Retail veteran warns of March crunch

Fred Milgrom, at the coalface of online retail, makes a dire prediction – not every retailer will survive past the first quarter of 2009. He tells AMANDA GOME his reasoning, and details how he is planning to take Zazz.com.au beyond the crisis.

By Amanda Gome

Fred Milgrom, at the coalface of online retail, makes a dire prediction – not every retailer will survive past the first quarter of 2009. He explains his reasoning, and details how he is planning to take Zazz.com.au beyond the crisis

Fred Milgrom, the revolutionary force behind Beam Software and co-founder of Smarty Pants Publishing, also ventured into online shopping through his website Zazz.

Fred picked the economic crash about a year ago, when he warned SmartCompany we were in for a rough ride and he was selling out and cashing up.

Now that dire times are here, we thought we would check in on Fred about how Zazz.com.au is going, and pick his brains on the economic outlook. His call? Not every business will survive past the first quarter next year.

 

Amanda Gome: You started Zazz in March 2006. Within a year you built a very strong online community with about 25,000 members last time we interviewed you. A year on, how many members have you got now?

Fred Milgrom: Almost double that now. We have grown very strongly and it is mainly through word-of-mouth recommendations. We are very pleased with that because it is a very loyal and very dedicated customer base that we have got.

Now just for people that don’t know, you basically put up a new gadget or product everyday for a fixed price.

That is correct. And everyday it is a different product and we offer prices that are below or close to wholesale because of our buying power.

Products include PCs, laptops, accessories, audio products, we have got good demand for health related products, gadgets, so it is a wide range of products that we do and we try and offer new things that people may not have seen or may not be able to obtain easily.

Last time we talked, traffic on Sundays was a bit slow because you were not getting conversions on sales. First, have you fixed that, and second, what have you learnt about getting conversions to a sale? What elements are really important to have on an online site?

We fixed up the weekend. We just had to change the product mix a little bit, we just played with the product and price points and so on and that is working well.

The conversion issue really relies on being able to have the right product. If you don’t have the product that people are looking for, it is not going to work. For example, we have found we couldn’t sell hardware or tools or things like that, and I think that is because people don’t need to make the impulse purchase on a website. They know they can go to a local hardware store or Bunnings or any of the other chains and it is readily available. So you have got to be able to offer something that differentiates you from high street shopping, and justify the shipping costs and everything else that is inherent in online shopping.

What are the best products then?

Well, obviously things which are hard to find anywhere else, so the unique imports always do well, or products where because we have found a supplier who is trying to get rid of excess stock or has discontinued a line, we are able to obtain a significant discount. If the discount that is available is exceptional then people respond to that.

When we talked last year, big retailers in Australia hadn’t gone anywhere launching successful online sites. You are also seeing aggressive competition. Have any of those been the bigger retailers? Where are they at?

I am not sure what the bigger retailers are doing. I think that they are still very tentative about online. Australia is still not as active in the online market place as in the US, which is surprising because Australia takes up new technology very easily. I think that the Australian public is very forward, but retailers haven’t really caught up.

So where is your competition coming from; new start-ups?

Yes.

You created a very strong community, people came through word-of-mouth and then start to engage through forums – but you were on the web at 7.30 in the morning until midnight making them work. Where have you got to with the forums now? What have you learnt a year on?

Forums were a lot of work a year ago, and are still a lot of work. You have to be there and be available for the community. You know they expect you to be able to respond to their queries and needs.

As the site grows, there is a transition that happens where the early adopters no longer necessarily see you as being as exciting because you are no longer something that is brand new. So some of them have moved on to other interests and it is a matter of making sure that the community is still alive and vibrant by supporting those people with new ideas and new things for them to do on the site.

How have you done that?

Well, we try and innovate all the time, so it is not just one thing; it is trying to find new things and new ways of involving the community, responding to their needs.

What is the latest one you have done that has worked?

We have tried to broaden the scope of the competitions, try and involve new members more and target new members in offering incentives for people who haven’t participated previously is one example.

Have you done anything with your email?

That is still going very strongly; people still complain if they don’t get it. I don’t think that we want to change that too much. It is working and I don’t think we want to add anything to what is there. People like it as being very simple, very plain, gives them just information they need, they don’t see it as spam and they look forward to it.

People get the email either daily or monthly, and about two thirds of members subscribe to it.

Revenue wise, have you monetised your site in any other way? Tell us about the model.

No, we haven’t looked at other ways of monetising the site. We are always looking at alternative options, but at the moment we are keeping a very clear focus.

Some of our competitors have gone in slightly different directions to what we have. So we offer one product a day. Other people are looking at often multiple products, or a product a day and some other product and so on. We think that dilutes the appeal of what we are doing, so we have stuck with the focus that we have. And I think that is working.

Where do you think these online communities are growing?

I think that it really is like any community; if the community has a purpose and it is vibrant and interesting, and it fulfils a need, then the community will keep on growing.

You were starting to use Twitter, MySpace and Facebook; are you finding Twitter better than those other two? How are you using those sites?

Well, Twitter is just another way that people can connect and find out what is going on, so we have got RSS feeds, we have got the daily email and some people are happy to receive daily SMS or follow otherwise on Twitter. So whichever way people want to obtain the information, we are working to make sure they get it.

What is your favourite new toy on the internet?

It is always the latest toy that is the favourite toy. But I really like the TiVo. I mean it’s not on the internet, but the TiVo really changes the television experience.

And how are you using it?

Just being able to pause and rewind live TV is just amazing. You can be watching TV, you can walk out of the room, come back rewind it, see what you’ve missed, keep going, it’s fantastic.

What about mobiles, iPhones, any other things?

I succumbed to the iPhone. I really enjoy the community that it’s built up developing apps for it and watching the sort of apps that are being made available for it, many of them for free.

I can understand the people who are doing it for money and it’s a business venture and all the rest of it. But more interesting for me is the people who are doing it for the love of it, and because they want to enrich the community. It’s a very exciting and very interesting platform.

But surely it’s the same as the internet. They’ll build their applications and then they’ll work out how to monetise it.

Not everybody does that. There are a lot of people on the internet and on the iPhone who are doing it because they feel they want to give back.

A year ago you were cashing up and you could see hard times coming. Is it is bad as you expected it to be at this point?

I think that our business is slightly insulated, but I think that in the community it is as bad as expected, if not worse. Because we’re offering products at a lower cost, people come to us and they feel happy to buy. Maybe we’re taking some sales away from the high street, but definitely high street retailers are feeling the pinch. And clearly everybody is nervous at the moment, and there is a clamp on spending.

Can you explain how you make revenue; and are you feeling any pinch at all?

We make revenue on sales of items. We buy low, sell high. And yes of course we are seeing a pinch, but we’re adjusting to that. We’re choosing products with alternate price points, more affordable price points, and choosing products that are more suitable to difficult times.

Have you got any other strategies going forward for you business? What else might you look at?

Clearly the type of products and the price points is really the key to any retail business. That’s what you’ve got to be looking at. We’ve got exceptional value coming up for Christmas for people who are looking for either office presents or family presents and so on. You’ve got to move with the times, and you’ve got to be aware of what communities are prepared to pay for.

Do you think we’ve reached the low? Or is this going to get worse?

My reading of the situation is that things are going to get much worse.

The reason for this is that at the moment we’ve got suppliers and retailers with too much stock and a cut down in spending by consumers. So we’re going to see a lot of sales coming up. The pre-Christmas sales, the Christmas sales, the Boxing Day sales, the New Years Day sales and so on, in a desperate attempt to try and move stock.

Now this is all stock that is currently sitting in the warehouses, and people are reluctant to spend and purchase them.

But next year when this stock has moved out of the system one way or the other, there’s going to be a major problem because the dollar has dropped significantly and there’s going to be “sticker shock”, because prices are going to be up 20%, 25%, 30% on what they are now because of the drop in the dollar.

So, we are going to find in March, not only are times tough but all of a sudden people go into the stores and say “hey, I’m not paying that”.

So I’m expecting that things will be worse in March.

That’s retail; so what about business-to-business?

It impacts all over. The current economic climate has resulted in a significant drop in the Australian dollar and what that means, as far as I can tell, is that there is going to be a drop in the Australian standard of living.

But people haven’t really accepted that. It hasn’t really sort of come through. Companies today are worth less than half of what they were a year ago. Not only has the sharemarket dropped by 40%, we’ve got the drop in the Australian dollar.

So on an international basis the Australian companies are seen as being worth half of what they were a year ago if not less. We have to see a reduction in the standard of living. And really the only thing that underpins the Australian economy, or did underpin the Australian economy, was export of mineral goods. We don’t have a knowledge economy that exports, we’ve completely dismantled the manufacturing base.

They’re trying to reassemble a bit of it with the recent car industry package. People argue that it’s so dependent on the global manufacturing industry; it’s a risky strategy.

They’re just trying to maintain what we have, they’re not trying to build it up even further. So Australia doesn’t have anything that it’s offering to the rest of the world except being a consumer, other than export of mineral goods. We’re probably going to see low growth in mineral exports only because of the drop in the dollar. If you took export of minerals out of the equation, I believe the Australian economy would be in recession.

So is it going to be any better in 2010, or worse?

I think it will probably be better in 2010. I think that once we get past March and people’s expectations have changed, then we’ll be in a position to actually grow from there. At the moment there’s still a great degree of denial.

What’s going to change their expectations?

People are going to have to except a lower standard of living in Australia. That’s just what the bottom line is going to be.

I personally think that the Government is doing a really good job. I think that the stimulus packages that they are trying to introduce are a positive response to what’s happening. But I think that people need to be aware that it’s not business as usual.

What are you doing on a personal side? You sold up and put a lot of money into cash. Is it too soon to be looking out for opportunities for new businesses or new ideas or even back into shares?

New ideas come up and you have to evaluate them on an ongoing basis. As far as property is concerned, I wouldn’t be looking at property for quite a while. I think that property probably lags the other indicators.

The only area in shares that I would be interested in looking at is shares in which you can be reasonably confident of a good dividend, because with interest rates going down, if you can get a good franked dividend and be reasonably assured that the company is going to continue that dividend stream, that’s a valuable purchase.

But as far as buying shares for capital growth, I don’t see that for three years or so at least.

Are minerals going to come back, can we keep going the way we’ve been going?

Eventually minerals will come back. It’s a finite commodity and there is going to be demand and people will want to buy things eventually, so minerals will come back. I’d really like to see Australia improve its knowledge industries, where we’re using brain power and innovative ideas that Australians can develop and turn that into export industries.

And of course we need better broadband.

Of course we need better broadband – that goes without saying.