Smooth online operators storm the high street

The latest breed of retail disrupters are moving online apparel into the bricks and mortar space – and bringing a leaner, meaner business model with them.

Pure-play online retail is dead: so said the chief executive of French-based online retailer vente-privee, Jacques-Antione Granjon, at the World Retail Congress in Paris earlier this month, and the evidence seems to bear out his words.

It may sound an obvious declaration to traditional retailers, who generally remain confident in their market-leading position and now agree a combination of ‘bricks and clicks’ is the strongest way forward. Yet the position spotlights a darkly ironic new threat for which many local players are very under-prepared: online retailers expanding into the bricks and mortar space.

Australian retailers lag far behind other parts of the world when it comes to adopting online sales channels. Deloitte’s annual Christmas Retailers’ Survey, released today, found a quarter of Australian retailers expect no online sales this Christmas – suggesting they have no online sales strategy at all. In addition, more than half expect a measly 2 per cent or less of their total Christmas sales revenue to come from online channels, and more than three quarters are still expecting only 5 per cent or less.

In the meantime, case studies show a highly evolved breed of retailer, anchored in the online space, is launching itself onto the high street – and in some instances doing a much better job at it than the old guard. Here’s why:

  • Starting from an online base means they are able to use customer data to first gauge markets before strategically tailoring store location and design to their customers.
  • They’ve already established a brand in the fast-growing online space, with a potentially global customer base.
  • They can use their existing, efficient supply chains to support physical stores – in contrast to bricks and mortar retailers moving online, who often have to completely rethink and invest in new back-end logistics.
  • They often exhibit a more entrepreneurial, frugal and innovative mindset, which carries over into a more dynamic store experience with a leaner cost structure.

Jonathan Sharp, leader of consumer practice at Boston Consulting Group Australia and New Zealand, says this last point is an especially important development for Australian retailers, who consistently complain of high rent and labour costs as primary reasons for their shrinking margins.

“They [online retailers opening physical stores] should have an advantage in store labour because to a greater extent they sell themselves off the screen, so they shouldn’t require as much investment to selling in-store,” Sharp says.

They can also get by with a smaller footprint, with fewer – but better placed – flagship stores, using them as ‘showrooms’ to engage customers and promote their brand. Additionally, depending on how they choose to configure their shop, they can reduce the amount of in-store space needed by utilising existing supply chains for stock fulfilment.

A standout example of a local player spearheading this movement in Australia is Shoes Of Prey. Founded four years ago as a lean start-up by Jodie and Michael Fox, and Mike Knapp, the custom design shoe store now has more than 50 staff and offices in China, Japan, London and Russia. In January Shoes of Prey’s first physical store opened at David Jones’ Sydney flagship. Featuring a sculpture made of shoes, and with the shop fitted out in materials used in the products and a soundtrack composed especially for the store, it promptly won the Store Design of the Year award at the World Retail Congress. And by the company’s own accounts, the David Jones store is also smashing sales targets.

Co-founder Jodie Fox says David Jones was the “perfect partner”, with the 175-year-old department store lending them some old-fashioned prestige and customer service wisdom to launch their bricks and mortar debut. But while David Jones has certainly gained some extra foot traffic from the concept store, the deal is clearly in Fox’s favour, with the business’ revenue heavily weighted online, and concession stores meaning lower margins for department stores (Local retailers may bake in Uniqlo’s glow, October 3).

Shoes of Prey is a rarity in Australia, however. The most noteworthy examples of online retailers moving offline are found overseas – US menswear retailer Bonobos, prescription glasses store Warby Parker and Gap subsidiary Piperlime have all pushed the envelope in their expansion to bricks and mortar.

Bonobos, with estimated revenue over $US400 million in the 2012 financial year, has signed a distribution deal with Nordstrom and now boasts one of the highest revenue figures per square foot of retail space in the country, according to media reports.

And Warby Parker, a strong disrupter in the American prescription glasses sector with estimated revenue between $US23 million and $US25 million in 2012 according to media reports, averaged $3659 worth of sales per square foot at its New York headquarters’ showroom in the same year.

But with Australian retail trends routinely lagging the US by several years, Deloitte retail leader David White says it’s inevitable the trend will grow in Australia in the next two to three years – and local retailers who are lagging behind with their online strategy should be very worried.

“It might catch people sleeping,” he says. At the moment they [online retailers going offline] are only a smaller part of the market but I think it could be a bit of a wake-up call, to be honest. With some of the traditional retailers there’s a digital denial.”

It’s not only the pure-play retailers who are encroaching on their home turf, either. Global brands with highly evolved omni-channel strategies are using their online channels to test the waters before storming the market with flagship stores in strategically placed, highly urbanised locations.

When US homewares store Williams-Sonoma wanted to expand overseas, it began by testing different regions such as Australia, the UK and Europe with its online offering. By far its biggest sales were in Australia – and now, more than half a century after it opened its first store in Sonoma, California, it’s opened one in Bondi Junction. There are nine more Australian stores in the pipeline.

“In Australia they’ve [Williams-Sonoma] got this model sorted,” White says. “They’ve got the strong brand, the customer service in-store, the supply chain, the products, the online offering.”

With all of this in mind, perhaps the most worrying finding from Deloitte’s Christmas Retailers’ Survey is a growing complacency among local retailers towards disruptive threats. Only 2 per cent of Australian retailers saw ‘digital disruption’ as the biggest risk to their business – down from 15 per cent this time last year. In contrast, 40 per cent cited their biggest concern as macroeconomic factors.

It’s a pity that's something they have very little control over, because while they’ve still yet to get their skates online this Christmas, the rest of the world is forging ahead with clicks – and bricks – and geography is no obstacle.

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