“The state of the art of online retailing is moving very very slowly.”—Seth Godin
If the web is a customer service medium, why is most web customer service so awful? Because online retail has barely even started. Sure, we have Amazon and eBay. But most online grocery shopping and banking services are anachronistic, organisation-centred, and dominated by monolithic bricks and mortar companies. Why isn’t there an Amazon for groceries or an Apple for banking?
(Note: this article focuses on the UK market, because that’s what I know. The principles apply everywhere, but the details and timing will be different.)
Old barriers to entry, weak competition
Banks and supermarkets benefit from barriers to entry which restrict competition. Although these barriers are crumbling, you wouldn’t know it from looking at competing online services, which suffer from weak product ranges, mediocre customer service, and low quality content—creating a poor user experience.
I call it the “take it or leave it” approach to customer service. Right now, they can get away with it, because there’s hardly any competition. Simply offering a way to transact online is enough to keep customers. But that won’t be true for long.
Let’s discuss two traditional barriers to entry: property and limited access to information.
Barrier to entry 1: control of property in prime locations
Supermarkets limit competition in grocery sales by owning strategically important property. [1] They build stores in prime locations. Before the web, the only way to compete was to build another supermarket nearby.
The equivalent in retail banking is branch networks. You know the mantra: a branch on every high street, enabling customers to open accounts, apply for credit, and deposit and withdraw money. Before the web, to set up a competing bank you’d need to invest in a branch network.
But now, using the web, customers can interact with supermarkets and banks without ever entering a shop. At some point in the future, owning property will create a competitive disadvantage, because of the huge costs.
Barrier to entry 2: limited access to information
The business models of supermarkets and banks depend on customers having limited access to information.
First, pricing. Pre-web, supermarket chains would charge higher prices for a given product in stores in wealthy areas, for example. They’d only compete on price with other stores within a given distance. [2] This is already more difficult because most of the supermarkets’ own websites publish prices that are presumably available nationwide. Likewise, in the past the only way to get detailed pricing information for banking services (interest rates, insurance premiums, credit card fees, etc.) was to traipse around the high street, queue up, and request a quotation. Now there are hundreds of price comparison websites that do it for you. The business model assumes that you’ll generally accept pricing as competitive—without really checking—an assumption that’s no longer valid.
The flip-side to pricing is quality: how good is this stuff, and could I find better quality elsewhere? That question is almost impossible to answer standing in a supermarket aisle, but sitting at home with your iPad, it only takes a few taps. The supermarket business model assumes that customers are willing to give up some control over quality in return for the convenience of a single weekly shop. My quality “gluggable” wine may be your cheap plonk—but the supermarket sells a mass-market compromise that we’re both prepared to buy. They’re assuming that neither of us has access to information about alternatives that would suit our needs better. Banks’ one-size-fits-all services follow the same pattern.
Retail branding: better the devil you know
This helps explain why branding is so important to supermarkets and banks. You choose a brand like Tesco or HSBC, and then you trust that brand to provide the products and services you need, at a fair price. This is backed up by advertising campaigns featuring housewives patting their back pockets in supermarket aisles. The message is: it’s too difficult to do your own research, so trust us to get you the products you need at the best prices. The unsavoury subtext is: if you don’t like it, that’s too bad, because the only alternative is another big brand. (Banks’ brand messaging also plays up security: we can afford branch networks and fancy TV ads, so your money’s safe with us.)
The web erodes these barriers to entry
The web erodes both of these barriers to entry. Given the opportunity, some customers will order groceries online, apply for banking services online, or manage their money online. And the near-universal spread of internet access (in the UK) means that customers have access to a huge amount of information about pricing, product quality, and whether they can trust organisations.
Current online retail services are anachronistic
So if that’s all true, why are supermarkets and banks doing just fine? Because nobody’s successfully taken advantage of these changes yet. Current online retail services are anachronistic, organisation-centred, and dominated by the incumbents’ culture.
All the serious online grocery and banking services in the UK are owned by incumbent supermarket and banking groups. Even the “independent” online grocer Ocado is part-owned by Waitrose, a supermarket chain; and online-only banks smile and First Direct are subsidiaries of Cooperative Bank and HSBC. These services take a pre-web retail experience and bolt on online transactions.
The clearest demonstration of this “bolt-on” approach is the way most online grocery orders are fulfilled. Your order gets sent to the nearest bricks and mortar supermarket, where a staff member walks through the store with a trolley, selecting your shopping. It’s as if Amazon sent a personal shopper to your local bookshop, and then drove the books to your house. You can’t miss the parallel with early television, which “followed the format of popular radio at that time”:
“When a new medium borrows from an existing one, some of what it borrows makes sense, but much of the borrowing is thoughtless, “ritual”, and often constrains the new medium. Over time, the new medium develops its own conventions, throwing off existing conventions that don’t make sense.”—A Dao of Web Design by John Allsopp
Let’s assume Ocado and First Direct are market-leading pioneers. What are their innovations? Ocado has direct-to-customer logistics without stores, and First Direct can open accounts online, with no physical bank branch involved. But both have bog standard product ranges, and traditional crappy customer service via faceless call centres or impersonal email. And they’re both dependent on traditional mass media advertising to find customers.
The future of retail: internet-quality customer service
So what’s going to happen next? New entrants will figure out how to provide internet-quality customer service, and they’ll shake up the market. Here are the key elements:
- Product strategy: create a broader, more specific, more personal product range than the incumbents can offer, “long tail” style. For example, sell products you can’t buy in Tesco, and provide a level of detail about their origin, handling, etc., that’s impossible to do in a store.
- Relationship management: redefine customer service. Instead of a faceless voice in a call-centre, imagine an account manager who knows your name and understands your approach to food, or the intricacies of your financial situation.
- Content strategy: kick the dependence on mass media and advertising for telling new customers how awesome your services are. Execute a growth strategy based on quality content, unrivalled user experience, and active community engagement.
I’ll expand on these points in future posts. In the meantime, stay alert to the cracks appearing in retailers’ strategy. Change gon’ come.
—Jonathan Kahn
Notes
1. “The control of land in highly-concentrated local markets by incumbent retailers acts as a barrier to entry, by limiting entrants’ access to potential sites for new larger grocery stores.” The supply of groceries in the UK market investigation, UK Competition Commission, 30 April 2008, page 12.
2. “The practice of varying prices in different geographical locations in the light of local competitive conditions, such variation not being related to costs… contributed to a situation in which the majority of [some supermarkets'] products were not fully exposed to competitive pressures and which distorted competition in the supply of groceries… the practice… operates against the public interest because their customers tend to pay more at stores that do not face particular competitors than they would if those competitors were present in the area.” A report on the supply of groceries from multiple stores in the United Kingdom, UK Competition Commission, 2000, page 5. ↩
What’s the relevance of content strategy to user experience designers? I’ll be attempting to answer that question in 6 minutes and 40 seconds this Thursday, at