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LeShop: A Success Story in the Swiss E-Commerce
1. The Company
e-commerce share
2. Reason for the Project
3. Increase in Product Range to Include Own-brand Frozen Products
business view, phase-model, animation phase, online advertisement, cannibalising effect, information phase, agreement phase, fulfillment phase, cross-docking, KPI,loyalty phase, personalization, relationships with suppliers, process view, assembly, application view, EDI, technical view
4. Implementation and Operation
solution scenario, implementation, One-to-One, BroadVision, individual software
5. Experiences
6. Success Factors
new economy
1. The Company
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LeShop is an online pioneer, which began selling groceries on the Internet in Switzerland in April 1998. After a turbulent few years, in 2009 LeShop is now one of the few successful e-commerce suppliers in the supermarket segment worldwide.
"LeShop wants to be the number one online shopping centre in Switzerland and the preferred supplier for products for daily use."
Christian Wanner, CEO Le Shop
From the vision follows a growth strategy, which has been adjusted to the development of recent years. Already in 2006, a second logistics centre was opened, with the belief that the potential was far from being exhausted. The management shows a great amount of agility: things are constantly questioned, improvements are sought, new approaches are created and where necessary tried out. Numerous operating figures are measured and are the foundations for a continuous improvement process, in which all employees and suppliers are included. The optimisation takes place in small steps, and is never completed. The LeShop team has learned to seek and find the correct solutions itself. In the past, various consultants were called in or some subtasks were outsourced. The results achieved from this were not always satisfactory.
Importance of IT and E-Business
Information technology has a fundamental significance for the e-commerce supplier LeShop – not only for the online shop. The IT director, member of the four-person executive board, described LeShop as a logistics company with a website as customer interface. All primary business processes are linked to their IT systems, naturally also the “Machine“, as they call the logistical infrastructure internally. Operative performance is a central success factor in the low-margin business, all movement of goods and operations are directed towards it.
2. Reason for the Project
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Starting position and Impetus for the Project
This case study examines the status quo of the business concept of LeShop and makes some statements as to how it has developed over the years. The inclusion of their own range of frozen products will be looked at in more detail as an example of how LeShop manages development processes. LeShop had already had frozen products in their range, but these were operated by the frozen goods specialists Eismann and separately delivered to the customers in their own refrigerated trucks. The advantage of the original approach for LeShop was that they did not have to deal with the high logistical demands involved in the transport of frozen products. However, the disadvantage was that Migros’ own brand of frozen products could not be supplied and that the customers received separate deliveries.
It was LeShops financial director, who provided the impetus in 2008 to operate the delivery of frozen products themselves. He had already developed the central ideas needed for this. The details of the development of the project and its implementation are described in chapter 4.
Introduction of the Business Partners
The achievements and activities described in this case study were predominantly carried out by LeShop themselves; the development also took place largely in-house. In order to understand the company background, it is necessary to introduce the parent company Migros.
Migros
Migros is the largest Swiss retail company. Migros employs 84,000 people at ten regional Migros cooperative associations, other retail companies such as Denner, Globus and LeShop, industrial businesses and other companies. In 2008, the retail sector made a group turnover of 21.5 billion Swiss Francs. In Switzerland, Migros has a market share of around 20 %. The Migros cooperative associations constitute the core of the company; even today they still follow the principles laid down by the founder of the company, Gottlieb Duttweiler, who died in 1962. One of these principles is the concentration on their own brands. Migros’ own brands are held very dear in Switzerland.
LeShop is in the unique position of being able to sell Migros’ own products along with other brands or products not available at Migros such as alcohol. LeShop uses Migros logistics for this and has outsourced the server operation as well as the operations of the network and Internet access to Migros IT Services.
3. Increase in Product Range to Include Own-brand Frozen Products
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In the following chapters, the business concept of LeShop and its operative implementation will be described as a whole. Aspects which are connected to the increase in product range to include their own brand of frozen products in mid 2009 will be described in more detail.
Business View and Objectives
LeShop is an online shopping centre with the main emphasis on the supermarket range of products. The target group is young families and working mothers who regularly have to deal with a large household shopping and who appreciate the home delivery service. Groceries, every day products and selected other articles from Migros’ range are for the most part, operated by LeShop themselves. Alongside this, LeShop sells complementary articles such as underwear and jewellery. These are operated by independent suppliers. Although in all cases the order is made through the shopping basket in the LeShop online shop, the customer is confronted with different delivery and payment configurations when they buy complementary articles. The delivery is made through LeShop or directly from the original supplier, depending on which part of the range it is. With these complementary articles, LeShop can raise the potential turnover of its investment in advertising and sales, without the increase in complexity which a broadening of their own product range would entail.
Before Migros frozen products were included, there was a complementary range operated from another supplier. In the second quarter of 2009, LeShop took over this segment and, in doing so, made its range more attractive. Again, the benefit for the customer is in the combination of Migros products with articles from other sources. As an additional benefit, the customer receives just one delivery instead of two separate ones.
The business scenario (cf. Figure 1) shows the added value configuration of LeShop with its partners, the most important processes and exchange/interchange transactions.
Figure 1: Business Scenario of LeShop
The organization of the market development and the activity will be discussed in the next section, according to the 5-Phase-Model [phase-model] for a continuous selling process.
Organisation of Market Performance in the 5-Phase-Model: 1. Animation Phase
LeShop aims for a long-term relationship with its customers, so that they will always meet their needs at LeShop. First of all it is necessary, however, to find access to potential consumers with fitting requirements in order to motivate them in the first place towards an initial purchase. This occurs in the animation phase. Because one does not simply come across an online shop as you would with a physical shop in a pedestrian zone, opportunities for contact have to be created by means of continuous advertising campaigns. LeShop runs advertisements on television and radio as well as in print media. Other offline advertising instruments include inserts in mail from advertising partners or personalised content in the Cumulus Programme letter which members of the Migros customer loyalty programme regularly receive. In online advertising [online advertising] , search engine marketing, banner campaigns and affiliate partner programmes play an important role. As an incentive, time limited competitions and price reductions are also offered within the advertising materials. Recipes are a content-led link to potential customers. These are available both on the LeShop website and also interspersed in the programme of the LeShop Internet radio station LeShop.fm, which started in 2008. LeShop benefits from the strong brand Migros, as long as customers notice the connection. The cross-channel advertising potential with Migros offers therein still more in unused potential. The possible shift of some of the purchases from Migros branches to LeShop [cannibalising effect] is not seen by LeShop as detrimental to the Migros group. Unlike their competitor Coop, LeShop can supply both Migros products and branded products so that the cannibalising effect is rather a disadvantage to Coop, if anyone.
5-Phase-Model: 2. Information Phase
Once the customer has visited the online shop for the first time and knows what is available, we speak of the Information Phase. It is important that customers find what they are looking for quickly and easily. The wide range of products in LeShop is, therefore, divided into 35 main categories which can be successively subclassified. The categories are expanded according to the season, e.g. in summer there is a barbecue category which has a selection of meat and sausages as well as accompanying sauces. LeShop makes good use of visuals, the customer can choose between various graphic renditions, e.g. the display as a list or as a grid with small or large images. Detailed information is provided for each product, maintained by the responsible product manager. The whole shop is available in four languages. Articles which are not available are not displayed at all. Great importance is given to product searches. Customers can search for a product by brand, product description, characteristic or even by an EAN Code. The search is tolerant towards misspellings, singular/plural and upper and lower case letters. In the case of large product ranges, e.g. yoghurt, the search can be further refined by brand, weight or price. Whoever still cannot decide can look at the product feedback from other customers as well as the number of stars awarded and can also read through their comments. Regular customers can set up personal shopping lists so that items needed on a regular basis do not have to be searched for from the various categories every time. Regular customers especially, want to get their shopping done quickly.
5-Phase-Model: 3. Agreement Phase
In the Agreement Phase we assume that the customers have basically found the products that they are interested in, although an actual order is dependent on other factors as well as the simplicity and transparency of the purchase process. The ordering and delivery conditions give information about guarantees, rules for orders (e.g. the minimum order), terms of payment and delivery. If there are additional questions, the customer can contact the Call Center, although they do not process orders there. Methods of payment accepted are listed within the conditions of payment. In addition, when the customer makes an order, they must consent to LeShop obtaining information about their credit history. Within the delivery conditions there are differences between products delivered by LeShop themselves, with special rules for frozen products as well as products from the complementary suppliers. In the case of some articles from complementary suppliers, e.g. jewellery, the order at LeShop is only the intermediary of a contract between the customer and a third supplier. The third supplier in the case of jewellery is the firm Urech. LeShop passes on the order data to this supplier but not the credit card data. The issuing of invoices varies; it can be either through LeShop or through the intermediate supplier.
The whole body of rules and regulations is included in the additional conditions and includes rules about minimum orders, delivery times and costs, deposits etc. LeShop has arranged its conditions in such a way that the mechanics of the logistics costs are quickly transparent and customers can easily see that they benefit from a reduction in their proportion of logistics costs when they make an order with a higher value. The single person, who is ordering a readymade pizza delivered every evening, will not be a LeShop customer. On the other hand, those who order their main household shopping for the coming week(s) all at once, are likely to reach the average LeShop bill of 224 Swiss Francs (145 Euros) without much difficulty and they can also benefit from the minimum delivery charges, depending on how often they order, of 7.90 Swiss Francs (5.12 Euros) or 10.90 Swiss Francs (7.10 Euros) (as of July 2009). This spirit of transparency and participation is a particularly clear advantage in the additional delivery costs for frozen products, which is described in more detail below.
One particular characteristic is the final price of an order, which is calculated only approximately. The reason for this is that some products, such as meat or fruit are charged according to their actual weight. The customer orders in a margin of, e.g. 350 to 400 g chopped beef. The product is displayed with a price per kilo and a price for an amount in the middle of the margin is calculated and placed on the provisional bill. The final order is made by the customer after they have checked the contents of their shopping basket in the check-out process through clicking on the order button. The contract is legally concluded only when the supplier confirms the acceptance of the order.
5-Phase-Model: 4. Fulfilment Phase
After the contract confirmation, we speak of the Fulfilment Phase. In this phase, both parties fulfil their respective obligations; LeShop in the form of delivery, the customer in the form of payment.
The goods processing and the assembling of customer orders are work-intensive tasks and particularly critical for success. It is decisive for the question, whether a profit can still be achieved, despite the complex article handling. For this reason, LeShop does not deliver to just any address in Switzerland, it does, however, reach 90 % of Swiss households. As a rule, for these households the motto is: ordered today, delivered tomorrow. The time frame for deliveries from LeShop is between 17:00 and 20:00 on weekday evenings and on Saturday mornings. In a few regions where there is a low amount of orders, deliveries are not made every day. The physical order processing at LeShop is carried out in two logistics centres. The products come from four temperature zones: unchilled, chilled fruit and vegetables, chilled meat and dairy products as well as – new from mid 2009 – frozen products. LeShop knows that it can only send products to their customers in which there can be absolutely no doubt as to their freshness. Because the supermarket segment represents a continually recurrent need, quality and freshness are regarded as the key to customer retention.
The orders, broken down into partial orders, are assembled in different zones and stored in paper bags. Fresh products are packed in cool bags, which are also equipped with a cool pack in the form of a plastic bottle filled with frozen water. Bread and flowers are processed on an make-to-order basis and are always delivered to the logistics centre early in the morning. After that, they are, like the other articles, simply taken from the shelves according to the order. Paper bags and cool bags are stored in transport boxes, in which the space is used to best advantage. Frozen products are assembled on an make-to-order basis in a specialised area and made ready for the LeShop distribution centres in special deep-freeze boxes. The deep-freeze boxes are already labelled with the final address label and are assigned for delivery in a cross docking process [cross-docking], that is without being opened or repacked. Once all the partial orders are complete, the order is put together and loaded on to one of 34 delivery routes. At this point in time, the customer receives an e-mail with a provisional invoice, so that they know what will be delivered. A carrier takes the grouped shipments in refrigerated vehicles to Swiss Post’s distribution centres, and the last stretch is delivered to the customer as an express delivery. The delivery takes place in a time frame of three hours. For LeShop this represents a reasonable compromise between logistics costs and service. Once arrived at the customer, the bags are taken out of the boxes and handed over so that the boxes can be taken back immediately. Should the customer not be at home, the delivery is either taken to a neighbour (if specified) or simply left outside the front door – in this way, there are practically no problems. The deep-freeze boxes cannot, however, be taken back in this case. The customers can return the boxes and cool bags at the next delivery and receive the deposit back then. The processing and delivery status of the orders can be recorded at every stage with the help of barcode scanners. The post service conveys the updated delivery data to LeShop, so that LeShop has a clear view of the whole delivery.
Insert: Operative Performance in the Warehouse
A central cost factor is the time taken to assemble the individual orders. It has already been mentioned that LeShop raises operating figures in its endeavours for continual improvement. Correspondingly, there are also key operating figures [KPI] e.g. a key figure for the average number of minutes for the assembly of an order. The assembly area is structured into work areas. Around ten people work in each zone. Every commission procedure is recorded with a mobile scanner and is registered with a time stamp. From this basis data, weekly performance figures are formed for each person and team. These can be accessed at several locations in the site. Errors in commissioning are traced back so that the responsible area also receives feedback here. Good performance figures are rewarded at the individual level as well as the team level in the form of bonus payments. The teams therefore are self-motivated to try to perform well. They are rewarded in this: most of the employees can greatly improve their basic salary, which is in line with the industry standard, through their performance.
After the up-to-date delivery data is transferred from the Post service, the order is settled. This includes the addition/deduction of the deposit from the bill after obtaining or returning cool bags and deep-freeze boxes. The customer receives this final order settlement as a pdf file by e-mail. If the customer pays by card, this is only actually debited now, at the time of the order only a reservation was made. The processing of card payments is carried out by the Payment Service Provider Datatrans. Customers who want to pay via an invoice with payment slip, receive this by post. For this purpose, the invoice data is passed to a Billing Service Provider on a monthly basis. This service provider undertakes the printing and dispatch of the invoices, and also sends reminders for payments not made. Codes from promotions as well as points from the customer loyalty programme Migros-Cumulus or UBS KeyClub can also be used as a method of payment.
5-Phasen-Modell: 5. Loyalty Phase
Once an order is completed, the relationship with the customer is not over for a supplier like LeShop. In the Loyalty Phase it is necessary to provide essential services and where relevant, activate guarantees but also to convert knowledge about the customer into new and where appropriate even more advantageous offers and therein cause repeat purchases.
If customers have queries or complaints, they can contact the LeShop Call Center. The staff there has the complete history of the customer on their screen as well as all aspects of the order and their status. In this way they can give professional information. If complaints are made, the staff remains obliging as customer satisfaction is accorded great importance.
The customer data resulting from the transactions is systematically analysed by LeShop. They are dealt with sensitively and not passed on to third parties. In the analysis, three customer groups are identified: 1. working mothers with children, 2. dual income couples without children and 3. others. Additionally, various other distinctions are made, e.g. whether someone has once ordered before, never bought fruit and vegetables and suchlike. Derived from this analysis, the customers receive a moderate amount of personalised e-mails [personalization], the content of which is adjusted to them and which can contain a targeted promotion. An online shopping session can also have an insert of a personalised promotion. Offline, Migros Cumulus letters can contain personalised special offers for LeShop customers. When a purchase is made within three weeks of the previous one, and exceeds a certain threshold, the customer is rewarded with the lowest possible delivery charge. Provided customers participate in the Migros customer loyalty programme Cumulus, they also receive cumulus points for their purchase of Migros products at LeShop. Particularly good customers occasionally receive a gift or invitations to special events. The success of the customer retention measures is shown in the fact that more than 35,000 Swiss households do their main shopping between once and several times a month at LeShop.
Cooperation with suppliers
LeShop is proud of its relationships with suppliers [relationships with suppliers]. These are established with a view to the long-term and included in the continual improvement process. Although LeShop’s sales volume is relatively small, it still has access to company management even at very large suppliers because of its role as an e-commerce pioneer. LeShop had to develop new performance characteristics and processes, which would have been impossible without constructive teamwork with their suppliers. One tries to achieve progress not by putting suppliers under pressure but by including them in the project. The internal fact orientation is extended to the suppliers. In this way, LeShop could even make a difference in such a large company like Swiss Post. Quality data is exchanged, KPIs (Key Performance Indicators) are discussed and better solutions are sought together. This is how suppliers are transformed with LeShop; a large post service in exactly the same way as the butcher and baker from Weingarten, for whom LeShop has become the most important customer. The principle is give and take. LeShop gives its suppliers, for example access to a part of the anonymised data so that they receive direct information from the market. The postal workers at Swiss Post receive a Christmas present with a letter and a “thank you” for their efforts – many employees do not even receive that from their own employer.
Expansion of the range to include own-brand frozen products
The decision to include own-brand frozen products in the range first came up when a solution was found how LeShop could deal with the additional demands (for the development of this solution see chapter 4). In its centre there is a separate transport box with dry ice, so that the cold chain can be maintained uninterrupted right to the customer. The freezer box is filled on a made-to-order basis in a separate deep-freeze storage warehouse, provided with final shipment labels and located with other transport containers in a cross docking process.
Figure 2: Display of dynamic transport cost depending on the fill level of the freezer box
There are considerable additional costs associated with deep-freeze logistics. One of the reasons is the price of the freezer box itself, for which a deposit of 30 Swiss Francs (20 Euros) is charged for each order. This correspondingly requires stock management and accounting logistics. Another reason is the additional logistic effort; for an order of a single package of ice cream these costs would be out of proportion with the value of the good itself. This is why LeShop makes the logistics costs for a box clear and charges the customer an additional 10 Swiss Francs (6.50 Euros) when they order small quantities of frozen products. If, on the other hand, the customer orders enough frozen products to fill the box, the additional costs are reduced in steps along the fill level to zero (empty). This correlation is shown in a dynamic display under the shopping basket symbol for the customer during the ordering process (see Figure 2).
Process View
The business scenario (Figure 1) gives an overview of the most important processes at LeShop. Figure 3 details the process of the assembly of partial orders in the stock zones of the logistics centres [assembly].
Figure 3: The process of assembling the partial orders
The complete orders were previously split into part orders per stock zone. The employees in the stock room assemble their orders led by the warehouse management system. Necessary data is displayed on their mobile handheld appliance, which is also equipped with a barcode scanner. At the commissioning, the actual articles taken are registered. If it is an article where the weight can vary, e.g. fruit, the actual weight data forms a basis for the final invoice calculation. During the process, the time of each individual operation made by the employee is also recorded. This data is the basis for the later valuation of performance.
Application View
All of the core systems at LeShop have been developed by LeShop themselves. Figure 4 shows an overview of the applications implemented and their task distribution. Within the kernel system developed in Java, LeShop distinguishes three large programme sections: the front-end (website with online shop), the back-end (all internal operative processes) and the system called “Call Center“, which is basically a comprehensive customer management system. They are integrated and work with the same data. The users can access them with a Web browser.
Alongside, a series of standard software systems and tools for special application areas are in use, e.g. Celebros for the product search in the online shop, ProClarity for analyses, ABACUS for the financial accounting and others. IT interfaces exist for the external service providers and transport services displayed in Figure 1.
As the own-brand frozen products were introduced, the assembly of the frozen orders for the Bremgarten logistics centre were transferred to a Migros site. The coordination with this site, as usual, should be carried out with automated electronic data interchange (EDI) . In order to achieve this, the first option was to connect this site indirectly to the Migros group’s central inventory control system. There was already a connection there in the framework of the orders of Migros products in LeShop. Because LeShop required an array of specific features for its frozen product range, e.g. the management of external brand products, the initialisation would have been very complex and would have demanded a great deal of time. For this reason it was decided to connect directly to the warehouse management system XELOG, which this company worked with. From LeShop’s view, this is now regarded like an external LeShop warehouse. For the information interchange the required message types were individually defined in an XML format. The most important message types are:
Figure 4: Overview of the most important software applications at LeShop
Technical View
Figure 5 shows the allocation of the systems to the sites as well as networks used for the integration. LeShop has outsourced the operation of the networks and the central production systems to the IT provider Migros IT Services, because they can provide a high performance and fail-safe operation cheaper than LeShop themselves. Nevertheless, the back-end system stands ready in both logistics centres, should there be a network interruption or similar, so that the business can continue to function.
Figure 5: System landscape of LeShop
4. Implementation and Operation
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In the eleven years that LeShop has been in business, many e-commerce companies have been founded and many had to give up. The way in which LeShop approaches projects and solves problems could well be one of its success factors.
Investment Decision
Over the course of years, some ten million Swiss Francs have been invested in LeShop; the exact figure has not been made public. The management emphasises, however, that the sum of investment is much smaller than in comparable companies in the USA and in Great Britain. LeShop has always had to be cautious with capital. The idea was initially implemented on a comparably small scale – with 1,500 dry products – and then successively expanded and optimised. “LeShop was not a company which would receive money from the stock exchange”, says the long-serving general manager and co-founder, its way was “I must first try and see how it goes”. On the stock market, one might have to tell other stories which are not always well-founded. It is indisputable that LeShop needed much more money for the development of expertise and infrastructure than they had had available at the start. Not every idea turned out to be right and sometimes a project had to be abandoned, e.g. activities abroad. However, luck was on their side when they needed to come up with yet more capital at the last minute. The great turning point came in 2006, when LeShop in the first trimester covered its costs for the first time and Migros secured 80 % of the capital. The way was paved towards growth and at the same time a second logistics centre was opened. Because of experience gained, human flexibility was more highly valued than rigid structure investment: the second warehouse is less mechanised than the first.
The stimulus for the project to introduce their own frozen products came from LeShop’s finance director. This is on the one hand surprising because this is not a typical concern for the finance department. On the other hand, it is characteristic of LeShop because every member of the four person directorship feels responsible for the company as a whole and also contributes to other departments, if one has new ideas or if in times of need. The starting point was the first approaches on how the great logistical challenges could be solved. They were the basis for some workshops which were described as “excel-dominated” by the IT director later responsible for the implementation. With Excel the project was calculated through, in doing so a timeframe of three years was applied and the estimates tended towards the conservative. LeShop always begins with the simplest scenario in these situations, in this case with a high degree of outsourcing [solution scenario]. But these calculations did not add up. Other scenarios were therefore developed, market targeting was undertaken with partners and partial solutions were devised, until a concept with an appropriate ratio of profit, costs and risks was found: A cool box with dry ice enables the uninterrupted cold chain from the LeShop warehouse to the customer’s front door. This is how it is possible for frozen products to be delivered alongside other products in one LeShop delivery.
Project Management and Change Management
Once the concept was found, it was quickly and decisively implemented. The development is observed using the same KPIs as in other goods ranges. The only additional measured value is the filling degree of the freezer boxes.
Choice of Partner
The frozen range brings along with it the need for at least a deep-freeze storage facility to be in operation and frozen products must be assembled. A Migros group factory offered to take on this service at their site and to provide fully commissioned freezer boxes in a cross-docking procedure. In doing so, transport costs to the LeShop logistics centres are incurred. For one of the two centres, these costs are affordable because of the short distance, not, however, for the other. It was therefore decided to build their own deep-freeze storage facility at the more distant site and to set up a new assembly process for frozen products. However, the supply in the cross-docking procedure is the same.
Evaluation and Implementation of the Solution
At the start of its business LeShop had originally wanted to keep the complexity of its activity small through extensive outsourcing and establishing of standard solutions. This also affected logistics and informatics.
In logistics, a strategic partnership with Swiss Post is in place. Swiss Post together with partners carried out warehousing and commissioning of orders in the early years. However, it became evident that the logistics requirements in e-commerce with their heterogeneous and complex small parcel shipment were clearly different to the pallets and large cargo shipments which the partners’ logistics were oriented towards. The integration of the IT systems was also no easy task as, at the end of the 1990s, these were not as yet designed for flexible cross-company cooperation. The appropriate balance between performance and cost could not be achieved in this configuration, so LeShop took over these functions themselves in 2001 and opened their first warehouse in Bremgarten.
In terms of business software they started with the system One-to-One from the then highly respected US supplier BroadVision. BroadVision. LeShop was a reference customer for BroadVision in Europe. It was decided to collaborate and further develop the solution together. Accordingly, LeShop had complete access to the source code of the software. One-to-One was primarily front-end orientated, functionality for the e-commerce logistics was lacking. Virtually every element of the application was configurable, resulting in a huge level of complexity in adjustments. Moreover, there were performance problems with the object-oriented application. LeShop quickly gained experience, which was reflected in clear specifications on the system functionality. For example, for fruit, vegetables or meat the actual variable weight and also the price should be displayed on every order. The final value of an order then varied from the original value. The standard software did not allow for such details to be displayed. Adaptations and expansions turned out to be too complex and costly, not least because of the high demand on external consultants. In order to be in a position to put their own demands more quickly and efficiently into effect, they began to replace One-to-One with their own developments in Java [individual software]. Because One-to-One is compatible with Java, a gradual replacement was possible. In a first step, the product search in the shop was replaced, next the shopping basket. Successively, all modules from One-to-One were replaced and new functionalities for the inventory management and the “machine” were developed. By “Machine“ the logistical infrastructure is meant, consisting of guide rails, switch plates and scanners. Particularly in logistics, it had been attempted to bring in experienced external experts. These were, however, so set in their ways that they were not considered suitable for a newcomer like LeShop. So, LeShop was forced to come up with the logistics for the e-commerce in the supermarket segment themselves. Ultimately the entire functionality of the software used today is self-defined and devised. In the development of software, LeShop is anxious to keep the systems simple and flexible. Adaptations must be possible, because “LeShop is ready every day to achieve a better process“. The conceptual considerations are documented in a Wiki, the implementation is specified directly in code. The IT director has built up the LeShop system in its current form from the beginning on with his team. He knows it inside out and is, therefore, a key person.
The introduction of own-brand frozen goods into the range was accompanied by numerous detailed specifications. One of them is, firstly, the already mentioned logistics scenario with the separate commissioning, the freezer boxes and the cross-docking provision. The freezer box suitable for the LeShop infrastructure was developed and produced for LeShop. The deep-freeze storage facility had to be built in Ecublens and be equipped for the commissioning. Automatic electronic data interchange had to be set up and tested with the Migros operation which provides the logistics centre in Bremgarten with frozen goods. Dry ice as a by-product has to be ordered and kept in stock. Because of its short shelf life, it has to be scheduled and re-ordered on a daily intake basis. The dry ice is in packaging which is exactly portioned and suitable for the layperson, it is furnished with appropriate safety instructions and manuals.
As the freezer boxes are valuable, an inventory and deposit management for each customer had to be programmed. Ingoing and outgoing boxes have to be balanced in the invoices. The cool bags also had a deposit on them, but because the value was low the external stock was not administered. The delivery process was different for the post service workers, depending on whether the freezer boxes are left with the customer or taken back. The recording takes place over handheld appliances with barcode scanners – appliances owned and managed by Swiss Post. The software for these had to be adapted because the delivery person is instructed over the display about what needs to be done. This software adaptation had to be coordinated with the post service and could only be achieved within the framework of a rotational release change.
Finally, the customers had to be informed and given instructions, additionally the terms and conditions had to be extended. The change to the product range was advertised in promotional activities. The communication of the various delivery costs depending on the filling degree of the freezer boxes was a challenge. The approaches first proposed underwent usability tests and proved too complicated. Only after some improvements did the current solutions come into being.
Ongoing Maintenance
It has already been mentioned which activities LeShop undertakes itself and which are outsourced. In IT, LeShop employs around ten people for support and further development of the systems. Additional external resources are called on for specific projects. Alteration projects at LeShop are generated like this: Every member of the executive board has an area of responsibility, in which they are responsible for the observation of KPIs and the optimisation of the processes. But the employees are also a source of many ideas and initiatives for improvements. If an idea is considered promising, it is first finalised theoretically. If appropriate a prototype is set up and functions are tested in live tests. The new functions are only programmed when the concept is approved. The processes is then adapted and transferred into ongoing operational use. Usually, however, there are even more changes in the end; almost any solution can be improved.
This approach runs the danger of a continually increasing complexity in the organisation and the IT systems. However the business management have undertaken to keep it simple. Moreover, the technology-dependent company is reliant on robust and permanently available systems. In this way, ideas are thoroughly filtered. The IT director has the role of a gate keeper. The company director joked that he was the most-hated man in the company because he ultimately decides what is feasible and what is not.
5. Experiences
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Numerous experiences from the eleven-year development of LeShop have already been described. Data about investments and profitability beyond the interwoven statements are not available.
The own-brand frozen range has been much welcomed by the customers. In the first month, June 2009, more than 33 tonnes or 56,600 frozen articles were delivered. Every fifth order already contained frozen goods with an average value of 50 Swiss Francs (32 Euros). Customers have understood that it does not make sense to order small amounts of frozen products. Depending on the season, children’s ice cream topped the list, followed by creamed spinach and oven French fries.
6. Success Factors
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On the occasion of the prize giving at the Best of Swiss Web Award 2009, the company director spoke of the luck that LeShop has had and that LeShop could have easily disappeared like many other e-commerce pioneers when the Internet bubble burst. This can easily be imagined. However, it cannot have been luck alone.
Specialties of the Solution
LeShop invented the supermarket segment in Swiss e-commerce. Neither in the business concept nor the logistics nor the business software could they call upon an established role model. In this respect, LeShop as a whole is a speciality, which, as so often in innovations in business, cannot be traced back to one or a few clear definable factors. Rather, the innovation LeShop consists of a successful combination of several decisions and actions taken over a long period which taken in isolation, are not at all exceptional.
Due to this expertise, LeShop as David managed to team up with the Goliaths and infiltrate a market which is characterised by increasing concentration. It succeeded along with Migros, which as main shareholder, now makes possible a speedy advancement. Migros contributes an attractive product range and brings in support services in logistics and informatics. It also succeeded with the Swiss Post, with whom they searched over some years to find suitable e-commerce logistics. It succeeded with large suppliers such as Nestlé and small ones, like a baker who has tailored his business largely to meet the demands of LeShop.
In the incorporation of frozen products into the own range, the innovation was that, in the use of a cross-docking provision of the delivery of frozen products the existing logistics could be used. The basis for this is the self-developed cool box which, equipped with dry ice, can ensure an uninterrupted cold chain.
Consideration of the Factors for Enduring Success
The undeviating belief in the potential of e-commerce in the supermarket range is certainly one of the success factors at LeShop. However, many visions failed in the Internet start-up era. An important factor was therefore the recognition that LeShop was operationally, above all a logistics company. Characterised by low margins and as challenging as the supermarket range is, it is about making the most of every opportunity and designing the range in such a way that it can be dealt with logistically and economically. Exactly how this is done, LeShop had to figure out first. With confidence and a great deal of persistence, a continuous learning process was established and sustained. Such a path is associated with many unpleasant situations, in which mistakes and uncertainness must be discussed. A further success factor should be accounted for here. The relationships were formed in such a way both within and outside that everyone overcame their differences and made improvements instead of bickering and giving up. A consistent orientation on facts, and, as a condition therein, the collection of KPIs as well as the open communication about them form the basis of a continuous improvement process supported by many participants.
If there is one central element of the infrastructure which represents LeShop’s business concept, it is the IT platform with the business software. It carries the business concept as front-end to the customers and allows an automatic control of the order logistics and accounting without media discontinuity. Apart from goods handling, no human assistance is needed in the standard process. The own-brand range is being extended with externally managed complementary ranges which are only integrated over data and therein the market potential is broadened. Far-reaching innovations such as the introduction of their own frozen product range can be achieved comparably quickly. In every transaction, data is collected, saved and evaluated. Carefully managed customer information is used in a long-term customer relationship to optimise supply and communication. The KPIs are the basis of the continuous learning and improvement process. LeShop’s business software was individually developed because standard software offered no acceptable solutions and because LeShop sees its strengths precisely in the agile and accurate organisation of its range and its processes. It will be a challenge, however, to continue this solution that has grown in so many small projects in such an agile and competent way if the key personnel from the first years are no longer available.
Lessons Learned
When one looks at LeShop quite simply and sees how it was developed with a great deal of expertise and how the infrastructure was built up, it is a little easier to understand why so many start-ups of the new economy failed at the beginning of the 21st century. Many really believed that fundamentally, with a clever customer front-end in the form of a website or an online shop, they could quickly be in business. In the back-end of the order processing and logistics, one would have been glad to rely on the apparent commodities of the old economy. However, in truth and in practice, the dependencies are larger. Successful business concepts must be integrated and perfected through the whole value creation chain, also when they begin in the Internet. To develop this required more time, expertise and capital than the most start-ups ten years ago were able to muster.
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Wölfle, Ralf (2009): LeShop: Eine Erfolgsstory im Schweizer E-Commerce, in: Wölfle, Ralf; Schubert, Petra (Hrsg.), Dauerhafter Erfolg mit Business Software - 10 Jahre Fallstudien nach der eXperience Methodik, München: Carl Hanser Verlag, 2009, S. 195-216. |
1. The Company
e-commerce share
2. Reason for the Project
3. Increase in Product Range to Include Own-brand Frozen Products
business view, phase-model, animation phase, online advertisement, cannibalising effect, information phase, agreement phase, fulfillment phase, cross-docking, KPI,loyalty phase, personalization, relationships with suppliers, process view, assembly, application view, EDI, technical view
4. Implementation and Operation
solution scenario, implementation, One-to-One, BroadVision, individual software
5. Experiences
6. Success Factors
new economy
1. The Company
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LeShop is an online pioneer, which began selling groceries on the Internet in Switzerland in April 1998. After a turbulent few years, in 2009 LeShop is now one of the few successful e-commerce suppliers in the supermarket segment worldwide.
Background, Sector, Products and Target Group
he limited company LeShop SA has been in majority ownership by Migros, the largest Swiss retailer, since 2006. Private investors still hold a share of just under 10 %. Even after the takeover by Migros, LeShop retained substantial freedom of operations and organisation.
LeShop sells solely on the Internet and only in Switzerland. In 2008, 200 employees processed 500,000 orders with an average value of 224 Swiss Francs (145 Euros), which resulted in an annual turnover of 112 Million Swiss Francs. LeShop has two logistic centres, one at the headquarters in Ecublens in the Frensh-speaking canton of Vaud and one in Bremgarten in the German-speaking canton of Aargau. Delivery is carried out by Swiss Post; the delivery area covers 90% of Swiss households.
LeShop’s core product range comprises supermarket products, supplemented by some special departments such as, e.g. underwear. In total, around 12,000 products are sold, of which fresh products such as fruit and vegetables, dairy products, bread and meat have a large share. The range of goods covers various customer tastes: additionally to regular Migros products and branded articles, other items are offered such as organic products, fair trade products, international specialities, exclusive gourmet products and M-Budget products for price-orientated customers. A unique selling point comes from the distinctive feature that LeShop can not only offer the Migros own brand (which is very popular in Switzerland) but also sell branded articles and other non-Migros articles such as alcohol. No competitor has such a large combination of goods on offer, not even in stationary trade.
The Swiss retail market is a saturated market, which has only grown at a rate of about 1% per year during the past 20 years. In the mid nineties, e-commerce emerged as an additional distribution channel in this sector. E-commerce sales amount to an estimated market share at around 5 % of the whole Swiss retail market in 2008. In the grocery and supermarket sector, the e-commerce share is much smaller: LeShop estimates the e-commerce share at 0.5 % [e-commerce share], of which around two thirds is allotted to LeShop and one third to the only relevant competitor coop@home. The reason for the lower share lies in the particularly high logistic demands caused by the heterogeneous and often perishable products. Other than in many other product segments, e-commerce cannot boast price advantages for groceries and so concentrates rather on service-orientated customers. Online merchants can successfully charge delivery costs to the customers. Nevertheless, for some years the market volume of this segment has risen between 20 and 40 % per year. LeShop reported a rise in turnover of 17 % in the first half of 2009, which is attributed to numerous new customers. For these customers, home delivery of their regular main shopping seems to be the most important reason for their Internet order. LeShop perceives young families and working mothers as their core customer base. They save time otherwise spent in the car or in the supermarket, they do not even have to carry the goods into the house themselves. Doing one’s main shopping results in high bills which are then honoured by LeShop in the form of low delivery costs.
Company Vision
The pioneer LeShop is the market leader in the supermarket sector in Switzerland and contributes greatly to the fact that Switzerland is second only to Great Britain worldwide in terms of the amount of turnover per head in this segment. LeShop expects a further lasting growth of the e-commerce share of consumer expenditure in the supermarket range. In this, the orientation is on Great Britain, where the e-commerce share already constitutes 2.2 % of all retail in 2008, a good four times the share in Switzerland. LeShop wants to maintain its leader role in its original supermarket range and also to selectively expand it, which is also reflected in their vision:
"LeShop wants to be the number one online shopping centre in Switzerland and the preferred supplier for products for daily use."
Christian Wanner, CEO Le Shop
From the vision follows a growth strategy, which has been adjusted to the development of recent years. Already in 2006, a second logistics centre was opened, with the belief that the potential was far from being exhausted. The management shows a great amount of agility: things are constantly questioned, improvements are sought, new approaches are created and where necessary tried out. Numerous operating figures are measured and are the foundations for a continuous improvement process, in which all employees and suppliers are included. The optimisation takes place in small steps, and is never completed. The LeShop team has learned to seek and find the correct solutions itself. In the past, various consultants were called in or some subtasks were outsourced. The results achieved from this were not always satisfactory.
Importance of IT and E-Business
Information technology has a fundamental significance for the e-commerce supplier LeShop – not only for the online shop. The IT director, member of the four-person executive board, described LeShop as a logistics company with a website as customer interface. All primary business processes are linked to their IT systems, naturally also the “Machine“, as they call the logistical infrastructure internally. Operative performance is a central success factor in the low-margin business, all movement of goods and operations are directed towards it.
2. Reason for the Project
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Starting position and Impetus for the Project
This case study examines the status quo of the business concept of LeShop and makes some statements as to how it has developed over the years. The inclusion of their own range of frozen products will be looked at in more detail as an example of how LeShop manages development processes. LeShop had already had frozen products in their range, but these were operated by the frozen goods specialists Eismann and separately delivered to the customers in their own refrigerated trucks. The advantage of the original approach for LeShop was that they did not have to deal with the high logistical demands involved in the transport of frozen products. However, the disadvantage was that Migros’ own brand of frozen products could not be supplied and that the customers received separate deliveries.
It was LeShops financial director, who provided the impetus in 2008 to operate the delivery of frozen products themselves. He had already developed the central ideas needed for this. The details of the development of the project and its implementation are described in chapter 4.
Introduction of the Business Partners
The achievements and activities described in this case study were predominantly carried out by LeShop themselves; the development also took place largely in-house. In order to understand the company background, it is necessary to introduce the parent company Migros.
Migros
Migros is the largest Swiss retail company. Migros employs 84,000 people at ten regional Migros cooperative associations, other retail companies such as Denner, Globus and LeShop, industrial businesses and other companies. In 2008, the retail sector made a group turnover of 21.5 billion Swiss Francs. In Switzerland, Migros has a market share of around 20 %. The Migros cooperative associations constitute the core of the company; even today they still follow the principles laid down by the founder of the company, Gottlieb Duttweiler, who died in 1962. One of these principles is the concentration on their own brands. Migros’ own brands are held very dear in Switzerland.
LeShop is in the unique position of being able to sell Migros’ own products along with other brands or products not available at Migros such as alcohol. LeShop uses Migros logistics for this and has outsourced the server operation as well as the operations of the network and Internet access to Migros IT Services.
3. Increase in Product Range to Include Own-brand Frozen Products
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In the following chapters, the business concept of LeShop and its operative implementation will be described as a whole. Aspects which are connected to the increase in product range to include their own brand of frozen products in mid 2009 will be described in more detail.
Business View and Objectives
LeShop is an online shopping centre with the main emphasis on the supermarket range of products. The target group is young families and working mothers who regularly have to deal with a large household shopping and who appreciate the home delivery service. Groceries, every day products and selected other articles from Migros’ range are for the most part, operated by LeShop themselves. Alongside this, LeShop sells complementary articles such as underwear and jewellery. These are operated by independent suppliers. Although in all cases the order is made through the shopping basket in the LeShop online shop, the customer is confronted with different delivery and payment configurations when they buy complementary articles. The delivery is made through LeShop or directly from the original supplier, depending on which part of the range it is. With these complementary articles, LeShop can raise the potential turnover of its investment in advertising and sales, without the increase in complexity which a broadening of their own product range would entail.
Before Migros frozen products were included, there was a complementary range operated from another supplier. In the second quarter of 2009, LeShop took over this segment and, in doing so, made its range more attractive. Again, the benefit for the customer is in the combination of Migros products with articles from other sources. As an additional benefit, the customer receives just one delivery instead of two separate ones.
The business scenario (cf. Figure 1) shows the added value configuration of LeShop with its partners, the most important processes and exchange/interchange transactions.
Figure 1: Business Scenario of LeShop
The organization of the market development and the activity will be discussed in the next section, according to the 5-Phase-Model [phase-model] for a continuous selling process.
Organisation of Market Performance in the 5-Phase-Model: 1. Animation Phase
LeShop aims for a long-term relationship with its customers, so that they will always meet their needs at LeShop. First of all it is necessary, however, to find access to potential consumers with fitting requirements in order to motivate them in the first place towards an initial purchase. This occurs in the animation phase. Because one does not simply come across an online shop as you would with a physical shop in a pedestrian zone, opportunities for contact have to be created by means of continuous advertising campaigns. LeShop runs advertisements on television and radio as well as in print media. Other offline advertising instruments include inserts in mail from advertising partners or personalised content in the Cumulus Programme letter which members of the Migros customer loyalty programme regularly receive. In online advertising [online advertising] , search engine marketing, banner campaigns and affiliate partner programmes play an important role. As an incentive, time limited competitions and price reductions are also offered within the advertising materials. Recipes are a content-led link to potential customers. These are available both on the LeShop website and also interspersed in the programme of the LeShop Internet radio station LeShop.fm, which started in 2008. LeShop benefits from the strong brand Migros, as long as customers notice the connection. The cross-channel advertising potential with Migros offers therein still more in unused potential. The possible shift of some of the purchases from Migros branches to LeShop [cannibalising effect] is not seen by LeShop as detrimental to the Migros group. Unlike their competitor Coop, LeShop can supply both Migros products and branded products so that the cannibalising effect is rather a disadvantage to Coop, if anyone.
5-Phase-Model: 2. Information Phase
Once the customer has visited the online shop for the first time and knows what is available, we speak of the Information Phase. It is important that customers find what they are looking for quickly and easily. The wide range of products in LeShop is, therefore, divided into 35 main categories which can be successively subclassified. The categories are expanded according to the season, e.g. in summer there is a barbecue category which has a selection of meat and sausages as well as accompanying sauces. LeShop makes good use of visuals, the customer can choose between various graphic renditions, e.g. the display as a list or as a grid with small or large images. Detailed information is provided for each product, maintained by the responsible product manager. The whole shop is available in four languages. Articles which are not available are not displayed at all. Great importance is given to product searches. Customers can search for a product by brand, product description, characteristic or even by an EAN Code. The search is tolerant towards misspellings, singular/plural and upper and lower case letters. In the case of large product ranges, e.g. yoghurt, the search can be further refined by brand, weight or price. Whoever still cannot decide can look at the product feedback from other customers as well as the number of stars awarded and can also read through their comments. Regular customers can set up personal shopping lists so that items needed on a regular basis do not have to be searched for from the various categories every time. Regular customers especially, want to get their shopping done quickly.
5-Phase-Model: 3. Agreement Phase
In the Agreement Phase we assume that the customers have basically found the products that they are interested in, although an actual order is dependent on other factors as well as the simplicity and transparency of the purchase process. The ordering and delivery conditions give information about guarantees, rules for orders (e.g. the minimum order), terms of payment and delivery. If there are additional questions, the customer can contact the Call Center, although they do not process orders there. Methods of payment accepted are listed within the conditions of payment. In addition, when the customer makes an order, they must consent to LeShop obtaining information about their credit history. Within the delivery conditions there are differences between products delivered by LeShop themselves, with special rules for frozen products as well as products from the complementary suppliers. In the case of some articles from complementary suppliers, e.g. jewellery, the order at LeShop is only the intermediary of a contract between the customer and a third supplier. The third supplier in the case of jewellery is the firm Urech. LeShop passes on the order data to this supplier but not the credit card data. The issuing of invoices varies; it can be either through LeShop or through the intermediate supplier.
The whole body of rules and regulations is included in the additional conditions and includes rules about minimum orders, delivery times and costs, deposits etc. LeShop has arranged its conditions in such a way that the mechanics of the logistics costs are quickly transparent and customers can easily see that they benefit from a reduction in their proportion of logistics costs when they make an order with a higher value. The single person, who is ordering a readymade pizza delivered every evening, will not be a LeShop customer. On the other hand, those who order their main household shopping for the coming week(s) all at once, are likely to reach the average LeShop bill of 224 Swiss Francs (145 Euros) without much difficulty and they can also benefit from the minimum delivery charges, depending on how often they order, of 7.90 Swiss Francs (5.12 Euros) or 10.90 Swiss Francs (7.10 Euros) (as of July 2009). This spirit of transparency and participation is a particularly clear advantage in the additional delivery costs for frozen products, which is described in more detail below.
One particular characteristic is the final price of an order, which is calculated only approximately. The reason for this is that some products, such as meat or fruit are charged according to their actual weight. The customer orders in a margin of, e.g. 350 to 400 g chopped beef. The product is displayed with a price per kilo and a price for an amount in the middle of the margin is calculated and placed on the provisional bill. The final order is made by the customer after they have checked the contents of their shopping basket in the check-out process through clicking on the order button. The contract is legally concluded only when the supplier confirms the acceptance of the order.
5-Phase-Model: 4. Fulfilment Phase
After the contract confirmation, we speak of the Fulfilment Phase. In this phase, both parties fulfil their respective obligations; LeShop in the form of delivery, the customer in the form of payment.
The goods processing and the assembling of customer orders are work-intensive tasks and particularly critical for success. It is decisive for the question, whether a profit can still be achieved, despite the complex article handling. For this reason, LeShop does not deliver to just any address in Switzerland, it does, however, reach 90 % of Swiss households. As a rule, for these households the motto is: ordered today, delivered tomorrow. The time frame for deliveries from LeShop is between 17:00 and 20:00 on weekday evenings and on Saturday mornings. In a few regions where there is a low amount of orders, deliveries are not made every day. The physical order processing at LeShop is carried out in two logistics centres. The products come from four temperature zones: unchilled, chilled fruit and vegetables, chilled meat and dairy products as well as – new from mid 2009 – frozen products. LeShop knows that it can only send products to their customers in which there can be absolutely no doubt as to their freshness. Because the supermarket segment represents a continually recurrent need, quality and freshness are regarded as the key to customer retention.
The orders, broken down into partial orders, are assembled in different zones and stored in paper bags. Fresh products are packed in cool bags, which are also equipped with a cool pack in the form of a plastic bottle filled with frozen water. Bread and flowers are processed on an make-to-order basis and are always delivered to the logistics centre early in the morning. After that, they are, like the other articles, simply taken from the shelves according to the order. Paper bags and cool bags are stored in transport boxes, in which the space is used to best advantage. Frozen products are assembled on an make-to-order basis in a specialised area and made ready for the LeShop distribution centres in special deep-freeze boxes. The deep-freeze boxes are already labelled with the final address label and are assigned for delivery in a cross docking process [cross-docking], that is without being opened or repacked. Once all the partial orders are complete, the order is put together and loaded on to one of 34 delivery routes. At this point in time, the customer receives an e-mail with a provisional invoice, so that they know what will be delivered. A carrier takes the grouped shipments in refrigerated vehicles to Swiss Post’s distribution centres, and the last stretch is delivered to the customer as an express delivery. The delivery takes place in a time frame of three hours. For LeShop this represents a reasonable compromise between logistics costs and service. Once arrived at the customer, the bags are taken out of the boxes and handed over so that the boxes can be taken back immediately. Should the customer not be at home, the delivery is either taken to a neighbour (if specified) or simply left outside the front door – in this way, there are practically no problems. The deep-freeze boxes cannot, however, be taken back in this case. The customers can return the boxes and cool bags at the next delivery and receive the deposit back then. The processing and delivery status of the orders can be recorded at every stage with the help of barcode scanners. The post service conveys the updated delivery data to LeShop, so that LeShop has a clear view of the whole delivery.
Insert: Operative Performance in the Warehouse
A central cost factor is the time taken to assemble the individual orders. It has already been mentioned that LeShop raises operating figures in its endeavours for continual improvement. Correspondingly, there are also key operating figures [KPI] e.g. a key figure for the average number of minutes for the assembly of an order. The assembly area is structured into work areas. Around ten people work in each zone. Every commission procedure is recorded with a mobile scanner and is registered with a time stamp. From this basis data, weekly performance figures are formed for each person and team. These can be accessed at several locations in the site. Errors in commissioning are traced back so that the responsible area also receives feedback here. Good performance figures are rewarded at the individual level as well as the team level in the form of bonus payments. The teams therefore are self-motivated to try to perform well. They are rewarded in this: most of the employees can greatly improve their basic salary, which is in line with the industry standard, through their performance.
After the up-to-date delivery data is transferred from the Post service, the order is settled. This includes the addition/deduction of the deposit from the bill after obtaining or returning cool bags and deep-freeze boxes. The customer receives this final order settlement as a pdf file by e-mail. If the customer pays by card, this is only actually debited now, at the time of the order only a reservation was made. The processing of card payments is carried out by the Payment Service Provider Datatrans. Customers who want to pay via an invoice with payment slip, receive this by post. For this purpose, the invoice data is passed to a Billing Service Provider on a monthly basis. This service provider undertakes the printing and dispatch of the invoices, and also sends reminders for payments not made. Codes from promotions as well as points from the customer loyalty programme Migros-Cumulus or UBS KeyClub can also be used as a method of payment.
5-Phasen-Modell: 5. Loyalty Phase
Once an order is completed, the relationship with the customer is not over for a supplier like LeShop. In the Loyalty Phase it is necessary to provide essential services and where relevant, activate guarantees but also to convert knowledge about the customer into new and where appropriate even more advantageous offers and therein cause repeat purchases.
If customers have queries or complaints, they can contact the LeShop Call Center. The staff there has the complete history of the customer on their screen as well as all aspects of the order and their status. In this way they can give professional information. If complaints are made, the staff remains obliging as customer satisfaction is accorded great importance.
The customer data resulting from the transactions is systematically analysed by LeShop. They are dealt with sensitively and not passed on to third parties. In the analysis, three customer groups are identified: 1. working mothers with children, 2. dual income couples without children and 3. others. Additionally, various other distinctions are made, e.g. whether someone has once ordered before, never bought fruit and vegetables and suchlike. Derived from this analysis, the customers receive a moderate amount of personalised e-mails [personalization], the content of which is adjusted to them and which can contain a targeted promotion. An online shopping session can also have an insert of a personalised promotion. Offline, Migros Cumulus letters can contain personalised special offers for LeShop customers. When a purchase is made within three weeks of the previous one, and exceeds a certain threshold, the customer is rewarded with the lowest possible delivery charge. Provided customers participate in the Migros customer loyalty programme Cumulus, they also receive cumulus points for their purchase of Migros products at LeShop. Particularly good customers occasionally receive a gift or invitations to special events. The success of the customer retention measures is shown in the fact that more than 35,000 Swiss households do their main shopping between once and several times a month at LeShop.
Cooperation with suppliers
LeShop is proud of its relationships with suppliers [relationships with suppliers]. These are established with a view to the long-term and included in the continual improvement process. Although LeShop’s sales volume is relatively small, it still has access to company management even at very large suppliers because of its role as an e-commerce pioneer. LeShop had to develop new performance characteristics and processes, which would have been impossible without constructive teamwork with their suppliers. One tries to achieve progress not by putting suppliers under pressure but by including them in the project. The internal fact orientation is extended to the suppliers. In this way, LeShop could even make a difference in such a large company like Swiss Post. Quality data is exchanged, KPIs (Key Performance Indicators) are discussed and better solutions are sought together. This is how suppliers are transformed with LeShop; a large post service in exactly the same way as the butcher and baker from Weingarten, for whom LeShop has become the most important customer. The principle is give and take. LeShop gives its suppliers, for example access to a part of the anonymised data so that they receive direct information from the market. The postal workers at Swiss Post receive a Christmas present with a letter and a “thank you” for their efforts – many employees do not even receive that from their own employer.
Expansion of the range to include own-brand frozen products
The decision to include own-brand frozen products in the range first came up when a solution was found how LeShop could deal with the additional demands (for the development of this solution see chapter 4). In its centre there is a separate transport box with dry ice, so that the cold chain can be maintained uninterrupted right to the customer. The freezer box is filled on a made-to-order basis in a separate deep-freeze storage warehouse, provided with final shipment labels and located with other transport containers in a cross docking process.
Figure 2: Display of dynamic transport cost depending on the fill level of the freezer box
There are considerable additional costs associated with deep-freeze logistics. One of the reasons is the price of the freezer box itself, for which a deposit of 30 Swiss Francs (20 Euros) is charged for each order. This correspondingly requires stock management and accounting logistics. Another reason is the additional logistic effort; for an order of a single package of ice cream these costs would be out of proportion with the value of the good itself. This is why LeShop makes the logistics costs for a box clear and charges the customer an additional 10 Swiss Francs (6.50 Euros) when they order small quantities of frozen products. If, on the other hand, the customer orders enough frozen products to fill the box, the additional costs are reduced in steps along the fill level to zero (empty). This correlation is shown in a dynamic display under the shopping basket symbol for the customer during the ordering process (see Figure 2).
Process View
The business scenario (Figure 1) gives an overview of the most important processes at LeShop. Figure 3 details the process of the assembly of partial orders in the stock zones of the logistics centres [assembly].
Figure 3: The process of assembling the partial orders
The complete orders were previously split into part orders per stock zone. The employees in the stock room assemble their orders led by the warehouse management system. Necessary data is displayed on their mobile handheld appliance, which is also equipped with a barcode scanner. At the commissioning, the actual articles taken are registered. If it is an article where the weight can vary, e.g. fruit, the actual weight data forms a basis for the final invoice calculation. During the process, the time of each individual operation made by the employee is also recorded. This data is the basis for the later valuation of performance.
Application View
All of the core systems at LeShop have been developed by LeShop themselves. Figure 4 shows an overview of the applications implemented and their task distribution. Within the kernel system developed in Java, LeShop distinguishes three large programme sections: the front-end (website with online shop), the back-end (all internal operative processes) and the system called “Call Center“, which is basically a comprehensive customer management system. They are integrated and work with the same data. The users can access them with a Web browser.
Alongside, a series of standard software systems and tools for special application areas are in use, e.g. Celebros for the product search in the online shop, ProClarity for analyses, ABACUS for the financial accounting and others. IT interfaces exist for the external service providers and transport services displayed in Figure 1.
As the own-brand frozen products were introduced, the assembly of the frozen orders for the Bremgarten logistics centre were transferred to a Migros site. The coordination with this site, as usual, should be carried out with automated electronic data interchange (EDI) . In order to achieve this, the first option was to connect this site indirectly to the Migros group’s central inventory control system. There was already a connection there in the framework of the orders of Migros products in LeShop. Because LeShop required an array of specific features for its frozen product range, e.g. the management of external brand products, the initialisation would have been very complex and would have demanded a great deal of time. For this reason it was decided to connect directly to the warehouse management system XELOG, which this company worked with. From LeShop’s view, this is now regarded like an external LeShop warehouse. For the information interchange the required message types were individually defined in an XML format. The most important message types are:
- Master data of products from LeShop to Migros site
- Delivery notification of products (large amounts) from LeShop to Migros site
- Goods receipt notification (large amounts) from Migros site to LeShop
- Commissioning order of customer order from LeShop to Migros site
- Feedback for customer order from Migros site to LeShop with status (OK/not OK), picked items, number of deep-freeze containers and their barcode number(s)
- Notification of stock correction (if required) from Migros site to LeShop
Figure 4: Overview of the most important software applications at LeShop
Technical View
Figure 5 shows the allocation of the systems to the sites as well as networks used for the integration. LeShop has outsourced the operation of the networks and the central production systems to the IT provider Migros IT Services, because they can provide a high performance and fail-safe operation cheaper than LeShop themselves. Nevertheless, the back-end system stands ready in both logistics centres, should there be a network interruption or similar, so that the business can continue to function.
Figure 5: System landscape of LeShop
4. Implementation and Operation
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In the eleven years that LeShop has been in business, many e-commerce companies have been founded and many had to give up. The way in which LeShop approaches projects and solves problems could well be one of its success factors.
Investment Decision
Over the course of years, some ten million Swiss Francs have been invested in LeShop; the exact figure has not been made public. The management emphasises, however, that the sum of investment is much smaller than in comparable companies in the USA and in Great Britain. LeShop has always had to be cautious with capital. The idea was initially implemented on a comparably small scale – with 1,500 dry products – and then successively expanded and optimised. “LeShop was not a company which would receive money from the stock exchange”, says the long-serving general manager and co-founder, its way was “I must first try and see how it goes”. On the stock market, one might have to tell other stories which are not always well-founded. It is indisputable that LeShop needed much more money for the development of expertise and infrastructure than they had had available at the start. Not every idea turned out to be right and sometimes a project had to be abandoned, e.g. activities abroad. However, luck was on their side when they needed to come up with yet more capital at the last minute. The great turning point came in 2006, when LeShop in the first trimester covered its costs for the first time and Migros secured 80 % of the capital. The way was paved towards growth and at the same time a second logistics centre was opened. Because of experience gained, human flexibility was more highly valued than rigid structure investment: the second warehouse is less mechanised than the first.
The stimulus for the project to introduce their own frozen products came from LeShop’s finance director. This is on the one hand surprising because this is not a typical concern for the finance department. On the other hand, it is characteristic of LeShop because every member of the four person directorship feels responsible for the company as a whole and also contributes to other departments, if one has new ideas or if in times of need. The starting point was the first approaches on how the great logistical challenges could be solved. They were the basis for some workshops which were described as “excel-dominated” by the IT director later responsible for the implementation. With Excel the project was calculated through, in doing so a timeframe of three years was applied and the estimates tended towards the conservative. LeShop always begins with the simplest scenario in these situations, in this case with a high degree of outsourcing [solution scenario]. But these calculations did not add up. Other scenarios were therefore developed, market targeting was undertaken with partners and partial solutions were devised, until a concept with an appropriate ratio of profit, costs and risks was found: A cool box with dry ice enables the uninterrupted cold chain from the LeShop warehouse to the customer’s front door. This is how it is possible for frozen products to be delivered alongside other products in one LeShop delivery.
Project Management and Change Management
Once the concept was found, it was quickly and decisively implemented. The development is observed using the same KPIs as in other goods ranges. The only additional measured value is the filling degree of the freezer boxes.
Choice of Partner
The frozen range brings along with it the need for at least a deep-freeze storage facility to be in operation and frozen products must be assembled. A Migros group factory offered to take on this service at their site and to provide fully commissioned freezer boxes in a cross-docking procedure. In doing so, transport costs to the LeShop logistics centres are incurred. For one of the two centres, these costs are affordable because of the short distance, not, however, for the other. It was therefore decided to build their own deep-freeze storage facility at the more distant site and to set up a new assembly process for frozen products. However, the supply in the cross-docking procedure is the same.
Evaluation and Implementation of the Solution
At the start of its business LeShop had originally wanted to keep the complexity of its activity small through extensive outsourcing and establishing of standard solutions. This also affected logistics and informatics.
In logistics, a strategic partnership with Swiss Post is in place. Swiss Post together with partners carried out warehousing and commissioning of orders in the early years. However, it became evident that the logistics requirements in e-commerce with their heterogeneous and complex small parcel shipment were clearly different to the pallets and large cargo shipments which the partners’ logistics were oriented towards. The integration of the IT systems was also no easy task as, at the end of the 1990s, these were not as yet designed for flexible cross-company cooperation. The appropriate balance between performance and cost could not be achieved in this configuration, so LeShop took over these functions themselves in 2001 and opened their first warehouse in Bremgarten.
In terms of business software they started with the system One-to-One from the then highly respected US supplier BroadVision. BroadVision. LeShop was a reference customer for BroadVision in Europe. It was decided to collaborate and further develop the solution together. Accordingly, LeShop had complete access to the source code of the software. One-to-One was primarily front-end orientated, functionality for the e-commerce logistics was lacking. Virtually every element of the application was configurable, resulting in a huge level of complexity in adjustments. Moreover, there were performance problems with the object-oriented application. LeShop quickly gained experience, which was reflected in clear specifications on the system functionality. For example, for fruit, vegetables or meat the actual variable weight and also the price should be displayed on every order. The final value of an order then varied from the original value. The standard software did not allow for such details to be displayed. Adaptations and expansions turned out to be too complex and costly, not least because of the high demand on external consultants. In order to be in a position to put their own demands more quickly and efficiently into effect, they began to replace One-to-One with their own developments in Java [individual software]. Because One-to-One is compatible with Java, a gradual replacement was possible. In a first step, the product search in the shop was replaced, next the shopping basket. Successively, all modules from One-to-One were replaced and new functionalities for the inventory management and the “machine” were developed. By “Machine“ the logistical infrastructure is meant, consisting of guide rails, switch plates and scanners. Particularly in logistics, it had been attempted to bring in experienced external experts. These were, however, so set in their ways that they were not considered suitable for a newcomer like LeShop. So, LeShop was forced to come up with the logistics for the e-commerce in the supermarket segment themselves. Ultimately the entire functionality of the software used today is self-defined and devised. In the development of software, LeShop is anxious to keep the systems simple and flexible. Adaptations must be possible, because “LeShop is ready every day to achieve a better process“. The conceptual considerations are documented in a Wiki, the implementation is specified directly in code. The IT director has built up the LeShop system in its current form from the beginning on with his team. He knows it inside out and is, therefore, a key person.
The introduction of own-brand frozen goods into the range was accompanied by numerous detailed specifications. One of them is, firstly, the already mentioned logistics scenario with the separate commissioning, the freezer boxes and the cross-docking provision. The freezer box suitable for the LeShop infrastructure was developed and produced for LeShop. The deep-freeze storage facility had to be built in Ecublens and be equipped for the commissioning. Automatic electronic data interchange had to be set up and tested with the Migros operation which provides the logistics centre in Bremgarten with frozen goods. Dry ice as a by-product has to be ordered and kept in stock. Because of its short shelf life, it has to be scheduled and re-ordered on a daily intake basis. The dry ice is in packaging which is exactly portioned and suitable for the layperson, it is furnished with appropriate safety instructions and manuals.
As the freezer boxes are valuable, an inventory and deposit management for each customer had to be programmed. Ingoing and outgoing boxes have to be balanced in the invoices. The cool bags also had a deposit on them, but because the value was low the external stock was not administered. The delivery process was different for the post service workers, depending on whether the freezer boxes are left with the customer or taken back. The recording takes place over handheld appliances with barcode scanners – appliances owned and managed by Swiss Post. The software for these had to be adapted because the delivery person is instructed over the display about what needs to be done. This software adaptation had to be coordinated with the post service and could only be achieved within the framework of a rotational release change.
Finally, the customers had to be informed and given instructions, additionally the terms and conditions had to be extended. The change to the product range was advertised in promotional activities. The communication of the various delivery costs depending on the filling degree of the freezer boxes was a challenge. The approaches first proposed underwent usability tests and proved too complicated. Only after some improvements did the current solutions come into being.
Ongoing Maintenance
It has already been mentioned which activities LeShop undertakes itself and which are outsourced. In IT, LeShop employs around ten people for support and further development of the systems. Additional external resources are called on for specific projects. Alteration projects at LeShop are generated like this: Every member of the executive board has an area of responsibility, in which they are responsible for the observation of KPIs and the optimisation of the processes. But the employees are also a source of many ideas and initiatives for improvements. If an idea is considered promising, it is first finalised theoretically. If appropriate a prototype is set up and functions are tested in live tests. The new functions are only programmed when the concept is approved. The processes is then adapted and transferred into ongoing operational use. Usually, however, there are even more changes in the end; almost any solution can be improved.
This approach runs the danger of a continually increasing complexity in the organisation and the IT systems. However the business management have undertaken to keep it simple. Moreover, the technology-dependent company is reliant on robust and permanently available systems. In this way, ideas are thoroughly filtered. The IT director has the role of a gate keeper. The company director joked that he was the most-hated man in the company because he ultimately decides what is feasible and what is not.
5. Experiences
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Numerous experiences from the eleven-year development of LeShop have already been described. Data about investments and profitability beyond the interwoven statements are not available.
The own-brand frozen range has been much welcomed by the customers. In the first month, June 2009, more than 33 tonnes or 56,600 frozen articles were delivered. Every fifth order already contained frozen goods with an average value of 50 Swiss Francs (32 Euros). Customers have understood that it does not make sense to order small amounts of frozen products. Depending on the season, children’s ice cream topped the list, followed by creamed spinach and oven French fries.
6. Success Factors
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On the occasion of the prize giving at the Best of Swiss Web Award 2009, the company director spoke of the luck that LeShop has had and that LeShop could have easily disappeared like many other e-commerce pioneers when the Internet bubble burst. This can easily be imagined. However, it cannot have been luck alone.
Specialties of the Solution
LeShop invented the supermarket segment in Swiss e-commerce. Neither in the business concept nor the logistics nor the business software could they call upon an established role model. In this respect, LeShop as a whole is a speciality, which, as so often in innovations in business, cannot be traced back to one or a few clear definable factors. Rather, the innovation LeShop consists of a successful combination of several decisions and actions taken over a long period which taken in isolation, are not at all exceptional.
Due to this expertise, LeShop as David managed to team up with the Goliaths and infiltrate a market which is characterised by increasing concentration. It succeeded along with Migros, which as main shareholder, now makes possible a speedy advancement. Migros contributes an attractive product range and brings in support services in logistics and informatics. It also succeeded with the Swiss Post, with whom they searched over some years to find suitable e-commerce logistics. It succeeded with large suppliers such as Nestlé and small ones, like a baker who has tailored his business largely to meet the demands of LeShop.
In the incorporation of frozen products into the own range, the innovation was that, in the use of a cross-docking provision of the delivery of frozen products the existing logistics could be used. The basis for this is the self-developed cool box which, equipped with dry ice, can ensure an uninterrupted cold chain.
Consideration of the Factors for Enduring Success
The undeviating belief in the potential of e-commerce in the supermarket range is certainly one of the success factors at LeShop. However, many visions failed in the Internet start-up era. An important factor was therefore the recognition that LeShop was operationally, above all a logistics company. Characterised by low margins and as challenging as the supermarket range is, it is about making the most of every opportunity and designing the range in such a way that it can be dealt with logistically and economically. Exactly how this is done, LeShop had to figure out first. With confidence and a great deal of persistence, a continuous learning process was established and sustained. Such a path is associated with many unpleasant situations, in which mistakes and uncertainness must be discussed. A further success factor should be accounted for here. The relationships were formed in such a way both within and outside that everyone overcame their differences and made improvements instead of bickering and giving up. A consistent orientation on facts, and, as a condition therein, the collection of KPIs as well as the open communication about them form the basis of a continuous improvement process supported by many participants.
If there is one central element of the infrastructure which represents LeShop’s business concept, it is the IT platform with the business software. It carries the business concept as front-end to the customers and allows an automatic control of the order logistics and accounting without media discontinuity. Apart from goods handling, no human assistance is needed in the standard process. The own-brand range is being extended with externally managed complementary ranges which are only integrated over data and therein the market potential is broadened. Far-reaching innovations such as the introduction of their own frozen product range can be achieved comparably quickly. In every transaction, data is collected, saved and evaluated. Carefully managed customer information is used in a long-term customer relationship to optimise supply and communication. The KPIs are the basis of the continuous learning and improvement process. LeShop’s business software was individually developed because standard software offered no acceptable solutions and because LeShop sees its strengths precisely in the agile and accurate organisation of its range and its processes. It will be a challenge, however, to continue this solution that has grown in so many small projects in such an agile and competent way if the key personnel from the first years are no longer available.
Lessons Learned
When one looks at LeShop quite simply and sees how it was developed with a great deal of expertise and how the infrastructure was built up, it is a little easier to understand why so many start-ups of the new economy failed at the beginning of the 21st century. Many really believed that fundamentally, with a clever customer front-end in the form of a website or an online shop, they could quickly be in business. In the back-end of the order processing and logistics, one would have been glad to rely on the apparent commodities of the old economy. However, in truth and in practice, the dependencies are larger. Successful business concepts must be integrated and perfected through the whole value creation chain, also when they begin in the Internet. To develop this required more time, expertise and capital than the most start-ups ten years ago were able to muster.