April 23, 2007
Non-Foods Going Up and Online
By George Anderson
Non-foods are going online. That’s the forecast of Forrester Research, which projects that an increasingly large percentage of sales in health and beauty care and other non-foods categories will migrate to e-tail between now and 2011.
Forrester’s US eCommerce: Five-Year Forecast and Data Overview, published last October, points to over-the-counter (OTC) medicines and personal care products, cosmetics/fragrances, pet supplies, flowers and greeting cards that will increase current level sales by two-times or more by 2011.
OTC medicines and personal care items, as defined by Forrester, generated $1.3 billion in online sales in 2006. By the end of 2011, that number is expected to climb to $3.3 billion or 10 percent of total category sales.
Based on Forrester’s numbers, it appears as though operators of food, drug and mass stores will need to develop a robust multi-channel approach to non-food sales if they are to avoid being picked off in a number of key categories.
By the end of 2011, for example, 14 percent of the dollars consumers spend on cosmetics and fragrances will be done online. Flowers and greeting cards (19 percent), toys and video games (30 percent), baby products (30 percent), office supplies (16 percent), and pet supplies (five percent) are other categories that consumers will increasingly go online to research and buy.
Consumers making these purchases fit a profile familiar to most retailers. They tend to be more affluent, educated and technically proficient. They tend to be more convenience than price driven.
Interestingly, these consumers see themselves as “being loyal to certain retailers,” opening up opportunities for merchants, according to Sucharita Mulpuru, senior analyst for retail at Forrester.
“As retailers leverage loyalty programs and credit card data to understand which consumers are most loyal to them, the online channel – as well as all other channels – will benefit from pushing appropriate marketing messages to companies’ best consumers,” Ms. Mulpuru wrote in the report.
Discussion Questions: If correct, what will the Forrester Research projections mean for purely brick and mortar retailers competing in non-foods in the year 2011? What actions does it suggest need to be taken now?
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Retailers whose gross margin is above 40% of the selling price and whose unit retails are above $30 should consider e-commerce very carefully and probably do some testing, if they’re not already on the internet. Fragrances and higher-end cosmetics fit those requirements, for example.
It really helps if the brick and mortar locations routinely collect their customers’ names and addresses (loyalty cards and store-name credit cards.) The biggest obstacle to profitable e-commerce: attracting customers to your site at a reasonable cost. The second biggest obstacle: it costs just as much to store, pick, and pack a $5 item as a $50 item.
Very few e-commerce businesses can attract paying customers for less than $10 each. E-commerce businesses often have trouble paying less than $1 to $2 to store, pick, and pack an item. So if a customer buys 3 items worth $8 each, and the gross margin is 40%, just the 2 overhead items listed above could cost $13 and the gross margin is only $9.60. If there’s a free freight promotion, that could add another $5 to the overhead.
Before the internet, many retailers tried catalog selling, in addition to their brick and mortar locations. Making money via the catalogs wasn’t easy. Very few brick and mortar retailers could make their catalogs pay unless they were subsidized by co-op advertising allowances that could’ve been better used in other media. The internet has similar economics to the mail order business of yore. It looks easy, it seems like a natural, there are all sorts of “brand building” rationales, and it’s customer-driven. But it often becomes just a sinkhole for money.
The reverse is also true. Once upon a time The Sharper Image was a profitable catalog retailer. Then they opened stores and profits plummeted. Sometimes it’s good business to stick to your channel.
It’s important for supermarkets, in particular, to understand that online OTC sales are being captured by their drugstore competitors across the road. CVS, Walgreens and Rite Aid have been online and selling everyday HBC items for quite some time now.
Forrester’s figures from 2006, that OTC medicines and personal care items generated $1.3 billion in online sales, and the forecast that by the end of 2011, that number is expected to climb to $3.3 billion or 10 percent of total category sales, are neither surprising nor overstated. At present, some of the traditional food, drug, and mass, retailers are running two separate businesses, in-store, and online. The trend will be to see these two entities come together in the near future, more in the same way as current trends in office supply stores where promotions and distribution are often mixed and matched.
All retailers at some point in time will need an online presence. Whether it is for eCommerce or order and pick-up in-store or for service. There is no one answer that fits all.
Online augments brick and mortar. Today’s consumer depends on the Internet for information and convenience. Brick and mortar stores need to offer something extra to differentiate themselves from online so as to keep customers coming into their stores.
Why do consumers move to online purchasing? Convenience, lower price, or both. What do retail outlets need to do to keep consumers? Give them a reason to use them. Provide more convenience, lower prices, and/or a good reason to use that store.
Take Walgreens as an example: renewing prescriptions online is extremely convenient and you can pick them up via a drive-through window without going into the store. However, with weekly sales, consumers have reasons for going into the store. In addition, there are outlets everywhere so that if you travel and forget a prescription you can get it filled anywhere because ALL the stores have access to the same database. Other retailers need to create reasons for consumers to continue to use their stores.
I don’t think pure brick-and-mortar stores will ever completely lose OTC sales opportunities to multi-channel alternatives. However, it is logical that a shift to online selling in this category will slowly increase in velocity.
To counter this trend, brick-and-mortar-only stores must keep thinking about how they differentiate themselves against not only other B&M, but multi-channel stores as well. There must be a compelling reason for consumers to bypass at-home shopping, such as a unique and compelling store experience.
Words of wisdom from Mark. However, I will add this: customer loyalty is the #1 factor in long-term retailer profitability. To keep customers loyal you must be customer-centric, which means knowing and providing what they need, want, demand and expect. And consumers now expect, demand and utilize multiple channels interchangeably. Because multi-channel customers are most profitable, industry-leading retailers are learning how to “right-channel,” delivering their offerings to each of their customers using the channel most preferred by the customer, and most suitable to the retailer’s profitability.
Of course you must not let your web site become a money sink, but you must leverage your web presence to drive traffic.
The forecasts are definitely in line with data trends – between 6% to 8% of all retail sales are currently conducted through non-store channels according to Census Bureau data. It is a large number for store-based retailers to sit up and take notice and start thinking seriously about a multi-channel strategy.
Not every category and not all consumer purchases in these categories will go online though, in fact I would expect the growth trend to plateau at some point, since a large number of purchases in these categories are convenience based (with the exception of categories like medicines and pet supplies) and a large number of consumers may not have the patience or discipline to go online and stock-up before supplies run out, at which point it would be more convenient to go to a store and buy rather than wait for an online purchase to be delivered. This obviously doesn’t apply to multi-channel retailers that allow store pick-ups for online purchases.
The past few years have been shaping consumer response to the proliferation of multiple channels, especially online, and when the dust settles, we will see that bricks-and-mortar stores are still standing, albeit with radically different business models. Until then it will do well for all retailers to have their ears to the ground, for no one can be certain which direction the online stampede’s coming from.
Anything that doesn’t require touching is fair game for an internet sale and normally, OTC meds and health and beauty are not an impulse buy, nor do they require the “instant gratification” of a buy on line, pick up in store purchase.
For example, I used to buy my skin creams, etc. from department stores, but I don’t always have time to go to the mall anymore (which, I suppose is the subject of another blog piece). Since I work out of my home, taking delivery at home is much easier. I can tell when I’m running out, so I can order in advance.
With all respect to Greg, I don’t think there’s an in-store experience that would change my mind on this one. I know what I want, and just need it delivered. It’s all about convenience. As more and more workers telecommute, the likelihood of requesting delivery of these types of products will rise.
E-tail is simply becoming more mature as a channel of distribution for non-foods. Consumers are now more accepting and trusting of the online buying process. They recognize that, depending on the class of goods, it can offer lower prices, more convenience, and often, a broader assortment of choices.
Traditional retailers need to recognize their strengths and weaknesses relative to competing in these categories against e-tail just as they do other retail formats. Ultimately, their success will be determined by their position in the “shopper-space.”
Though clearly internet sales will continue to grow and new uses will evolve, the location strategy of Walgreens and CVS has made them so convenient to so much of the population that they will continue to grow in these categories between now and 2011 in spite of survey information to the contrary.
Many contributers to RetailWire have noted that brick-and-mortar stores can succeed on the web if the online shopping experience is convenient as well as consistent with what the customer expects in-store. Online retail also allows for breadth of assortment that might not fit inside a store’s four walls.
On the specific issue of non-food categories like HBA and cosmetics, Walgreens comes to mind as a retailer that has had huge success gaining market penetration through their real estate strategy. They overwhelm a typical market with many stores in close proximity to each other, adding to the “convenience factor” and also capturing key sites in growth areas before the competition can develop them. This philosophy– market dominance through saturation–might lend itself to web retailing, where Walgreens does not seem to be the dominant force online that it could become.
One key advantage of online is the ability to get opinion and analysis from people who have actually used the product. Contrast that with the “help” you typically get in a retail store. If you can even find someone who appears knowledgeable about a product, there’s always that doubt as to whether they’d say anything to make a sale. And it’s not necessarily retail’s fault–how can you possibly have staff that really use every product in the store?
But online is different. Lots of people have used nearly everything you find in an online store, and they have no motivation to tell you about it other than the fact that they appreciated the information when they were looking. And there are usually enough opinions that the outliers’ impact is minimized, and a consensus emerges.
Given that kind of consumer-empowering environment, buying online after doing your research comes quite naturally. If the e-tailer does a good job (one merchant that always threw little samples in with an order based on what was ordered comes to mind), they’ll get the repeat business.
Offline retailers can tap into this space as well, and need to better integrate online and offine shopping. Buy online, pick up offline needs to be the norm, not the exception, for example.
I must be the last of the eternal optimists, as far as top-of-the-line supermarkets are concerned. As I see it, on-line purchasing of nonfood is a much bigger problem for specialty retailers. That’s the disadvantage of specializing…radical changes can hurt more and faster.
Stores with a diversified product mix and handling mostly low-priced specialty nonfood basics–like supermarkets–can accept relatively small sales losses, while watching the big category killers take their lumps and perhaps (hopefully) shut down some of their stores–and perhaps, even yielding some of their former sales to–supermarkets!
Take pet supplies. More and more items being sold on line can sharply reduce traffic to brick and mortar specialty stores like Pets Co. Too bad for them; good for supers.
How about big box retailers specializing in stationery and office supplies, like Staples? On-line purchasing could hurt them badly. Even if they maintain sales by going on-line themselves, eventually they would have to close some of their outlets or build them smaller.
Take much more important categories like HBC and pharmacy. Now HBC sales are very important to supermarkets, but at best they’re 5% of store sales. In drugstores, HBC is double or triple that…so again, on-line hits will hurt drug much more than food. Ditto on Rx.
My problem with supermarkets is that there are so many cluckers out there.(I won’t name them, but we know who they are.) I will name some top operators, and again, we know who they are–H.E.B., Wegmans, Publix, Big Y and Price Choppers, Hy-Vee, Schnucks Markets…They’re going to be OK, because they are selling a diversified product mix in a highly professional manner, with highly motivated employees, etc. Not only are they the cream of the crop, they sell cream, milk, butter, cheese, eggs and yogurt..and also, some pet supples, headache remedies, Bic pens, digital photo printing, meat and potatoes……
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Retailers whose gross margin is above 40% of the selling price and whose unit retails are above $30 should consider e-commerce very carefully and probably do some testing, if they’re not already on the internet. Fragrances and higher-end cosmetics fit those requirements, for example.
It really helps if the brick and mortar locations routinely collect their customers’ names and addresses (loyalty cards and store-name credit cards.) The biggest obstacle to profitable e-commerce: attracting customers to your site at a reasonable cost. The second biggest obstacle: it costs just as much to store, pick, and pack a $5 item as a $50 item.
Very few e-commerce businesses can attract paying customers for less than $10 each. E-commerce businesses often have trouble paying less than $1 to $2 to store, pick, and pack an item. So if a customer buys 3 items worth $8 each, and the gross margin is 40%, just the 2 overhead items listed above could cost $13 and the gross margin is only $9.60. If there’s a free freight promotion, that could add another $5 to the overhead.
Before the internet, many retailers tried catalog selling, in addition to their brick and mortar locations. Making money via the catalogs wasn’t easy. Very few brick and mortar retailers could make their catalogs pay unless they were subsidized by co-op advertising allowances that could’ve been better used in other media. The internet has similar economics to the mail order business of yore. It looks easy, it seems like a natural, there are all sorts of “brand building” rationales, and it’s customer-driven. But it often becomes just a sinkhole for money.
The reverse is also true. Once upon a time The Sharper Image was a profitable catalog retailer. Then they opened stores and profits plummeted. Sometimes it’s good business to stick to your channel.
It’s important for supermarkets, in particular, to understand that online OTC sales are being captured by their drugstore competitors across the road. CVS, Walgreens and Rite Aid have been online and selling everyday HBC items for quite some time now.
Forrester’s figures from 2006, that OTC medicines and personal care items generated $1.3 billion in online sales, and the forecast that by the end of 2011, that number is expected to climb to $3.3 billion or 10 percent of total category sales, are neither surprising nor overstated. At present, some of the traditional food, drug, and mass, retailers are running two separate businesses, in-store, and online. The trend will be to see these two entities come together in the near future, more in the same way as current trends in office supply stores where promotions and distribution are often mixed and matched.
All retailers at some point in time will need an online presence. Whether it is for eCommerce or order and pick-up in-store or for service. There is no one answer that fits all.
Online augments brick and mortar. Today’s consumer depends on the Internet for information and convenience. Brick and mortar stores need to offer something extra to differentiate themselves from online so as to keep customers coming into their stores.
Why do consumers move to online purchasing? Convenience, lower price, or both. What do retail outlets need to do to keep consumers? Give them a reason to use them. Provide more convenience, lower prices, and/or a good reason to use that store.
Take Walgreens as an example: renewing prescriptions online is extremely convenient and you can pick them up via a drive-through window without going into the store. However, with weekly sales, consumers have reasons for going into the store. In addition, there are outlets everywhere so that if you travel and forget a prescription you can get it filled anywhere because ALL the stores have access to the same database. Other retailers need to create reasons for consumers to continue to use their stores.
I don’t think pure brick-and-mortar stores will ever completely lose OTC sales opportunities to multi-channel alternatives. However, it is logical that a shift to online selling in this category will slowly increase in velocity.
To counter this trend, brick-and-mortar-only stores must keep thinking about how they differentiate themselves against not only other B&M, but multi-channel stores as well. There must be a compelling reason for consumers to bypass at-home shopping, such as a unique and compelling store experience.
Words of wisdom from Mark. However, I will add this: customer loyalty is the #1 factor in long-term retailer profitability. To keep customers loyal you must be customer-centric, which means knowing and providing what they need, want, demand and expect. And consumers now expect, demand and utilize multiple channels interchangeably. Because multi-channel customers are most profitable, industry-leading retailers are learning how to “right-channel,” delivering their offerings to each of their customers using the channel most preferred by the customer, and most suitable to the retailer’s profitability.
Of course you must not let your web site become a money sink, but you must leverage your web presence to drive traffic.
The forecasts are definitely in line with data trends – between 6% to 8% of all retail sales are currently conducted through non-store channels according to Census Bureau data. It is a large number for store-based retailers to sit up and take notice and start thinking seriously about a multi-channel strategy.
Not every category and not all consumer purchases in these categories will go online though, in fact I would expect the growth trend to plateau at some point, since a large number of purchases in these categories are convenience based (with the exception of categories like medicines and pet supplies) and a large number of consumers may not have the patience or discipline to go online and stock-up before supplies run out, at which point it would be more convenient to go to a store and buy rather than wait for an online purchase to be delivered. This obviously doesn’t apply to multi-channel retailers that allow store pick-ups for online purchases.
The past few years have been shaping consumer response to the proliferation of multiple channels, especially online, and when the dust settles, we will see that bricks-and-mortar stores are still standing, albeit with radically different business models. Until then it will do well for all retailers to have their ears to the ground, for no one can be certain which direction the online stampede’s coming from.
Anything that doesn’t require touching is fair game for an internet sale and normally, OTC meds and health and beauty are not an impulse buy, nor do they require the “instant gratification” of a buy on line, pick up in store purchase.
For example, I used to buy my skin creams, etc. from department stores, but I don’t always have time to go to the mall anymore (which, I suppose is the subject of another blog piece). Since I work out of my home, taking delivery at home is much easier. I can tell when I’m running out, so I can order in advance.
With all respect to Greg, I don’t think there’s an in-store experience that would change my mind on this one. I know what I want, and just need it delivered. It’s all about convenience. As more and more workers telecommute, the likelihood of requesting delivery of these types of products will rise.
E-tail is simply becoming more mature as a channel of distribution for non-foods. Consumers are now more accepting and trusting of the online buying process. They recognize that, depending on the class of goods, it can offer lower prices, more convenience, and often, a broader assortment of choices.
Traditional retailers need to recognize their strengths and weaknesses relative to competing in these categories against e-tail just as they do other retail formats. Ultimately, their success will be determined by their position in the “shopper-space.”
Though clearly internet sales will continue to grow and new uses will evolve, the location strategy of Walgreens and CVS has made them so convenient to so much of the population that they will continue to grow in these categories between now and 2011 in spite of survey information to the contrary.
Many contributers to RetailWire have noted that brick-and-mortar stores can succeed on the web if the online shopping experience is convenient as well as consistent with what the customer expects in-store. Online retail also allows for breadth of assortment that might not fit inside a store’s four walls.
On the specific issue of non-food categories like HBA and cosmetics, Walgreens comes to mind as a retailer that has had huge success gaining market penetration through their real estate strategy. They overwhelm a typical market with many stores in close proximity to each other, adding to the “convenience factor” and also capturing key sites in growth areas before the competition can develop them. This philosophy– market dominance through saturation–might lend itself to web retailing, where Walgreens does not seem to be the dominant force online that it could become.
One key advantage of online is the ability to get opinion and analysis from people who have actually used the product. Contrast that with the “help” you typically get in a retail store. If you can even find someone who appears knowledgeable about a product, there’s always that doubt as to whether they’d say anything to make a sale. And it’s not necessarily retail’s fault–how can you possibly have staff that really use every product in the store?
But online is different. Lots of people have used nearly everything you find in an online store, and they have no motivation to tell you about it other than the fact that they appreciated the information when they were looking. And there are usually enough opinions that the outliers’ impact is minimized, and a consensus emerges.
Given that kind of consumer-empowering environment, buying online after doing your research comes quite naturally. If the e-tailer does a good job (one merchant that always threw little samples in with an order based on what was ordered comes to mind), they’ll get the repeat business.
Offline retailers can tap into this space as well, and need to better integrate online and offine shopping. Buy online, pick up offline needs to be the norm, not the exception, for example.
I must be the last of the eternal optimists, as far as top-of-the-line supermarkets are concerned. As I see it, on-line purchasing of nonfood is a much bigger problem for specialty retailers. That’s the disadvantage of specializing…radical changes can hurt more and faster.
Stores with a diversified product mix and handling mostly low-priced specialty nonfood basics–like supermarkets–can accept relatively small sales losses, while watching the big category killers take their lumps and perhaps (hopefully) shut down some of their stores–and perhaps, even yielding some of their former sales to–supermarkets!
Take pet supplies. More and more items being sold on line can sharply reduce traffic to brick and mortar specialty stores like Pets Co. Too bad for them; good for supers.
How about big box retailers specializing in stationery and office supplies, like Staples? On-line purchasing could hurt them badly. Even if they maintain sales by going on-line themselves, eventually they would have to close some of their outlets or build them smaller.
Take much more important categories like HBC and pharmacy. Now HBC sales are very important to supermarkets, but at best they’re 5% of store sales. In drugstores, HBC is double or triple that…so again, on-line hits will hurt drug much more than food. Ditto on Rx.
My problem with supermarkets is that there are so many cluckers out there.(I won’t name them, but we know who they are.) I will name some top operators, and again, we know who they are–H.E.B., Wegmans, Publix, Big Y and Price Choppers, Hy-Vee, Schnucks Markets…They’re going to be OK, because they are selling a diversified product mix in a highly professional manner, with highly motivated employees, etc. Not only are they the cream of the crop, they sell cream, milk, butter, cheese, eggs and yogurt..and also, some pet supples, headache remedies, Bic pens, digital photo printing, meat and potatoes……