December 31, 2002, 12:00 AM

A mall operator finds a market in transferring real world expertise online

Chelsea Property Group is finding that the retailers who rent space in its outlet malls are prime prospects for renting its online services.

The outlet mall concept has been a hit, and Chelsea Property Group Inc. should know-it operates more than 50 in some 30 states. The real estate developer builds, owns and manages the malls, does the marketing to drive shoppers to them, and takes a portion of sales at each store.

Guess what: that works on the web, too. Three years ago, a new division of Chelsea Property Group, Chelsea Interactive, swapped out “outlet mall” for “technology platform” and moved the otherwise nearly identical model online. Instead of a physical location and services, it offers a technology infrastructure that bundles technology and services from vendors such as BroadVision Inc., Oracle Corp. and others to support e-commerce applications from the customer interface through marketing all the way to back-end functions. Today it handles e-commerce for eight major brands including Liz Claiborne Inc.’s Elisabeth.com Polo Ralph Lauren’s Polo.com and others.

Not a differentiator

Though well-known for its parent company’s outlet mall operations and to the brands it’s taken online, Chelsea Interactive has flown largely under the radar since the company made the leap from the brick-and-mortar world into the online channel some three years ago. “We spent the first three years getting it right,” says John Reilly, vice president of sales and marketing at Chelsea Interactive. Now, the company is pursuing brand marketers both in and out of the apparel sector and in and out of Chelsea Property Group’s existing client base.

Outsourcing a greater share of e-commerce operations has grown as marketers have come to a better understanding of the web’s role. Competitor GSI Commerce Inc.’s rapid growth and the recent debut of Amazon.com’s online apparel mall are but two examples. Like other marketers online, brands are looking to save cost while extending reach, which adds to the appeal of a shared technology platform.

“Brands like Liz Claiborne and Polo could do this themselves,” Reilly says. “But it’s not strategically important to do it themselves, though it may have been at an earlier time during the dot-com craze. They’ve realized that a shopping cart, a web site and most of that functionality is a commodity, not a strategic brand differentiator. And they’re deciding they want to focus on product, pricing and image rather than the guts of operating a site.”

With about 30 clients, the former Global Sports, now GSI Commerce, towers over Chelsea Interactive’s current eight, but it’s under a different model. Like Chelsea, GSI bundles e-commerce applications and functions, but unlike Chelsea, it acquires the merchandise to resell it.

Chelsea Interactive offers another type of outsource solution, one closer to the outlet mall model which it knows already. It acts as more of a virtual landlord to the tenants on its platform in a model customers have called a “one to one” analogy to how parent Chelsea Property Group handles store relationships in the offline world. The only difference is that merchandise offered online, unlike the outlet mall’s, is full price. “They provide the shell and we build out the look and feel of the brand, do the merchandising, and run it. It’s much like leasing space,” says Brad Lenz, vice president of store visual, planning and construction/e-commerce, at Liz Claiborne.

In fact, Chelsea calls the commissions it receives from online sales “rent.” Brands on the platform pay Chelsea Interactive 10% to 20% of net e-commerce sales, depending on their individual arrangement; some choose to lower their percentage by also paying a fixed fee up front.

Chelsea Interactive also brings to its online tenants something extra: already-established relationships with the brands, some as long as 15 years, through the outlet mall connections of parent Chelsea Property Group. That trust has been a plus in enlisting brands who remain hyper protective of their image and wary of spending big while just starting to explore the direct channel offered by the web. Chelsea Property Group’s mall portfolio includes the factory stores of clients such as Armani, Versace and Gucci. Though Chelsea Interactive’s online portfolio does not at this point include those brands, it does include the equally image-conscious Polo, Elisabeth and Timberland, among others.

Liz Claiborne’s plus-size brand, Elisabeth, the apparel manufacturer’s first branded direct-to-consumer venture online, launched in November 2000 under Elisabeth.com. Of all its brands, Liz Claiborne determined that Elisabeth had the best opportunity online initially as its research showed that plus-sized women were catalog shoppers already accustomed to buying remotely. And Elisabeth already was a known presence in stores- including outlet stores operated offline in Chelsea malls. When Liz Claiborne started researching its options, “Chelsea approached us with the idea of providing a platform for brands to launch in the online sector, with a business model similar to a landlord business model,” Lenz says.

ROI right away

Today, Chelsea Interactive provides a full e-commerce solution for Elisabeth.com, though some functions are outsourced beyond Chelsea. The Chelsea platform allows Elisabeth to segment its e-mail marketing customers, but it outsources e-mail marketing distribution to CheetahMail Inc. UPS’s Logistics Group handles fulfillment. Both are integrated with Chelsea’s platform. Clickstream behavior reporting is outsourced to WebSideStory Inc., though Chelsea Interactive is developing the capacity to offer that service through a partnership with data mining technology provider Teradata, a division of NCR Corp. “Part of our mission from the company is to understand what does and what doesn’t work online,” Lenz says.

So, does outsourcing work? Lenz won’t disclose sales of the brand online, but he talks like a satisfied customer. “With the investment it would have taken up front to build out the site ourselves, we would still have been a ways off from a positive ROI. By going with Chelsea Interactive, we were able to derive a positive ROI from the site the first year,” he says.

Sharon Connor, senior director of commerce technology at Polo.com, estimates that the hardware, additional software licenses and consulting and development cost required to internally build out the e-commerce platform it wanted could have been a $2.5 million to $3 million capital investment.

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