Arturo: So Jim, who are Feelunique’s main competitors and how does your business model differ from them?
Jim: I would make a distinction between the existing high street bricks-and-mortar incumbents and the newer online e-commerce players. Offline incumbents may be slightly different in each market, from specialist beauty or health and beauty stores (for instance in the UK they’re heavily dominated by Boots) to department stores.
On the other hand, we find that within online retail we have two types of competitors. First, there are the Amazon-like generalists, who play all ranges of verticals and don’t necessarily have a full range of products (because not every brand wants to distribute through them). Their strength is, to a great extent, being price competitive, and having great service levels. That’s why it is critical for us that our core e-commerce proposition is as good as these big horizontal e-commerce players in terms of good customer experience, high-quality shipping, high-quality customer care, etc.
And the second online competition comes from those companies that have built a vertical specialist around beauty. Here, our focus is to be ahead of the game in terms of innovation, so people see us as the authoritative place to go to buy their beauty products. The positive fact is that beauty is an underpenetrated market online, between 5-15% (and for instance, in countries like France penetration is only about 5%) so there is a lot of growth opportunity ahead.
I guess many non-beauty-related e-commerces may find similar scenarios on their verticals. How are you planning to stay competitive in this challenging environment?
Regarding offline retail competition, we’re focused on building services that both replicate and are better than the experience you might have on the high street. “Sampling” is a perfect illustration of this effort, especially since one of the myths around beauty and e-commerce is that you shouldn’t buy beauty products online because you need to speak to the person behind the counter, get their recommendations and samples and try the products.
Then, Amazon-like retailers will keep focused on improving the three classic pillars of any retail commerce (range, value and convenience), i.e. having a full range of products across a full range of categories, great value, great prices, and great delivery propositions and customer care.
Therefore, what every vertical specialist should do is first, build their brand positioning in terms of brand loyalty and stickiness. Then, create a sector authority in terms of trust and credibility. This covers a range of things like having a strong product selection (including in some countries re-assuring customers that you will be sending genuine products); having all the latest products; promotional gifts with purchase; having authoritative reviews; quality editorial how-to guides, etc. So you’ve got a depth of knowledge and information that you can reliably provide to your customer.
And of course, I think our focus should revolve around service innovation, i.e. helping customers to select and receive their product in the more innovative ways that are available in the market at that time. And that’s for me really why a deep immersion in your vertical is important because if you’re a generalist retailer, chances are you’re not going spend a lot of time developing a beauty sampling service if it’s only going be relevant to a portion of your business.
Online convenience is little by little beating the offline ‘sampling’ experience. However, I guess this is not an easy task, especially in industries like beauty…
Sure. The good part is that technology will keep creating new opportunities for online e-commerce players to improve the online experience in different ways. Things will become more automated, and in particular, with the developments of AI (from bots to other applications that we can’t even think of right now), there’s lots of scope to develop new ideas.
But even now we are already offering sampling alternatives. For instance, recently we’ve introduced a service called pick-and-mix, which gives you access to a range of about 500 samples across different categories. For a small fee, you can select 5 of these samples, have them sent to you, and we refund this fee in your next purchase.
What have been some of your toughest challenges when scaling up businesses?
The first one is around maintaining growth. I think that a common misconception for people who have never worked in a growth business is that such growth comes effortlessly. True, there are some cases that have come up with an amazing business proposition and the growth has just come by and they have just to figure out how to manage it. But equally quite often, to get a business that’s growing at 20, 30, 40 % a year, it requires a relentless drive and attention to detail.
Then if you achieve that growth, what I find really challenging is thinking about your business model and the business economics. So, for example, when I worked at LOVEFiLM from 2006-2013 I was always comparing ourselves with Netflix and one of the things that struck me was that their pricing was much lower than ours. I’m sure there were some local factors that made that the case, but what I end up realising is that, in that type of subscription service, if you have a lower price point, you can make the same amount of margin at different price points since people’s tolerance to continue within the service is greater the less they pay. So, to put it simply, if you charge people 10 pounds a month for something they only use 5 times, they are getting an average cost of 2 pounds per usage. Therefore, if such usage falls, it’s very probably they drop the service, while if you charge 8 pounds, you might manage to retain those lower users –and therefore your costs are lower accordingly- and you end up making the same amount of money but with more customers.
One of the things I realised at LOVEFiLM is that you can charge a lot less and grow more quickly, but once you’ve got your business to a relatively mature state, it’s really hard to then unpick your pricing and margin. Why? Because you would constantly be saying “you know what, we really have a better business if we charge a pound less a month, but actually I can’t do that now because I’ve got a million customers and that’d be a million pounds a month worse off, and it may not come back in the future. Unfortunately, I just can’t afford that investment.”
And what kind of business model and business economics questions keep you “awake at night” at Feelunique?
We are not a subscription-based business, so in our case, it is more about having the right balance between pricing, promotion and customer retention. For instance, I continually think about our hair care category. Since we’re selling people shampoo and conditioner, it should be fairly certain that if you’ve bought a bottle of shampoo from us last month, at some point in the next weeks or months, you are going to use that shampoo and buy another bottle. But professional shampoo products are quite widely available in the market, and they are highly price-competitive, so it’s quite easy for a customer every time they need to buy a replenishment to go onto Google and find the person who has the best offer at that time and order it from there.
So, surprisingly, for a product that has a high replenishment factor, there’s a really low level of loyalty. But the thing that is in my head is that there must be a price point at which people would say “you know what, that price of that product is good enough for me to be happy to buy it from Feelunique every six weeks for the next 10 years”. So, you’ve got to find that right balance between how much margin I am prepared to give away versus how much money do I need to spend on customer acquisition the whole time to replenish my customers versus keeping that same customer happy every month after month.
So these are the kind of challenges we face, and I think it’s more relevant to a growing scaling business because your business model is still relatively new. I try to understand the dynamics of our customer, trying to nail down what’s the right balance between price and growth and profitability.
And what have been the main challenges from the finance standpoint?
I would say the cash flow and the funding of the business. As part of a deliberate investment plan during the ownership of our current owners, we’ve been going through a path where we are consciously losing money, i.e. we’ve invested in marketing and in management infrastructure to get a greater customer base and operational capability, and getting equity investment to support that loss-making.
This can make the day-to-day working capital management very challenging because we found that some suppliers will look at our financial statements (or they use credit agencies to look at our financial statements) and they are reluctant to give us credit because we are loss-making. There’s a continual job to be done with credit insurers and credit agencies and suppliers to ensure that they understand why we have the financial position that we have and that we are not a credit risk.
Is the management of these relations part of your job?
Sure, and this is something that I’ve done before in my previous CFO roles and that I keep doing now as COO, either with credit insurers or with our main suppliers. If you take the example of a large group like L'Oreal (responsible for a meaningful portion of our sales), there is a significant amount of money due them at any one point in time. So it’s essential that alongside the commercial relationship going on with them on the buying side, we also have a financial and operational relationship with their finance, credit and supply chain teams, so that they understand our business, our cash requirements.
Funny enough, the small suppliers pose more challenges because they have not necessarily the bandwidth or the inclination to understand your business and therefore they sometimes just refuse to give you credit.
How are your processes keeping up with the fast growth and how do you and the finance team contribute to it?
I would make a distinction between the two “types” of finance: a more “core” finance function around management accounting, financial reporting, the flow of cash in/out the business; and the finance function that revolves around analysis, decision-making, and supporting the business.
Both of them contribute in different ways. As the business grows and scale, we need to make sure that financial processes are aligned to that and scale appropriately and therefore enable the business to operate efficiently and then to make sure we have accurate and timely financial information to understand the performance. And in any e-commerce business, having very up to date information is key. The second is around FP&A, i.e. taking that data and providing the analysis and support to help people in the business to make the right decisions. For me, one of the key things in online business is the pace of decision-making, which implies that having good quality information and having financially literate people that will help you interpret that data and are either able to make decisions themselves or support other managers, is really important.
So, I have two direct reports that have finance elements in the roles, one person is looking at the actual accounting and process side of finance, and other is focused on the analytical side (and the business intelligence team report to her). By the way, I think it is important to have business intelligence tied into the analytical side of finance because that helps driving what data you want to look at, and how to use it in a sensible and structured way.
Having been at Feelunique for more than three years, how do you see technology affecting the finance department?
I think maybe one of the biggest challenges in a business like ours, where technology enables us to manage a high volume of transactions, is that, if you don’t get it right, then you can get into real trouble.
Nowadays, since we have an efficient finance function where many processes are highly automated, we can process thousands of transactions to the business every day having a quite small finance team – around 7 people from the Finance Director down to AP.
So, if efficiently managed, it is great that you can process your supplier payments with two people. However, if things aren’t working well, the mismatching of invoices, item-related disputes, pricing errors, etc, you can get into a mess very quickly. So, again, it is key that you make sure that the end-to-end process runs efficiently, from the buying team placing a purchase order to the supplier processing that on their side (sending you the goods, receiving them into your warehouse, receiving the invoice and matching the whole thing off and then paying the supplier). If not, fixing errors could quickly require more resources than you have in your team.