MORE ETAIL THAN RETAIL

February 2013

From Offline to Online PAGE 03

Products & Services Segmentation PAGE 04

Silver Surfers PAGE 05

Breaking Down Barriers PAGE 05

The Dark Side PAGE 06

From Clicks To Bricks PAGE 06

Selling Overseas PAGE 07

Fighting Back PAGE 07

Know The Rules PAGE 08

Shrinking Portfolios PAGE 09

Supersize Sheds PAGE 10

In Conclusion PAGE 11

CONTENTS

Online retailing has boomed. Whereas not many people had even heard of the concept ten years ago, today millions of people are shopping via the internet.

Offering customers speed, convenience and the opportunity to find the best prices with just a few clicks, it’s not surprising that the e-commerce and online auction industry’s revenue has increased on average 9.2% each year for the last five years.

“Online sales in December 2012 were up 17.8%, the fastest growth since 2011 when they rose by 18.5%” (source: British Retail Consortium)

Department stores are one type of retailer which have got to grips with multichannel retailing over the last few years. Retail Week declared that multichannel retailing has come of age as department stores emerged as one of Christmas 2012’s big winners.

FROM OFFLINE TO ONLINE

One of the biggest successes must surely be the American ecommerce company, Amazon, founded by Jeff Bezos who was named the industry’s fourth most important person in 2012’s list of who’s who in Retail Week. The largest online retailer in the world today, Amazon took six years to turn a profit from the day it began service. It now adopts a multi-level e-commerce strategy, letting almost anyone sell almost anything to almost any user. Other online retailers also sell their products through Amazon, which leases space as well as warehouse facilities.

Online retailers can operate at lower cost structures, have a wider reach and sell more products than retail stores.

Other traditional bricks and mortars retailers have employed online sales as part of a multi-channel offering. Customers can now choose to browse, buy or return through the channel of their choice, be it via a retail store, online store, mobile store, apps, catalogue or over the phone. Next is hailed as one of the forerunners in this area, with buyers often browsing through the catalogue, and then placing their order online or in-store.

03

During 2012-2013, revenue is expected to have jumped by a further 8.5% to £66 billion despite the effect of consumer confidence on spending habits. Although times have been hard for high streets and other retail outlets, the online space has been affected less. More and more of us are embracing the latest technology which is good news for online retailers. With a focus on good value, companies like Amazon which allow consumers to easily access the cheapest items, will be more appealing than ever before. It will be no surprise when online distribution becomes a central factor in more and more retailers’ business models, with online profits overtaking those in-store.

PRODUCTS & SERVICES SEGMENTATION

04

BREAKING DOWN BARRIERSOnline retailing means consumers can browse and buy products from all over the world......from the comfort of their own house. Many sites will convert currencies or have sites for different countries to make transactions as easy as possible for the consumer. Geographical barriers have to all extents and purposes, been removed – and higher postage costs for buying products from overseas seems a small price to pay.

...showing that silver surfers are on the rise. However, while the more mature citizen has embraced the use of the internet, many still prefer to buy in-store. Teenagers and young professionals are the next largest group at 22% (with 25-34 years olds not far behind at 20%), with digital music downloads featuring heavily in their online shopping lists.

Internet users

aged 55 and over

Internet users

aged 45 to 54

Internet users

aged 35 to 44

Major Market

Segmentation

23%

Internet users

aged 2 to 24

22%

20%17%

18%

Internet users

aged 25 to 34

SILVER SURFERSAlmost a quarter of internet users in Europe are now over 55 years old...

05

With online grocery sales expected to double by 2015, Tesco announced a new strategy last year, to build a number of ‘dark stores’ to meet the increasing demand of online grocery orders. At the time of going to print, the supermarket giant has already opened dark stores in its top ten sites by revenue. These are often similar to supermarkets but the only people in them are staff fulfilling customer orders. Customers can either collect from store or have their items delivered.

THEDARK SIDE

FROM CLICKSTO BRICKSAmazon is expanding its newly launched Pickup Locations offering, which allows customers to collect parcels from either an Amazon locker or Collect+store. These are located in large shopping centres, convenience stores, newsagents and train stations – great news for those who prefer not to have items delivered to their home address.

New Amazon locker locations are being added weekly, while the number of Collect+ stores will increase over the coming months.

06

07

SELLINGOVERSEASEtailers selling their products around the world need to be aware of local regulations when it comes to advertising, marketing, goods storage, distribution and employment – pretty much the whole business model. With different rules in different jurisdictions, businesses without well thought out strategies run into difficulties. Overseas jurisdictions may have very different laws to domestic ones so any strategy should be developed at the start and recognised locally, taking into account any changes in the law over time.

FIGHTINGBACKRetailers are looking for ever increasingly innovative ways to encourage customers to visit their store instead of shopping online. The latest in technological developments means retailers can help entice people; driving footfall and increasing sales in store.

The latest in mobile phone apps means retailers can do all this by taking multichannel retailing to a new level. Apps such as Shopkick, launched back in 2010, allow subscribers to communicate with a store via its music system. When a customer walks into a participating shop, their smart phones are activated, bringing them real time deals and offers not available online, without having to spend any time form filling. No actual purchase is required to access the deals.

Shopkick also gives customers the chance to earn ‘kicks’ for simply walking into a store, which can then be redeemed against items such as iTunes gift cards, restaurant vouchers and movie tickets.

In the US, Shopkick’s partner brands include Macy’s, Disney and Levis amongst many others. Shopkick has already generated significant revenue to its retail and brand partners – to the sum of $110 million in the first year of operation alone. There are currently over 3.5million users and over one billion offers have been viewed.

While this app has yet to find a place on our smart phone home screens, no doubt it or other similar smart phone apps will inevitably be the next big thing in the UK retailing market.

Data Protection Act: online retailers amass reams of information about their customers – from email addresses to home addresses. Whereas customers will often question retail stores asking for those details, they have to hand over a certain amount of information to an online retailer in order to complete the transaction. Etailers can protect themselves from any issues over

data protection by ensuring there is a policy statement on their website which is easily accessible and simple for customers to use and by following eight data protection principles which can be accessed at the Information Commissioner’s Office website.

Sales of Goods Act: this gives rights to consumers regarding the quality of product they are purchasing.

Consumer Credit Act: protects the rights of consumers using credit/debit cards for purchases. Also covers consumers entering into agreements for loans or credit.

Unfair Terms in Consumer Contract Regulations: these ensure retailers can’t impose unfair terms in agreements.

Consumer Protection (Distance Selling) Regulations:

etailers must give customers certain information before they make an order. These regulations also stipulate there must be a cooling off period during which customers can change their mind.

E-commerce Regulations: set out which information etailers must share with online customers including guidelines for advertising and promotions.

This is a very brief overview of these rules:

KNOW THE RULES

08

There is a raft of legislation that all etailers should be familiar with, which have been created to protect both consumers and businesses when buying and selling online. Some fall into the more traditional regulatory arena while some have been created specifically for online selling.

SHRINKING PROPERTY

PORTFOLIOS

The rise in pure play online and multichannel retailing means different demands are being placed on retailers across the UK. Whereas before it was all about location, it’s now more about the customers’ buying behaviour. If physical stores are making less and less profit but the online channel is delivering above expectations, retailers are considering a property portfolio restructure.

One of the biggest factors preventing a restructure is rigid lease structures – retailers could well be tied in for the next five or ten years. Retailers are disposing of states – where they can find a buyer in the current market and sub letting space to third parties.

One option for retailers trading from a store that is marginal at best with the lease coming up for renewal, is to request that the landlord consider renewing the lease

on a ‘no-rent basis’.

These sorts of leases are usually subject to a break clause which allows either party to terminate the lease on short notice i.e. three months, so providing flexibility for both parties. This allows the landlord to proceed with a new letting if he finds another occupier. He will also avoid the holding costs associated with having a void as the retailer picks up all rates and outgoings of the property. The retailer may

find he is able to continue trading for some time, particularly if the shop’s location makes it difficult for the landlord to re-let in the current market, at much less cost.

Deloitte’s report in 2012 (The changing face of retail – The store of the future) claimed that in order to remain competitive, retailers may have to reduce their property portfolio by 30-40% in the next five years.

09

The failures already this year of Jessop and HMV have been partly blamed on business models which have not changed fast enough to meet the challenge of online retailing, including the structure of the companies’ property portfolios. The high costs of holding property and a change in customer expectations means stores have to work harder to deliver the right return and retailers are having to rationalise space.

The ability of both pure play etailers and

multichannel retailers to distribute products to

customers is critical to business success. The efficiency of the supply chain and distribution

network is therefore of paramount

importance.

The nature of the chosen strategy

will depend on the retailer,

the nature of the

products

stocked and the location of customers.

Most retailers will choose from direct delivery from store, direct delivery from a warehouse or distribution centre or delivery through outsourced operations by third party providers.

Larger retailers with huge product ranges are tending to adopt a regional distribution strategy, using smaller vans and trucks to deliver goods in urban areas rather than larger lorries. A few however, are opting for a national strategy using a single

warehouse (up to 500,000 sq ft) with a number of distribution centres in key regional locations – smaller retailers are also opting for this approach.

Retailers seeking to identify suitable warehousing need to consider the type of stock sold; volume of stock shifted and the location of customers.

As etailing continues to grow, so does the need for more warehousing space. The major benefit for retailers is the cost saving in swapping expensive shelf space in stores to cheaper shelf space in sheds.

SUPERSIZE SHEDS

10

11

Retail will continue to go through turbulent times during the next few years. As the way consumers shop evolves further, we will see an exponential growth in etailing with technology acting as the cornerstone of the retail experience.The high street will need to embrace new ideas and innovations to appeal to a convenience and value-led target audience, many of whom are strapped for both cash and time. It’s clear that the landscape is shifting and only the fittest - or those willing to adapt - will survive.

Only the fittest - or those willing to

adapt - will survive.

IN CONCLUSION

Disclaimer:

The content of this report is a guide only. For legal information on any of the subjects mentioned, please contact Kathy Toon on 0800 763 1459 on Kathy.toon@sghmartineau.com