A new breed of retail letter bomb

The next wave of online retailing, far more dangerous for traditional store retailers than the first wave, is now upon us. It has been happening in the US and Europe for more than a year, but has now arrived in Australia.

It is – wait for it – full-price, non-discount retailing. That's right – they don't compete on price. The first wave of online retailers was, and still is, the discounters, but why are full-price online stores more of a wealth hazard for traditional bricks and mortar retailers? Because the margin is applied to service, specifically better delivery, instead of discounting.

The first of these is an online clothing and footwear store called The Iconic, which started up six months ago. It was created in just six months of business planning by five former management consultants, four from Boston Consulting and one from McKinsey and Co, copying similar operations in Europe.

The Iconic's point of difference is that it offers free overnight delivery, guaranteed, within Australia, and three-hour delivery in Sydney for $4.95. Returns within 100 days have free delivery as well.

The business's principals are two Australians, Adam Jacobs and Cameron Votan, two Germans, Finn Haensel and Andreas Otto and an American, Ryan Tuohy. They were all working in Sydney with BCG and McKinsey and decided a year ago that there was a gap in this country for a full-priced, free delivery retailer, copying ones in the US and Europe that had already taken off.

They got start-up funding from Rocket Internet, one of the world's biggest incubator funds, as well as a private Swedish fund called Kinnevik.

Almost all innovation involves taking something that's already being done and doing it better, and the key to making this one work was developing a partnership with Australia Post. Under Ahmed Fahour's management Australia Post is trying to transform itself into a parcel delivery service for products bought online, to counter the collapse of ordinary mail.

The five partners persuaded Fahour and his team to initiate a sorting shift between 2am and 4am that didn't cost The Iconic or its customers any more. It means that products bought in the evening in front of the TV are ready to be dispatched by 6am the next morning and delivered free at 9am (according to Adam Jacobs).

The three-hour delivery within Sydney is done by a courier company and an automatic dispatch system; any longer and the fee is refunded.

This is an astonishing level of service, and takes online retailing to the next level.

The five partners won't reveal any of their numbers except website traffic, which is public anyway. The Iconic is averaging 150,000 unique visitors a day, which is about three times the traffic that most of the traditional retailers are getting to their online stores.

Haensel told me they are "considerably” ahead of business plan at this stage and growing rapidly, mainly supported by performance marketing online, but also some TV, radio and print marketing.

In my view this sort of operation is a dire threat to existing store retailers, especially the big cumbersome ones.

At this stage it sells about 500 fashion brands – mostly Australian, but they are steadily signing up international brands as well. The reason it's taking longer for the overseas brands is that they have to deal with local distributors, who have close existing relationships with stores like David Jones and Myer and are reluctant to deal with a challenger.

But it's more of a threat to the property owners. Myer, David Jones and the other fashion chains all now have online stores and although they have been slow to move, they can catch up if they're good enough.

But the landlords have no hope. Like print media, they are in a business with a limited future – the only question is how long they've got.

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