Michael FoxThursday, 03 February 2011 13:35
Michael Fox: Online vs Traditional Retail, Cost Savings - Mentors
Exactly what overheads will I save with my online retail shop compared to a bricks and mortar store?
I’m planning to launch an accessories retail shop. I will almost certainly do this online, but I wanted to know exactly what overheads I’ll save compared to a bricks and mortar store?
It's a great question. It's certainly much cheaper to launch an online retail store compared with a physical store, and there are significant cost savings to be made. That said, there are also some significant disadvantages to operating an online only store. So it's worth looking at both the pros and cons.
The major costs you won't incur include:
The annual rent you'll pay can vary significantly depending on your target customer and the type of store you're looking to open.
We were recently looking at Oxford St. in Paddington, Sydney as a potential location for a Shoes of Prey retail store and rents there can get as high as $150,000 per year for a 70m2 store.
A good location in the major mall of a capital city will be much higher than that, as will a store in a premium Westfield centre.
Australia has some of the highest retail rents in the world, with Sydney ranking second highest in the world for retail rents and Brisbane and Melbourne are not far behind. By operating online you'll avoid paying rent which is a major cost saving.
Unless by some incredible coincidence the previous tenant had fit out the store in a way that exactly suits your brand, you're going to need to spend some money to fit out a physical store if you lease one.
We received a quote for moving some walls, redoing a floor, painting, fitting out an alarm system, replacing the air-conditioning and some other works to a store we were looking at in Paddington.
We were quoted $120,000. That didn't include shelving, fixtures and fittings which would have cost extra on top of this price. To keep a store fresh it will need to be re-fit out every five years or so and requirements to re-fit out stores are usually written into leases at major shopping centres.
A physical retail store needs to be staffed whenever it's open. If your store is going to operate seven days a week and average 10 hours open per day you're going to need two full-time staff just to keep the doors open, and more if you want to have two or even three people in the store during busy periods.
Depending on the quality of the staff you want to hire, you're looking at least $100,000 a year in staffing costs.
You'll need people to run the customer service for your online retail store, so you're not getting out of this cost completely, but if you launch with email-only customer support as we did, it's much more flexible in terms of staffing.
As you grow and hire staff you can add phone and chat support as we've done at Shoes of Prey, but you can get away with much lower staffing at launch to keep your costs down.
Electricity, insurance, phones and other incidentals
There are a whole range of smaller costs that you'll incur opening a physical retail store. Many of these you'll also incur with an online store but they will generally be lower.
You don't need expensive down lights to light up your store, insurance for a small warehouse is generally much cheaper than a retail store and you can get away with a Skype number instead of a phone line for phone calls.
If you add all that up there are certainly some significant cost savings in opening an online store compared with a physical retail stores.
However, while there are some significant cost savings in opening an online only retail store, there are also some significant disadvantages which need to be weighed up against the benefits.
Building your online store
Like rent, the cost for doing this can vary significantly. To start out you can try an off the shelf system like Shopify that makes it really simple to put together a high quality online store without a great deal of technical knowledge.
Hire a designer to put together the graphics and you potentially have a good online store for under $5,000, plus a percentage of your sales ongoing depending on which Shopify plan you go with.
At the other end of the scale you might want to do something unique and different like we did with Shoes of Prey. One of our co-founders Mike Knapp is an ex-Google software engineer so he built the site in-house, but the value of the time he's put into the site would be worth many $100,000's.
To get to launch would have cost us around $80,000 in Mike's time so that was still cheaper than if we'd launched our business with a physical retail store.
Most online retail businesses will need to warehouse the stock they're selling. The size of the stock will determine how expensive warehousing is going to be for you.
Most online retailers I speak to, us included, used the founders’ living rooms as warehouses when starting out, so the cost here is more your sanity than a physical cost.
As you grow you'll need to look into warehousing. There are third party providers who will manage the warehousing of your stock for you, or at the other end of the scale you can set up a multi-million dollar facility as DealsDirect http://www.dealsdirect.com.au have done in Australia.
If you're selling online you're going to need to ship your goods to customers. You'll need to work with a local company such as Australia Post (which has it's challenges) or a local courier service.
We're a more unique case at Shoes of Prey because our products are mostly made to order. We use DHL to ship our shoes directly from our office in China.
Potentially the biggest variable in opening an online store versus a physical retail store is marketing. I'll break this down into two sub components:
Traffic - A physical retail store in a good location provides great foot traffic and customers to your store. Just by being there you'll hopefully be selling product.
A poorly marketed online store might sit there with very few visitors. If there's nothing to differentiate your online retail store, it can be an uphill battle getting visitors to your website.
That said, if you have a unique proposition you can bring a lot of people into an online retail store. Back in March we had a record day with 197,000 people visiting our site.
Good luck fitting that many people into a physical retail store! More than two thirds of our traffic and 60% of our sales come from people outside Australia. We'd need a massive network of stores to achieve this offline.
Conversion Rate - It varies greatly depending on the product but a good physical retail store should make a sale to around 20% of customers who enter the store.
An average Australian online retail site will sell to 1% of visitors to the site.
Our conversion rate at Shoes of Prey is much less than that. There are a number of reasons for this, it's certainly much easier to visit an online retail store than a physical retail store, but there are also issues around not being able to see and touch a product.
This is a significant issue for us selling women's shoes online as shoes are something most people would ideally like to try on before they buy them.
We try to counter this with great photography and educational videos on our site, but until technologies improve significantly, online retail stores will continue to have much lower conversion rates than their physical counterparts.
There are some significant cost savings in opening an online retail store compared with a physical retail store, but there are also some potential disadvantages as well.
We're clearly strong proponents of online retailing at Shoes of Prey but you need to ensure you have a unique offer and a strong point of difference from your competitors to succeed in the space.
Michael Fox managed Google’s online sales and operations agency team for Australia and New Zealand before moving into entrepreneurship. He's a co-founder of Shoes of Prey, an online retail website which allows women to design their own shoes and Sneaking Duck, which sells fashionable prescription glasses online. He blogs in detail about the process of running Shoes of Prey at his blog www.22michaels.com.
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