David Jones tries online ... again
Dec. 2011.
SMEs take note: the inability of large businesses to do what they need to do can seem incredible. It's very hard for some leopards to change their spots. A case in point is the move to online retail.
An interesting example is David Jones. The magazine accompanying the Dec 2, 2011 Australian Financial Review had a good interview with Paul Zahra, CEO of David Jones (an upmarket department store).
In the interview, there were some startling facts about the failure of DJ's online effort.
Mr Zahra revealed that under the former CEO, David Jones canned their online effort after losing $28m. Losing $28m is remarkable for a channel where the turnover would have been below $5m. Normally we associate online stores with low fixed costs (and therefore low contribution margins and cheap prices). There are a couple of ways you can lose a huge amount of money. You can sell below variable costs, and lose money on each sale, or you can have astronomical fixed and startup costs. (A large firm can invent a third way: it may allocate irrelevant corporate overheads, and include them in the loss). I can't believe DJs achieved enough volume to blow $28m on selling below cash cost. This leaves fixed costs and startup costs. Spending that on consultants, developers and marketing is always possible, but it seems remarkably generous. I'm guessing some very over-priced acquisitions.
For SMEs, the lesson is that a firm with top-class management, a ridiculous amount of money and a nice strategic plan completely screwed up. Many smaller businesses have stepped into the gap.
However, that's in the past.
DJs obviously needs to find a successful hybrid online solution. There's no point establishing a traditional online store: the margins are low, and the added-value of the existing business is too low. Instead, DJs is using the role model of Neiman Marcus, an upmarket US department store with a decent complementary web offer. NM claims that online is about 10% of revenue ... perhaps it doesn't sound much, but Myer said it was selling only $5m online (a year ago, before it relaunched), which is about 0.2%.
In the bricks-and-mortar world, David Jones and Myer have followed different strategies: Myer went for the store-in-a-store concept. To my mind, this leaves David Jones standing for something more than Myer: Myer's approach is basically to become a landlord. At David Jones, you are more likely to engage with people who work for David Jones. Mr Zahra claims that market research reveals much stronger customer service ratings than "our main competitor": I can easily believe that. How does this fit with an online approach?
Establishing hybrid retail channels is not easy. One US analyst praises Nieman Marcus approach to its online offer is "From its email to digital look books, look books to the e-commerce experience, Neiman Marcus has created a seamless experience for their shoppers". DJs has already made a seamless customer experience a bigger part of their in-store experience.
Myer and David Jones need to find an online approach that delivers healthy margins. Using comparative advantage analysis, DJs is more likely to succeed than Myer, in my opinion.
However, even if they do succeed, it will have taken years. Years after the time that it was obvious that the Australian retail market would face significant disruption, years in which new players have established themselves.