Executive  Summary  Retailers  are  setting  aggressive  targets  to  double  online  revenue  in  less  than  five  years  –  but  spending  more  on  email,  search,  and  affiliates  is  not  going  to  be  enough  to  achieve  the  necessary  growth  rate.      Retailers  must  look  to  new  ecommerce  concepts  to  meet  revenue  targets.    Simply  copying  the  new  

entrants,  however,  will  not  ensure  success.    Established  brands  and  retailers  must  leverage  their  own  unique  assets  to  create  compelling  new  sites  and  applications  based  on  these  concepts  which  address  real  consumer  needs  and  desires.    A  portfolio  approach  to  managing  a  number  of  new  concepts  will  

work  best.    The  implementation  approach  that  the  business  and  IT  can  agree  on  is  usually  SaaS  sites  integrated  into  the  core  ecommerce  platform  via  approved  APIs  and  web  services.              

 

Table  of  Contents  Executive  Summary.............................................................................................................................................1  

Business  as  Usual  Won’t  Double  Online  Revenue  in  5  Years ...........................................................................3  

New  Retail  Concepts  Provide  the  Growth  Engine.............................................................................................4  

Legacy  Storefront  vs.  New  Retail  Concepts .......................................................................................................6  

What  Consumer  Need  are  You  Satisfying?........................................................................................................8  

Leverage  Existing  Assets .....................................................................................................................................9  

A  Portfolio  Approach  Will  Work  Best.................................................................................................................9  

New  SaaS  Sites  Integrated  to  Core.....................................................................................................................9  

Summary ............................................................................................................................................................10  

 

 

Business  as  Usual  Won’t  Double  Online  Revenue  in  5  Years  “J.C.  Penney  has  seen  the  future  and  it's  digital.  The  department  store  chain  is  looking  to  grow  its  online  business  by  $1  billion  within  five  years.”    

Dow  Jones  Newswire,  June  22,  2010    

The  focus  to  step  up  online  operations  "is  on  the  verge  of  maniacal."    The  digital  platform  is  

the  single  biggest  investment  we're  making  as  a  company."    Thomas  Nealon,  EVP  &  CIO,  J.C.  Penney  

J.C.  Penney  is  not  unique,  just  the  most  open  about  their  goals.    Nearly  every  major  retailer  (from  Macy’s  to  Walmart)  has  plans  to  double  online  revenue  in  the  next  few  years.    Why  are  nearly  all  

retailers  looking  online  for  massive  growth  at  the  same  time?  

• Amazon.    In  Q4  2009,  in  a  shaky  retail  environment,  it  grew  electronics  and  general  merchandise  sales  60%.    Amazon’s  online  revenue  increased  $10  billion  from  2007  to  2009  -­‐  nearly  equal  to  the  rest  of  the  Internet  Retailer  500  combined.    Goldman  Sachs  now  predicts  that  Amazon  will  

account  for  25%  of  all  ecommerce  growth  over  the  next  few  years.        • Ecommerce  tipping  point.    Ecommerce  is  no  longer  viewed  has  high  growth,  but  small  in  size.    

According  to  Goldman,  by  2019,  ecommerce  will  grow  by  $68  billion  to  only  $60  billion  for  

offline.        • Building  new  stores  no  longer  working.    At  46.6  sq.  ft.  of  retail  space  per  capita  the  US  is  more  

than  twice  as  saturated  as  the  second  highest  country  (UK).    Over  10,000  store  closings  

happened  in  2008-­‐2009.    

So  how  do  you  double  online  revenue  in  4  years?    Is  the  average  growth  rate  in  ecommerce  enough  to  achieve  that?    To  answer  that  question,  we  found  the  best  data  source  we  could  of  public  and  private  ecommerce  revenue  –  the  Internet  Retailer  500  (IR500)  –  and  calculated  the  Compounded  Annual  

Growth  Rate  (CAGR)  for  the  years  provided  in  the  data  (2007-­‐2009).      

 

We  excluded  outliers  (Amazon,  Apple  and  any  retailer  without  3  years  of  revenue  data).    The  CAGR  of  the  resulting  483  retailers  is  8%.    The  chart  above  shows  that  8%  CAGR  requires  9  years  to  double  –  

nearly  twice  as  long  as  most  companies’  targets.    To  double  in  4  years  requires  a  19%  CAGR.  

Clearly  a  retailer  has  a  large  growth  gap  to  fill  (19%-­‐8%=11%CAGR)  if  it  wishes  to  double  revenue  in  4  years.    Traditional  customer  acquisition  approaches  of  TV,  print,  email,  affiliates  and  paid  search  are  only  leading  to  8%  growth  on  aggregate  for  the  industry.    So  where  will  the  11%  additional  annual  growth  

come  from?  

New  Retail  Concepts  Provide  the  Growth  Engine  The  world  of  ecommerce  has  been  largely  unchanged  for  the  last  decade.    Nearly  all  retailers  follow  the  standard  ecommerce  storefront  model,  acquire  customers  through  email,  paid  search  and  affiliates  and  reward  loyalty  points  based  on  purchases.    Recently,  changes  in  consumer  behavior  and  the  maturing  of  

social  networks  and  smart  phones  have  enabled  highly  successful  businesses  based  on  new  retail  concepts  such  as  Gilt  Groupe,  Groupon,  Rue  La  La,  NET-­‐A-­‐PORTER,  and  Lockerz.    Many  of  these  are  already  approaching  $500  million  in  revenue  and  are  valued  at  well  over  $1  billion.    Top  venture  

capitalists  recognize  the  opportunity  and  are  flooding  the  space  with  capital.        “The  online  shopping  paradigm  is  finally  changing.  Indeed,  I  think  we’ve  seen  more  innovation  in  the  last  

10  months  than  in  the  last  10  years.  We’ve  seen  an  explosion  of  interesting  technologies  and  opportunities  that  seek  to  change  online  shopping.”  

Josh  Kopelman,  Managing  Director,  First  Round  Capital  

 

Many  of  these  new  retail  concepts  are  achieving  much  higher  growth  rates  than  19%.    Some  examples:  

• Rue  La  La  –  A  Private  Sales  site  grew  0  to  $140  million  in  2  years  (full  disclosure:  Optaros  client).    Others  in  the  space  include:  vente  privee  (0-­‐680  million  Euros  in  seven  years)  and  Gilt  Groupe  

($0-­‐$500  million  in  3  years)      • Groupon  –  Group  Coupon  site  achieved  a  $1  billion+  valuation  in  only  16  months  (only  YouTube  

was  faster)  and  $350  million  gross  merchandising  revenue  as  a  2  year  old  company.  

The  contrast  is  striking  when  you  compare  one  of  these  new  concepts  against  even  an  excellent  

traditional  ecommerce  storefront  retailer.    The  chart  below  shows  how  Crutchfield  compares  against  Groupon  over  the  last  year.    36-­‐year  old  Crutchfield  has  seen  flat  traffic  while  Groupon  surged  in  1  year  to  quadruple  Crutchfield’s  unique  visitors  and  double  its  sales.  

 

So  new  retail  concepts  can  generate  much  faster  growth  rates.    But  how  can  established  brands  and  retailers  leverage  these  concepts  to  speed  their  own  growth  rates?    The  first  step  is  to  understand  how  

these  new  retail  concepts  are  fundamentally  different  from  the  legacy  ecommerce  storefront.      

 

Legacy  Storefront  vs.  New  Retail  Concepts  New  Retail  Concepts  differ  from  the  legacy  ecommerce  storefront  in  how  they  acquire  customers,  

merchandise  product  and  generate  loyalty.    New  Retail  Concepts  tap  into  much  more  powerful  behavioral  economics  that  can  generate  rapid  revenue  growth.    Table  A  below  breaks  down  the  differences  in  these  three  areas:  

Table  A:  How  New  Retail  Concepts  Differ  from  the  Legacy  Storefront  

  Legacy  Storefront   New  Retail  Concepts  Customer  Acquisition      

Purchase  Type   Intent  to  purchase   Impulse  Where  is  She  Buying?   Computer  at  home/work   Anywhere,  on  any  device  How  She  1st  Finds  Site   Brand,  Search,  Affiliate   Word  of  mouth,  social  networks  Customer  Acquisition  Costs   No  scale  economies   Increase  Returns  to  Scale  

     Merchandising      

Consumer’s  Role   Shop   Recommend,  Market,  Merchandise  Type  of  Merchandise   Standard  seasonal  product   Unique  deals,  personalized  SKU:  Sales  Ratio   Many  SKUs,  small  volume   Few  SKUs,  high  volume  Tomorrow’s  Merchandise   Predictable   Uncertain/exciting  

     Customer  Loyalty      

Best  Customer   One  who  buys  the  most   One  who  influences  the  most  Loyalty  Program   Points  for  purchases   Points  for  invitee  purchases  Retailer  Relationship     1:1,  Seller:Shopper   Brand  Community  Leader  Return  Purchases   Push  email  offers  to  Her   Train  Her  to  check  every  day  

 

Combining  all  of  these  new  elements  creates  powerful  new  business  models  –  what  we  call  New  Retail  

Concepts.    Many  of  these  elements  can  also  be  added  on  to  the  ecommerce  storefront  model  –  but  to  lesser  effect.    Below  is  a  short  description  of  the  key  points  of  business  model  difference.  

Customer  Acquisition      

Nearly  all  ecommerce  retailers  assume  the  following  about  online  purchases:    

• Intent  to  purchase  –  impulse  purchases  don’t  happen  online;  shoppers  start  by  looking  for  something  specific        

• Computer  –  is  where  the  purchase  happens  • Brand,  Search  and  Affiliates  –  are  what  drives  traffic  to  retailers’  sites  • No  scale  economies  –  every  new  shopper  requires  a  fee  to  an  affiliate  or  Google  

New  Retail  Concepts  make  a  different  set  of  assumptions  that  lead  to  increasing  returns  to  scaling  customer  acquisition  efforts  –  a  powerful  business  model  advantage.  

• Impulse  purchases  –  consumers  will  make  impulse  purchases  online,  especially  when  a  friend  

lets  them  know  about  a  unique  item/price  for  a  limited  time  and  supply  or  something  they  could  do  together  

• Consumers  can  be  trained  to  return  to  the  site  each  day  to  check  out  the  latest  offer  

• A  retailer  doesn’t  have  to  pay  Google  or  affiliates  for  new  revenue  –  shoppers  will  come  back  for  free  

• Impulse  purchases  can  happen  anywhere,  so  mobile  is  very  important  

Merchandising  

Nearly  all  ecommerce  retailers  assume  the  following  about  merchandising:    

• The  retail  calendar  is  broken  into  seasons  and  appropriate  merchandise  must  be  made  available  

at  the  right  time  for  each  season  • A  broader  assortment  is  generally  preferable,  it  provides  a  greater  opportunity  that  the  shopper  

will  find  something  they  like  and  make  a  purchase  

• Shoppers  like  to  know  that  they  can  always  find  certain  items  on  the  site    

New  Retail  Concepts  make  a  fundamentally  different  set  of  assumptions  about  merchandising:  

• Traditional  seasonal  assortments  don’t  drive  impulse  purchases,  unique  or  personalized  merchandise    is  what  is  compelling  for  an  impulse  purchase  

• The  customer  is  more  than  a  shopper,  she  also  markets  to  friends,  recommends  products,  merchandises  through  voting  and  look  books  which  helps  Buyers  determine  what  is  going  to  sell  

the  best  • Few  SKUs/high  volume  is  ideal  –  even  down  to  a  single  SKU  a  day  • Limited  SKUs  means  a  site  experience  that  can  be  radically  different  (no  search,  no  navigation,  

no  product  detail  pages,  no  thumbnails  and  registration  required  at  the  homepage)  • Surprising  her  with  new  merchandise  each  day  is  a  positive  –  it  causes  her  to  come  to  the  site  

everyday  to  check  out  what  is  new,  and  perhaps  make  a  purchase  

Customer  Loyalty      

Nearly  all  ecommerce  retailers  assume  the  following  about  customer  loyalty:    

• Customer  satisfaction  is  based  on  the  basic  experience  –  checkout,  shipment  accuracy,  returns,  

etc.  • A  loyalty  program  awards  a  shopper  for  her  purchases  –  encouraging  her  to  shop  again  • The  retailer  strives  to  have  a  more  direct  relationship  with  each  shopper  

• Even  loyal  shoppers  require  emails  pushed  to  them  with  offers  to  get  them  to  return  and  purchase  

New  Retail  Concepts  make  a  different  set  of  assumptions  about  customer  loyalty  that  leads  to  greater  word  of  mouth,  brand  affinity  and  revenue:  

• The  best  customer  is  not  the  one  that  buys  the  most,  but  the  one  that  influences  the  largest  

total  amount  of  purchases  including  her  own  and  her  network  of  invited  friends  • Loyalty  programs  should  encourage  her  to  invite  her  friends  and  reward  her  when  her  friends  

purchase  

• It  is  the  retailer’s  job  to  cultivate  the  community  of  customers  to  increase  brand  affinity  and  encourage  the  continued  viral  growth  of  customers  

What  Consumer  Need  are  You  Satisfying?  Many  retailers  make  the  mistake  of  thinking  that  these  new  elements  can  be  tacked  on  to  traditional  campaigns  (e.g.  Private  Sales  is  simply  a  different  Coupon  Code)  and  that  alone  will  generate  the  

explosive  results  shown  by  New  Retail  Concepts.      

Unfortunately,  it’s  not  that  simple.    New  Retail  Concepts  still  need  to  satisfy  a  consumer  need  or  desire  to  be  compelling.    The  consumer  desire  should  always  be  kept  in  focus  as  new  concepts  are  developed.          

 

 

 

Leverage  Existing  Assets  Established  Brands  and  Retailers  have  numerous  advantages  over  start-­‐ups  and  should  leverage  these  in  

the  development  of  new  retail  concepts.    At  a  high  level  the  main  assets  are  generally  centered  on  customer  knowledge,  brand  and  multi-­‐channel  capabilities.    The  key  to  success  is  merging  New  Retail  Concepts  with  existing  assets  in  ways  that  are  compelling  for  the  consumer.      

  Existing  Assets  Customer  Acquisition    

Purchase  Type   Purchase  history  Where  is  She  Buying?   In-­‐store  and  online  How  She  1st  Finds  Site   Existing  traffic  Customer  Acquisition  Costs   Existing  customer  list  

   Merchandising    

Consumer’s  Role   Early  purchasers  of  top  trends  Type  of  Merchandise   Strong  supplier  relationships  SKU:  Sales  Ratio   Most  popular  items  Tomorrow’s  Merchandise   Buyer  expertise  

   Customer  Loyalty    

Best  Customer   List  of  top  customers  Loyalty  Program   Existing  loyal  customers  Retailer  Relationship     Trusted  Brand  Return  Purchases   Email  Campaigns  

 

A  Portfolio  Approach  Will  Work  Best  Many  Brands  and  Retailers  fall  into  the  trap  of  trying  to  create  the  one,  perfect  new  concept.    The  result  is  often  an  extended  period  of  analysis  and  internal  meetings  that  leads  to  nothing  being  implemented.    

The  one  perfect  idea  becomes  the  enemy  of  the  good.    With  New  Retail  Concepts  it  is  generally  better  to  take  more  of  a  portfolio  approach  and  test  out  a  few  concepts  in  parallel.    Rolling  them  out  quickly  and  rapidly  learning  from  customer  feedback  is  generally  a  better  approach.        

New  SaaS  Sites  Integrated  to  Core      Brands  and  Retailers  are  constrained  by  their  existing  platform  and  IT  priorities  and  staffing.  Often  these  

IT  constraints  lead  to  implementations  that  are  not  what  the  business  preferred  (e.g.  Private  Sales  as  a  coupon  code).    IT  generally  does  not  have  the  time  to  take  on  these  new  concept  projects,  yet  needs  to  ensure  security,  scalability,  stability  and  compliance  with  corporate  standards  for  any  new  project.      

An  approach  that  most  of  our  clients’  IT  departments  prefer  is  a  separate  SaaS  ecommerce  platform  that  integrates  via  approved  APIs  into  the  core  system  for  product  information  and  checkout.    Additional  

“nice-­‐to-­‐have”  integrations  include  a  shared  cart  and  single  sign-­‐on,  but  these  are  not  mandatory.      The  table  below  provides  a  more  detailed  description  of  this  common  approach.  

 

This  approach  gives  the  business  control  over  the  user  experience  (which  is  critical  to  maintaining  the  

Brand)  and  doesn’t  divert  IT  resources  away  from  the  core  site;      it  also  complies  with  IT’s  standards  and  avoids  burdening  them  with  yet  another  system  to  manage.  

Summary  Online  retailers  with  aggressive  growth  goals  are  increasingly  recognizing  that  they  will  need  to  look  to  New  Retail  Concepts  to  achieve  those  goals.  Incremental  improvements  in  existing  storefront  models  

simply  won’t  generate  enough  growth.    To  create  success  with  these  new  concepts,  retailers  should  look  for  opportunities  to  leverage  a  portfolio  approach  of  SaaS  based  implementations,  based  on  a  strategic  understanding  of  new  customer  needs  and  their  unique  assets.    

Most  companies  find  it  quite  helpful  to  put  more  structure  around  the  effort  to  conceive  and  launch  

new  retail  concepts.    We  recommend  a  workshop  that  walks  through  the  steps  outlined  in  this  paper  to  develop  a  set  of  candidate  retail  concepts  that  are  true  to  the  brand  and  leverage  the  company’s  existing  assets.    These  candidates  are  then  put  through  an  opportunity  assessment  screen  and  fleshed  

out  through  rapid  prototyping  for  final  prioritization.