JT: Could you give a quick description of M.Video-Eldorado’s business and strategy?
AI: The business is essentially consumer electronics retail, with a few experimental inclusions of other categories. Our ambition is to double the revenues of the group from today’s RUB 500bn to RUB 1tn by 2025. The Russian consumer electronics market is today slightly shy of RUB 2tn, and we expect it to grow to RUB 3tn over the period. So, we are starting with a market share of 26%, and aim to grow both with the market and from gaining share. A key tool for achieving this will be our mobile-centric technology platform called OneRetail, which has three key elements:
- It is a web platform
- It is a standard customer application
- It is a sales representative application for use on the shop floor
AI: We know that a typical customer journey towards an appliance purchase begins with two weeks of iterations and exploration, which tends to start with online store browsing and can include physical store visits. OneRetail helps us track and analyse this, and it is based on proprietary technology. It is currently rolled out in about half of our stores, and we are making major efforts to overhaul our IT architecture to refine it. I like to describe it as us redefining the company from a bricks-and-mortar retailer with an online presence to a technology company with a physical presence. We have made good progress in the past ten months, which you can see from the speed of soft development, data-driven products and procedures, how we talk about our processes, the introduction of agility coaches, etc. It is a big change, and the speed of technology releases is increasing, with about 1,000 new features in H1 2021 alone. In the old days, it would have been perhaps ten. The key organisational change is our introduction of product teams and tribes, supported by DevOps (practices combining software development and IT operations) and agile processes. We have launched over 100 teams so far this year, and we need to double the number over the next two years.
When we bring our customers onto our platform, either online or in-store, we really understand their needs and can offer better service and personalised price, and thus we are better able to influence their checks. We can retain them better, which we see through the annual frequency of purchases. The industry average is 2.4 per year, and customers on our platform are well above three. And the average spend goes from RUB 7,000-8,000 across our company, to RUB 12,000 in the platform. So, by developing our technologies and data-based solutions, we intend to build a base of 25 million OneRetail customers, and 25 million customers x three checks x RUB 12,000 per annum would give annual revenues of RUB ~900m. If we add RUB 100m of B2B revenues, we get to our target of RUB 1tn in sales.
JT: What is your view on the shift from physical stores to online retail?
AI: The stores play a very important role in our business. The interaction and transactions that take place in the stores are important. It is much more effective to influence customers and help them solve their specific problems in the store, with face-to-face dialogue. And our sales representatives will benefit from our platform tools getting the information about a customer’s purchase history and preferences.
Without a direct relationship and interaction with the customer, consumer electronics makers need to make massive marketing investments to cut through the noise, connect with the customer and protect or strengthen their brand value. Russia is an idiosyncratic market, with five well-capitalised online players vying for supremacy, plus us, plus the product suppliers with their brands. This makes for a level of media noise which is enormous. In this environment, the ability to put your innovative product on the shelf in an outlet, pushed by dedicated specialists, is an extremely important feature.
I believe that in the long term this will lead to a major concentration of big retailers such as Amazon and Best Buy, likely only one big and broad online marketplace, complemented by a few category specialists for categories which require an involved purchase.
AI: The rollout of our OneRetail platform is intended to gain an economic benefit for ourselves and better service for our customers, and we are toying with the idea of becoming much more of a service platform for vendors. The historical level of service provided by retailers has been more or less to carry inventory and have products on display available for sale in stores. I think this approach is obsolete, and it does not allow for curation by us or for the complex logistics of a modern omnichannel approach.
In order to get the most out of the curation we can offer through our stores, we need to ensure that we have the right training and motivation for our 30,000 own staff and our 8,000 vendor promoters. We are accordingly evaluating and reviewing our approach for incentivising, planning and managing stores.
JT: What are the key logistical challenges in e-commerce fulfilment?
AI: One specific challenge for all online retailers in Russia is that it is a vast country, with big differences in population density and levels of infrastructure in different regions. I learned that lesson very well when I ran a telecom operator. And the challenge becomes even greater when you run a hub-and-spoke logistical model, which is where our industry is going. If you bet on highly efficient, centralised models with automated warehouses, your last-mile delivery becomes prohibitively expensive and difficult to maintain, not to mention the reverse logistics for goods returns. The alternative is a distributed inventory model, where what used to be an inventory for the customer becomes an inventory for us. The stores have to carry the goods which are most in demand, and this is where our curation comes into the picture. We have about two million square metres of total store space, it is ready-to-use, well-located and is already profitable.
AI: We are currently completing the exercise of developing our logistical approach, contingent upon the level of service we aim for in our different categories. What goods do we carry in inventory where? And these decisions will dramatically impact how our store network evolves. Some stores will need to be reconfigured. In some cases, we may replace some of the floorspace with what you could call an “urban warehouse”. We will make the inventory management of goods on shelves and on display more efficient, and free up some capacity for local inventory. I do not think the concept of dark stores, dedicated to online fulfilment and with no customers visiting, is relevant for us. But with urban warehouses in cities, we are able to increase our number of SKUs (stock-keeping units) and offer a much better level of service, such as express missions of under four hours. This is prohibitively expensive for centralised logistics.
We will likely develop the systems side of this rethink and revamp in-house, but I expect that we will partner with third parties for last-mile delivery, as we did, for example, with two-hour taxi delivery from the store. These services will need to be closely integrated with our platform. If you want to claim supremacy in a category, you will need to offer not only 70% of the available assortment; you will have to carry a long tail of products in a very large geography. It is not rocket science, but it will require a sophisticated model underpinned by rigorous thought processes. Unlike for a B2B distributor with standard “big box” outlets with 25,000 articles, we need to curate the assortment we carry for local and regional preferences and logistical solutions. For example, we are now piloting an AI-based service to plan the assortment displayed on the store shelves. And we see that data-based planning of TVs or laptops you display in stores do increase sales. We will have different configurations and inventory for different stores. The logistics of replenishing stores with showroom goods are not that difficult. It is when you combine them with e-commerce collection and returns in the stores, that they become a big challenge.
JT: How much online migration is COVID-driven and how much is structural?
AI: I think we have certainly seen some reallocation of disposable incomes for consumers during the pandemic. Unable to travel or enjoy certain types of entertainment or other experiences, they have indulged in buying some goods they want instead. That boost to demand should be mostly temporary, until there are more leisure spending options available again.
AI: The pandemic has also been a strong catalyst for consumers to buy more online, and to my mind this is unquestionably more of a permanent change. People have learned to value the convenience of online shopping with home delivery. Once we see the big breakthrough for online grocery shopping, I would expect online retail migration to speed up even more. If you are able to buy groceries hassle-free online, why would you want to buy anything else offline? But it could be different for high-involvement purchases, with a need to try and feel. I have no illusions regarding consumer electronics; we will need to reroute some of our deliveries to e-commerce in the future – but not 100%.
JT: Will we see more remote working?
AI: We kept our stores working at full capacity when the authorities allowed it. When restrictions were introduced, we tried to be pragmatic and creative, and we developed a sort of kerb pickup service for customers and we had salespeople do consultations with customers via video call, to give a couple of examples. Stores are now open, but we currently still have restrictions in place for our office premises and work mostly remotely. This will probably remain in force until October. Only those staff essential for maintaining systems or the document flow are working in our offices, which is about 200 out of a total of some 4,000 office staff.
It was a bit challenging joining the company as the new CEO under these conditions, but it very quickly also seemed like a golden opportunity which was too good to miss. The company was apparently functioning, even functioning well, with such low office attendance. We are now well on the way to implementing a new model where 20% of staff have a mandatory office presence, 20% are kept on rotating shifts, and the remaining 60% come in to work on an as-needed basis. They don’t have a dedicated space in our offices. Under this model, the office becomes a collaborative, social thing.
With this model for our offices, we can either reduce our space, upgrade our premises, or both. There is arguably some merit for a retailer having low-key, basic premises, to “‘send the right signal” to vendors and be able to argue and negotiate with the right image for a low-margin business. But when you start to transition from a retailer into a technology company, the office starts to matter more. It can make a greater difference, both as an HR brand for the company and to be perceived as an attractive collaborative environment that creates a sense of belonging.
Are there issues related to offices and remote working? Sure. After more than a year of these conditions, staff engagement has declined, while stress and fatigue are higher. My impression is that we are working more under these conditions, not less. I have team calls with people calling in from different places around the world, which gives us an issue with different time zones. People work ungodly hours. I also think affiliation with a company tends to be weakened by remote working. It lowers the threshold for people to switch to another employer, especially for functional staff.
Perhaps a paradox here is that people have not disliked remote working; they have been in favour of it. People may well consider it a negative if you don’t allow them to work remotely.
A key question to ask going forward will be what value you can add by coming into the office. If you are going show up only to sit in your cubicle and crunch numbers throughout the working day, you might be more productive by working from home. We are thinking about supporting this with, for example, home office furniture, and computers. There could also be recruitment advantages from remote working. Staff costs are typically 20-30% higher in Moscow than in the regions for the same qualifications. Now, we might be able to hire functional staff in other locations at a lower cost, who can do the work remotely.
JT: What sorts of premises will an omnichannel retailer need in the future? Stores versus warehouses/fulfilment centers versus office space?
AI: Clearly, we will have to do some reconfiguration of how much is showroom and how much is back-end in our stores. We will need to decide whether small-format stores work in our new setup, or if we need to focus on bigger stores to support the necessary logistics. We will need to rely on a third party for fulfilment logistics, particularly last-mile delivery. In essence, we are upgrading our existing store-based setup to fit e-commerce fulfilment. Speed and accuracy of delivery are rising, with narrower time slots, and quickly after the order has been placed. Our store network needs to be configured to allow this.
With fewer people in our offices, I want to try and seize an opportunity and use smaller office premises of higher quality. But these are not so easy to find. Many companies are surely thinking along similar lines, and there is only so much high-quality office space in prime locations out there.
I don’t think there has been any pronounced mismatch between rental levels and current demand for retail premises so far. During the pandemic, landlords have generally been realistic about the situation and been prepared to accept temporary rebates or other concessions to help tenants cope with a very difficult situation. There will be pressure on the retail industry to reduce costs, including for premises. I suspect that there will be a polarisation going forward, with strong demand for retail premises in prime locations with high entertainment value, proximity to food courts and dining, etc. Traditional, “pure” retail experiences in poor locations will struggle, unless they cater for convenience shopping.
JT: What do you think is the single greatest challenge to realising your strategic aims and financial targets?
AI: I would say the greatest uncertainty is the economics of the new model for retailers, how industry profit pools will be redistributed among the players and the value chains. You have retailers operating with traditional business models and modest margins. They are being attacked by online players, who are in today’s capital markets environment incentivised to prioritise growth over cash flow and profits and show extremely rapid growth to be able to capture network effects and exploit a strong first-mover advantage. This puts dual pressure on incumbent players, who want to protect profits and cash flow but cannot afford to be outgrown by new digital players.
