Q&A With eBags’ Peter Cobb on Why They Shut Down Their UK Site

8 Comments | This entry was posted in International

Some of you may have seen that eBags recently decided to shut down its UK operations.  For the past few years, online retailers have been looking towards Europe as an opportunity for strategic growth.  This move by eBags definitely raises some questions.  I had the privilege to catch up with eBags Co-Founder and SVP  Peter Cobb (and also a Shop.org Board member) to get his take on why eBags made this decision and what he thinks it means for other online retailers.

Scott: What was eBags’ initial plan for success when you launched in the UK a few years ago?

Peter Cobb, Co-Founder, SVP, eBagsPeter: Our plan was to form a beachhead for the EU (we chose Cambridge, UK), establish the UK business, then roll out to the 400M potential customers in continental EU. We would roll out to the rest of the EU with the team of ten we had in the UK.  We got the UK part up and it was actually working quite well (125 brands, 10,000 bags all drop-shipped directly from the brands).

Scott: Can you give me a general overview of why eBags decided to shut down its UK operations and put a hold on EU expansion?

Peter: It’s a complicated question and answer. It would have required a few more years for the UK business to be profitable, which was acceptable during the pre-meltdown days, but the environment has changed and there is much more uncertainty. eBags probably is experiencing what a lot of companies are going through right now. Taking a look at each area as an entity and determining whether to keep it based on its ROI. The issue was whether we wanted to spend the internal Denver resources on IT, customer care, translations, financial reporting, web design, etc. for each country we rolled out to or whether there was more upside in focusing on solidifying the strength and market share of the eBags USA business with those same resources (a common dilemma within companies). As you know, our business model is drop-ship and we have 550 brands and 42,000 products on eBags USA so we feel that our model is superior, especially during these times when other retailers are slashing inventory.

Scott: What lessons did eBags learn from this experience?

Peter: In reality, entering a new country makes it a startup business and it takes several years to become profitable. One reason is that the sales have to scale to cover the fixed costs. Also, entering a new country a site has to generate visitors and unless a brand already has high awareness, the fastest way is through keyword search. As you probably know, expensive keyword search is ok when it is 15-25% of the sales mix but when you start out in a geographic area with minimal traffic and no email list, keywords tend to be 80% of your marketing spend and sales. Tough to justify during these difficult times. Every retailer looking at the EU will face this (unless it is Amazon, eBay, Walmart, etc. who might have instant awareness).

Scott: Do you think other online retailers can be successful in Europe and do you have any plans for resuming eBags’ EU expansion?

Peter: Time will tell, but our feeling is that it is doubtful that other bag retailers will have much success in the EU over the next few years and we will be able to re-visit the EU when blue skies return and some of our competitors have vacated the category.

Scott: Retailers are usually willing to share their successes, but some of the best lessons are drawn from setbacks or when things don’t go as planned.  On behalf of the entire Shop.org community, I want to thank you for being so forthright and sharing this very helpful information.  I strongly encourage other people to reply to this blog with additional insights they may have about online retail international expansion in today’s economy.

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5 Comments

  1. Posted February 23, 2009 at 3:20 pm | Permalink

    Peter –

    First, thanks for sharing this story. The insights and decision points are instructive.

    Given the topic, I couldn’t resist adding a POV ;) It seems to me there were a few elements of the underlying story that drove the outcome, but that these elements are in fact different for everyone… so outcomes for others might be more positive. And this is what inspired me to reply. I don’t think entering a new country takes several years to become profitable for everyone.

    It seems your elements were: 1) a margin structure that results in retail margins being shared between ebags and its many brands, 2) an entry strategy that required scale to drive profit, 3) a need to build brand awareness as a pure play.

    On 1), many brands have the opportunity to expand internationally online and do so directly, cutting out intermediaries. Branded manufacturers – those that make, sell and distribute their own products – are more naturally positioned to do this. And because they do not have to share margin with anyone else, they have more room to cover costs and drive profits earlier in the plan.

    On 2), it’s the risk/reward tradeoff. You could go faster, enter more markets earlier, drive more volume and potentially reap rewards earlier; BUT doing so incurs incremental risk too. It’s not uncommon for retailers to take a phased, limited-reach, UK-first approach. That said, the other issue you had was the fixed cost of a staff of 10 to cover. I am aware of other retailers expanding internationally that find ways to dramatically leverage U.S. based teams for much of the work and choose carefully which functions are placed overseas.

    But that leads to comments on element 3): As a pure-play you were disadvantaged on the brand awareness front, but there are certainly U.S. retailers who enjoy strong brand awareness already. Even with no email list and a limited marketing budget, these retailers can use existing infrastructure (retail stores, sales offices, marketing teams, distribution centers, customer service teams) to take on and share some of the new work related to an online storefront.

    My view is that international expansion is the next natural phase of organic growth for many retailers, but I’d readily acknowledge it isn’t a strategy for everyone.

    I also think timing is everything and the reality is that your story is set amidst the context of the global meltdown. I think many online retailers with your profile: shared margins, phased entry strategy with high fixed costs, and a need to build brand awareness will all struggle in the midst of this economy.

    Fortunately for some, their profile looks different and the prospects are perhaps brighter too.

    Troy

  2. Posted February 24, 2009 at 10:08 am | Permalink

    Agreed, Troy…especially on #2. Extending elements of an existing U.S. domestic e-commerce operation into overseas markets is a strategy that we’ve seen a number of pure-plays and multi-channel retailers employ over the past 18 months as a way to test the waters in a larger number of countries without the up front overhead and capital investment.

    If you can leverage the existing platform, distribution, and customer care operations in a virtual way, it gives you the chance to determine which of the foreign markets are most lucrative for you. Then you can plan subsequent phases of investment in marketing and operations where they are most likely to pay back quickly.

    The trick, of course, is to pull this off *and* deliver a customer experience to these international shoppers that is as good as what you offer to domestic shoppers. If you don’t get localization, international payment processing, efficient overseas shipping, and adequate customer service right, you won’t see the word-of-mouth and repeat buyers you need to succeed.

  3. Michael AMAR
    Posted February 24, 2009 at 11:07 am | Permalink

    Hi Peter,
    I share Troy’s point of view. Besides, I was surprized that the lead generation was one of your problems in Europe.
    Affiliate marketing and rev share deals with well known and established brands are two ways to drive unexpensive traffic and brand awareness. This can represent 80% of your traffic.
    Michael

  4. Charlie Rudkin
    Posted February 25, 2009 at 6:37 pm | Permalink

    Interesting article. Good insights.

    I couldn’t help but notice there was no mention of an investment in organic search marketing of which SEO is just one component. Even in the US and our relatively mature market, merchants do not optimize their sites as well as they could, tending to focus on a limited number of terms resulting in a fraction of their site’s product page inventory ranking well in the SERPs. In new markets where your brand is less well known, optimizing for small head as well as “torso, long tail and ultra long tail” terms is critical for success.

    When merchants translate and localize their sites properly, and optimize those sites in their entirety, they can enjoy increased qualified traffic and capture market share from established competitors.

  5. Posted March 4, 2009 at 6:55 am | Permalink

    A good article and I think this is a conservative but a right choice for ebags not go further on EU market.

    However, there are new markets, like China. Is it interested to Peter ? If so, we hope there will be a chance to discuss and exchange the ideas about this territory.

    P.s. I attended tonight’s ceremony at TGA and congratulations to Peter for the Award of 2009 !

3 Trackbacks

  1. [...] the other hand, eBags recently shut down its UK expansion, citing “the high cost of building a brand and an unfavorable exchange [...]

  2. [...] global initiatives in 2009. High-profile market retreats like those of JCPenney from Australia and eBags from the UK tended to come early in the economic downturn rather than late, and indeed the last few months of [...]

  3. [...] a slightly different view on the subject, I highly recommend reading also Scott Silverman’s interview with eBags’ Peter Cobb on why they decided to pull out of Europe for now. And if you’re really serious about the [...]

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