How traditional retailer can move to online sector and become a market leader – the case with Allo company

A 12-year girl is pulling her father by the arm towards the shelf with coffee machines and vacuum cleaning robots, “Let’s go and have a look at the quadcopter on the shelf above the washing machine. It should be specially designed for domestic use. We should find out what it can do.” There is really a quadcopter on the upper shelve. Similar quadcopters are on the table in the middle of the sales area. The consultant is smiling, “It is an ordinary model. We have just put it to the place that was free.”

In new stores of Allo network a person, who does not closely monitor electronic novelties, can easily believe in existence of “quadcopters, which are specially designed for domestic use” or other technologies from science-fiction movies. In one of the corners of the sales area we can see a couple, discussing whether 20-cv orange robot is capable of lifting TV remote control by its arms, and in the other corner a man moves chaotically, wearing VR helmet and viewing something. Pupils on monowheels pass this guy by.

A 12-year girl is pulling her father by the arm towards the shelf with coffee machines and vacuum cleaning robots, “Let’s go and have a look at the quadcopter on the shelf above the washing machine. It should be specially designed for domestic use. We should find out what it can do.” There is really a quadcopter on the upper shelve. Similar quadcopters are on the table in the middle of the sales area. The consultant is smiling, “It is an ordinary model. We have just put it to the place that was free.”

In new stores of Allo network a person, who does not closely monitor electronic novelties, can easily believe in existence of “quadcopters, which are specially designed for domestic use” or other technologies from science-fiction movies. In one of the corners of the sales area we can see a couple, discussing whether 20-cv orange robot is capable of lifting TV remote control by its arms, and in the other corner a man moves chaotically, wearing VR helmet and viewing something. Pupils on monowheels pass this guy by.

According to Maxim Raskin, one of the owners of Allo network, it is how the tech stores should look like in 2017. Clients’ expectations from offline marketplaces have changed dramatically: if earlier smartphones were bought in the nearest stall of a huge network (the formats were plus-minus the same and it was senseless to look for another sales outlet), now the personal electronics stores are a destination point, and purchase of smartphone or gadget is a much greater event.”

For the period of Allo stores operation many things has been changed in consumer sentiment and target places for purchasing tech products. More attractive prices, an opportunity to choose and compare goods of different sellers as well as no need to leave your house to purchase new iPhone are the factors, which brought consumers to online sector.

According to the data of market research institute GFK, in 2016 household appliances and electronics occupied 60% of total Ukrainian e-commerce market. At the same time, a percentage of online sales of household appliances in Ukraine is higher than the average percentage in the European Union (23.7% against 21.1%). Albeit this statistics mostly covers the dwellers of big cities with high income (a little bit more than 3 million people make purchases online), till the moment e-commerce in tech sector have grown faster than in the others.

• 60% of the market is occupied by household appliances and electronics
• 23.7% of online sales of household appliances
• 3 million of the Ukrainians make online purchases

Until now, a history of Allo has been proving the current trend. The retail network, which was established still in 1998, for almost twenty years has opened stores in 130 cities of Ukraine and hired over 2,600 employees. Further, the company adjusted its course to online sales that made it one of the largest players in e-commerce. It would hardly be possible without decisions that have been taken for the last 10 years.

Merge and acquisition

In 2013 the largest deal for the whole lifetime of the Ukrainian mobile market was closed. Allo, who owned over 500 stores at that moment, acquired Mobilochka network, which had 417 stores in 149 cities. At the moment of the deal, the total share of the company in mobile retail segment, according to “Kommersant” newspaper, made 60%. Allo calls this deal a milestone in the company’s history.

Maxim Raskin comments, “Mobilochka network closed and Allo occupied its locations, offered hiring to employees and handled remained goods. Although, we understood that it was not always optimal costs and we would need to optimize the network. It enabled us to increase the share on the market up to 80%.”

In 2013 the issue of Mobilochka network acquisition by Allo company was discussed not only by media, but also inside the company. Finally they decided to keep both brands as management would like to take the advantage of both successful networks. Dmitriy Derevitskiy, owner of the company, shared his opinion, “In terms of brand recognition, according to our data, Allo had 92% and mobilochka – over 60%. It was obvious that this asset should not be lost. Today, Mobilochka is one of the most successful franchising projects in mobile retail sector of our country. We continue running Allo the same way as it was before.”

• 917 stores were owned by both networks in 2013
• 60% -total percentage of the companies in mobile retail segment at the moment of the deal.
• 92% and 60% – recognition of Allo and Mobilochka brands in 2013.

Merge of brands, apart from obvious expansion of the retail network, enabled the company to get better conditions from suppliers and manufacturers of tech products. An experience in placing new products on the market was useful in this case. For instance, in 2014 Allo started actively selling Nomi products, which was called by some sources the own trade mark of the company. By the way, in Nomi they are not so unambiguous concerning patronage of the Ukrainian network patronage. According to brand manager Sergey Zolotukhin, Nomi is a stand-alone project and Allo is their key distribution channel. It ensures 45% of Nomi sales in Ukraine.

In any case, Nomi product range includes different market segments: budget telephones (in Ukraine the amount of users makes about 1.5 million people), TV sets, power banks, virtual reality helmets and even quadcopters. Nomi is the most illustrative, but not the only example of specific brands promotion.

Maxim Raskin says, “We facilitated entering to the market and development of Nomi and Xiaomi. We have strong positions in cooperation with Sony. However, these brands, having a big proportion in our portfolio, are also successfully sold in other networks. Allo is some kind of springboard, which facilitates promotion of the products and provides significant results. So, for instance, some Xiaomi models became TOP-5 in smartphone sales in Ukraine. Even though the official operation of the company commenced on the Ukrainian market less than one and a half year ago. The ecosystem of Nomy brand, which also started with Allo and now it is a national brand – is one of the largest not just on Ukrainian market. I assume that it would be almost impossible for the company with a small-scale business to boost such a project.”

Merge of brands, apart from obvious expansion of the retail network, enabled the company to get better conditions from suppliers and manufacturers of tech products. An experience in placing new products on the market was useful in this case. For instance, in 2014 Allo started actively selling Nomi products, which was called by some sources the own trade mark of the company. By the way, in Nomi they are not so unambiguous concerning patronage of the Ukrainian network patronage. According to brand manager Sergey Zolotukhin, Nomi is a stand-alone project and Allo is their key distribution channel. It ensures 45% of Nomi sales in Ukraine.

In any case, Nomi product range includes different market segments: budget telephones (in Ukraine the amount of users makes about 1.5 million people), TV sets, power banks, virtual reality helmets and even quadcopters. Nomi is the most illustrative, but not the only example of specific brands promotion.

Maxim Raskin says, “We facilitated entering to the market and development of Nomi and Xiaomi. We have strong positions in cooperation with Sony. However, these brands, having a big proportion in our portfolio, are also successfully sold in other networks. Allo is some kind of springboard, which facilitates promotion of the products and provides significant results. So, for instance, some Xiaomi models became TOP-5 in smartphone sales in Ukraine. Even though the official operation of the company commenced on the Ukrainian market less than one and a half year ago. The ecosystem of Nomy brand, which also started with Allo and now it is a national brand – is one of the largest not just on Ukrainian market. I assume that it would be almost impossible for the company with a small-scale business to boost such a project.”

From niche to the market place

According to forecasts of GFK, in future the growth rates of online sales of household appliance will slow down, and traditional offline categories like clothing, footwear, accessories and goods for children – will, vice versa, gain momentum. In Allo they also share this opinion. In 2016 the company singled out in a separate segment a variety of new categories: goods for children, perfumery and cosmetics, car accessories, interior design items and sports requisites. According to Valentin Kalashnik, President of Ukrainian Direct Marketing Association, online store development from niche store to market place is reasonable if a retailer wishes to be successful. It is quite difficult to generate and maintain traffic for stand-alone niche online store.

Allo’s new categories in 2016

• Goods for children
• Perfumery and cosmetics
• Car accessories
• Interior design items
• Sports requisites

At present, over 120,000 active goods in 1,400 categories are represented on the website allo.ua. Proceeding from the average traffic indicators for the last few years, the company is the second in the list of Ukrainian online stores (price aggregators), giving the first place to Rozetka. The average audience is 8 million visitors per month.

Allo has one more advantage, not so evident at first sight, contributing to expansion to the size of market place – a well-developed network of offline stores. For end consumer it means that he/she can order the goods from the proven seller in Internet and pick it up in the nearest offline store. Additional categories of the goods had a positive impact on Allo: till the end of 2017 the Company will open 15 flagship stores, and the area of such store will grow from 85 sq. m to 350 sq. m. It is not only the area and design of sales outlets that will undergo transformation, but also the arrangement of business processes. Management team singled out different zones of ecosystems and brands, having created the authorized Shop in Shop of the world tech brands as well as separate zones of “smart house”, electric transport, game consoles, acoustic, robots and other gadgets. Such stores also have a large area of Internet orders. All this is implemented to avoid consumer’s discomfort from absence of certain goods in offline shop.

Maxim Raskin comments, “It is quite difficult to compare the indicators of online market share between retailers. The reason is different formats and calculation policies. Lately Click and Collect service is actively developed. It provides an opportunity to pick up the goods, ordered online, in offline stores. For the last couple of years our market share has been between 16% and 18% of overall goods turnover.”

In future the company plans to deal more with mobile commerce. Maxim Raskin comments, “We see great prospects in the trend for increase of the share of mobile users. Still they have comparatively low indicators of conversion. Probably, it is a problem of retailors who have not generated user-friendly purchasing conditions. We approach the issues of chat-bots and AI with caution as we don’t like to cause discomfort to our clients and reduce conversion due to still imperfect systems and tools. Although, for sure, these segments are the future.”

In-house reforms

This year MPP Consulting agency included Allo in rating of 100 the most expensive national trademarks and estimated cost of the brand as equal to $24 million. Allo’s headquarters is still in Dnepr. According to its founders, it causes no management problems, even taking into consideration the company’s size (currently the group of companies has 3,000 employees: 450 – central office and all others – stores and regional offices).

Allo in numbers

• 120,000 available goods on the website
• 3,000 employees
• 8 million visitors per month
• 15 flagship stores
• $24 million – cost of Allo brand

All this became possible owing to introduction of various management approaches. For example, in the company they take Net Promoter Score seriously. It is used to evaluate customers’ readiness for repeated purchasing. According to Maxim Raskin, such things cannot be just the responsibility of marketing department.

He assures us, “The data that we obtain as clients’ feedback, are discussed at the meeting of the Committee, including all directors and President of the Company. Thus, for example, a few years ago Allo has made a conscious decision to the prejudice of current profit. They decided to refuse from “special offer” practice while developing price offers. If we say the client that the product costs 3,000 UAH, that’s how it really is. You should not additionally spend 500 UAH on other things to get the price, as many market players offer. If we say that the client has bonuses in the amount of 300 UAH, it means that he/she can come and buy something using these bonuses, instead of facing additional restrictions, such as a mandatory condition to buy 10 different goods at price of 30 UAH. Using Net Promoter Score we assess all factors: from perception of brands that we sell to the quality of service centers work.”

At the moment the company hasn’t any department of innovations. According to the leaders, it will hardly be established in the nearest time. They say there are many things to be improved besides the innovations. For instance, management of data on customer experience. According to Maxim Raskin in Allo they pay special attention to CRM systems and detailed analysis of ROPO scenarios (Engl. Research online, purchase offline – search for information on the product before its purchasing offline).

A dynamics of sales (especially in the segment of mobile devices) speaks for itself. A part from the net sales of telephones, during the last year the company has activated 1.68 million subscribers of mobile networks. They occupy similar market share in the category of telephone accessories, for instance, headphones. For the same period they have doubled market share in sales of TV-sets, laptops and household appliances. Sales of wearable gadgets have dramatically increased.

Of course, in the company they study the best practices of the major global players. However, it’s not always that they can apply this experience in the Ukrainian realities. Maxim Raskin states, “We analyze rather successful cases in the specific functional areas, than success stories of the company as a whole. For sure, an example of Zappos company is very interesting in terms of business strategy as well as management principles. However…Would this company be able to achieve the same success in Ukraine, with all our restrictions? Is the Ukrainian market enough to get return on investments in Research & Development, like in case with Amazon? These are the rhetorical questions.”

Shadow fighting

In Allo they do not deny that for further growth the company yet has to overcome a number of its own constrains: to accelerate implementation of projects, to simplify business processes, to correct ongoing processes here and now, instead of using long-playing corporate procedures. Although, they believe that the serious limitation of Allo’s business development is imposed by the external factor. Namely: “grey” and “black” tech market.

According to GFK, every fifth tablet, smartphone and laptop that was sold in Ukraine in 2016, had been imported illegally. A share of “grey” supplies of photo cameras, refrigerators and washing machines varies from 25% to 10%.

Maxim Raskin states, “It is the government who should deal with this problem, but, in fact, we address it. It is no secret to anyone that over 60% of all iPhone sales — is a sale of smuggled goods. It costs cheaper just by the reason that no taxes were paid for it. We almost do not make money on iPhone. We often sell it at cost price in order to meet customers’ expectations and prevent market monopolization by “black” sellers.”

“Grey” tech market

• A share of “grey” supplies of photo cameras, refrigerators, washing machines and TV-sets varies from 10% to 25%
• ˃60% of all sold iPhones are smuggled
• 1 of 5 laptops, smartphones and tablets, sold in Ukraine in 2016, were imported illegally

Maxim Raskin is sure, “ AT present, “it is cheaper in the Internet” just if you buy smuggled goods. Most of legal players keep parity prices in online and offline stores. It has limited e-commerce growth rates and development of small players (most often they go underground and sell the goods illegally). It also forced large player to change approaches and shift focus from price wars to Customer Expеrience”

Such policy has borne its fruits. For example, the first batch of iPhones X, which had appeared on the shelves in early December, was sold in the network of stores for three days, despite of the price of 37,999 UAH. However, in Maxim Raskin’s opinion, for the last years pure e-commerce has lost its major competitive advantage over traditional retail – now lower price means that the device is smuggled. Therefore, in the nearest future competition between online and offline commerce will be built around convenience of purchasing process, instead of price.