Express: Online retailer with sophisticated fulfilment
Express Gifts trades principally through its retail brand Studio (about 20% of sales are via a legacy but identical brand, Ace). Studio’s move to being an online platform is central to management’s current strategy.
Exhibit 3: Product sales (£m)
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Exhibit 4: Customer base (m)
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Exhibit 5: Online sales %
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Exhibit 6: Bad debt as % of revenue
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Exhibit 3: Product sales (£m)
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Exhibit 5: Online sales %
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Exhibit 4: Customer base (m)
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Exhibit 6: Bad debt as % of revenue
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Retail profitability improved
Product sales for the year grew by 9.6% on a 52-week basis to £285.1m. Customer numbers, up 13% at 1.8 million, benefited from a focus on promoting showcase products, and increased digital marketing and TV advertising. The decision to rework and bring forward the pre-Christmas marketing campaign drove a spike in H1 results but was key to the increased profit increase in the year as a whole. Marketing activity has also positively influenced the established customer base. Management sees further potential for growing both retention and average spend.
Exhibit 7: Express Gifts – revenue growth: Product and Financial Services (FS)
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Online penetration grows relentlessly
Management now describes Express as a ‘digital first’ value retailer, and is managing the process consistent with online orders moving close to 100% in the future. It is relentlessly growing its online penetration. Online customers in FY18 increased from 63% to 68% (the figure was higher at 72% in Q3 due to the seasonal peak). A higher and faster accelerating percentage of new customers placed their first orders online, at 84%, up from 71%. For the under-25 customer group, the online proportion is 97%. Mobile and tablet are strong drivers of online sales, up from 37.5% to 47.4%. Express’s age range is broad, with its core customer base aged between 25 and 55 years.
Technologies that Express has adopted include IBM’s Commerce platform and Qubit technology, allowing it to personalise the customer experience and increase the versatility of the online shop. In FY18 Express continued to improve functionality and website merchandising, and introduced Aura, which enhances the mobile experience through product recommendations. Further digital developments in FY19 include a programme of artificial intelligence (AI) releases through the year. Management believes there is a role for AI to help drive customer numbers beyond the two-year target of two million. It aims to use social proofing (the social and psychological phenomenon in which individuals mirror the behaviour of others) throughout the customer shopping experience.
Improving the buying process
Although at c 30% Express’s gross margin is low compared with some online retail peers (Amazon 33%, ASOS 50%), figures are not necessarily comparable as Express offers financial services as well as product (also ASOS sells apparel only). Management intends to move the buying process from an historical focus on the catalogue to a view across the entire season that will be reflected in the pricing architecture. Management believes this focus will allow it to sharpen its buying prices with resulting improved value for customers combined with margin improvement.
Downward pressure on costs
Management has worked hard to mitigate the cost impact of sterling’s depreciation. Actions included a reduction in stock lines to streamline the buying process, and achieving added efficiencies in Far East sourcing. These mitigated the FY18 exchange rate impact on product gross margin to 40bp, while maintaining the value offer for customers. In FY19, a new seasonal planning process is being introduced, while the move of the Far East sourcing centre to management in Shanghai rather than Hong Kong should help to disintermediate sourcing, relieving cost pressure on margins while avoiding significant customer price increases.
Over two years the clothing and household categories have accelerated such that they dominate the product range, leaving gifts, electricals and other ranges comparatively flat. Clothing and household goods now jointly account for 68% of revenue. Clothing (including footwear) has accelerated particularly fast (new customer numbers are one-third over two years to take total customers to 1.8 million in FY18), and now represents 29% of total sales. Management is convinced it has further potential.
Exhibit 8: Clothing and household dominate range and growth
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Source: Edison Investment Research. Note: Based on company presentations (52-week basis).
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One of the issues the company faces is that it takes c 18 months to grow a new customer to profitability. Clothing is a particularly progressive category as its customers are more frequent users than in other categories, creating the potential to contract the recruitment period, while clothing also smoothes seasonal peaks in sales and recruitment.
Express’s market: Wide and progressive
Of Express’s 1.8 million active customers, c 84% are female, of whom around a third have children, with the core market being 25-55 year olds. Experian profile analysis has shown that approximately half of customers are from households with an annual income below £30k. At this level consumers have an acute interest in matching quality and value; this group also has an active interest in credit that operates on a fair and professional basis. It is therefore not surprising that a c 50% of customers take credit averaging c £360, which they pay off in an average of nine months (although customers have flexibility to match payments to their budgets and could take longer than this).
The online channel continues to gain share within the UK retail market, representing 17.3% of all retail sales in April 2018, up from 15.6% a year ago, and growing y-o-y at 11.7% against 3.5% for all retail (source: ONS). Hence it represents a favourable tailwind for Express. We therefore regard both the fact that 68% of orders are now online, and the accelerated rate of growth of the online share, as significant. The average online order value is slightly higher than the offline equivalent, at c £50. Around 40% of customers buy personalised products; the personalisation process is more cost-effective online. Around half of customers pay their bills online.
The online channel also provides marketing opportunities. Express can track customer visits providing valuable information on dwell times, conversion rates, failed searches, complementarities and other customer statistics available for data analytics. That should result in better product selection, range structures, assortment mix, marketing approaches and therefore sales.
Express continues to print its traditional catalogue, but the clear objective is to move towards a high mix of online sales. In line with this strategy, the company has increased marketing activity, particularly around TV and social media advertising, and has led the effort with ‘showcase’ promotional products such as the computer tablet priced at £19.99, which sold c 60,000 units in FY16. It has also opened a Philippines call centre operation, which is now being consolidated.
Around 30% of Express’s revenue is from financial services in which consumer credit is offered to customers and over the past two years management has been successful in rebalancing product sales against financial services income, with an aim of stimulating product growth without customer detriment. In FY17 financial services income grew 7%. In FY18, the company implemented its new credit account management system, Financier, for all customer accounts, bringing improved and clearer ‘plain page’ statements with simpler account management, enabling proactive management of non‐performing accounts. The company is trialling additional tailored financial services products in FY19.
As part of its working capital management, FDL sells non‐performing receivables to specialist third parties. This market has been particularly attractive over the last year and management believes leading players may be looking to list in coming months. FDL has taken the opportunity to slightly accelerate such sales, generating an estimated £2m of cash and profit.
The customer redress programme is proceeding to plan and within current provisions, and is due to be completed in the coming months.
Fulfilment and distribution
Express’s main distribution facility is housed in a modern warehouse at Accrington, near Manchester. The facility, which consolidates an operation once spread between seven warehouses, manages around 3,000 stock keeping units and employs c 200 people. Different areas are connected by 3.5km of conveyor belts. The order processing system currently picks c 200,000 items per day, with the capacity to increase this to c 300,000. The Klug software relies on barcode identification and is capable of bringing together a typical basket of five to six items within a session. This may include goods such as clothing, cutlery or pencils, which go through a personalisation process to inscribe or embroider a name on the product; this is a popular and differentiating feature of Express’s offer. Personalisation operations take up c 7,500sq ft of the site. The system incorporates a double-check on order fulfilment, as a result of which the unit has a record of over 99% accuracy.
From its origins in home delivery, the fulfilment structure is ideally established for a transition to high levels of online orders. Express is now focusing on adapting its front-end offer more specifically to the online marketplace. As part of its platform development, it has moved its websites to IBM’s Commerce platform, which includes new account management features and cyber security compliant with the EU's General Data Protection Regulation (GDPR), effective from May 2018.
FDL plans to update its warehouse technology over the next two years. It has already implemented projects to ensure it is compliant on the GDPR. Because FDL already has comprehensive data on its customers and their shopping preferences, it is in a strong competitive position. Management recognises this and will invest to protect and enhance this asset.