The recently retired chief executive of DSG International, John Clare, spoke to a small group in Edinburgh on 5 October 2007. DSG is a leading retailer of electrical goods, primarily in the United Kingdom through stores such as Dixons, Currys and PC World. This article summarises the low-margin nature of the business, the drivers for globalisation and growth in scale, and makes some fascinating observations on the role of physical premises for developing a successful e-commerce (internet retail) model.
Price and Margins
Electronics retailing is characterised by infrequent purchases, with competition primarily on price: Consumers tend to decide to buy a specific product, and have little loyalty to specific retailers. Factors such as availability (“can I take it home from the store now?”) and after-sales support (“what happens when it breaks?”) are still important, but often secondary considerations to price.
Competition on price means low margins: 3-4% margin is typical on goods sold in stores (15-20% gross margin). On some goods margins are lower. A computer might retail at a price that offers a gross margin as low as 6% – not enough to cover the full cost of the sale. Creative sales techniques are required: For example, offer a free printer with the computer, but don’t include the connecting cable, the ink or the paper. Those additional items attract surprisingly generous margins – enough to offset the loses from the original transaction.
The United States market is even more price-centric: Consumers might drive huge distances to save a few cents on a purchase – without apparently considering that the cost and time of the driving may exceed the saving on purchase price. (DSG attempted to enter the US market in the 1980s, but failed. In part due to enthusiasm of Wall Street investors to encourage a competitor to grow a monopoly by continually losing money selling goods below profitable margins: In the long term, the strategy fails, because once a monopoly has been created, raising prices to profitable levels simply causes new competitors to enter the market again.)
Until 10-15 years ago, the advantages of scale in electrical retail were modest: Being part of a branded network of stores does not alter the property costs of owning local stores.
Two factors have made scale increasingly important in electronics retailing, and driven the current trend towards the globalisation of electronics retailing:
- Limited scope for growth in domestic markets: Additional growth beyond a threshold (for example, DSG’s 20% UK market share) in a domestic market becomes increasingly harder and harder to attain – it is simply easier to focus on “foreign” markets.
- “Systems” (supply chain, ordering) have become critical to reducing costs and so creating a competitive advantage. Remember, this is a sector where tiny cost differences can determine business success or failure. These systems are increasingly expensive. Walmart was cited as an example: Their systems are valued at over $1 billion. Eventually Walmart had to expand beyond the US to justify such high levels of investment in its systems.
Large established retailers in mature markets (such as France and Germany) were difficult to compete against. Instead DSG (and other large established retailers) have been focusing on “immature” markets – those still dominated by many small retailers, such as southern and eastern Europe, and China. India is also an attractive market, but lacks developed infrastructure and willingness of government to allow foreign investment in the sector.
E-Commerce and Internet Retail
Internet retailing has grown from around 1% of DSG’s sales in 2002/3, to about 10% in 2007. Competition tends to be smaller or unbranded businesses, competing on price. Consumer trust (in an established brand) and commitment to support give established large retailers an advantage online.
DSG has two distinct internet-based retail operations:
- PIXmania, a “pure play” (internet-only) retailer selling to most of Europe. The decision to acquire this business may be characterised as “hedging one’s bets”: The only acknowledged internet-only success in the EU has been Amazon. It still is not clear whether the Amazon model will transfer to other sectors.
- Existing physical retail brands, given online presences.
The second type of operation was initially similar to the first, until the introduction of a facility that allowed customers placing online orders to collect the goods from their local store:
The ability to order online and collect goods from your local store tripled online conversion rates, from 1-2% to 4%.
Customers ordering online typically collect goods outside of working hours (before 09:00 and during the evening). These are evidently people that wish to shop online rather than in a store, but want their goods delivered so fast they are prepared to travel to the store to collect them.
Conversion rates may still appear low compared to those at stores (around 30%). But the proportion of customers who are simply researching products, without the intention of buying immediately, is not known.
Improved conversion rates aren’t the only advantage for the retailer. The gross [I assume] margin on internet sales is only about 6%, with a tendency for orders to be for single items (for example, one low-margin computer, with no chance to sell money-making printer ink or paper). However, when the customer arrives at the store to collect their order, they are successfully being sold half (by value) as much again in other items. That raises the overall margin on “internet with collect-from-store” sales to 13-14%.
The e-commerce model is still being developed. Cost reductions are likely as software becomes more standardised, although retailers are simultaneously moving to higher quality, more complex systems, so cost trends are mixed. Currently internet retail operations are about 6% cheaper than physical retail operations.
That means that the “internet with collect-from-store” model has very similar overall margins to the store-only model – and both offer significantly higher margins than the internet-only model.
It is easy to overlook the constraints of slow physical delivery networks when discussing selling goods over the internet. DSG’s “internet with collect-from-store” model gives some rather compelling evidence for just how important rapid delivery is.