Lunch with McKinsey & Co. - teXt FILES by Kevin G. Belmonte (PHILSTAR.COM INC.)

Last Monday, I was invited by Jim Ayala to attend an informal luncheon meeting hosted by McKinsey & Company to present their Firm’s initial findings on the performance to date of Asian e-commerce sites as compared to U.S. and European counterparts using survey results from McKinsey’s proprietary e-Performance Scorecard as well as other data. Before describing some of the general insights from this session, let me say a few things about Jim’s Firm. McKinsey is arguably the premier management and strategy consulting firm in the world today. Of course, my good friend Manny Maceda, who is one of the top global partners of Bain & Co., would disagree with this assessment. And maybe Mark Fuller, Richard Rawlinson and Emmett Thomas of Monitor Co. would disagree as well.

But suffice it to say that McKinsey has established itself as the strategy leader in the Philippines, at least at this time. Jim, who heads the Philippine practice, has catapulted McKinsey to the very top of the strategy consulting sector in the country. They are the premium-priced provider (my personal guess here is an average monthly billing per client of about US$250-300,000 or thereabouts for a typical engagement). Yet even with their high price, many of the largest Philippine corporations are leveraging their services. I won’t identify these companies here (McKinsey keeps a strict code of confidentiality on their client relationships) but I’m sure there’s enough buzz around our business circles and many have some idea who these clients are.

I’ve known Jim casually since the 1980s. I remember one encounter on a plane trip from Manila to the U.S. I had already finished my B-school at Kellogg and was working for the strategy practice of Arthur Andersen in Chicago. Jim, if I recall correctly, was in the midst of his graduate work at Harvard. I remember Jim asking me then which clients I was working for. And I remember telling him I could not reveal their identities for confidentiality reasons. I don’t know why this incident has stuck with me.

Anyway, let’s get back to that luncheon meeting. Jim and Gina Manzano, an Associate with McKinsey, had invited a number of the Philippines’ e-commerce luminaries to the event. My fellow Kellogg alumnus Dennis Valdes, head of Inq7.net, was there. Patrick Go and Rosanna Go of e-store-exchange.com were there. Patrick Garcia, Mr. Chief Bidshot himself, was there. Candice Alabanza and Therese Ng, general managers of JobStreet.com and femalenetwork.com, respectively, were there (I’m sure Lisa Gokongwei would have been there, too, but she’s out of the country attending two family weddings). Edwin Coseteng, ex-McKinsey himself and head of JobsDB, was there. And T.G. Limcaoco of myayala.com stopped briefly to say hello (he attended an earlier session of the event). In fact, one attendee commented that most of the Philippine "hits and page views" were in attendance that day.

The presentation was led by McKinsey’s Senior Marketing Specialist for Asia, Mike Sherman, based in Hong Kong. The primary data source was from McKinsey’s interview survey of more than 50 e-sites in Asia. I’m not going to give a detailed account of that proprietary presentation here. I’ll leave that to McKinsey, which should be putting out more information in the leading dailies shortly. Suffice it to say that the session was quite informative and helped to confirm some of my suspicions regarding the performance of Asian e-players so far.

The first key finding is that Asian e-sites are spending less money than their U.S. and European counterparts in both attracting visitors into their sites as well as getting these visitors to return thereafter. That’s the good news. Quoting from the Asian Wall Street Journal’s account of the McKinsey work, Asian B2Cs "spend an average of 10 U.S. cents in marketing expenses to attract a visitor each month, compared with US$1.50 in Europe and US$2.30 in the U.S." One of the arguments for this lower cost and higher repeat visitor rates is because Asian e-sites, having learned from the mistakes of the West, have been more cautious in their marketing spending. I believe one of the other reasons for this cost-efficiency may lie in the fewer Asian e-sites viz the West and, hence, less choices for the Asian Internet user. The potential spawning of more Asian e-sites was also curtailed by the ongoing consolidation and weakening of Internet stocks in the West.

Now for the bad news (no surprise here). The second key finding is that, unfortunately, Asian e-sites have not been able to convert their visitors into paying customers. Asian content sites lag far behind in ad revenues per visitor compared to their U.S. and European counterparts. On the e-tailing front, the AWSJ report on the McKinsey findings states that fewer than 1% of visitors become customers, while U.S. and European sites have managed to turn 2.3% and 2.5% of visitors into customers, respectively; and this, from a much larger customer base.

The last couple of findings from the McKinsey presentation have to do with some potential solutions for Asian e-sites, although my feeling is this solution set will continue to evolve as online markets and, more importantly, online customers, mature further. The first has to do with finding a niche in the market, then focusing your energies on building strong competitiveness in this niche. McKinsey’s findings show that most profitable Asian B2Cs have focused on a particular segment of the market and have a clear picture of the needs and values of this target customer group. By focused marketing, these e-sites have also been able to keep their costs down. And because of specialization (and a better understanding of customer needs), these sites have been able to enhance their revenue per customer metrics.

The second solution has to do with a message I’ve espoused many times in this column – it’s the brick-and-click operations which are succeeding now and will most likely succeed in the future. McKinsey found that brick-and-click e-tailers who leverage their offline brands had five to eight times the success rate in terms of converting visitors into paying customers viz pure clicks. By synergizing with their brick brands, these e-sites are also able to reduce their marketing and certain operating costs.

What does this all mean for Philippine B2Cs? Well, there are only so many Filipinos on this planet, a niche in itself. With the market’s limited size, and as I’ve said in the past, B2Cs will need to achieve number one or two status in their chosen market segments in order to have meaningful revenue streams. Going after a bigger market base (e.g., even a Southeast Asian base) is difficult and may result in further erosion of focus. Most Philippine B2Cs are going to have to be content with minimal, if any, revenues for the next few years. And under this backdrop, the harsh reality is many will not make it.

To Jim and Gina, thanks for the invite. Let’s do it again.