The WimLex Show #1

“It’s not about selling better shirts. It’s about selling better!”

3:30

Alex: My blog, Kassenzone, your company Expand Online, Zalando… All the most successful things in e-commerce started back in 2008! So let’s rewind back ten years and look at the market as it was back then. In Germany, Zalando’s approach to marketing was revolutionary. What were things like here in the Netherlands?

Willem: In 2008, the e-commerce landscape here was entering a period of fast development. A lot of smaller pure-players like bol.com and CoolBlue that had started out a few years previously began growing rapidly. They stood in sharp contrast to bricks-and-mortar stores, who were hardly present online. Since 2008, we’ve seen pure-play concepts venturing onto the high street and stationary retailers going online.

From an online marketing point of view, we were still primarily focussed on Google – Facebook being quite small at the time. It was about driving traffic to a site and then converting on that site, whereas today, we’re looking at a full omni-channel spectrum, e.g. how website traffic is driving in-store sales. That is a big change as against 2008.

Alex: A question from my perspective as someone who is no great believer in omnichannel (my understanding, in fact, is that it’s only there to prevent pure-play businesses from prospering!): do brick-and-mortar businesses in the Netherlands still think it is possible to get customers back from pure-players by going omnichannel?

Willem: Well, I for one think it is possible. Take the Dutch market: it’s geographically small, so consumers are generally close to stationary retailers. Therefore, although online is growing rapidly here, it’s still only 10-15% over retail sales overall. It depends on the product category, too: the return rate for shoes bought online is very high, for instance, so it actually makes a lot of sense for shoe retailers to get people in-store for a fitting, lowering returns. The crux is the data strategy: even if they’re not buying online, you need to find out who your customers are.

8:05

Alex: My take would be as follows. Even if you can reduce return rates and identify customers as they come into the store, offering them recommendations based on what they have bought from you online, this kind of omnichannel project is – in our experience – so complex and bricks-and-mortar infrastructure is so expensive that the pure-play companies who evolved into marketplaces with service offerings are simply more successful.

Willem: The way I see it is that there are a lot of strong retail players who still need to develop a strategy. We have seen a string of bankruptcies in the Netherlands, including big fashion players like V&D and McGregor. Developing a good omnichannel strategy is the only hope for this kind of company. Of course it makes sense for likes of Amazon and Zalando to stay focussed on online; the rest has no choice if they want to survive. Don’t you agree that retailers need to become e-tailers?

11:00

Alex: I think we are in agreement, but let me explain where I’m coming from here. Back in 2005, I was employed by the German retail group Otto, which claimed to be “The Biggest Multichannel Retailer in the World”. At that time, multi-/omnichannel was considered to be the winning model. We tried to do a lot of things with the Group brands, revamping websites and moving them off of slow legacy platforms, like with Otto.de, for which we started a new-build. Yet they have, to date, not been particularly successful in refactoring their existing brands; rather, recent success has come from pumping money into a new venture called AboutYou (also active in the Netherlands!). It’s a greenfield attempt to compete with Amazon, Asos et al.

I helped to set up AboutYou, and that has really influenced my thinking. In 2011, I left the Otto Group to join an agency called NetImpact: we built a lot of stuff, including NetShops, one of the biggest shopware companies, and what is now the biggest digital consultancy for brands and manufacturers in Germany, eTribes. AboutYou was one of our incubation projects, and one of our managing directors from the NetImpact team, Tarek Müller, joined the Otto Group with it.

Back when we were doing a lot of this kind of incubation work, lots of our client companies had reached the conclusion that their own transformation projects had been too slow. Even if everyone from board level downwards was convinced of the necessity of digital transformation, there simply was no way of transforming a legacy company. What became ever clearer was that the only option was to bet on legacy-free ventures.

That was, in essence, why we set up Spryker. Lots of companies were asking us for “a better Demandware” or “a cheaper Magento” or something they could integrate into their IT departments. What we’ve learned, though, is that successful online challengers – from Zalando to Ocado, from Picnic to AboutYou – all keep IT in house. In fact, better IT capabilities are their USPs, because it’s not about selling better shirts anymore: it’s about selling better! And this “selling better” doesn’t have anything to do with legacy strengths such as the ability to open new brick-and-mortar locations or to get the in-store lighting right. No, it’s about better personalisation, better CRM, better online product data. In other words, it’s about creating a better customer experience, and that’s where you need to do better than the market. It’s something that you can’t buy of the shelf, however.

What this means for large-scale stationary retailers asking how they can compete with online challengers is that they need to be willing to invest 20%-30% of their revenue in new ventures – and spend much more on their IT capabilities than to date. It’s not enough to rename the Head of IT “CTO” and go for Zalando, though! And all omni/multichannel strategies which are geared towards nothing more than preserving an existing business model may look good on paper, but are only serving the needs of, say, the 10% of customers who want to buy shoes online and bring them back in-store. Meanwhile, they take so long to implement and have such uncertain prospects of success, that’s actually much more promising to put money into riskier greenfield projects.

17:10

(Willem offers the example of a brick-and-mortar retailer in the Netherlands which has successfully built up an online presence and asks Alex if he thinks that is the exception to the rule. Can incremental innovation within an existing organisation work, or does it always need to happen externally in a corporate start-up?

What hardly ever works, replies Alex, are “best-practice strategies” based on copying capabilities which market leaders have. Incremental innovation can work in a digital context, though, he says, citing Amazon as proof: it went from bookseller to marketplace to AWS and is now becoming an advertising platform. The difference as opposed to legacy retailers is that Amazon is innovating incrementally from a position of strength – and by ploughing all profits into new ideas. For companies now forced to innovate in an increasingly irrelevant part of the market, continues Alex, it is hard to attract talent, and while ‘electrification’ – i.e. updating ERP systems, getting smart tills – can help established stationary retail, real ‘digitisation’ means placing bets on new revenue streams and attracting young talent.)

21:40

Alex: As it currently stands, legacy companies are not in a position of strength. They’ve been scrimping on digital innovation because they thought they could keep pursuing their linear strategies: opening new stores, stocking new brands, etc. I wish I could tell them: “Don’t worry, everything is going to be fine. Here’s some new software! Now, just put football tables in all your offices and Club Mate in the fridges…” But that would be lying.

In fact, the working environment at successful digital companies isn’t actually all that great. It can often be very hard to keep up with what’s going on, too, due to the sheer pace of change. And people aren’t adapted to dealing with change. That is why big companies’ understanding of themselves is as organisations for minimising and managing risks. Successful digital companies say: “We’re not able to manage risk, but we can manage opportunities.” That is a fundamentally different approach. Going back to V&D, for instance: what could they have done to survive? They would have needed to have started 15 years ago from a position of strength and sold their warehouses to spend on selling on Amazon.

Willem: You mention Amazon a lot, and I too am convinced by their model: they’re not actually even that active in the Netherlands, and are already the seventh largest e-commerce store here.

Alex: But they don’t have a Dutch website, do they?

Willem: No, they sell here via Amazon.de. I know that you give a lot of talks on the future of Amazon, and one lecture which interested me was about “The Amazon Dilemma”. I think this concept might interest our listeners…

24:10

Alex: Okay, so some our listeners might know about “The Prisoner’s Dilemma” in game theory. In it, two prisoners are made an offer by the prosecutor: if one betrays the other, he/she will be set free. It’s somewhat hard to explain fully in a podcast, but essentially, it creates a lose-lose environment for the prisoners. The Amazon Dilemma applies to vendors which derive large proportions of their revenue from Amazon: they can’t get out. So Amazon can punish them – demanding ever higher advertising spends or lower wholesale prices – and yet they have no recourse: you can’t set up a cartel with other vendors; you can’t change Amazon’s behaviour. The only thing to do is to be the cleverest of the prisoners!

Willem: So wait, is that Amazon’s Dilemma or the Producers’ Dilemma?

Alex: The producers’, because Amazon is their prison! So the lessons for listeners here is: it’s better to be the jailor!

Willem: You mean to be the platform?

Alex: Yes, or the marketplace, or whatever you want to call it: in reality, it’s being a prison. You have to lock the customer in (perhaps that’s where the business concept of “lock-in” comes from, actually…) and the producers. In Germany, somewhere between 50% and 70% of all customer journeys now start on Amazon. For manufacturers, that means: if your product or brand isn’t showing up on Amazon, it won’t get bought.

So it comes down to a tough balancing act: on the one hand, there is no foreseeable future in which Amazon is going to be regulated, meaning that it will continue to dominate; on the other hand, you have to protect your customer access. You can’t do that with lame omnichannel strategies. You have to push new interfaces, interaction points, and digital assets instead.

We notice this shift, because companies who have grasped this no longer look at IT as a cost centre. It’s not about getting the next online shop or CRM as cheaply as possible any more. They’re realising: “Hang on! That data warehouse you guys helped me build: that’s how I’m now differentiating myself from the competition! So maybe IT is now an executive issue, not one which can be delegated down to the third level of management in our IT department…”

Willem: We’re see this shift, too. Previously, the CIO would keep an eye on costs – as would the purchasing department, who were always lurking just around the corner! Now, however, digital is on the CMO’s agenda and is understood as a profit centre: CMO’s see their digital assets as engines to drive better customer acquisition and engagement.

This means that, as well as agencies like ourselves, our clients often now have their own in-house teams working on digital strategies. We don’t just deliver our clients a platform, but offer innovative ways to engage with customers: our clients therefore no longer see us as a cost factor, but as a growth partner. CMOs are realising that digital is not just about a new CRM or data warehouse, but more about aggregating data and interpreting customers journeys.

And that’s only the starting point. Any brand which really wants to ‘escape from prison’ needs to make sure it understands the way its customers are behaving and have a better grasp than their competitors of what a customer journey looks like. They’ve got to get under consumers’ skin and see how each channel and each item of content is working at the point in time when the consumer is interested in their brand. Understanding this better than marketplaces gives them a shot at survival – and at operating a successful multi-acquisition strategy in which customers still come from Amazon, but also directly. Loyalty programmes can play a big role here, for instance.

31:00

Alex: Let’s be honest, though. Clients comes to us – both at Spryker and at other ventures I’m involved in – either out of ambition, or out of fear. And I would say that 90% are driven by fear (usually raised by Amazon). Is that the same in the Netherlands?

Willem: Well, the ‘Amazon Angst’ isn’t so strong as in Germany or the UK or, well, pretty much any other market where Amazon is operating just yet. So right now, I see a lot of brands innovating on the basis of positive assumptions rather than fear. And that is a good thing! You namechecked Picnic earlier, and they’re a great example: they are disrupting the way supermarkets work and have developed a completely new method of distributing food to consumers.

How was it in Germany? When – and how fast – did the fear factor become omnipresent?

Alex: It varied from category to category, but we are now seeing a lot of brick-and-mortar bankruptcies – and I think Amazon’s share price will have broken the $2000 barrier by the time this podcast goes out, while Zara, which is the poster boy for vertically-integrated retail, has taken a big hit.

So actually, it’s only really starting now. In Germany over the last two years, Amazon has grown at a simply unbelievable rate. Globally, Amazon is growing at $150 million per day year-on-year; the German market is contributing $15 million of that. Let’s compare that to the ambitions of some multi-billion-dollar retailers: “In 2025, I plan to have $50 million online revenue.” Amazon is growing by that much every single day in seven-to-eight hours.

In view of this unprecedented surge, linear strategies have proven insufficient to get customers back or keep profitability up. Yet new businesses are coming up and bringing lots of entrepreneurial momentum – and Picnic is an excellent example. I interviewed one of the founders for my Kassenzone podcast, actually, and hopefully we can get one here. After all, this series is just starting, and that’s why I’m so excited to be creating it with you: it’s important to compare markets and their momentum.

Willem: I agree!

Alex: Well, in that case, let’s not reveal too much in the first show and leave something for the next episodes…

(Alex closes the podcast by asking Willem what kind of questions he will be putting to their guests in the upcoming interviews. Willem stresses his interest in data and talks about the first guest for Episode 2 before revealing how the portmanteau “Wimlex” became the name for this podcast. Alex lists his three favourite e-commerce questions: Where do customers come from? How loyal are they? And how profitable is the business?)