Debenhams buys in to multi-channel retail as high street sales slump

Profile picture for user slauchlan By Stuart Lauchlan October 26, 2014
Summary:
In nearly 110 years, UK high street retail giant Debenhams has been through many changes, the latest being its ongoing shift to a multichannel future.

Debenhams origins date back to 1813 when William Debenham invested in the an existing firm which then became Clark & Debenham, until 1851 when Clement Freebody invested and the firm became Debenham & Freebody. By 1950, Debenhams was the largest department store chain in the UK, owning 84 companies and 110 stores.

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But in recent years, in common with so many fashion chains, Debenhams has come under great pressure from the low-cost retailers, such as Primark. Last week the firm reported pre-tax profits of £105.8 million, down a massive 20.6% year on year, on full year sales of £2.3 billion, up only 1.3% on the same time last year.

One relatively bright note was struck by a 17.6% rise in online sales, hitting £430.7 million to account for 15.3% of group sales. Other figures of note:

  • Visits to Debenhams.com few by 15% to 276 million hits.
  • Some 38% of online sales came from mobile devices.
  • Mobile devices accounted for 58% of the visits to the website.
  • Demand for click and collect services grew to 22.3% of all online orders, from 7.4% last year.

So when CEO Michael Sharp talks of the firm being on a journey to a multi-channel future, the conclusion can be reached that the firm is embarking on this late, but making some progress towards its objective which is:

to build a leading international multi-channel brand. Increasing availability and choice through multi-channel is important because we know that multi-channel customers are our most valuable. Focusing on UK retail, our UK stores play a crucial part in our strategy but they need to become more efficient and they need to play a changing role in the multi-channel world.

He adds:

Delivering a flagship online experience is also part of building a more competitive and economic business. Our online offer has to be visually more exciting and engaging. Key deliverables to peak trading included refreshing the Web site, for example, through a new home page and better photography.

Customer pain points have been addressed, including a new checkout process, which is easier to use, and promotes the new delivery options. We’ve also changed our returns and re-phone post process to make things easier and quicker for customers, and we believe this will improve satisfaction and encourage the peak purchases.

Mobile moves

The firm's mobile numbers are seen as highly encouraging sign of progress, accounting for 60% of online visits during 2014. The focus now is on improving the usability of mobile and tablet to make them fat finger friendly. That means responsive web design across platforms, explains Ross Clemmow, Debenhams e-commerce director:

Our mobile smartphone business continues to grow, but it’s a lot more mature. Tablet is very much faster.

What we are doing going forward is to make sure that all front end changes that we make, whether its cosmetic to our home page or the key trading pages on the site render properly to both devices.

Actually, what we find is on tablets, customers browse more and spend more per transaction. So what we’re starting to think about is [what we] do on a smartphone which is 'I just need to function and get through this shopping journey quickly', [which] will be different to what we do on a tablet, which is about trying to put more inspiration in front of customers.

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One thing that Debenhams is famous for is its approach to promotions. A US shopper familiar with the seemingly near permanent 'flash sales' at the likes of Banana Republic might find Sharp's stated concern that there is a perception that the firm is always holding a sale. This is however regarded as an issue and one that has been addressed by removing promotional days from the calendar.

One reason for this is to achieve a better mix between online and offline, argues Sharp:

We’re adapting our approach for promotions for different channels because we know online is inherently more promotional than stores, and in being less promotional we have to ensure our everyday value and pricing is competitive.

The competitive nature of the online retail landscape is bringing its own pressures to bear. Sharp states that Debenhams aim is to provide convenient and cost effective fulfilment with the goal of driving sales, recovering a higher proportion of fulfllment costs and reducing the cost of that fulfilment.

To that end, a number of changes have been made to the firm's online fulfilment process to make it competitive on speed and price. For example, the cut-off time for next day delivery to home has been extended from 2 PM to 10 PM while next day Click & Collect from store is now an option.

This is in its own right may be a positive change, but it's only another step on the journey. Sharp states:

Our objective quite frankly is to get to the point where you could have same day Click & Collect.

We know that this trend towards convenience is only going to grow and we know that we need to improve our offer. There will be no further improvements beyond what we’ve talked about before Christmas but we are working on how this will develop over time and part of that will include later cut-off and part of it will include same day Click & Collect.

Back end squeeze

As for squeezing out online fulfilment costs, well, this too is inevitably a journey, as Sharp admits:

When we benchmarked our online proposition versus best-in-class, what’s quite clear to us is that our cost of fulfillment is too high and we could reduce that by some 30%. Automation is the key to reducing that. Best-in-class is automated and many other retailers have followed that route. So we could reduce cost of fulfillment by 30%.

The other side of the coin is that we do not recover enough of the fulfillment cost by charging for premium delivery options. The big debate is we still offer standard delivery, which is free over £30. I think what would be interesting for us to learn over the course of the next few months is can we wean ourselves off standard delivery although alternatively now that we’ve got the other options, increase the threshold over which free delivery becomes free,.

We got to increase the percentage of recovery of those costs. I believe best in class could be as high as about 80% recovery. Two years ago we were five last year at 10% and this year we’re budgeting around 17%.

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One area for investment to reduce fulfilment costs revolves around back end and supply chain systems. Sharp is candid here:

Currently, our systems across multi-channel and international from a buying, merchandising and range point of view are just not good enough and are not joined up and quite frankly we make it difficult for our teams to plan as effectively as they need to as the business becomes global.

There are other challenges as well:

We currently have a single view of our stockpile, but we don’t have a single stockpile. One of the issues that we’ve got is that we don’t have a single inventory management system but we have two inventory systems, one for online and one for stores. What we want to do is to combine those into one system for April 2016, which will happen in line with our changes to automation. And the combination of those two things should have a material impact on our distribution costs.

The supply chain, which connects our global distribution channels to the sources of our products, needs to be more flexible and scalable, whilst at the same time helping us to improve standards of customer service and reduce costs. Major projects here included distribution center automatization and single warehouse management system along with further extensions to ship direct.

As the business becomes increasingly global and multi-channel, we need to be able to make better informed decisions through proved visibility or performance regardless of where we’re selling our products.

So, a lot do, but progress is being made, insists Sharp, citing the meeting of a number 'done before Christmas' objectives set in April:

All of these have been achieved. We have launched the new delivery options. Our stores have been equipped with the space and the tools to service next day Click & Collect. The distribution centers are more efficient following the introduction of the automated packing machine for online orders.

We have centralized returns, which will improve simplicity and make it faster in terms of recycling stock back into the business and changes to the supply chain include the use of our own fleet to support next day Click & Collect and the restructuring of the international supply chain to get products more quickly to market.

We’ve also improved the visibility of our performance in terms of our view of the customer and our view of the product with a single enterprise data warehouse.

Two years ago Click & Collect represented 7% of online sales. Last year it was 22%. We’re planning that that could go as high as 50% over the course of the next couple of years and therefore we have to put staff in store to manage that along with investing in technology just makes the whole process quicker for customers.

For 2015 and beyond, customers should also expect a more personalized experience with 75% of all email communication personalized, according to marketing director Richard Cristofoli:

That means the content is personalized to either your previous shopping or browsing behavior. We see click through rates increase by 5% and demand rates by 0.5 point when we add personalized emails.

[A] second source of value is now we can email you regarding abandoned baskets and view behavior. They are amongst our highest return emails. Obviously they're controlled, so you're not getting them every five minutes. You get a maximum of one a month, but they're amongst our highest returning emails and we’re running that through peak and again that’s in the plan.

The firm is now able to squeeze more from its direct mail program which historically has only been able to target store card customers. Cristofoli explains:

We’ve been able to drive a better ROI by taking out the worst performing card holders in the direct mail program and replacing them with our best online shoppers and thereby that drives a higher return again from the direct mail program.

Of course the challenge for Debenhams, as for all bricks and mortar chains, is how to balance the impact of online and channel shift to the offline estate. Sharp says:

We measured that about 60% of an online sale is incremental, which clearly means 40% is cannibalizing store sales.

The challenge here is how we get a better return from the million square foot of space in our UK stores, which deliver a lower sales entity than the space around it.

This has led to additional franchises in store from the likes of Costa Coffee and Mothercare, through an ongoing program of modernization to opening new stores in 10 priority markets over the next three years.

Offline isn't going away any time soon it seems for Debenhams.

My take

Debenhams has a long way to go to compete with internet and e-commerce pureplays. Frankly it's started late in the race and is playing a long catch-up game.

That said, it's clear the current executive team are aware of the shortcomings and have a plan to address them. So the real question becomes: is there time?

I hope so. A high street without Debenhams isn't something I care to look forward to.