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Tesco has
announced a third-party marketplace within the Tesco Direct web site. It’s a
good idea but the implementation betrays all the signs of a rush job.
When
Amazon founder and CEO Jeff Bezos penned his annual letter “to our shareowners”
for 2011, he devoted most of the first half to comments from satisfied
third-party sellers and Kindle self-publishers. He said that fulfilment by
Amazon (FBA) had shipped tens of millions of items on behalf of sellers in the
last quarter of 2011. Sellers could use Amazon’s global fulfilment centre
network like a giant computer peripheral and when they used FBA, their items
became eligible for Amazon Prime, for Super Saver Shipping, and for Amazon
returns processing and customer service.
Amazon
has ridden the wave of surfing and shopping to become the leviathan of the
internet that it is today and carried with it a raft of third-party sellers who
floated on its success. According to some estimates, the Amazon Marketplace
accounts currently for up to 40% of the company’s online sales.
Tesco plc
released its preliminary results for the full financial year on Wednesday and
promised more localisation, more personalisation and more online selling in the
year to come. Tesco CEO Philip Clarke announced a £150 million investment in
internet operations, which will include opening the Tesco Direct marketplace to
third-party sellers.
Both he
and Tesco CFO Laurie McIlwee set out a clear and coherent strategy for the
“bricks and mortar” element of the company’s global operation, which includes a
move to smaller-format stores in many parts of the world. It also embraces an
increase in the number of Tesco stores that are “dot-com” only, which pick and
pack without the inconvenience of customers, and have proved successful despite
teething troubles at Tesco’s Enfield dot.com centre that opened recently.
Clarke
said, “We know what the issues are and we know how to fix them,” but he and his
CFO were less sure-footed in respect to online operations. An examination of
the revamped Tesco Direct website reveals all the hallmarks of rushed
implementation, probably to meet the deadline of the financial year-end. Just
one third-party seller was listed on Wednesday. By the end of the week,
precisely three companies had signed up: online plants and garden specialist
Crocus, electronics retailer Maplin and niche gizmo supplier, Purely Gadgets.
The
Amazon model works well and it provides an example of how an online retail
marketplace should operate. Research by cloud computing specialist Deepfield
Networks shows that one third of all internet users access an Amazon Web
Services (AWS) site on any given day. Bezos has taken the company from online
bookseller to become an integral part of the web with reported net sales in
2011 of $48 billion (£29.9 billion) thanks to his instinct for the way etailing
could and should work. In his wake, a host of “Amazon Associates” small and
large have benefitted from the Amazon Marketplace.
“Without
Amazon handling shipping and customer service, my wife and I would have to be
running to the post office or someplace every day with dozens of packages. With
that part taken care of for us, life is much simpler. This is a terrific
programme and I love it,” says RJF Books & More owner Bob Frank, quoted by
Bezos in the Amazon annual report for 2011.
“Invention
comes in many forms and at many scales. The most radical and transformative of
inventions are often those that empower others to unleash their creativity – to pursue their dreams. That’s a big part of what’s going on with Amazon Web Services,
Fulfilment by Amazon, and Kindle Direct Publishing,” Bezos told shareowners.
At
the Tesco analyst briefing on April 18, the company announced preliminary group
sales of £72 billion – up 7.4%
on the previous year. McIlwee told the gathering, “The orientation towards electrical was too high, which depresses the
gross margin of that business. We have re-launched the Tesco Direct web site to
make it far more functional and far easier to use from a mobile perspective. We
finished 2011 with 38,000 SKUs and by Christmas of this year we will be up to
200,000 SKUs. Some of that will come from marketplace; a lot of it from our own
ranges going online.”
This was
not the clear vision of the future as expounded by Bezos, more a stock-keeping
statement. McIlwee went on to acknowledge that the company has not exploited
one of Tesco’s most valuable assets: the distribution network that already is
in place. He said, “We deliver to 2,400 stores around the UK every day. That’s
already a baked-in cost and we are going to leverage that system. It has
surprised us how many customers want to pick up from their local store. At the
moment, there are 770 Click & Collect stores and we will double that by
Christmas. This gives us 80% coverage of the UK within a five-minute drive time
and what we currently pay to a third-party operator will be leveraged off our
own cost base.”
It is a
cogent argument but although customers who buy from third-party suppliers will
receive Clubcard points, the free Click & Collect service does not apply to
products bought from sellers in the marketplace. This seems to exclude one of
the primary advantages of being a seller on Tesco Direct. Why would anyone
choose to shop through Tesco Direct when they can use the excellent website
that Crocus offers? Crocus must see some potential for incremental sales but
surely the benefits come from fulfilment by Tesco, as McIlwee himself pointed
out.
In
contrast, the Amazon marketplace offers sellers a simple choice. “Upload your
product inventory – Customers
buy your products: Amazon helps customers make quick, easy and worry-free
purchases – Ship products to
customers yourself or let Amazon fulfil for you – Get paid: Amazon deposits funds into your bank.” What could be easier? And Amazon
marketplace customers in the UK earn Nectar points that can be spent
immediately at the checkout in Sainsbury’s. You can’t do that
with a Clubcard!
Tesco
needs to take a much closer look at the operation of the Tesco Direct online
service, the launch of which should have been delayed until more sellers had
been persuaded to sign up.
Clarke
said, “We have to increase our focus on the long-term strategic objective of
ensuring that the business remains well-positioned for the opportunities and
challenges of the internet. The pace of change has noticeably quickened in both
food and non-food. That is why it is right to take a new approach to allocating
capital, which fits the future. We must keep a clear focus on the strategic
opportunity of the internet for a business with our scale, our reach and our
capabilities. By 2020, every person under the age of 21 on the planet will have
been born in the digital age. It is already changing the way that they shop.”
He
pointed out that everyone in the room could use a smartphone to order and pay
for non-food item now and collect it from a Tesco Express store after 3 p.m.
the following day for no charge. “The challenge for everyone is making money in
non-food online. Our online businesses grew sales last year to over £2.8
billion and increased their profits, despite a strong development-cost
headwind,” he said.
The
problem for Tesco is that you cannot dip just a toe in the water when you build
an online marketplace. Clarke’s “phased introduction” must have a “big bang
moment” to capture the attention of the audience. Amazon customers know they
can take their pick from among thousands of vendors and still have the security
and assurance of ordering from the Amazon web site.
Amazon
gives sellers the option to supply direct or use the resources of FBA. If Tesco
Direct marketplace is to succeed, management must promise more than an intent
to “push forward with a clicks and bricks strategy”. Tesco’s online marketplace
has to reach critical mass in order to be a success and to achieve this they
must extend clicks and bricks to all marketplace vendors wanting to exploit the
benefits.
McIlwee
told analysts, “We don’t need to chase the future, we need to focus on what we
have.” The £150 million he has earmarked for online development sounds like a
lot of money but it must cover all Tesco ventures into the connected world.
Investment this year would buy Tesco Direct the place it seeks. Timidity,
fuelled by uncertainty, will allow competitors to fill the vacuum and lead to
the long-term decline of the business.
Clarke
and McIlwee should aim to attract and hold on to the widest possible range of
marketplace vendors and take their lead from Jeff Bezos, a man who knows about
these things. He said, “Even well-meaning gatekeepers slow innovation.
When a
platform is self-service, even the improbable ideas can get tried because
there’s no expert gatekeeper ready to say ‘That will never work!’”
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