only “marketplace”/dept store. Did this work for them? Well 2013 saw Shop Direct deliver its first profit in 10 years so it took a long time and a lot of effort post brand investment to get them there and that was a pre-digital world with lower expectations on a direct business. Since 2013 the group has had a somewhat Yo-Yo financial performance, however 2020 has seen a covid driven profit vs 2019’s loss but; on the whole fairly inconclusive and the Littlewoods brand is officially being managed to invisibility due to strength of VERY as the core brand.

As to the Frasers group, and the House of Fraser purchase, delaying the publication of your accounts multiple times does not provide confidence and from a reporting perspective the numbers have been hidden in “Premium Lifestyle” which has seen growth, but also includes a number of brands. Looking at 2019 you can see that HoF was making a £50m loss on revenue of £300m (woah!!). So despite a few store closures its unlikely to be helping just now (another tick in the box for increased cost for BooHoo outside of the purchase price of Debs brand).

This post is getting on now and i haven’t even looked at ASOS and Topshop as of yet, however that part should be a lot easier. There are three reasons for this. Firstly, it’s a more obvious fit and secondly the amount of data available in the public domain is limited and thirdly its a simpler job i.e. they are not trying to create anything new. From ASOS’ perspective, they have recovered from the “blip’ a couple of years ago when their share price dropped due to warehouse fires and a rise in debt . The point here was that the debt was fuelling capital expenditures with a clear strategic goal to enhance distribution through the development of additional hubs ( most prominently in the US). This capital intensive push has subsided now and the business is cash rich and cash generative. You can see this in the following stats taken from their company reports –

ASOS all in £	2017	2018	2019	2020
Revenue	1.923bn	2.417bn	2.733bn	3.263bn
Profit	80m	102m	33m	142.1m
gross margin	48.6	49.9	48.8	45.9
net cash position	160m	42m	-15m	407m

Its worth noting that the increased cash position in 2020 was supported by a c£200m cash boost which was essential in funding the £265m purchase of Topshop, Topman, Miss Selfridge and HIIT (a small subsidiary of Burtons).

Following a similar protocol as the Boohoo analysis the official statement is pretty telling as to expectations, with the brands settling in to become ASOS Brands, which delivered c£1bn in 2020. In 2018 Topshop/man did £800m worth of business whilst in 2020 evidence suggests that onsite Topshop sales on the ASOS platform grew 41%. The statement also mentions some £265m of annual revenue (this would be covid affected although the language is opaque even if essentially this suggests that ASOS have literally paid £1:£1 on revenue, worth thinking about that… buying a set of brands on a £1 to £1 revenue basis in a severely depressed year) Its also worth remembering that both Topshop and ASOS are international businesses with roughly half of both revenue outside the UK (this is in stark contrast the the more local pattern seen at Boohoo).

Taking this into consideration we have a simple logic flow on the value of the deal. Topshop was growing on ASOS at double digit levels. ALL that revenue & profit could taken in-house if it was bought and owned by ASOS (assume profit positive). 50% of total Topshop revenue is/was done outside the UK, this broadly matches ASOS and reinforces their international outlook. In a non-covid year and a VERY poor conversion figure of 40% online its reasonable to put a figure of £320m of potential digital revenue which will be directed to ASOS’ site with some quick SEO optimisations also it includes a significant proportion already on-site at ASOS (I’d imagine that AOS was a very important reseller for TopShop. This excludes the Miss Selfridge contribution which, whilst admittedly smaller (estimated £25m revenue pa max) provides additional £ into the deal of the £320m revenue vs £255m purchase price.

I’ll be honest here because much of this is “fag packet calculations” but they show the clear difference between the two deals i.e. one is “buying revenue” whilst the other is “buying costly potential”.

I told you it’d be a quicker piece of analysis but in conclusion the ASOS & Topshop deal is likely to be self-funding whilst the Boohoo & Debenhams deal requires significant investment to make it work (its not a simple port).

ASOS’ acquisition is also in-line with the business strategy (international expansion) whilst BooHoos is a step away (previously Boohoo have just acquired cheap fashion brands in a Mike Ashley style to extend their demographic mix) with a lot more risk inherent in the assets transformation.

This is a reminder that it’s not always about the headline figures with these deals, it’s what goes on behind. Topshop is a “going concern” in the way its been bought but Debenhams is a distressed asset that requires much work.

Strategy is choice. Risk is inherent in choice but analysis and synthesis suggest that one option is a lot riskier than the other. The ultimate upsides are comparable however. If i were a betting man, I would say that both would no longer meaningfully exist in 5 years. ASOS will have subsumed completely the TopShop brand and may even have moved into physical retail (its kept the flag ship on Oxford Street), whilst Debenhams will have gone the way of Woolworths, a loved brand that no-one really cared enough about to still shop there.

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Why Digital Availability aids Strategic decision making plus why digital ads aren’t analogous to rent or signage

I published a paper with WARC a couple of weeks ago that expanded the detail on one of my earlier blog posts on a concept called Digital Availability. I’ve tweaked and extended it a bit here –

• Researchers such as Professor Byron Sharp have written about the need to build mental and physical availability. These are rightly considered key factors in driving brand growth because it makes it easier for people to notice and buy your brand.

• A lack of nuance in language and detailed knowledge mean that a third “availability” should be added to improve understanding and serve as a partner to mental and physical availability. Digital availability is concerned with improving the breadth and depth of a brands distribution brands online.

• Digital Availability channels include the likes of PPC, affiliates, mobile commerce, social commerce, review sites and third– party retailers like Amazon or vertical specialists like Mastersofmalt.com or the various websites of The Hut Group

By enhancing the nuance around ‘availability’ we can improve our communication with the C-suite by clearly talking about all the levers at play to help brands grow in three simple classifications – mental, physical and digital.  

Conclusions

• Many digital availability channels and routes to market are more akin to merchandising/purchasing models rather than advertising models which require a whole different way of thinking and skillsets, including complex fulfilment engines required to service and stock goods
• If you view digital channels as separate (Digital Availability) the budget and structural implications become clear. You cannot compare a Google Shopping or Amazon link to a TV ad – although they both fall under the auspices of the 4P’s one is concerned with Place whilst the other with Promotion.  
• Just like Physical Availability a true cost benefit analysis still needs to be done for Digital Availability channels to make financial sense. 
• Strategic decision making is improved through enhancing the nuance around the options to drive growth
• All ads with a CTA are signage not just certain types of digital “ad”, and the term “signage” lacks nuance as these “units” are more akin to being stocked in a shop i.e. shelf space
• Digital Ads aren’t replacements for RENT because there is so much more that goes into e-commerce over and above placing ads (storage, fulfilment and distribution) plus accountancy terminology treats them very differently (revex vs capex)

THE BIG definitions

Physical availability = brands being available to buy in more places (offline )

Mental availability = being the first brand in mind when an individual comes to buy

Digital availability  = brands being available to buy in more places (online)

Here is where we start –

Mental and Physical availability, according to Professor Byron Sharp (source HBG 2011)

At first glance all seems fine. The all-encompassing nature of the Physical Availability definition seems to encapsulate every eventuality, including availability to purchase within the digital sphere.  In fact Professor Sharp has on occasion stated that PPC (as an example) is simply a Physical availability channel.  I agree. To simplify, view Google as similar to Tesco.  Brands merchandise their product within the Tesco store just as much as they could in Googles “store”.  Brands negotiate with Tesco about where their product will sit on shelf (or Gondola end/POS) just as they do with Google’s search listings.  

So why am I suggesting that a new categorisation is required? Much of the world is digital and if the COVID-19 era has taught us anything it’s that conceptually Physical vs Digital distinctions are less important than maybe we thought. That said, whilst concepts can be great, in the real-world language matters, and over-simplification can lead to blind spots.

To enhance an already influential and well known concept is risky. However; I think it’s worth learning from the realm of science that Professor Sharp has less time for, the social sciences, and in particular Behavioural Economics. I believe “Physical Availability” has a Framing problem. Words matter and it’s a simple truth that for some people the word “Physical” clouds their thinking to physical-only environments (like Bricks & Mortar) and whether we think that’s foolish or not, it’s still a fact. 

Taking it one step further, If we take Sharps/Ehrenbergs heavy and light users, we can apply them to knowledge too.  The “heavy users” in this example will know the complete definition of Physical Availability and be comfortable encapsulating and communicating every potential distribution channel however; the majority (the light users) will simply use the term “physical availability” and a proportion will trip up on the language and consider it only in a Physical sense not a Digital Sense.  

This has major strategic implications and as marketers we should be looking to enhance understanding through communication rather than dismissing the “light users”.

As such I have proposed an expansion of the Availability Duo to an Availability Trio.

Now I’m sure there will be many, including Professor Sharp himself, who will think this is pointless, it confuses, “we spent years trying to educate people that digital isn’t a separate thing” (privilege is writ large here) and I agree it is, for those who are “heavy users” that is i.e. those who know the definition inside out.

You could also argue that a simple “be available to buy in more places” and “be the first brand to appear in someones mind at point of purchase” would suffice. I actually prefer this but we’re working in a world where Physical and Mental Availability are known concepts and have worked their way into the lexicon (even if they are jargon)

But; a reminder, we aren’t doing this for the “heavy users”. This isn’t for them, it’s for the light (and non) users so that we can grow the influence of marketing at the boardroom level by effectively talking about all the levers at play to help brands grow.  In other words I’m talking about driving penetration growth of the availability concept.  Better thinking and better marketing helps everyone. The concept, in practice also aids allocation of resources within client businesses where Marketing is very separate from Operations (and on and offline ops are also separated).

So, that’s the simple extension of the concept and its definition. That said it’s also useful to understand what Digital Availability channels are and which brands are demonstrating an effective and strategically beneficial use of them.  Like most things in strategy there is a degree of “it depends” at play but for simplicities sake here’s a (definitely) non-exhaustive list:

• SEO – Optimisation of availability (this works across e-commerce platforms
• Generic PPC and Google Shopping – Using Googles shop to sell
• Affiliates – Essentially using a digital  3^rd party to sell your product,
• “Collapsed” ad formats (click to buy etc)
• Mobile commerce – Can you easily buy the product via a mobile device?
• Social commerce – Do you have social media commerce capability activated?
• Review sites – Are you present with click to buy activated?
• Third party retailer listings (online only retailers including amazon  or vertical specialists such as The Hut group or a website like Mastersofmalt 

The list could go on and on. Each one opens up a new avenue to purchase. A new avenue that services a potential new customer and could extend market penetration. Obviously, the cost of set-up and ongoing fulfilment needs to be validated against the potential opportunity. Some of this would be Revex  and some would be Capex (adverts are typically defined as revex in financial parlance whilst capital builds e.g. website builds are capex) which takes you further down the road with strategic applicability and C-suite influence.

Another key thing to point out is that many Digital Availability channels and routes to market are more akin to merchandising/buying models and require a whole different way of thinking and skillsets. Strategic choice requires you to factor in the complex fulfilment engines required to service and stock management implications too, e-commerce is rarely easy as I have written about before here and here.  

The point being that if you view these type of digital channels (Digital Availability) as separate, the budget and structural implications become clear. You cannot compare a Google Shopping or Amazon link to a TV ad (the same difference is akin to comparing product on shelf at Tesco with a TV ad) although they both fall under the auspices of Marketings 4P’s (Price, Product, Promotion and Place).  Even in this categorisation of marketing tasks its clear that Google and Amazon are “Place” whilst the TV ad is “Promotion”.  I believe that by splitting out Digital Availability in the way I have choices become more transparent and therefore more useful to strategic decision making.

The recent COVID-19 impact on e-commerce really sheds a light on those who are being successful in this field and on the strategic intent that comes to light by creating distinction from Physical Availability.  

One of the most interesting is Nike who are shifting their Digital Availability emphasis away from third party vendors towards owned assets .  At face value this suggests that they are reducing their digital availability however strategically they have made the choice to “own” the full brand experience, relying on fewer intermediaries where they have little control. A decision which; over time may lead to greater profits (there is much more going on here that won’t fit in this paper).  Obviously this approach isn’t open to everyone and therefore it’s certainly a problem for CX and UX management for brands that can’t.   There is an argument that there is no real difference to relying on Tesco to appropriately manage your sales channel.  That said, Tescos are a retailer, Amazon are not (really).

This stands in contrast to Adidas who have signed a deal with Zalando to run their digital fulfilment which requires a truly integrated strategic partnership between the two German companies .  Adidas are essentially outsourcing this function rather than owning it, allowing Zalando to run the CX and UX for a large proportion of sales online.   The implication being an acknowledgement that e-commerce is tough to do right and even the biggest brands need a little help in making it all work. There is a loosening of control here and a different kind of risk, which is clearly a strategic choice.  Whether it is the right choice will be seen.

Looking at the UK grocery market as another example, you can see that very few are really “outstanding” when it comes to e-Commerce.  What do I mean by this? Well  a review of the financial literature by these players suggests that they all saw penetration double  as a result of covid restrictions, this suggests that no one Brand really outperforms/is stealing share via Digital Availability i.e. it’s not driving relative growth.  That said, all the brands are active in this space meaning that it’s probably restricting loss i.e. game stakes.  There are clearly different models of fulfilment within this category though which is probably another article in itself.  

In the opposite direction many direct-to-consumer brands are finding that despite their success (in building digital availability) they are reaching a ceiling due to a lack of physical availability. Brands like Harrys and Fenty have looked to build Physical availability via merchandising deals with large retailers.  

This duality between Physical and Digital availability is clearly a balance and a strategic choice which needs to be identified at a brand and category level.  

Just like Physical Availability a true cost benefit analysis still needs to be done for Digital Availability channels to make financial sense.  This is another reason to split it out and make it separate .  The immediate capital investment for much digital availability will be lower but; there are other implications linked to the full value/supply chain that need to be factored in.  Just because you can doesn’t mean you should, you still need to ask “Is there really enough demand to justify creating the avenue and also is it driving incremental sales?”  

Why Ads for online businesses are NOT rent or signage – The pursuit of nuance

Related to the above concept are a few papers written in the summer. Around this time Grace Kite published a paper on the two-types of online advertisement. This states there are two types of ads online. One that is similar to traditional “brand” ads and the other that of a signpost for e-commerce businesses, it also suggests that marketers may not be aware of this dichotomy. I’m not sure i agree here. There is clearly a “future cashflow” & “present cashflow” or Brand & DR situation going on online (much like in the offline world) but also a third type of solution which is really what this is about. This concept of of “e-commerce signposting” relates more strongly to the concept of Digital Availability.

There are some similarities to my thinking, not least the belief that there are some quirks in the online advertising ecosystem that mean that some of the “ad” solutions aren’t actually ads at all (and are closer to the traditional retail Merchandising or Buying roles) however this is the 3rd type of “ad” not the 2nd. i also don’t think the term “signpost” is that helpful. All ads with a call to action are effectively signposts, whether they are online or offline. Bundling terms is great but not when it reduces nuance and there is plenty here.

Furthermore the water was muddied somewhat with the paper in WARC based on another paper in the Economist suggesting that Ads are similar to Rent. So, is it Rent or a Signpost?. Does it matter? Yes, i think it does. As mentioned above, i think “signposting” is incorrect as it doesn’t add enough nuance to the debate. I also think that when thinking about these Digital Availability channels the term Rent is also incorrect. There are two reasons for this, both from an accounting perspective and also from a task perspective.

I’ll explain – Rent is a periodical cost and is typically Capex. Ads are a variable unit cost (they’re typically CPC) and are typically Revex. So in simple accounting terms we have clear difference (and remember part of this exercise is to help improve communication at a c-cuite level).

These “digital availability” placements are typically situated in online marketplaces, listings or e-commerce platforms i.e. you are paying upon completion of a sale by another entity. Google is allowing you to use its “shop”, Amazon is allowing you to use its “shop” etc There is no signage (you could argue that a partner ad placed by a media agency next to the listing is signage). It’s like being stocked on Tescos shelves (as i mention above). Would you consider being stocked in Tescos as “rent” or “signage”? I’m sure you wouldn’t. BTW this isn’t an attack but more an attempt to pursue clarity and aid strategic decision making.

Ben Evans has also alluded to this here with a little more nuance as he groups the trade-off between online and offline in a way that acknowledges the difficulties of e-commerce. That is, its not as simple as just transmitting offline rent into online ads, you must also include fulfilment costs, returns, storage etc etc, so that the Rent signifier obscures a lot of additional cost associated with trade online. Its striking how many people still think that e-commerce is cheap and easy, this sort of labelling does nothing to dissuade this thinking.

In all of this, that should be our objective, to aid strategic decision making with enough nuance to provide context. Words matter and we’re in the effective communications industry after all.

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The rise of E-commerce, changing expectations and the great unbundling (Retail and motor)

A few weeks before Christmas I was invited to the annual “future of technology series” run by https://www.apcuk.co.uk . It was a great line-up and the videos are all here for your perusal including my own short presentation. I took the opportunity to present on how changes in consumer expectations are likely to drive structural changes in logistics and last mile fulfilment and why understanding the commercial impact brands can mitigate through their businesses strategies. I specifically focussed on the Motor in this presentation but some of the insights are cross-category. It was whistle stop and i’ve certainly gone deeper here than i did for the 10mins i had then, with some more examples, so hopefully it may help spark some interesting thoughts of your own…

So, the first slide started with ONS data showing the shift in share of retail (online vs offline). Obviously grocery is overwhelmingly offline (penetration is around 13% which is double pre-covid but still low) but even total retail excluding grocery only comes in at 27% i.e. lets not accelerate the decline of offline by believing its dead already. That said, there appears to be a step change of around 7.5% which is not insignificant and a new baseline.

That said, the previous chart is in % terms and when offline retail effectively closed in LD1 (lockdown 1) its perhaps unsurprising that e-commerce saw a % increase. To add more colour to the scenario its worth looking at actuals and as you can see whilst there has been a clear acceleration, the total offline retail dwarfs the online world. When you hear people calling for Amazon to be broken up because of the stranglehold on retail, its worth remembering this chart. Amazon is only a proportion (and a small one) of that red line. Its certainly not a monopoly here.

Something that this change has affected though is consumer expectations. When it comes to e-commerce and delivery the biggest impact Amazon have arguably had is on perceptions of service. We expect cheap, quick delivery with the minimum of fuss. I’ve written previously about e-commerce and how fulfilment is expensive and hard and how the costs of decent delivery have to come from somewhere but its worth reiterating

Fulfilment networks are costly. The set-up is vastly different from a retail outlet and the limited distribution required to stock fixed units plus they have “last mile delivery” issues too. The “hub-and spoke” model of Argos and the regional and local hubs operated by Next are designed to mitigate this and improve efficiency/reduce cost. Interestingly the key, non-covid, statement in last years Next company report, for me, is “The focus will be on systems that consolidate items, quickly and accurately, into individual parcels”. Why is this important?

What do i mean by this? Well its about distribution, especially that last mile. Its one of the problems with the food delivery businesses like UBER and Deliveroo and explains why they are trying to shift into broader logistics because what’s that problem?.. marginal costs. Let me explain, a van or bike (plus driver) represents a cost and as soon as you have a single package this cost is incurred. The first parcel is always the most expensive whilst subsequent packages reduce that cost by spreading it, that’s marginal cost, the extra cost incurred for each subsequent unit.

In traditional store based logistics this is fine. You fill the lorry to its capacity and off it goes. In the new e-commerce model where parcels are being delivered to multiple houses in a small geographical area plus the expectations for instant delivery (and cheap) set by AMAZON you have a problem, because its unlikely that you’ll be able to send that package out on a full truck, ergo its highly cost inefficient. This is happening all over the country too in multiple locations, every day. As a business you could hire 3rd parties to do this part for you, but; even with multiple potential clients this can still be a problem and there is an elevated cost for utilising their network because they know this and clients pay for the inefficiency. This is what I mean by “stepped” because each vehicle started is contributing marginal cost that is not optimal, kranking up the negative effect on margins and explains why brands that operate in the mid-low end of margins struggle with e-commerce and have to find the savings somewhere else in their business (see the BOOHOO paper again for the wrong way to do it). Back to that mention in NEXTs report. They’re looking to cross subsidise this uncontrollable aspect by focussing on their own operations and reducing inefficiency there. clever stuff eh!.

So, why did i leap to bundling and unbundling. Well everything above is fairly general. This is an actual trend and its fuelled by consumer expectations with clear commercial impact. This is also where the implications start. So, a reminder, if the logistics scenario above is the the case, businesses have a choice. Either continue to run their own logistics networks or utilise someone else, a good example in modern retail is NIKE vs Adidas.

Over the Summer Nike were raving about the rise in e-commerce, they’d pulled off some of the big ecomm platforms and the shares were skyrocketing. Read the company reports again and you’ll notice that margins declined and admin costs also declined hugely (including demand generation or marketing). In simple terms a huge cost centre was removed which lended a glossy glow to the bottom line figures BUT also; despite full price sales increasing (this is a function of an excellent stock management system) margins have consistently declined. check here, here and here for more info. I’m digressing from my original point a bit here but if you remove £3bn (combination of operating expenses, they namecheck flights!! and marketing here) from £10bn revenue its going to look good on the bottom line (and its also likely to come storming back when covid is over) but also that consistent 1% drop in margin is due to the owned e-commerce focus and represents how difficult it really is to cross subsidise the old world with the new and stay the same. Adidas on the other hand are currently piloting using Zalando to do their fulfilment. How does this relate to bundling and unbundling, well its simply do your logistics or don’t?

The bundling vs unbundling example Is clear in this example. Hiut the specialist jeans maker from Wales who “ONLY DO JEANS” and make a virtue out of it or Tesco and Booker and a vertical integration play that is arguably Sir Dave Lewis’ finest gift to the TESCO business. Especially when you remember the context of the business he came into, with multiple acquisitions struggling to do anything other than drag. He made one BIG play and it was a step up the chain I.e. a big bundle. So onto the car market…

Its worth reminding everyone at this point that the thesis of this presentation was e-commerce has risen (but not as much as you’d think), but its real impact is on the expectations of service. E-commerce is a drag on margins because of marginal cost inefficiency and therefore businesses have a strategic choice to make, do they bundle or unbundle…. So Motors and motor sales, a market ripe for disruption.

There has been an acceleration of new brands in the car buying space in recent years but the two that catch the eye are Alex Chestermans Cazoo and BCA’s Cinch. Why is this and how does the above trend feed in? Simply put, if buying a car is shifting to the e-commerce model then imagine the commercial implications of the “last mile”. The car has to be dropped off at a house. Its going to be either driven (in which case you need a following car) or via a truck (which has only one car on board for residential streets, probably with a HGV driver and a sales person on board) which means the marginal costs are steep. The opportunity costs are also huge because that sales exec can only service ONE delivery/sale during his time on the van vs the multiple ones he can manage when on the forecourt. You can see how costs are going to rise exponentially! Now i’m not saying that buying online is going to be mainstream anytime soon, its still a tiny % but combine this with the national coverage of online sales (imagine i’m in London but buy a car in Glasgow) and the whole regional/local garage model is under significant pressure. OEMs (original equipment manufacturers) for new cars can’t do this and whilst they often handover control to sales networks, that becomes complicated too as they’re often not fully national.

So (longwinded) that leaves the door open for the aggregators to step in and they’re perfectly placed to dis-intermediate the sales networks by building out their logistics back end + a digital forecourt front end and cover the whole of the UK, essentially bundling sales and logistics up and leveraging economies of scale. BCA already do logistics for the motor industry (and they own We Buy Any Car) but Cinch is them entering the new car sales marketing (they’re a £2.5bn business) whilst Cazoo are coming from the other direction and going sales platform, supported by a logistics network (and then they’ve bought some forecourts, probably as a holding pen).

If i were to conclude this rather rambling section I’d say that size matters in the e-commerce sphere to mitigate those changing expectations and bundling sales plus logistics plus forecourts/warehousing is the future. OEMs would be better placed to just give up sales (unbundle), whilst the sales networks themselves face an existential threat.

Ah yes TESLA. They can do it. They sell direct after all (despite Elon backtracking on closing his forecourts) Well can they? They’re already losing money and as we’ve set out the e-commerce model doesn’t help here. In fact it does the opposite. So its really not the DTC model you need to be worrying about. It’s the aggregators who bundle.

WOW. I definitely added loads of other stuff in there that was in my head especially as the original video was only 10 mins long. I summarised here and i still think this is the best overall way to do it, so i’ll leave it at that.