Direct marketing firms face pressure

Apparel e-commerce is an intensely competitive business and getting tougher. This is making life harder than ever for the main catalogue businesses, helping explain Nissen’s decision to accept the embrace of Seven & I Holdings.

Competition from big players in apparel e-commerce is intensifying. As well as the old catalogue firms and pure online players, department stores, specialty chains and, following Seven & I’s plans to buy Nissen and Barneys New York Japan, Japan’s retail conglomerates too are piling into the fast growing e-commerce channel.

All this competition is putting pressure on the traditional direct mail businesses. In the early years of e-commerce, firms such as Nissen and Senshukai had an easy ride, but now competitors are pressurising them on price, fast and free delivery, easy and cost free returns, and seasonal trends, i.e. most of the key factors that make or break an online business.

Nissen is about to become a subsidiary of Seven & I Holdings – just in time too given the dramatic loss of sales in the last two years. In 2013 alone sales at the core direct marketing operation fell 12.5%, producing a loss, although the company overall increased sales by 25% to ¥178 billion thanks to the acquisition of UCC’s Shaddy subsidiary. Nissen will be the e-commerce hub for Seven & I’s planned omnichannel retail group.

Senshukai looks in better shape for now, but with Nissen part of the Seven & I empire and Amazon and Rakuten both investing heavily in its key markets, it too is vulnerable. In FY2012 overall sales rose 6.2% to ¥146 billion and the core mail order operation was up 5.7% to ¥130 billion thanks to strong sales of womenswear and interiors. In the first nine months of 2013 sales fell 1.2% partly because of the need to discount key apparel lines to compete with other online stores. Senshukai has been making efforts to buy in more growth, notably its acquisition of 51% of Shufu no Yu, a direct marketing business targeting young mothers.

Senshukai just launched its latest five year plan that calls for sales of ¥187 billion, up from ¥141 billion in 2013, of which direct marketing is expected to account for ¥158 billion up from ¥126 billion. Dubbed Innovate for Smiles 2018, the plan suggests a complete switch to e-commerce operations with catalogues used mostly for marketing purposes. This will allow Senshukai to escape from the yoke of the long lead times required for catalogue planning and so compete more effectively with fast response specialty stores and online retailers. Online transactions already account for 70% of sales, but catalogue derived purchases are still a key chunk of this even if the order itself is through a webpage.

To achieve its goals, Senshukai will strengthen its core targeting of 30s and early 40s women through add on services. It has always been good at meeting the needs of both expectant and young mothers in this segment, but with birth rates low it will now focus on childless women as well. It will also try to bolster waning sales to the over 45s with new brands and services.

To better compete on price and raise profitability, Senshukai will convert partially to a vertically integrated model, raising the percentage of directly sourced product. It will also open more stores under the Kurasu no Fuku brand.

All this is well and good but e-commerce businesses continue to ratchet up their services and market share. Start Today for example saw sales rise 10.7% in FY2012 and 13.6% in 1H2013, but transaction values rose 21.5% to ¥49.5 billion boosted by Zozo’s new free shipping policy. Further growth is expected for the full year following the launch of La Boo, a mall for younger women, the SME portal Zozo Market, and the smartphone app Wear, which while not a money maker yet is generating plenty of publicity for Zozo – Start claimed 1 million downloads of the app by the end of February.

Start Today is narrowing the service gap with Amazon too, leaving Nissen and Senshukai looking slow and archaic. It will begin a same day delivery service in key regions in April, starting in Kanto where close to 50% of Zozo’s customer base lives. Marketing will emphasise the potential convenience of ordering while browsing the Zozo store on the morning commute and have delivery arriving after getting home. The emphasis on smartphone purchases is no accident; in the last quarter of 2013, 50.1% of orders on Zozo came through phones, the first time mobile sales have exceeded PCs.

Plenty of smaller merchants are emerging too. NTT Docomo acquired Magaseek last year, and Locondo continues to evolve. The latter will launch an online outlet mall called Locolet in April focused on bags and footwear. Prices will be around 70% off RRP and yet Locolet will still offer free shipping and 30 day returns. It projects sales of ¥10 billion for the new site within three years. Locondo itself expects sales for FY2013 ending February to hit ¥5.2 billion, up 67% on the year, rising to ¥10 billion this year including its first profit.