Business Week e.biz -- Web Smart Companies
Virgin Takes E-Wing (int'l edition)
Richard Branson is using the Net to bring order to his motley conglomerate
Richard C. N. Branson has made a career of confounding his critics. His Virgin Group Ltd. spans 170 businesses, from airlines and railroads to music stores and condoms. So when the British tycoon moves online, one shouldn't expect just digital music and virtual airline reservations. Try some 5,500 London households paying gas and electric bills online through Virgin's Web site since July. An additional 2,000 Brits tooling around in cars they bought on the Net, thanks to a new Virgin service launched a month earlier. Then there are the nearly 2 million people in the country booking train tickets through Virgin--and 1 million using the Web to tap Virgin's help in managing $4 billion in assets, including insurance, mortgage, and investment funds. And don't forget the $58,000 worth of wine they're buying online from Branson each week.
The irony here is that Britain's most colorful and controversial entrepreneur is no big fan of technology. "I'm not that interested in the Net, personally," says the 50-year-old founder and chairman, who doesn't use a computer and instead keeps copious notes in leatherbound notebooks. What Branson does like is the ability to use the Net to bring order to his unwieldy conglomerate. "A lot of people never thought Virgin was very logical because we didn't specialize in any one area," says Branson, comfortably seated in the London townhouse that doubles as his office. "But then the Internet comes along, and I'm able to pretend that it was all a carefully crafted plan," he jokes.
Carefully crafted or not, virgin.com is a digital giant in the making. Still in its first year, the Web site is attracting 1.9 million visitors a month and ranks as the 12th most popular Web destination in Britain, according to market researcher MMXI Europe. Now, Branson is trying to build virgin.com into one of the world's top portals. He has spent more than $225 million to develop Net businesses and services, ranging from a global mobile-phone company to radiofreevirgin.com, a sister site offering software to turn a PC into a digital radio. Branson believes the Virgin name, known for its hip, consumer-friendly image and exceptional service, will translate well across a rash of Web businesses. "Virgin.com isn't a company, it's a brand," says Will Whitehorn, a Virgin director who oversees the company's e-commerce activities.
The stellar red-and-white Virgin logo is a big draw for potential partners, too. Branson is starting out on his home turf and then rolling out his virtual ventures across the globe with foreign partners footing most of the bill. The Australian Mutual Provident Society (AMP), the country's biggest fund manager and insurer, for example, invested $175 million last year in upgrading and maintaining Virgin's online financial services arm, Virgin Direct. All profits are split equally between AMP and Virgin, even though the Australian company provided most of the funding.
That's just one of at least half a dozen deals. The partners are drawn to the fact that Branson splashes the Virgin logo and its Web address across everything from shopping bags in the Virgin Megastores to the sides of trains and the tails of planes, saving a fortune in advertising. "Virgin's approach to the Net has been very clever," says Simon Knox, professor of brand marketing at the Cranfield University School of Management in Bedford. "Each launch of a new business builds upon the one before, rather than developing isolated branded businesses."
And then there's the way Branson is using the Web to streamline operations inside his empire. His Virgin Atlantic Airways Ltd. and record stores now order inventory online as needed, instead of having to keep huge stashes of CDs and parts close by. Within Virgin's byzantine corporate structure, the Net is used to orchestrate activities among the company's 30,000 employees worldwide. Each business, for instance, has its own marketing staff that relies on the Net to coordinate advertising spending and strategy with Virgin's corporate offices before booking the business with one central ad agency. The privately held company estimates that the Internet will boost efficiencies and shave 15% off its overall costs this year, although it declines to provide specific figures.
Branson is betting the efficiencies will grow as virgin.com becomes a cyberconglomerate. By putting all of Virgin's businesses on one easily accessible site, he can cross-promote the company's seemingly limitless offerings. For instance, users might log on to the Web site to buy an airline ticket on Virgin Atlantic and then check out a mortgage or order a case of wine. "I normally use Virgin's Web site for entertainment listings, but I was surprised by the amount of stuff they offer," says London Web designer Steven Scott, who logged on recently to check out airfares and ended up buying CDs.
Now, Brits can find another online service from Virgin. On Dec. 8, Branson launched an auction business available through virgin.com. To kick off the service, nine Virgin companies will auction flights, cars, wine, and mobile phones. For the first two weeks, consumers were able to name their price--since all bidding began at $1.50. Beginning Jan. 31, the range of goods and services will change weekly. Virgin plans to promote the auction channel heavily across the various sites that make up virgin.com. "Considering the brand recognition that Virgin has wherever it operates, they've got the right strategy in place: an online marketplace for offline products," says Jamie Wood, head of European equity research at J. P. Morgan & Co. "The Web works best when a brand aggregates a variety of services into one place with a guaranteed level of service."
Despite all its nifty Net services, Virgin is late to the Web. So far, most of the ventures behind virgin.com are available only in Britain. The company's online sales total a puny $216 million. That's just a fraction of Virgin's overall sales of $5.2 billion. And it's way behind the $500 million in e-commerce and advertising revenues that rival America Online Inc. generated for the fiscal year 2000 ended June 30. Critics also question whether plastering Virgin's red-and-white logo over such a disparate range of businesses undermines the clarity or integrity of the brand.
The Virgin brand hasn't gained much traction among Net shoppers in the U.S. In December, Virgin announced it was temporarily pulling back from online music sales in the U.S. through its Virgin Megastore site. Virgin says the level of U.S. sales has not been sufficient to justify the investment needed to maintain a full-service e-commerce operation. Virgin Megastore now plans to focus its online efforts on providing music-related content while expanding the number of stores in the U.S. from 19 to about 40 by 2005. Because the U.S. is still a small share of Virgin Megastore's overall sales, the company hopes that increasing its presence in America will eventually strengthen its position online.Brand leverage. Branson also faces tough competition from such global Net players as AOL and Yahoo! Inc., which already have well-established portals offering almost the same fare. "Everyone wants to be a leading portal these days," says analyst Mikael Arnbjerg of market researcher IDC in Copenhagen. "Virgin can leverage its brand in certain market sectors, but that's not enough to become a major player."
Besides pure Internet companies, Virgin's rivals include other bricks-and-mortar players in a wide swath of industries, including rival airlines, travel agents, music and electronics retailers, as well as mobile-phone heavyweights such as Britain's VodaFone Group PLC. Within Britain, VodaFone, British Telecom, and France Telecom's Orange are better entrenched in the mobile phone business--as are traditional retailers where Virgin operates.
Branson doesn't deny any of these challenges. But he insists that Virgin's strength is that the brand isn't inextricably linked to just one business or product. Unlike other cell-phone operators, Virgin can cross-sell a variety of products and services to its mobile phone customers. And because brick-and-mortar retailers tend to specialize in one area of the market, Virgin believes its diverse offerings will be a major advantage. Virgin is betting that selling its own merchandise, something neither AOL nor Yahoo does, will give it an edge over the big online players. "Being completely virtual and simply selling other people's products is a zero-sum game," says Whitehorn.
Where Branson's strategy has the potential to pay off handsomely is on the wireless Web. Virgin already sells mobile phones and offers Virgin Mobile, a wireless network that is a joint venture with Deutsche Telekom's cellular company, One 2 One. By 2005, mobile phones are expected to account for more than 40% of the estimated $20 billion in European e-commerce transactions, according to London-based market research company Mintel. "This is where Branson has really done his homework," says Peter Richardson, principal analyst at The Gartner Group, an Internet consultancy in Egham, Surrey. "He realizes the considerable potential for mobile phones as a distribution channel, and any of his businesses can benefit from this."
How? Virgin Mobile gives Branson a direct line to customers without incurring extra marketing costs. Using short text messages, Virgin can offer targeted promotions for any of its products and services. Today, some 20% of Virgin Mobile's revenue is e-mail and other data communications, but Branson estimates that nearly 50% of the wireless network's revenues will come from non-voice traffic by 2005. By then, Branson believes most of the transactions on virgin.com will be made through cell phones instead of PCs. Branson envisions a day when Virgin Mobile users will be able to reserve a seat on Virgin Trains while waiting on the platform, simply by pressing a button on their phones. Once aboard, Virgin Mobile users can check their investments through the Virgin Direct financial services site, book a vacation through Virgin Holidays Ltd., or listen to the top-selling tracks at the Virgin Megastores.
What could give Branson a big boost on the Web is Virgin's reputation for super service. In June, the company launched Virgin Cars, an online site where British consumers can buy a broad range of makes and models at an average discount of 17% from those sold in dealerships. Virgin can offer lower prices by buying cars from European dealerships, where the vehicles are far cheaper than in Britain due to the strength of the pound. That advantage won't last forever. So Branson is building a reputation for quality and white-glove treatment by offering a service package that includes warranty, roadside assistance, and pickup-and-delivery maintenance, including a clean car when it's returned.
Branson doesn't view the Web as a tool simply to boost the top line. Virgin is using the Internet to streamline its far-flung operations. Virgin Atlantic Airways, for instance, is tapping into the Net to improve the efficiency of its supply chain. The airline now buys most of its new and used parts online. Whenever mechanics need a part, they log on and place their order--instead of Virgin having to stock a complete array of plane parts. This just-in-time approach, says Whitehorn, has helped the carrier achieve great savings by reducing the amount of inventory it needs to warehouse. If a plane is stranded on the tarmac or in the hangar because of a faulty part, Virgin Atlantic can check the Web for a local supplier that stocks that part and have it sent to the runway in a matter of hours, something that would have been impossible three years ago. Whitehorn won't say specifically how much the airline is saving, but says nonfuel costs have been cut by 5% overall.
Using the Net, Branson has even resuscitated his money-losing V Shop retail chains. The British chain, known until recently as Our Price, is a miniature version of the Virgin Megastore, where customers can buy music, videos, entertainment gear, software, and mobile phones. In September, the stores were renamed V Shops. Instead of stocking massive amounts of CDs, videos, and games, V Shops now keep only the most popular products on its shelves. The rest are held at a fulfillment house contracted by Virgin. Customers who want to buy something other than what the store has in stock can choose from an additional 110,000 products available via in-store kiosks hooked to the Net. Currently, 10% of all sales are through the in-store kiosks.
The impact on the bottom line is considerable. By slashing its in-store inventory in half, Virgin is saving around $300,000 a year at each of the 150 V Shops. Monthly sales are up an average of 40%, and Virgin anticipates all of the retooled V Shops will be profitable in their first year. "Technology has enabled us to put a dying business back on its feet and make a small store big," says Virgin Entertainment Group CEO Simon Wright.
For Branson, a self-confessed techno-illiterate, the Internet may be just another means of building the Virgin brand and bringing order to his vast empire. Yet, if his efforts pay off, the Virgin name might one day stand for techno-savvy.By Kerry CapellReturn to top