February 2002

The fulfilment resources of Britain's third-largest home delivery business are now available to third-party customers. e.logistics magazine hears its philosophy from Arthur Koeman, who is driving the initiative

Warm sunshine splashes the smart pine flooring of the main UK office of Hermes General Service, somehow reinforcing the image of a brisk new business with its sights firmly set on the future. It belies the traditional air of the giant Freemans office block that houses it - a listed building in south London dating back to the pre-war heyday of the catalogue shopping market.

The contrast runs much deeper than mere appearances. Catalogue retailers have been steadily re-inventing themselves in recent years - subtly changing their core proposition to focus increasingly on multi-channel selling, short delivery times and high quality.

 

The Otto group, which owns a range of UK brands including Freemans and Grattan, has been as keen as any to exploit new business opportunities, and the creation of Hermes General Service is one of the most obvious signs. Its objective is to focus on third-party fulfilment opportunities, harnessing the group's massive existing logistics resources to draw more value from them.

It was started several years ago in Germany, Otto's home country, and is gradually being rolled out on a global basis. So far it has active operations in Austria and the US (where it is aligned with the group's Spiegel subsidiary), and recently it started up a unit in Japan. This is a joint venture with Sumitomo, with which Otto already runs a mail-order company, Otto Sumisho. This is now believed to be the country's third-largest catalogue group. Otto has a 51 per cent share.

Outside Japan, the business model tends to be one involving joint ownership between the group itself and its local subsidiaries. Hence the UK company is owned jointly by Hermes General Service in Germany (100 per cent controlled by Otto Versand) and the group's British operations. Ultimately it adds up to full corporate ownership, but the chosen approach provides a subtle mix of local risk and reward and wider group involvement.

Expansion into third-party fulfilment in the UK was initially constrained by the group's need to absorb the Freemans purchase of the late 1990s. So far the most visible product of that process has been the creation of Parcelnet, which combines Freemans' transport resources with those of Grattan (acquired in 1991). Rolled into it are operations previously branded Speedlink and Direct Line. This may not yet have achieved the high profile of Reality, GUS's composite fulfilment arm, but it is believed to be Britain's third-biggest home delivery business after Parcelforce Worldwide and Reality.

Third-party fulfilment had to wait a little longer, but last year Hermes General Service set up its UK business, and it has been actively marketing itself since then. To head up the operation the group drafted in Arthur Koeman, a long-time Dutch-born Otto stalwart who had latterly been running the group's buying operation in Hong Kong. The head of marketing, Tim Bruun, joined from Hermes General Service/Otto in Hamburg.

Initially the core team numbers under a dozen people, but you have to see them against the background of a UK business that has three call centres, six major warehousing complexes offering 220,000 sq m of space, 13 depots, 950 staff and over 4,000 couriers.

The cosmopolitan flavour of the team is no accident. "We're very internationally-oriented," Koeman says. "It's one of our key selling points." He takes pleasure in emphasising that Otto is by far the most international of the catalogue groups, as well as being the largest.

And as a selling point it evidently works. "We find that business enquiries usually start with call centre capabilities and delivery," Koeman says, "but customers soon start asking about our international abilities."

So who exactly is HGS targeting? It seems the company is casting its net fairly wide. "Originally we were looking for high-turnover clients in emerging direct sales markets, but then we broadened our approach. We realised we could also offer value to mail order companies, manufacturers, retailers, even banks." That means, he says, that HGS would be happy to deliver clothing to high street stores as well as direct to consumers.

The main condition is that clients should have a "reasonable" turnover, "and would feel comfortable working with us."

As to the actual services that clients might opt for, Koeman reports that the main interest so far has been in call centre operations, delivery services and warehousing. However, he points out that the company can draw on an unusually wide range of other services too - from Web site development to merchandising. "And if a client wanted something we didn't handle in-house, we'd still offer it and use partners to provide it."

Clearly it helps with the initial pitch for the company to be able to point out that it does its own Web development and catalogue design in-house. "But I don't see customers coming to us just for Web development," Koeman says. "It would be part of a package. The objective of course is always to sell more than just one service."

In terms of starting up new business, Koeman says deliveries usually come first. "Warehousing takes longer to implement." There is a pay-off, however. "Customers who opt for warehousing tend to want call-centre capability as well." He expects the balance to end up around 70 to 30 in favour of delivery-only customers.

He feels Parcelnet's extensive courier network is a particular strength here "because it's so efficient." By courier, he means self-employed individuals who may be using cars for the deliveries. "They have a very small area to cover, and can deliver 35 to 40 packages a day. Because they know their own patch, their first-time delivery success rate is quite high.

Significantly, multiple delivery attempts are part of the standard offer; so a good first-time rate helps keep costs down. But as Koeman points out: "If we need to add capacity, we simply hire more couriers."

Koeman takes a fairly robust line on the kind of delivery options that it needs to provide. "We listen to what customers want, and propose service levels that meet their needs; but we don't over-stress our ability to offer elaborate solutions." As an example, he says that if people start talking about features such as tracking and tracing, "we ask if they really need it." (Needless to say, Parcelnet already does have its own tracking system.) In a similar vein the company offers am or pm deliveries, but not within more specific time bands.

On the question of unattended deliveries, Koeman feels there has been no proven success yet with any of the emerging systems. "Finding common solutions to the problem is better than working on the fringe," he says, although he is keeping an open mind on the possible benefits of specific solutions.

One way of achieving operational economies is cooperating with rival companies, and Koeman has no reservations about this approach. "There's competition between the big corporates on branding, but we happily talk to each other about practical issues like dealing with 'red route' parking restraints. It makes sense to share common problems. As long as we trust each other, it's ok."

When it comes to some of the smaller catalogue groups, HGS is quite comfortable to work with them. "Some are more than happy to take advantage of our expertise," Koeman says. "The whole catalogue business is a real melting pot at the moment. Traditional retailers are introducing catalogues, Internet companies are introducing catalogues. Increasingly we're in a multi-channel sales environment, and that's where a company like HGS can come into its own."

Koeman is notably unfazed by the prospect of handling international fulfilment - an activity that has proved a minefield for e-tailers unprepared for the technical hurdles. "We're accustomed to taking a global perspective," he says. "From our viewpoint, the real challenges are not so much legislative as in matters of taste." He says this ability gives the company particular strengths in handling work such as market trials.

He feels another strength in the HGS armoury is its integrated IT platform, a Unix-based system which rejoices under the name PaLoMa (Parcels Logistics Marketing). This has been built up in-house over the past five years. "It's a mature and proven system, but it will be expanded even further." Currently it is being implemented internationally.

When we closed for press, HGS was on the point of announcing its first significant UK business wins, and Arthur Koeman was confident of some fairly rapid expansion. "I see us breaking even this year," he told us. After that, it could be upward all the way.

Otto's global reach

Otto Versand Group was started in Hamburg in 1949, and has grown to become the world's biggest mail-order combine, turning over £14.6 billion (55 per cent outside Germany). It is also arguably the only global player in a market usually defined by national or regional borders. It is now headed by Dr Michael Otto from the second generation of the founding family.

International expansion started in earnest in the mid-70s, when the group acquired 3 Suisses in France. In 1982 it added Spiegel of Chicago, gaining a major US foothold. Grattan in the UK was acquired in 1991, then Freemans in 1999. The group also owns the UK's Kaleidoscope catalogues. Altogether it now has a presence in 23 countries, operating though 90 trading companies.

Hermes General Service takes its name from the in-house delivery service launched by Otto in Germany as long ago as 1972. However, in its current international guise HGS is very much a business of the new e-commerce era, drawing on group resources to provide everything from Web design to payment processing, storage, delivery and returns.