James Patten and Bradley Carr

The founders of beauty and kitchenware sites ry.com.au and kitchensuperstore.com.au say beauty products shine no matter the economic circumstances, with high-end consumers more likely to buy online than trade down.

Patten and Carr also explain how they manage to offer large discounts across their two sites, deliver their verdict on Australia Post’s parcel delivery, and say why a slowdown in the economy doesn’t worry them as much as the exchange rate.

Having already clocked up about 110,000 members and tipping $10 million in revenue, Patten and Carr also flag the development of more sites.

Thanks for talking with us. I was looking at your beauty website (www.ry.com.au) and I noticed that you have a salon. Did that come first or did that follow from the website?

Patten: The salon came first.

And from that, the idea of the website grew?

Patten: Yeah, what happened with the salon is that I was working in the hairdressing industry, I had the salon and I wanted to do something a little bit bigger, something a little bit better than just a small salon in a town.

There were two courses of action: one was grow the salon and have 100 salons across Australia, or something that I thought was probably a bit more exciting, something new at that stage in Australia was online shopping.

And at that point there was no one selling shampoo and stuff online and that’s when I was introduced to Brad and had this idea to say, “Look, this is what’s been happening overseas”. Obviously online retail overseas was three or four years ahead of Australia at that point. I wanted to be the first to do it here in Australia.

Did you identify high margins?

Patten: The margins aren’t massive, but it’s a consumer product… we were just saying the other day that there might be a recession but unfortunately people’s hair doesn’t stop growing and people won’t stop washing their hair. The industry that it is, I think there was a study in the recession back in the 50s in America called the “lipstick effect”.

Even for hair?

Yeah even for hair, you’ve probably experienced it yourself – a woman would probably rather not eat than have regrowth. [Laughs]

I am not one for starving myself.

But if you ask people what’s important to them, a lot of people don’t see it as a luxury item. I was always confident it was something that people will continue to want, but at that stage the only way to access it was through a niche salon that might only have one or two ranges.

With eCommerce and online shopping just about to kick off at that point, I thought, “This is going to be massive in Australia, if you do it well. There’s a good opportunity there”.

How are you managing to absorb the discounts on the RRPs?

Patten: I guess it’s a volume thing. Obviously you don’t want to get involved in a price war where it’s really a race to the bottom.

People expect the savings online, but it’s not always about being the cheapest, it’s about an overall value proposition. So sometimes people say, you know, you can save three dollars on a bottle of shampoo but it comes back to convenience in the fact that unless you are buying one hundred bottles or five or six bottles of shampoo, which people don’t often do at a time, by the time they pay their shipping and stuff it is probably the equivalent of buying in a store or maybe even a little bit dearer.

But it’s that convenience and the information of being able to read what’s in the bottle or what the bottle does; it’s something that the internet provides that may be not all hairdressers have been providing or doing well for along time.

Do you think the hair industry has tried to get away with mark-ups on the products that they sell in their salons?

Carr: I don’t think the mark-ups on the products are any more than you have got on other regular goods that people buy. I don’t think the mark-ups are massive. The hair companies create the market themselves; the same company that owns Pantene owns Wella and your bigger brands, so they create the entry-level shampoo, the medium shampoo and the professional shampoo.

Patten: So the retailer doesn’t really get to choose the margins.

And you’re not seeing people at the moment trading down their products?

Carr: I think there are a lot of people trading down their products, and move into Pantene to save a few dollars, but then there are also the people that will not trade down from Redken and they might jump online to save a few dollars.

As fewer people spend money on the big name products, more people start jumping online. There are still more people coming online than there are stopping buying these brands.

And how do you set your delivery prices? Do you think it is better to have a higher price for your products and free shipping or have a set price for shipping and work your pricing around that?

Carr: Free shipping is always a great thing for the consumer. It means that there are not extra fees on top of what you are buying, so to have a free shipping option is great.

I would like to be able to do free shipping and returns, like you see in the States and the UK, but unfortunately there are not enough people in Australia and postage is too expensive and it is just too big of a place to afford to be able to do that.

Most of your customers are in the major cities though I assume?

Yeah, they are in the major cities, but the cost of a parcel in Australia is more than in America or the UK. I think it is $6.95 as our standard postage charge or it’s free for any order over $150 so we are giving away as much as we can to make the shopping experience as good as we can for the consumer.

And try to encourage people to spend up to $150 obviously.

For us, if someone spent $120 and they pay for shipping it is probably more profitable than them spending over the $150. But it is a better deal for the consumer; they buy a few different things at once.

And that is why we offer a large selection, so they don’t have to go and buy six months’ worth of shampoo, they can get their shampoo, their make-up, and their skin care all at once and save on the shipping that way.

How do you find Australia Post to deal with? We’ve heard of some complaints by licensees that there were too many parcels clogging up the system, I assume because of greater demand from online sales. And I know the Productivity Commission identified some deficiencies in deliveries across Australia. Do you think that they aren’t coping at the moment?

Carr: I think Australia Post are downsizing; I mean, they are cutting their account managers, their staff, they keep pushing stuff back to call centres.

So for them to have a bottleneck of too many parcels, I don’t know why they are complaining about too many parcels because the letter industry is dying and on its arse, and parcels are the only thing that will keep Australia Post surviving.

I think cutting staff and downgrading everything on a management level is not going to help that problem. [Laughs]

In terms of your dealings with them, you don’t think that there is a problem in their service delivery?

Patten: We use a number of different service providers, not just Australia Post. I would say probably their service delivery stacks up maybe around the same as everyone else at the moment.

But if you were asking me to identify a market in Australia where one of the big players from overseas, DHL or Federal Express, to come in and really shake it up and do a really good job of it, the postal system in Australia is probably a little bit out of date and antiquated technology-wise.

Carr: The technology and tracking system that they used is a bit behind the times.

Patten: Everyone talks about the broadband network and how it will increase sales, but probably one of the most difficult things for us in this country is competing with the roadblock of the logistics of some stuff.

Why did you make the jump then from hair and beauty into kitchenware? It doesn’t seem to be an obvious leap.

Patten: A lot of people have asked that question saying that they don’t see the link, but if you were to look at the type of kitchenware that we sell and the type of hair care and beauty products that we sell, they are all these great brands, high-end consumer products.

So if someone asked what is your target demographic, I would say probably 70% female between 18 and 50, and if someone asks a cookware shop what their target demographic was, they would probably say almost the same thing. Obviously with the rise of [TV shows] My Kitchen Rules and MasterChef, cooking and staying in is almost like the new going out.

We’ve got heaps of other areas we would like to open online stores in but the way it was going and we did a bit of research online and it just seemed like a good fit for us.

Carr: It’s the same consumer that wants to get a leading brand conveniently online and have a wide selection of all the best brands in one place at good prices, so whether it be good value professional kitchenware brands or professional hair care brands, it’s about bringing all those brands together in the one place.

I assume you hope to pull some of your Ry customers across to kitchenwaresuperstore; have you seen quite an overlap?

Carr: Yes, definitely. I mean, it is the same consumer, but you have to be careful of how you market to people because they don’t like to be spammed. Someone buying their shampoo doesn’t mean they want kitchenware products, so we’ve got to be careful and smart in the way we cross-market them and the way that it grows. But we have already seen some really good numbers come across.

Where else would you like to move into?

Carr: There are a few different industries that we are looking into at the moment; I probably won’t tell you which ones they are to be honest. But for us it’s about taking the great brands that people know and love and putting them online and giving them the customer service they deserve.

I don’t know about yourself but the last time I walked into David Jones and Myer I was disgusted at the service; no staff, no product knowledge, the ranges were laying around everywhere, everything was in bargain bins.

People complain about discounting online and RRPs being slashed, but David Jones and Myer constantly do it and it’s getting worse and worse, and they don’t back up with good service. You just don’t get a good shopping experience anymore when you walk into one of the department stores.

They do have the rent and labour costs.

Patten: Yeah, they do, but that has been an argument that we have had since the start of time, “You can run an online store because you don’t have any overheads”.

And like you said at the beginning of this conversation about having a salon, you also notice we run a full-service kitchenware store, so we do have the overheads of a kitchenware store. But it’s 2011, so I’m not sure anybody would be sensible to open any business that didn’t have an online component.

The costs of running a professional, good quality website with the amount of customer service staff that we have and the logistics staff, especially in Australia with the employment costs and staff, the costs are surprisingly quite high.

I think people think that when it comes to internet sales it like people on eBay selling out of their garage, but it’s not the case – you have to pay high rents for warehousing, customer service staff, marketing. It’s not the ark; you can’t just build a website and hope that people are going rock up.

How many warehouses do you have?

Patten: One.

One, and how many staff?

Carr: About 16.

And you are looking at $10 million in revenue.

Carr: Yes.

And how are you feeling about the economy at the moment? We saw unemployment jump today to 5.1%, are you bearish like a lot of people?

Carr: The economy is definitely in a bad shape, but it has been happening for awhile now and we’re really feeling the effects of it. And you are right in saying that David Jones and Myer and other traditional retailers are not in a good position. If you look at the rent and labour costs in Australia they are phenomenal. It is more expensive to run a shop in Surfers Paradise than if you set up one in New York.

And how are you going to make any money in here if you are going to buy a pair of Nike runners from Nike Australia and sell them in your store, you have to pay $100 wholesale, when they are RRP$80 in America?

So I think the brands themselves haven’t adapted. They haven’t seen the internet; they’ve put their head in the sand and woken up now.

And the biggest losers are the Australian consumers because small business can’t compete; we can’t compete with pricing overseas. Once you add in your rent and your overheads, you just can’t buy a product cheap enough from the brands in Australia. So the brands need to look at a more global pricing structure.

But on the flipside how do they do that? How do they change that that quickly, how do they either halve the price here or double it in America? How does that work?

Obviously they need to make more money per product here because there are fewer people, but not that much more money.

They’ve had it very good here for a long time here in Australia; it has been a little cash cow here and no one’s known about it. And the internet has opened that up and really opened their eyes.

Patten: I think with the unemployment figures, traditionally over time when there is a downturn, when things boom people go crazy in the wrong direction, everything’s going to be amazing, we’re all going to be billionaires, and when things start to slow up a bit, it is all doom and gloom. People both ways probably go a little bit over the top.

You can say unemployment is at 5.1% but that’s still nearly 95% of the country that is employed and with money in their pocket to spend.

The good thing is that they have got that money and they know now that the retailers are doing it hard and they can choose where they can spend it. So as retailer I can work a little bit harder, a little bit smarter to make sure they spend it in our store.

The unemployment and the economy doesn’t scare me as much as maybe the exchange rate, and obviously they are all linked in, but with unemployment and slowdown in the economy, we are fairly confident with our business model that there are some good opportunities for us still.

Pleased to hear it. Thanks, nice to talk to you.