December 26, 2000, 9:55 AM

Chain Reaction

There’s nothing that gets the blood pumping faster in the hearts of traditional retailers than scrambling to beat the competition. In days of yore, big chains thrived on slugging it out for customer loyalty with price wars, upstaging each other with lavishly sponsored holiday parades and stealing away the competition’s most personable department store Santas.

National retailers are experts at battling each other in the bricks-and-mortar and catalog world. But now, aware that an interactive medium is here with the potential to draw huge new crowds of shoppers, department store and mass merchandise chains are taking their competitive wars to a new battle ground: the Internet.

With their big budgets, big systems and big inventories, chains such as Bloomingdale’s, JC Penney, Kmart, Macy’s, Nordstrom, Sears and Wal-Mart aren’t just throwing up token Internet storefronts. They’re bent on dominating Web shopping in the same way they built themselves into multi-billion dollar chain store giants.

But the medium is so new, no chain has a lock yet on a successful selling formula. Instead, they are experimenting with approaches and changing their tactics and strategies with a frequency that causes traditional merchants’ heads to spin. “The Internet offers unlimited potential,” says Kent Anderson, president, Macys.com, San Francisco. “The Web has no physical restraints and offers unprecedented ways to build highly personalized shopper relationships.”

The big chains are hoping to dominate Web selling, just as many dominate traditional selling. To gain Web market share, big chains can leverage their deep financial pockets, direct catalog arms and national distribution systems. Unlike local merchants moving to the Web or virtual merchants who must build up customer credibility, national retailers enjoy instantly recognizable brands and legions of loyal shoppers.

“Traditional retailers already have the public’s trust,” says Pamela E. Stubing, associate director, national retail consumer products, Ernst & Young LLP, New York. “If consumers shop online at Sears, they just expect their credit card transaction will be safe and their order handled properly.”

But trust is only part of the equation. National merchants will have to demonstrate that they can fulfill customers’ Web expectations. And that means changing their whole approach to retailing.

Being nimble is all

Successful Internet merchants are nimble. They don’t wait months to give the buying public what it wants or hand out rain checks if an item isn’t in stock. Successful Internet merchants also know the art of one-on-one Web marketing and fulfilling individual Web orders. And that is where the big chains face serious challenges.

“We’ve only started to figure out this medium,” says Dan Nordstrom, co-president, Nordstrom Inc., Seattle. “We are 30 seconds into a marathon.”

To make the transition to Internet retailing, department stores and mass merchandisers are:

• Forming stand-alone electronic commerce companies or separate internal subsidiaries.

• Offering merchandise online that exceeds the number of items found in a typical department store.

• Moving more catalog functions to the Internet.

• Extending marketing strategies that work in traditional retailing to Internet selling.

“There is going to be a day soon where nearly every retailer must be on-line and the public is certainly going to expect the big anchor stores among them,” Nordstrom says. Because Internet merchandising is so unique and different from traditional retailing, several chains, including May Department Stores Inc., Dillard Department Stores Inc., Neiman Marcus Group and Kohl’s Department Stores Inc., don’t have any immediate plans to sell online.

In January, Saks Inc., formerly Proffitt’s Inc., named William E. Halsam, a former convenience store chain and travel center executive, to be its president of electronic commerce strategies and special consultant for long-range planning. But Saks is just beginning to figure out its Internet selling gameplan.

Many chains are reluctant to move to the Web in a big way because they’re worried about losing existing customers or making a bad investment on a sales medium as new as the Internet. “Their biggest fear is losing foot traffic,” says David C. Edelman, vice president, The Boston Consulting Group, Toronto. “Some chains haven’t figured out what merchandise categories they want to offer on the Internet or if the investment without more online shoppers is worthwhile.”

The big chains making the most splash are those that didn’t want to be hampered by trying to move a bricks-and-mortar operation to the Web. Thus they are focusing their Web selling efforts on setting up separate electronic commerce arms. Sears, for instance, began merchandising on the Internet in December 1997 when it opened a Web store and started selling hand tools.

At the time, the chain’s corporate marketing department headed up all Internet sales initiatives. But as Sears began fleshing out its strategy, Sears executives realized they needed a separate Internet unit that could operate across multiple internal divisions. A small, but focused team of Web selling executives could cut through red tape and reach key corporate decision makers in vital support areas such as merchandising, distribution and information technology quickly.

A separate entity

Another priority was keeping up with the constantly changing electronic commerce market. Sears wanted its Internet arm to be entrepreneurial and its management team concentrating on Web merchandising categories where the chain could capitalize on its most popular product brands such as Craftsman tools and Kenmore appliances. Sears executives achieved their objective by forming Sears Online, a concentrated Internet sales and marketing affiliate, and selecting a project leader experienced with both the inner workings of the company and with a strong knowledge of Internet technologies.

Today, Sears Online is busy conducting customer focus groups and combing through Sears’ marketing database of 100 million households to learn more about Web buyers and their purchasing preferences. “We are focusing on speed and getting it done fast,” says Alice M. Peterson, vice president, Sears Online, Hoffman Estates, Ill. “Large organizations have a lot of structure so there can be efficiencies in getting the scale and good effects of being big. This unit will take advantage of that scale without getting slowed down.”

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