2 days ago while at Apple Expo, Rodrigo told me he was bored with my notes on retailing and e-commerce (though he admitted he very much liked my web 3.0 definition, here). No wonder, Rodrigo has an IT techno background and I'm just a poor down-to-earth grocer. So my friend, I'm sorry but you once again will have to bear, or to zap, the following post !
You all know that a bit more than 20 years ago Warren Buffet acquired the famous Nebraska Furniture Mart, at the time just one big single store, a one stop for furniture, electronics and appliances, and Buffet loved the concept and the management, essentially founder Rose Blumkin (picture), a Russian immigrant. The $60M deal was stroke in a famous handshake !
Now the Nebraska Furniture Mart is just a bit more than just more one big store with 3 units, the other ones being in Kansas City, built from scratch in 2003, and in De Moines, Iowa (acquisition) in 2000. Units are all around 700,000 Sq Ft, (60,000 Sq M). It's around 6 times bigger than the average Ikea store !
While there are much larger national and international retailers with hundreds, if not thousands, of stores, with consequently a greater purchasing power, the NFM successfully competes with just 3 big local stores.
And they are some other similar case studies around : for my French audience, esp parisian, let's just mention "Surcouf", now part of PPR, which for a long time used to be one big single massively successful store in the 12th arrondissement of Paris. And let's also mention the incredible 35,000 Sq Ft B&H photo video store in New York City that I mentioned yesterday as they have a small booth at Apple Expo 2006.
Back to the US, CNN was recently pointing on 2 other examples in the Chicago area : Sam's Wines & Spirits, a 33.000 Sq Ft store with $70M sales, and Abt Electronics, a 360,000 Sq Ft consumer electronics unit with $300M sales (which also operates a $60M e-commerce website).
Both have to compete with powerful and larger chains, be it CostCo, Best Buy, Circuit City, etc.
And it works well ! How come ? Well guys, this is pure logic if not mechanics ! This is the nitty gritty of retailing, in fact is a pretty easy and clear model to grasp, unlike web 2.0 models !
On the one hand there's the gross margin, which is a function of your global size and your bargaining power. The bigger you are, the more likely you are to get lower purchasing costs. But if you now include logistics, then the picture may change significantly. As a matter of fact, shipping to dozens of stores in a given area is significantly more expensive than to one single big store. And the more bulky the items are, the higher the logistics costs. Consequently, even if a big single retailer is at a small cost disadvantage vs big national chains, it may partly or totally compensates with lower logistics costs.
Then there are the fixed operating costs. To drive them down, you must increase throughput and conversion rate (e-commerce hasn't really invented anything here). Those are function of the attractivity of the commercial proposition which for any retailer, including e-commerce, is based on 3 elements : choice, price and service. The more attractive those 3 elements are, the farther away people will come from, and the bigger the throughput. I remember that 10 years ago (when there was a single unit), Surcouf was attracting customers from 100 kilometers around.
On top of the above economic parameters, those big unique stores put a very strong focus on having exceptionally knowledgeable and customer dedicated staff. And I can tell you, it's easier to get and supervise that quality of staff on one place than on 500 locations ! People recruiting, training and management is one of the key hurdle in expanding a retail chain. It is only because they have a specific "employee training and empowerment" drive and model that the best retailers succeed, but it's really not an easy task.
So, to cut a long story short, a big single local retailer is likely to get a gross margin more on less on par with much bigger national chains, therefore low prices as well, and its super large concept size enables it to offer a wide choice, further enhanced by great employees, and all of that will in turn drive mass of people to the store, therefore setting a decent level of profitability. It's simple retail mechanics.
Warren Buffet quickly grasped that when he shaked hand with Ms Blumkin !
Of course this works with 2 proviso, hardly difficult to understand : on the one hand the targeted population must be sufficient : retailers do that every day : they take the radius of attrativity of a store (depends of its size and concept) and calculate the population size within, then apply a % of penetration. On the other hand, the larger space must be smartly utilized to extend product lines and categories. The larger choice must find an echo by customers. No benefit in expanding space for the sake of space !
And there's a retail law I shall give : the bigger the store, the higher the square foot revenue ! It simply works in every retail segments. It's no magic, it's mechanics !
From these lessons from the brick & mortar world, one could easily derive e-commerce principles. I once heard a web 2.0 executive saying that "internet is such a specific environement". For sure, but how about the specificity of commerce ? Is that such a widespread skill to deeply feel what commerce and e-commerce is all about ?
Sure, in e-commerce there's both the "e" and the "commerce" sides, but thinking that the "e" must prevail is simply a big mistake which will lead to operational blunders (hiring the wrong people, setting up the wrong priorities, allocating money in the wrong directions, etc). My conviction is that people from the retail industry are probably those best placed to understand the e-commerce nitty gritty and drive the business most successfully, unless the model is evolves towards a web 2.0 non transactional one.
You may for example move the company I founded 7 years ago, Photoways.com, a fantastic place to buy great innovative photo products, into a big community sharing website (ie Flick or YouTube), but this is no more the same model !
However, the truth is that it's the "e-commerce" itself as a whole which is very specific, at the cross between web technologies and web marketing, traditional commerce skills and mindset, and also traditional mail-order business. An e-commerce dreamteam should be composed of people from those different origins but I wouldn't put the "e" sets the directions of the business !
"I'm just a poor down-to-earth grocer"
that's what we love :-)
Posted by: gandon françois albert | September 14, 2006 at 09:01 AM
Michel, you wrote: "And there's a retail law I shall give : the bigger the store, the higher the square foot revenue ! It simply works in every retail segments. It's no magic, it's mechanics !".
I find this rule very interesting and had never actually thought about it. However, I don't understand the underlying mechanics. Could you please elaborate a little bit on the system? Many thanks in advance.
Posted by: Jeremy Fain | September 14, 2006 at 12:07 PM
Sure Jeremy, it stroke me as well when I was a young consultant at Bain & Co, working on retail issues.
But thinking it over, it makes sense :
The bigger you are, the more choice you offer, the better prices you offer, the more possibilities you have to advertise, therefore a higher throughput and higher square foot revenues...
As for the data itself, I don't have them at hand, but once a year you have "panorama de la distribution" from "Point de Vente" magazine. It gives sales and square foot revenue as this is a key indicator in the retail business.
It for example gives the square foot revenue for small super market (supérette), supermarket, hypermarket. It works perfectly well.
The law is wonderful.
Posted by: Michel de Guilhermier | September 14, 2006 at 12:23 PM
Many thanks for your explanations Michel. Next step for me is to look for revenue / retail space data and see by myself.
One more question: does the rule apply to the restauration business?
Posted by: Jeremy Fain | September 14, 2006 at 05:38 PM
You're welcome.
Well, re the restaurant business, I don't have any data, but I don't see why it would work ?
Price and product range criteria, linked to size, are irrelevant there !
Posted by: Michel de Guilhermier | September 14, 2006 at 05:41 PM
That's what I thought as well. I'll still look for data when I have time, since results might be counter-intuitive.
Posted by: Jeremy Fain | September 14, 2006 at 06:04 PM
More specifically, the architectural issues alone in the "developing the application" stage are often left to the developer or distributed to architectural teams.
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