In its second-largest acquisition, Amazon buys the company for $970 million.
For major chain retailers, harnessing the web is hard work, but crucial to success in the new retailing world. Some have gotten it right and show how it can be done.
When Office Depot Inc. decided to get into e-commerce in 1994, there was never any doubt that the web would serve as the center point of a long-term multi-channel strategy-even though its strategy went against the norm at a time when the fashion was to build web sites as separate retail channels.
"We believed from the beginning that, for our customers, the Internet would be an important tool in the way they would do business," says Monica Luechtefeld, executive vice president, business development and information technology, and e-commerce chief who since ’94 has championed the web as a core of the retailer’s multi-channel strategy. "Our move to the web was strategic, not an accident."
More than 10 years later-a generation in Internet time-that decision continues to pay dividends in each of Office Depot’s selling channels, but especially on the web. Online sales are growing at the fastest pace among all Office Depot’s channels-up 19.2% in 2004 over 2003, not bad for a retailer with more than $3 billion in online sales.
Office Depot started out with an e-commerce strategy that was part of a corporate strategy that valued the web as both a distinct channel and a fulcrum to drive sales across stores and catalogs. Ranked No. 3 in online retail sales, following Amazon.com Inc. and Dell Inc., Office Depot is No. 1 in online sales among retail chains.
Office Depot developed a good retail model that experts say gives it the flexibility to respond to market forces, succeeding on the web as well as in stores and capitalizing on the fast growth (25% a year) in online sales over the past several years.
However, other retailers without a clearly focused web strategy are losing out in online sales in a way that can hurt store sales, analysts say. The challenge for each big retailer, experts say, is to figure out how to thrive in a world where the web has become a major generator of direct sales and customer relationships. "The issue is how can big retailers leverage the growth in online sales," says Mark Goldstein, former CEO of Kmart’s BlueLight.com retail site and now CEO and founder of customer rewards program provider Loyalty Lab Inc.
In contrast to Office Depot, Borders Group Inc., at one time considered by industry analysts to be potentially the strongest national book retailer, abandoned its early efforts to run its own retail web site in favor of outsourcing it to Amazon.com. It has since fallen behind rival Barnes & Noble Inc., and has not developed its outsourced web presence to take advantage of significant changes in its market, analysts say.
Borders’ comparable store sales at Borders superstores, its best-performing locations, rose 0.6% in 2004 over 2003 and the same percentage for the first half of 2005 compared to the same period a year earlier. At Barnes & Noble, by comparison, same-store sales rose 4.8% for the second quarter, while sales at its BarnesandNoble.com rose 14% year-over-year to $96.3 million.
Fighting for market share
A big reason for the slack sales at Borders is the large amount of space Borders dedicates in stores to recorded music products, a market that is shifting online, says Derek Leckow, stock analyst at Barrington Research in Chicago. And, because it has not developed online expertise, it is a market that Borders is not in a position to capitalize on. "That category has been down in double-digits," he says. "It’s been a huge drag on comp store sales."
Leckow notes that Borders may eventually move into the online market for digital music to replace the store music sales, but entering it now would put it up against established competitors in a crowded market.
Without the ability to quickly take advantage of shifts in the market, retail chains run the risk of losing market share to others who can, experts say. It was true 40 years ago when Wal-Mart Stores Inc. started its march and it’s true today as unknown retailers become big rivals online.
One of the crucial things about the web for retailers, as every merchant from Wal-Mart and Amazon to 5-year-old pure-play Zappos.com Inc. knows, is that it levels the playing field where startups can compete on the same 17-inch computer screen as the biggest multi-channel national retailers.
Indeed, the web has spawned some remarkable success stories among flexible startups that have left retail chains flat-footed. Footwear and accessories retailer Zappos has surged in six years from zero to $300 million, and Newegg.com hit $1 billion in sales last year, its fourth year in business, doubling its sales from 2003.
But an established and profitable retail chain like Wal-Mart, where online sales rose an estimated 8% in 2004 over 2003, may take years to figure out the right mix of infrastructure and strategy to capitalize on online sales and truly leverage the power of the web in all channels. "Wal-Mart is still trying to figure out what the online channel means to its business, and how it can use it to support and target customers," says Rob Garf, retail analyst with AMR Research Inc.
In the case of Borders Group, Leckow maintains it was correct to outsource its e-commerce business to concentrate on its core competency in running stores, where it has plans to improve its in-store cafés and expand the number of superstores. Borders operates 504 superstores under the Borders brand, and plans to add 15 to 20 this year. It also operates another 700 smaller, mall-based stores under Waldenbooks and other brands. Borders was unavailable for further comment.
Seeking brand synergy
But others say Borders’ decision to outsource e-commerce has a detrimental effect across channels, and that it should be complementing store improvements with web site improvements. "I find the whole notion of giving up and going to Amazon strange, because online it’s not their brand, it’s Amazon’s," says Paula Rosenblum, director of retail research at research and consulting firm Aberdeen Group Inc. "It should be all about getting some brand synergy."