Retailers swimming in the great blue ocean

Whenever we launch new business models or “new mousetraps”, as management consultants say, we tend to have only a short period of time during which our “newness” has value to shoppers and better margins for the business.

iPhones were followed very effectively by a range of very good competitors, and so too was the iPad. Continuing with management consultant-speak this innovation creates an area of “blue ocean” – low competition and high profit – around the innovators for 12 to 18 months.

Around that time the competition will arrive with similar innovations and price drop. And our own business costs increase, along with promotional and advertising cost increases and our high margin drops.

This week online retailer Amazon announced a profit drop of 73% to $63 million in the quarter, compared with the same quarter 12 months ago on the back of a huge sales revenue increase of 44% to $10.88 billion.

The blue ocean it had enjoyed is starting to turn a little red, because as its marketing costs ramped up, more competitors entered the online retailing market. Not to be confused, there are very few companies on our small planet that are that big and grew that much.

Amazon CEO, Jeff Bezos, highlighted the amazing growth by announcing that September 28 was the biggest order day ever for Kindle, even bigger than previous holiday peak days.

As the new Kindle electronic book reader and Kindle Fire tablet computer were introduced last month, he went on to say that in the three weeks since launch, orders for new Kindles are double those of the previous launch. Based on what has been seen with Kindle Fire pre-orders, Amazon will be increasing capacity and building millions more than planned.

That’s a great growth story, but it is now driven by creating demand, not just supplying demand. It’s being driven by new products, and advertising.

As Amazon moves into the mainstream that other retailers operate in, it has to spend money to create “footfall” into store, or more aptly, to create “screen fall” in its online retailing model to woo online shoppers to their computers, tablets and smartphones.

And there’s more good growth news and bad cost news to come for pure online retailers and traditional retailers with online offerings.

Online research from Shop.org’s Annual eHoliday survey revealed that 68% of retailers expect their company’s online sales to grow by at least 15% in the 2011 gift-giving season.

Similarly, research by the US retail industry body, the National Retail Federation showed that the average shopper plans to do 36% of their holiday shopping online, which is up from 33% last year. So the good news growth story continues.

This increase in sales is being driven by increased marketing spend and improved offers to online shoppers, with free shipping.

The increased marketing spend has been both online and in paper-based communication. According to the National Retail Federation, over a third of online retailers said they had significantly invested in QR codes in offline advertising, such as magazine ads and billboards. Of those who regularly use social media platforms, almost 75% said they had already invested in Facebook, while 40% have invested in Twitter.

With online marketing spend, comes increased technology spend. In the last 12 months, many online retailers have invested in new technologies, data mining, website and service features. Over half said they have significantly invested in mobile-optimised websites and around 20% in tablet device apps.

None of that is cheap. It’s just like doing major store refurbishments for traditional retailers.

Only 12 months ago I was interviewed by journalist Nirosha Methananda from Power Retail, who asked when free shipping would be the norm. At that time, free shipping was the exception. Walmart had only just started trialling it in the US and other online retailers were using it as a short-term promotion.

This holiday season free shipping offers will be the norm, as over 90% of online retailers say they plan to offer it at some point this year, making it a shopper expectation.

And the cost impact? Well, 56% of online retailers say that their budget for free shipping promotions is either somewhat or significantly higher than last year. Therefore margins will shrink, or prices will need to go up.

What we are seeing is a coming together of online and traditional retailing – both in the manner in which each communicates with shoppers and the cost to service them.

Soon all retailers – traditional or online – will be back to swimming in the same ocean.

In his role as CEO of CROSSMARK, Kevin Moore looks at the world of retailing from grocery to pharmacy, bottle shops to car dealers, corner store to department stores. In this insightful blog, Kevin covers retail news, ideas, companies and emerging opportunities in Australia, NZ, the US and Europe. His international career in sales and marketing has seen him responsible for business in over 40 countries, which has earned him grey hair and a wealth of expertise in international retailers and brands. CROSSMARK Asia Pacific is Australasia’s largest provider of retail marketing services, consulting to and servicing some of Australasia’s biggest retailers and manufacturers.