FlyingPig's Preston talks e-tail

FlyingPig may have had its share of difficulties but five months after it's launch it's is an an established player readying a major revision. Russel Brown talks to FlyingPig's Stefan Preston in this week's Friday Fry-up.

Stefan Preston is keyed up. Maybe he's always like this, but the CEO of FlyingPig.co.nz has some things to say - about his own business, about criticism and about armchair e-commerce experts.

The e-tail venture he launched with his old friend Adam Keller began in earnest in May last year. Preston had left his job as general manager of Whitcoulls, saying he planned to do some Web consultancy and to work on the next Whitcoulls Website, which was due for launch in June.

The Whitcoulls site never did launch. Instead, it was fixed up, reconceived and rebranded as FlyingPig.co.nz. And when it launched in October, it wasn't quite ready. The headlines focused on glitches in pages, strange search results and stressed-out servers.

But out of the difficulties, Preston and his people began to establish a reputation for customer service and responsiveness. Now, five months on, FlyingPig is about to go to Rev 1 of the Website. Preston is also gearing up for announcements about new funding and new product categories.

It's all, Preston tells Russell Brown, about having "good technical execution and good business execution”.

Stefan Preston: You've got to have good technical execution and good business execution. And the trouble with the Internet is that you can't make any money on it. There's no operating profits in this game, so your business execution is crucial. It's about the cost of the capital that goes into actually making this thing happen.

So it's nice to have good technical execution, but if good technical execution comes at the cost of time to market and ability attract capital and all that sort of stuff, then what you do is trade it off.

And, absolutely, we traded it off. There's no question about it. We would've spent another year getting it right.

There's one other aspect to this and that's that none of us are out there hiring experts. The only people we've got are really armchair experts in e-commerce - because no one's done it. If you're first out there with a big amount of investment, the best way is to just jump in and see. It's not like there's anyone else to compare to, apart from Amazon or something, which is a ridiculous comparison.

So, yeah, we took a but of flak, but ultimately we have a business here with 47 people, with a lot of hard-won e-comm experience. And we've had something like 7000 customer emails and a whole bunch of behavioural analysis on the site, and endless statistics about advertising performance and page performance and conversion rates and all that stuff.

If we'd decided to launch when we were ready, (a) we wouldn't really have been ready, because you never can be, and (b) we'd be missing all that experience.

So what you're saying is, the key issue last year was speed to market.

Absolutely. I just wanted to get out before Christmas. We took a site which was half-built, and half-built for a totally different purpose. It wasn't scalable to the extent we needed and we're still battling with that. We will be until Version 2 comes along.

Version 2 will slicker and better and all that but we've got changes coming up soon for the Version 1 site - which is a pig of a thing, because the pages are linked with ASP right down to the data level. The pages are complex and heavyweight, very hard to change - and it's a very data-demanding site.

Then there are things like we're using SQL's standard search engine, which is a pig for the application we're using it for. So we're grafting a new search engine onto it and putting a better user interface onto it, adding categories and that sort of stuff. Everything's taking three times as long because the architectures not stable, but … we're out in the market and we're shipping serious value. I can tell you that we're shipping more than the leading e-comm retailer in Australia.

Given that you're so unhappy with Version 1 of the site, are you staying with the same platform for Version2?

We like the platform - Microsoft SQL Server. There's nothing wrong with it. Our architecture in Wellington is basically Barnes and Noble's architecture - Compaq-Microsoft-SQL. It's all highly scalable with multiple redundancy paths and all that stuff. We've really got the techos revved up over it.

When things did go wrong last year, I think you earned a bit of credit for the way you responded. You answered customer emails personally, for example.

If someone sends me an email, I'll respond. The whole business is about the customer and we'll do anything to make sure someone's happy. We know that the Internet's a bit like driving a car in 1904 - it's very complex, it breaks down a lot - it's kind of a weird thing to be in.

But we have enough customer service reps to cover about 10 orders per day per rep - we're over the top on customer service. I've heard some great stories about our people going the extra mile.

We had some dumb things happen too. On our publishing platform there's a place where you type in price and then you have to push a point and then the noughts. And people missed the point out because in another part of the interface you don't have to put the point in. So you get prices of $9900 instead of $99.

We've also been taking in feeds from various data providers to the tune of two million records and obviously that data's been raw. When we launched there was some pretty dumb data in there - 99 cent Palm Pilots. Well, it was a Psion actually. And the customer who ordered it was happy at the end of the day.

What did you do?

We didn't supply it but we gave them something else - a $100 gift voucher or something. I don't think they really wanted the Psion. But that's okay. It's hard when people are critical to take this early deployment approach. But there's so much commitment here to get it right and we don't regret taking the approach that we have. We've been out there and our brand is very well known now.

There's no doubt about that. If not the only you're certainly the first brand that people think of in your market.

Yeah. And that's the game. It's a marketing game. You've got to be a number one brand. Then you've got to get the logistics and the fulfilment and all that stuff to back it up. And then it's a Web development game. But the Web development and all the CRM stuff can come over time - the important thing right now is to occupy the space and be credible in the space - not to be perfect.

There's a lot of backfilling going on now. I'll be really happy to get off Version 1, but there's still a lot to come even on that. Just to get past the search engine issues …

So when do you expect that to be done?

Within days. The guys have loaded a whole bunch of new stuff on boxes at the same time. We're trying Windows 2000, we've got a new search engine in, there's a new UI - well, the same one, but better looking.

You're currently hiring customer service people - are you looking to keep them and bring them up through the business?

One of the beautiful things about joining a growing business like this is that it's a learning machine. And the more you learn the more valuable you become to the business.

Everyone in our company gets stock options. Everyone is welcome to take a role that's bigger and better and faster because obviously as we're growing we'll need more senior people. I think what limits people in organisations like this really their ability to learn quickly. And as you get more senior you need more emotional intelligence. People either reach the limit because they don't have the brain power or because they don't have enough EI to develop the people skills they need to look after a team.

I kind of think we've built the company around "anything's possible". So we don't put any limits on anybody. One of my favourite things is getting somebody in who has not necessarily demonstrated that greater level of skill, but who take to something like a duck to water.

We've got some business analysts here who are just becoming real entrepreneurs. They're really good at putting deals together, they understand the strategy and they are going to go from strength to strength. As far as I'm concerned they can be directors if they want. They've got the skills.

And that's the new economy, isn't it? A person who's been in our business for a year is worth 10 times someone who brings a lot of outside experience but hasn't been blooded in the Internet.

You've managed to a very senior level yourself in bricks and mortar business - what's so different about a Web business?

The biggest distinction is that in a Web business we're working with what I call a discontinuity - a technology that comes along and basically stuffs up all of the business assumptions you ever worked with.

The first principles are still the same. You've still got a marketing mix, promotion, product and all that sort of thing - but all of the fundamental boundaries on which your marketing mix is based are now changed. You've absolutely got to have a team of people who work from first principles.

In ordinary businesses, what happens is that you've built up a business franchise based on a whole bunch of systems and procedures and supply contracts - and basically every year you're just editing the previous year.

In this business, you are writing the entire story and it is utterly useless to look at what happened before - because nothing ever did happen before that's relevant. So you have to have people who are incredibly smart and who understand the fundamentals and first principles. So they can say, gee, what marketing mix is going to work in this channel now, given that "X" has happened to the Internet?

I know people like yourself are obviously really good at understanding that - but I've got to find people like yourself who are prepared to work actually doing it. And unfortunately on the leading edge that's not what happens. For the leader of a business like this, what happens is that a hell of a lot more falls to you in terms of what to do next.

The use of capital is completely different. In a regular business, you go to the board with a CapEx and pro forma P&Ls and you can tell them pretty much what the capital return on investment's going to be. You can do that with a reasonable amount of certainty.

But in this business, you cannot predict your sales. The best you can do is say, well, the space is going to be roughly this big, the economics are roughly like this … and my bet is that, if I spend enough money wisely enough and amass the right resources and the right deals and connections, we will win a large proportion of this space. And that, when the fat lady sings, the industry economics in that space will be attractive enough to reward us for our early investment. That's all you can do.

In this space, you've got a whole lot of people who are a fair way down the track in terms of understanding the potential of it, and who have made bets with their own money at seed level, and who are now attracting mezzanine and IPO-level funding into their businesses to occupy that space.

And then, for every one of those people, you've got nine cowboys who are entering without really idea at all of the fundamental economics of the game they're playing. They're attracting a lot of capital on a speculative basis and it's just totally the Wild West.

I'm not saying we've got it nailed, but we have our cunning plans and strategies, that we've thought through carefully. Our aim is that we will IPO and we'll have institutional money behind us and we'll be really big - and we've got a pathway to achieving that. We know what milestones we have to achieve on the way there.

There are a lot of people out there founding what are basically garage operations and who have been very disappointed. I get the odd email from people who say "our site's better than yours, so how come we're not worth millions of dollars and really high profile?"

It's just because the game isn't all about having the most perfect site. It's about a balance of getting technology right over time and getting your supply chains right, getting the brands you work with right, getting your investors right and developing investment credibility in what you're doing.

You have to assemble it in a way that attracts capital from the capital markets or attracts enough customers to justify it, attracts the right staff - the whole thing is like building a little house.

You obviously came to many of these conclusions before you actually launched FlyingPig last year …

What I did is way back in mid-97, when I was running Whitcoulls, we said, we'd better look at this Internet thing. So we tossed a couple of people in the corner with ten or twenty thousands dollars and they had a crack at it using Xtra Business Builder.

And the only purpose of that is to say, let's just climb into it. You only truly learn things when you're in the fire. Nothing sharpens your mind like your own investment and your own reputation sitting behind something. Your senses are so sharpened by your commitment. When you're on the sidelines, it's easy to criticise but it's not easy to learn.

We learned some things at Whitcoulls and that was great. Certainly the challenges of building up a decent order base in the market became evident to us. It's an early-adopter market and it's something that's very difficult for bricks and mortar companies to do.

So I got to a point where I said, we're either going to do it properly or not. And I'd finished off running the company and achieved what I wanted to do - and I found that 90% of my interest was in the Internet and only 10% in the main business.

It was kind of the wrong way around and I had a team there that was perfectly capable of taking over - so I quit to focus purely on the Internet. I had absolutely no idea what I was going to do. I remember at the time having to figure out some explanation for why I was leaving; it was dangerously like, "he's going to go and focus on his family life," which is always code for he's being kicked out! Because nobody gives up a job like that to just go to nothing.

So I joined up with one of my friends [Adam Keller] who used to work with me at Bain & Co, a strategy consulting firm in San Francisco. We decided at the time we were almost unemployable.

I went to Stanford Business School, which was great, and as a result of that I know … I don't like to say the names, but the second or third person at Yahoo! and one of the top people at Excite and a guy who's running an $18 billion investment fund and people like that. So we went up to the states and literally just toured around these guys and talked to them.

The problem for me was that we were trying to do e-comm in New Zealand, but we had to do it meaningfully. If you're doing e-comm in New Zealand, you're either going to do a niche to the rest of the world, or you're going to focus on the New Zealand market. And really, it has to be the latter, because if you start a niche business, you're going to want to shift it out into the US anyway.

Starting the site is really the smallest part of this business. It's all about the logistics. If you're going to build the thing for scale later on, it isn't about having a garage with a few products on the shelves. We just studied all the problems that were in the way of having a scale business here in New Zealand.

In particular, we studied it from the angle of being a bricks and mortar company. I think you can't do it in New Zealand without the support of bricks and mortar companies, because they own the supply chain. You're never really going to have power unless you can have some leverage in the supply chain.

The problems are threefold: one is that bricks and mortar companies just have the wrong brand for the Internet. Farmers Online? Who cares?

But you'll have noticed that Farmers registered a swathe of Farmers-related domain names late last year …

And so they should. I'm not saying there isn't a place for Farmers.co.nz, but it's not going to be a high-profile Net play, is it? Because what Farmers Online says is Farmers. You can drive to one. They're on every street corner. So what value is there having it on the Net to sell the same products? Unless you have Farmers Online and you're going to do something different.

But the trouble is if you do it under the same brand, what do you get? Brand confusion. Not only that, but people don't really like going there - who on the Web today is really a Farmers user? They're most fairly technical, able, educated people that are really not the core of Farmers' customer base anyway. It's the same for Whitcoulls, Noel Leeming and all the rest.

You've also got brand conflict on the marketing side, because if you take each [product] category and say, how does this category work on the Internet, what you find is what we found when we deployed books. Totally different pricing to in-store - cheaper - and where a bookstore has 10,000 titles we have 1.8 million. That existing brand does not 1.8 million titles, super-cheap!

The other issue is organisation. Like I said before, if you're going to implement on the net, you need really smart people who are used to working from first principles and building up the right solutions. If you're working with a company that's been there for years and has a strong franchise, you're looking for people who are comfortable with not too much change and are very experienced.

Also, you don't know the technology - and it's cowboy town out there. Everyone's starting up a Web services company, and I can tell you that none of them are confident with the technology, and that's because the technology's immature. So you're paying top dollar for people who are operating in an immature technology environment, so you're being let down one garden path after another.

Third, you've got a problem with capital. If you've got to make 10% EBIT every single year, and suddenly you decide you want to invest in the Internet, so you stick a couple of million into a site - and guess what? Not only is it going to take a couple of mill, it's going to burn up negative operating earnings. It totally stuffs your whole P&L and you just can't do it.

So you're going to market it to a different sort of investor that you're going to market the company that's paying dividends and doing all that.

So if you're serious about the Internet and you're doing it to more than just support your bricks and mortar business, then you've got to have a separate capital structure.

My friend who's running the $18 billion investment fund said to us, there is not one single example of a bricks and mortar retailer in the US succeeding on the Web. And it's probably true. People say, well, Barnes & Noble is a big Internet site, but they're just getting beaten by Amazon, they're just dead by comparison. Toys R Us is a great example of a bricks and mortar brand that's been nuked on the Internet. They're in their fourth version and they still aren't even a patch on EToys.

What about The Gap? But The Gap isn't really a retail brand, it's a product brand - same with Land's End, Victoria's Secret. There are pundits going around now saying the bricks and mortar guys are going to catch up, that their superior logistics and supply chain logistics are going to nuke the pure plays out.

But I don't really buy that, because the brand of logistics that we're deploying in the e-comm space is just so radically different to these guys. I can't think of once piece of expertise in the logistics side of a retail operation that actually helps you in e-comm. If anything, it just slows you down because you've got a whole bunch of guys who are highly opinionated and want to do things in a certain way.

Someone I was talking to the other day - a very visionary person who works in the same space in another country - feels that e-comm retailers at some point may end up acquiring the bricks and mortar retailers. Tail wags dog. I think that may be a little bit ambitious, but it's possible, particularly if we can sustain these high valuations in the stock market.

As I was saying, you probably absorbed a lot of this before you even launched. What have you learned since then?

I've certainly sharpened by appreciation of the technologies and how they go together and what their limitations are and that sort of thing.

Would I have done anything different? I don't know. It's hard to argue with the success that we've achieved so far. I would rather have had less criticism, but in a funny way the criticism kind of gave us an opportunity to show people how committed we were to customer service.

With the knowledge I have now, we might have been able to mitigate things a little better, but you're comparing today's business to a time when we had three people in a room, drawing on whiteboards and putting deals together. I'm just really pleased that we got this thing off the ground as quick as we did.

So where now? Music retailing is an area you've already signalled.

Music's coming up. It's the last of the really hard categories. There are a lot of music retailers on the Net in New Zealand. I guess from that point of view it's not that attractive a category for us to be in, but it suits us because we have a lot of the skills necessary to deploy that category at scale. We're very good at dealing with large am,ounts of data and so we'll be deploying a full range - 200,000 to 300,000 titles.

We'll have full Liquid Audio track downloads and that sort of stuff. I think it's going to be very hard for some of the smaller retailers to keep up in that aspect. You need money to do that.

Your choice of Liquid Audio - a copyright-protected format - is going to please the industry.

We're a blue-chip business. We're not going to do shonky things or sell stuff that falls off the back of trucks or upset people's copyright. We've got to play it down the line, because our objective is to build infrastructure for the future.

A lot of stuff is going into this business which might in the short term seem that we're making a hard road for ourselves, but in the long terms leaves us with a better balance.

What will be the trigger for your decision to IPO? Will it be time, sales, having your full range of product categories up and running?

I think that when we IPO we will want institutional participation, because otherwise you just haven't got a float that's big enough to justify the kind of investment we have here.

Beauty Direct is floating, and they're many, many times less evolved in terms of deployment than we are - certainly in terms of orders. A small float like that's not going to achieve institutional participation but it's going to bring along all the overhead of public company management.

So we're certainly going to be in the private equity field until we believe we've got a blue chip float to deliver to the market. I will say that the NZSE has us pretty concerned. There are some pretty good indications that there's just not enough liquidity in the market to really do the opportunity justice.

I can't tell you about it now, but we expect to announce in the next few weeks some pretty major moves in terms of the whole way we play our next round of capital. People will be very interested in what we're doing.

What changes will the public see in the site this year?

We've got lots of categories coming up, including the thing with travel.co.nz. Services isn't really our core thing, but we're starting to amass a pretty good customer base right now, and the ability to leverage that and cross-sell between categories is attractive. We did a good deal with travel.com.au and we think they're really good operators, who understand the space.

We may have more than 20 product categories by the time we're done.

Is there any binding principle to the categories you'll deploy?

We try to enter categories where we believe the Net adds value. I love the book category, I like the value it adds to the consumer. There are millions of books in print in the world and you can't keep them in a bricks and mortar store. If your passion is photography, for example, the only place in New Zealand where you'll reliably get photography books is us. Which is good.

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