July 24, 2013

dm and Amazon part company

photo: Gourmondo/DHL
New entrant: DHL intends to offer its own food delivery service throughout Germany by 2015
So dm and Amazon do not intend to continue their online sales co-operation!

Germany’s largest drugstore operator and the US online giant have failed to find a viable model to market health & beauty own label.

The liaison between anthroposophically-minded dm and big, brash, opaque Amazon was always an unlikely one. And it is difficult to resist concluding that the Americans lacked conviction when promoting the project.

The fact remains, however, that two leading international companies, both at the top of their individual game, have not succeeded in wooing tech-savvy consumers in the world’s second-richest country by GDP per capita.

What does this tell us about e-commerce in German mass consumer markets? 

One could argue that the alliance was only a test for both parties, but the words of dm CEO Erich Harsch aren’t exactly encouraging for online shopping enthusiasts:

“The way sales and revenues developed at Amazon has shown us that consumers prefer to buy drugstore products in stores.”

In all, dm offered a total 1,700 lines from its own label range via Amazon. In effect, the multiple assumed the role of a wholesaler, while Amazon took care of logistics, pricing and advertising.

It turned out to be a damp squib. Lebensmittel Zeitung understands that revenues at the internet shop only slightly exceeded those of an average dm outlet (574m²).

Strange bedfellows

When the two jumped into bed together two years ago, it took the trade by surprise. Dm had been coy about going online, but thought that an alliance with virile and dashing Amazon would enable an online baby to be raised “under reasonable economic conditions”.

At the time, Harsch saw the step as a way to reach customers who would not normally visit one of the current 1,400 “dm” stores in Germany. Although he was careful to emphasise that the JV was only a test, it was clear from the start that the market leader was also interested in going it alone.

Otherwise, it is difficult to interpret the company’s initial interest in the online subsidiary of failed drugstore giant Schlecker. A look at the books soon revealed that health & beauty products and online delivery aren’t yet a marriage made in heaven.

But where's the money?

It was a clear omen for the Amazon project. Low-margin products are difficult to sell profitably when online sales are still relatively small.

To make matters worse: Most internet customers want bulky items such as baby’s nappies (diapers) where ruthless competition means a rock-bottom margins.

Harsch doesn’t seem to have given up completely, although he keeps his cards close to his chest regarding future plans: “Of course we continue to follow all developments in online retailing and are constantly reviewing what activities make sense further to what we have learned with Amazon.”

So the Karlsruhe-based company continues to search for a viable online solution.

Jumping on the bandwagon

It is certainly not alone! Arch-rival Rossmann has been running its own internet shop for a decade where it also sells non-food lines such as garden furniture.

Owner Dirk Roßmann was candid enough this spring, however, to publicly admit that he still hasn’t found the golden key to online profitability.

Meanwhile, no one else in the trade wants to miss the online bus. Even Metro Group hypermarket subsidiary “real,-“, whom one would have thought has enough troubles of its own in bricks & mortar, is filing away at its online offer.

More significantly, Schwarz Group hypermarket subsidiary Kaufland has revealed that it is considering selling food online.

Edeka, Germany's largest food retailer, is making local tests and wants its Netto discount arm to open a non-food online shop this year.

Rewe, Germany’s no. 2 retailer, is testing online delivery on a local basis and is also experimenting with drive-ins.

Given a situation where virtually everyone is stirring the pot, and where there has already been so much movement in other segments such as books, shoes or electronic entertainment, it is only a question of time before someone makes the decisive breakthrough in food.

The Aldi factor

Of course, the sleeping 800-pound gorilla in the cage is Aldi. The discounter has a number of trump cards it can play: vast retail brand strength on its home market; a limited, and therefore manageable assortment; a high percentage of easily-handled packaged goods; and an omnipresent store network for distribution purposes.

Add to this management excellence, almost limitless finances, and the ability to take an extremely long-term view as a privately-owned company, then one has just described a potential game changer.

Lebensmittel Zeitung believes that Aldi has put online at the top of its agenda. So the gorilla has only closed its eyelids and is not sleeping. Whenever they open, things in the German cage are going to change big and fast.

Related article in German: Lebensmittel Zeitung, no. 29, 19.07.2013, by Manuela Ohs, Jan Mende, Christiane Ronke & Elisabeth Kapell


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