Book - Retail's Last Mile: Why Online Shopping Will Exceed Our Wildest Predictions

THE HIDDEN ENGINE OF ONLINE RETAIL
The Neglected Power of Operations in Online Success

www.jonathanreeve.com.auJonathan Reeve
Contents
Introduction
The operations challenge in online retail
Three online retail mindsets
Developing profitable online operations
Reflection points
About the author
PAGE2
CONTENTS

We all talk about ‘digital’, but the biggest challenge for
most online retailers lies in their ‘physical’ operations
Most online retailers face an operations bottleneck. Operations issues are driving poor service, high
costs and team member frustration. These retailers are falling behind a handful of leaders who have
their online operations under control and can focus on improving their customer offer and profitability.
Designing and executing the optimal operational model for an online retailer is a challenge. The best
approach typically emerges over time and varies by sector and geography.
Throughout my work, I have witnessed the benefits of a structured long-term approach to online retail
operations, one giving equal weight to customers, profitability, and execution.
Most retailers have no option. If they can’t find profitable and scalable ways to service online demand
they will eventually become extinct.
PAGE3
INTRODUCTION

PAGE4
Today, 7% of sales are through a digital channel
and 33% have a digital component
INTRODUCTION
Sales Through A Digital Channel from US Census Bureau.
Sales With A Digital Component based on Forrester US Cross-Channel Retail Sales Forecast: 2014 To 2018 (July 2014) and Jonathan Reeve estimates
SALES THROUGH A DIGITAL CHANNEL
Ex: PURCHASING ONLINE, DELIVERY AT HOME
SALES WITH A DIGITAL COMPONENT
Ex: BROWSING ONLINE, BUYING IN STORE
2000 2015
1%
7% 4%
33%
2000 20152030
?
2030
?

PAGE5
The Internet has led to exciting new delivery options for
customers, but these add cost and complexity to retailers
INTRODUCTION
Customers
Delivery
Physical delivery
Virtual delivery
Click & Collect
“Traditional” shop
Delivery
Supplier
Store
Distribution
Centre

Challenge 1: The increased cost and complexity
of online retail fulfilment
Online is higher cost than a store….
•  Online retail shifts the cost of picking and
delivery from customers to the retailer.
•  Online customers are deal-focused and
expect free shipping: higher costs are rarely
recovered through higher pricing.
•  Returns are a hidden but significant cost.
…and omni-channel is higher cost than online
•  Omni-channel retailers face a “double-
whammy”: more customer touch-points
equals more cost and more complexity.
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THE ONLINE OPERATIONS CHALLENGE
The Internet is having
a similar impact. It’s
still early days and
hard to know how
things will evolve:
Many will not survive
TYPICAL “END-TO-END” OPERATING COSTS (% OF SALES)1
20%
25%
STORE ONLINE OMNI-CHANNEL
(STORE & ONLINE)
30%
1. True “end-to-end” costs are often not reported, e.g. because online fulfilment is cross-subsidised by other areas.

PAGE7
Challenge 2: The need for new mindsets across
the organisation
Area From To
Store Teams Service business model Process business model
Supply Chain Satisfactory stock record accuracy Excellent stock record accuracy
Logistics Transport of cases Transport of singles
IT Legacy, reactive Agile, pro-active

PAGE8
Challenge 3: The rise of online disrupters
Lockers to solve the
problem of inconvenient
delivery timeslots
Automated warehouse
fulfilment
Amazon Dash –
simplified ordering
(eliminating the
shopping list)
Ordering Fulfilment Delivery
Innovation
examples:

Challenge 4: Many retailers lack confidence in
the new world of online retail
The impact of the Internet is rather like
a meteor.
65 million years ago a meteor 10 km
wide and travelling at 30 km / second
hit the Yucatan Peninsula in Mexico.
At first there were few effects outside
the area hit, but gradually the
earth’s atmosphere changed.
Clouds of dust started to block the
sun, slowly transforming the climate.
Over time, only 30% of species
adapted to the new climate.
PAGE9
We can look at the
Internet through the
same lens. We’re still
in the early days and
it’s hard to see
through all the dust
and know how things
will evolve.

PAGE10
Online retail mindsets: Which one applies to you?
Mindset Approach Focus Pay-Off
Creative
“We’re creating a new way for
the future.”
Future 10x
Reactive “We’re reacting to the world we
see now.”
Present 4x
Passive
“There’s no need to adapt or
change.”
Past 1x
THREE ONLINE RETAIL MINDSETS

The passive mindset
Many retailers believe they don’t need to change and only adjust
their operations when they are forced to.
Walmart is the world’s largest retailer. In 2003, it had no online grocery
business in the US. In fact, it only started testing the idea in 2011 with
one trial in its home state.
Today, Walmart is making significant investments in an online grocery
offering and having to solve online challenges that could have been
addressed ten years ago.
Meanwhile, Amazon has been making steady progress and in 2015,
its stock market value exceeded that of Walmart for the first time.
PAGE11
1. Walmart’s UK subsidiary Asda did start offering online grocery several years earlier than Walmart in the US.
Walmart would have gained some learning from this experience, although the UK market is very different to
the US and the internal challenges will be different in each organisation.

The reactive mindset
The most common mindset of retailers is to respond to
what competitors are doing or to short-term, internal
priorities.
For example, retailers are encouraged to become “Omni-
Channel” which translates to serving customers whenever
and wherever they want to shop.
In practice, many Omni-Channel retailers are prioritising
the customer offer over their profitability and ability to
execute, but feel they have no option but to match their
competitors1.
An example is the US trend to store-based fulfilment. It has
its place but is high cost and therefore will not be the
foundation of a profitable long-term strategy.
PAGE12
1. A 2014 survey by PWC found that only 14% of Omni-Channel initiatives were profitable

The creative mindset
Some retailers shape their markets by creating an optimal model for the
future. Typically, these are the start-ups or new entrants. But there are
no barriers to incumbents taking this approach.
In 1995, two British grocery executives attended a consulting
conference. At this time, only 25% of households had computers.
During the conference, a consultant predicted that one day, shoppers
would order groceries from their kitchens. Attendees nearly fell off their
chairs laughing. But the executives, Tesco’s then CEO and Marketing
Director, saw how convenient it would be to have groceries delivered
to customers’ doorsteps. As a result, they set up Tesco.com in 1996.
Putting yourself in your customers’ shoes is the first step. But the secret to
Tesco.com’s success was a relentless creative effort to solve two other
challenges at the same time as making life better for customers:
•  What is the most efficient way to get the job done?
•  How do we make life simple for the teams who actually do the work?
PAGE13
1. Sir Terry Leahy and Tim Mason. Story related in Management in Ten Words by Sir Terry Leahy

Model: 3 pillars of profitable online operations
There are three pillars to profitable online operations:
1.  Customer offer: how could we improve the way our
customers’ needs are met?
2.  Operating model: how can we profitably deliver the
customer offer?
3.  Execution: how do we make it happen?
Most online retail strategies prioritise one aspect of the
operations plan – usually the customer offer. It is then left to
other teams to figure out how to deliver the offer to
customers and make a profit.
The key is to focus on all three from the start.
PAGE14
PROFITABLE ONLINE OPERATIONS
1. CUSTOMER OFFER
Efficiency

1: The customer offer
It all starts with the simple question: “what
business are we in?”
Many companies focus on improving what they
do now not what their customers actually want.
For example:
•  Kodak invented the digital camera but did
not commercialise it
•  They thought their business was “creating
better quality photos”
•  Whereas what Kodak’s customers really
wanted was “to capture memories”
Incumbents tend to overlook customer
inconveniences that also affect their
competitors.
PAGE15
DISRUPTERS FOCUS ON ISSUES WITH THE MODEL:
SHOPPING EXAMPLE
Incumbent focus Disrupter focus
Range Effort to write shopping list
Pricing & promotions Travel to / from store
In-store service
Time selecting products

2: The operating model
Online retailers have many options to ensure
customers receive their products. Every option
has its own cost profile and operational pros and
cons. These can change as volumes increase.
Every sector has its own dynamics and the
optimal fulfilment method can vary even for
products sold in the same store, for example:
•  Video games
•  Consumer electronics
•  White goods
PAGE16
DIFFERENT MODELS MAY BE RIGHT FOR DIFFERENT TIMES
VOLUME
COST /
UNIT
OPTION C
OPTION B
OPTION A

3: Execution
A good business model design sets up an opportunity to make money. Execution
makes it happen. There are three key phases in execution:
1.  Set up
2.  Manage performance
3.  Continuous improvement
The cause of many execution failures is when the
Managers who build the strategy don’t think about
making life simple for the teams who do the work.
PAGE17
Example
Webvan set out to revolutionise supermarket shopping
with a direct-to-customer model. It had the backing of
some of the smartest investors in Silicon Valley and
George Shaheen the CEO of Andersen Consulting (now
Accenture) had quit his role to lead it.
Gary Sargeant, an early Head of Tesco.Com, visited one
of Webvan’s warehouses when its valuation was $5 billion.
Gary knew immediately the business wasn’t going to work
because the warehouse design did not make life simple
for the teams who had to do the work. Most of the
female employees were having to stand on crates to
operate the equipment.
Webvan went bust just a few months later.

The hidden engine of online retail
Too often I see online retail strategy focused on
designing a great customer offer. The challenge
of how to profitably deliver that offer is left to
teams who may have had little involvement in the
decisions.
The best online retailers know that taking an
operations perspective at every stage delivers
higher sales growth, lower costs and happier team
members.
PAGE18
1. CUSTOMER OFFER
Efficiency

Reflection points
What is your mindset around online retail?
•  Passive
•  Reactive
•  Creative
Is anyone in your market working to eliminate the key sources of
dissatisfaction for your customers?
What is really driving your online strategy?
•  Improving your customer offer
•  Increasing your profitability
•  Removing barriers to execution
•  All of the above
PAGE19
REFLECTION POINTS
What are the jobs your
customers are looking
to get done?

About the author
Jonathan Reeve is passionate about helping retailers to develop
profitable, stress-free, online operations.
Jonathan has worked in online businesses in three continents over the
past 15 years and was part of the team that developed the operating
model for Tesco.com, the world’s leading online grocery retailer.
Jonathan’s unique perspective comes from having both developed
online strategy and led the front-line teams who deliver the service to
customers.
Jonathan has an MA in Economics from Cambridge University and an
MBA (with Distinction) from INSEAD. His prior roles have been with Tesco,
Coles, Aussie Farmers Direct, Goldman Sachs and Arkwright Consulting.
Jonathan lives in Melbourne with his wife Anna and sons Leo and Max,
enjoys keeping fit and has completed several ultra-marathons and
Ironman triathlons.
PAGE20
ABOUT THE AUTHOR

Adviser, Speaker and Author
Jonathan’s soon to be released book THE FUTURE OF RETAIL helps make sense of the unprecedented
change underway in almost every retail sector. Jonathan applies his strategic, academic and practical
experience to explain the trends reshaping retail and how to respond to the new reality.
Jonathan’s keynote presentation THE FUTURE OF RETAIL is designed for organisations looking to develop
their leaders to understand and respond to the trends reshaping retail. Drawing on fifteen years of retail
experience, Jonathan presents an entertaining keynote that will inspire as well as inform the audience.
Jonathan advises teams at all levels and offers a range of services including strategy development and
implementation, online operations diagnostic audits and one-to-one mentoring. “Benchmark Your
Online Operations” is a popular option for retailers who’d like to understand how they stack up against
global best-practice. This includes a leadership de-brief session as well as the feedback report.
Jonathan writes a regular blog. You can sign up to this on his website or by emailing him.
Phone: +61 428 537 925
Email: jr@jonathanreeve.com.au
Website: www.jonathanreeve.com.au
PAGE21
ABOUT THE AUTHOR

PAGE22
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This version: 15 January 2016.

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