Online to offline
AFTER years of struggling, online retail is finally starting to catch on in Australia, but some of the country's most successful digital entrepreneurs have come up with an unusual expansion plan – bricks and mortar retailing.
While these online retailing gurus including Naomi Simson of RedBalloon, Andrew Cooper of DStore and Tony Nash of Booktopia remain staunch-defenders of everything digital, they have began developing hybrid online-offline strategy to take their brands into new markets.
This isn't a desperate grab for more revenue. Instead, these multi-million dollar businesses are searching for ways to expand their reach, and are convinced moving offline is the best way to do it.
Cooper is planning to open a chain of shops in order to make the most of the masses of foot traffic passing through shopping centres every day.
Tony Nash will soon open vending machines in airports and rail stations in order to expand his company's brand, while online "experience" retailer RedBalloon will soon offer packages with catalogues and gift cards in department stores.
Of course, not every online retailer is convinced of the strategy. DealsDirect chief executive Paul Greenberg and Catch of the Day chief Gabby Leibovich say moving offline would be a step in the wrong direction.
But that won't deter the online-to-offline pioneers. Make no mistake, they're coming to a shopping centre near you.
Who's doing it?
Online retailing in Australia isn't anywhere close to being the dominant force it is overseas. A range of recent reports indicate the majority of online visitors only use websites for product research – then they go offline to buy.
It's something the bigger retailers, including Harvey Norman and JB Hi-Fi chiefs Gerry Harvey and Richard Uechtritz, have been saying for some time. Both companies are among the most popular online retailers, but the pair say they won't pour too much money into the online offering because it isn't providing a good enough return.
Brian Walker, chief executive of Retail Doctor, says online companies are realising that operating in the digital space isn't providing them with everything they need, and a hybrid approach will deliver the best result.
"This is certainly a growing trend, without a doubt, because these companies are recognising the need to be what we call "multi-channel" retailers. They need to sell their product at all the various consumer touch points."
Dstore founder and chief executive Andrew Cooper is planning the acquisition of a number of fashion-based stores, simply so he can expand the brand to as many people as possible.
"These stores will actually be fashion-based, but we are going to maintain that store's brand and sometimes have a "Dstore Company" tag. Sometimes rebranding them altogether would be counterproductive."
"This is really driven by the consumer. We think customers form relationships with brands, and at the moment we have customers who have a relationship with us but we aren't servicing them to the best of our ability without having an offline channel."
Online bookseller Booktopia, which is currently turning over about $7.5 million, intends to sell merchandise through vending machines placed in airports, shopping centres and train stations. Chief executive Tony Nash says the concept will popularise the digital offering.
"Vending machines are an interesting concept, but the more interesting question is, how do you move through being a $10 million online business to being an $80 million business without using things like Google AdWords and optimising your website? I'm enjoying that challenge."
RedBalloon, headed up by Naomi Simson, is also expanding into shopping centres by offering gift cards and, most recently, with gift boxes containing a card and a catalogue of "experiences" to choose from. Marketing managing Kristie Buchanan says this move has been made to deliberately market the company to an entirely new audience.
"We know that the only way that we achieve our goals is to make sure we are wherever gift decisions are made. By answering the customer's needs, it obviously gives us an opportunity to tap into an incremental revenue stream. It makes strategic and financial sense for us."
"The offline world opens up new opportunities in terms of giving people a more tangible gift offering. Our research confirms how much tangibility of a gift is often important for gift givers."
But the trend isn't just constrained to Australian retailers. Just a few years ago computer manufacturer Dell was offering one of the most efficient and cleanly-designed online retail shopfronts in existence, with users able to customise and order laptops and computers.
Now, the company has branded kiosks in shopping centres and department stores, and customers are able to get a deal on a Dell in almost any major electronics shopping destination.
Why are they doing it?
Moving offline isn't admitting defeat but is instead just another way of gaining revenue, these companies say.
Just as an offline department store moves online to appeal to convenience, these businesses are moving offline to get their brand out in the open and increase sales. Having a physical presence with a customer service point solidifies the actual existence of the brand in customers' minds, Walker says.
"Our view is that online doesn't replace offline," Cooper says. "We're all for competition for the retail dollar, and one way we do that is by opening up offline stores in the same methodology that would see us go from offline to online."
"Having the convenience of the online channel is great, but occasionally offline is more convenient for people, especially if they have a shorter buying window. The catchphrase here is multi-channel retailing, and it's these type of retailers that are getting the most of the market."
Walker also says moving into offline magnifies the probability of online purchases. If a customer sees a brand on a street front, they will recall that brand more easily if they see it more often and the two channels will feed into each other.
"This type of move is really about being available to consumers 24/7 and putting your brand out in physical locations so people will recognise you are a multichannel vendor, and are covering all your bases."
Tony Nash says he could continue to operate Booktopia without moving online, and could increase the current $7.5 million revenue by just marketing with digital advertising, but maintains putting a brand in front of someone's face will benefit both off-and-online sales.
"I think that for all businesses, whether you are offline or online, it really comes down to what your intentions are for the business and what you hope to achieve."
"Are you looking for an exit to your business, or want to take it all the way? In the end, this really just comes down to what you see as the best opportunity for your business to grow, and it doesn't matter if it was offline or online."
Buchanan says RedBalloon's move is definitely about. While she says the company is able to continue expanding on the internet, it would be ignorant to ignore the opportunities that can be harvested by using both the offline and online channels – each must use the other.
"We launched the gift cards in 2007, towards the end of the year, and that was our only extension into the offline world until recently. We decided there is a bigger opportunity here, and it's all about taking advantage of the tangibility of the offline world. We are looking for the next big growth opportunity."
"The biggest difference between online and offline is touch. The offline world opens up new opportunities in terms of giving people a more tangible gift offering."
How do I do it?
It's easy to start a website when you've already been selling in a bricks and mortar environment, as most of the retailing infrastructure is already in place.
But experts say moving from online to offline isn't for everyone, and those that do embark in a real-world strategy must tailor their products appropriately.
Buchanan says businesses must have the right people, especially those who know the retail environment well. Recruitment could be necessary, along with an audit on the business to determine the proposed financial gain and how exactly the product will work.
"Offline to online is less risk, but this is much, much riskier. Understand the critical importance of stock management, logistics and merchandising. Maintain brand consistency. Make sure you have the same brand voice in the offline world that you have online."
"It can be very expensive, and also if you're going into using other retailers, if you're going into another retailer or setting up your own offline outlet, its expensive and these retailers have massive cost pressures and they require quite larger margins and there have been hefty negotiations to ensure its financially sustainable."
Cooper says one of the major factors required in a move to offline retail is experience.
"The industry is cut-throat, companies die every day and if you're going to survive you need someone who is able to judge the market and determine whether something is a good move."
Greenberg agrees, saying Cooper is "one of the pioneers of the industry... and he does have a large amount of experience".
Nash also says businesses must choose their product carefully – don't offer anything offline that you wouldn't be prepared to offer online.
"The real challenge with the offline model, is that these are just two different operations but you really have to be certain about why you are doing it and what you are doing. If offline makes sense, then do that, but you have to be able to market and coordinate your offering well."
Competition is also important to consider. Nash says his company would never move offline if it didn't have a unique strategy, warning a physical bookstore would be too risky a move.
Instead, opening a unique feature to books like a vending machine attracts customers to the brand by offering them something new, which eventually points them to the website.
The problem, Nash says, is that Booktopia doesn't have experience in offline ventures, so the company has had to branch out to consultants who have more experience. "It's all about how best to grow the business, and we think this particular offering is the best way."
Buchanan says RedBalloon carefully selected the gift-box strategy as a complementary service to its online offering. The boxes contain a gift card and a full product catalogue, which Buchanan says gives the customer a richer view of what the company offers, and thus points them to the site.
"We already launched the gift cards, but around Christmas last year we decided there was a bigger opportunity. Gift cards don't really do the offering justice, and we were missing something to communicate effectively to the huge range of offers we were giving out."
"We wanted to be sure we did this in a way that was reasonable. We had to take a number of decisions about what the product represented, what sort of risks we would be willing to take and consider our margins. We had to really test this out carefully."
Why shouldn't I do it?
But while online businesses are comfortable expanding their territory into bricks-and-mortar, those remaining online say moving offline is a backwards step.
To these entrepreneurs, digital retailing requires commitment and moving offline represents a step backwards into an old-fashioned and out-dated business model.
Gabby Leibovich, chief executive of online retailer Catch of the Day, says his company once operated offline but after achieving success with the online format, he and his co-founder brother decided to abandon the physical retail strategy.
"We thought that by combining bricks and mortar it would give the online business a push and more credibility. But while the online business was growing at a fast pace, the retail business was not going anywhere too fast. We decided to close the retail side back in June 2009."
"It was one of the best decisions we made that year. Now we are able to put all our focus on Catch of the Day and keep growing the market "sideways" like we just did by launching a New Zealand site and similar offers."
Walker says moving offline is often incredibly expensive, more expensive than setting up a website, and businesses must ensure what they are doing has been tested so they do not run into more costs than they expected.
"You're typically investing in a lease, physical settings and you're pouring a lot of capital into the asset. A lot of these businesses are having to create a physical brand, when they've only ever operated online before, and it costs money."
Greenberg says his company will never move offline and that it would be counter-intuitive to move to a more expensive, less dominant and business model.
"The key thing here is that offline retail, and the cost of setting up offline retail, is an incredibly expensive model. And who has to pay that expense? Ultimately, it's the customer. We are a no-frills, no-pills solution and we're just trying to sell our products for less, not for more."
"I think we have a terrific business model. It isn't perfect, but it's continuously improving, and why would we dip into the world of offline retail when we know the cost base is going to go up?"
Buchanan also says businesses must carefully consider whether their model is appropriate for the online format.
"Some businesses work extremely well purely as an online business, like auction sites... but this model wouldn't work nearly as well in the offline world. The margins of the business also just wouldn't support it."
"On the other hand, some business models, like furniture retailing, could pose challenges in online retailing, especially with regards to logistics sophistication and costs, not to mention a likely lack of understanding of online marketing."
The multi-channel trend
While a few digital natives have set their sights online and aren't turning back, for some entrepreneurs moving into bricks-and-mortar represents an expansion of their business into new and exciting territory.
Buchanan says moving into shopping centres represents a product that can result in a deeper relationship to the customer, which keeps them coming back for more.
"We wanted to be closer to the customer experience, to talk with them in person, learn from them and listen to them. So far customers are really enjoying the visibility the retail locations have provided. It extends the online experience."
Nash says it would be ignorant not to at least consider operating in separate channels, and resisting the opportunity will hold your business back.
"Think about travel agents – if you are online only, is that really the best thing for you? There are pros and cons in that, and there are pros and cons in this strategy too. But if someone dropped $30 million in our lap and we could do anything, I would do a mixture of both channels."