September 28, 2005, 12:00 AM

Getting It Right

(Page 2 of 4)

Amazon-which doubles as Borders’ e-commerce platform provider as well as its biggest online competitor-handles all fulfillment and pays Borders a referral fee for online sales made through the Borders section on Amazon.com. Shoppers also have the option of ordering online and picking up at a Borders store, in which case Borders pays Amazon a referral fee. Borders includes the fees it earns for online sales on Amazon in its financial statements under "other revenue," which includes membership club sales. All together, it amounted to less than 1% of total 2004 revenue of $3.9 billion.

The Borders experience offers a lesson to retail chains, experts say, to first define how the retailer fits in the market and determine what consumers expect from it. Some chains like regional competitors to The Home Depot, which has a well-established e-commerce channel, may forgo web-selling to concentrate on providing attractive stores with a high level of customer service. And while retailers like Office Depot and rival Staples Inc. push for strong sales in each channel in an integrated, multi-channel environment, others like Best Buy Co. Inc. may view the online channel mainly as an efficient way to drive traffic to stores so customers can touch and feel products.

The important thing for retail chains, Goldstein says, is to choose the best option to keep customers coming back for a valuable shopping experience. "If you get caught in the middle, you’re in trouble," he says "Borders got squeezed between Barnes & Noble and rival Amazon."

Still, even those retail chains with clearly defined strategies face challenges in getting the most of online sales.

Although more big retail chains have been sharpening their online strategies in recent years, recognizing the web’s importance as a sales channel in itself and as a base for multi-channel sales, some are playing catch-up with technology and strategies.

Investments in the e-commerce channel by retail chains have had to compete with their traditional growth strategy-opening more stores. If a multi-channel retailer adds a store, it can expect to get a first-year boost in sales, but growth in a new online channel is less proven, experts say. "Retail chains don’t usually go from zero to $40 million overnight in the e-commerce channel," says Jim Okamura, senior partner with retail consultants J.C. Williams Group. "While the long-term growth rates are attractive, the assurance of revenue gain has not been there when compared to the store expansion formula."

Pioneering spirit

But that formula has kept some retailers off the industry pace of growth in online sales. A major challenge facing many of the big chains, experts say, is overcoming the fact that they were late to the game in building the kind of infrastructure and operational policies they need to thrive in a world where the web is the centerpiece of multi-channel retailing. "One of the strengths the e-commerce channel brings to retail chains is the ability to merchandise enormous breadth and depth of products, so it should be a good fit for big players," Okamura says. "It’s contradictory that a lot of stores are weakly invested in e-commerce."

So why do Office Depot and other successful multi-channel retail chains capitalize on the ongoing industrywide rise in online consumer spending while others slip? One reason is their ongoing drive to improve each channel. Last year, Office Depot began installing up to eight web-enabled kiosks per store, offering them as a way for shoppers as well as store associates to access OfficeDepot.com to search for products. The web site, meanwhile, has won high marks from performance monitoring agencies that measure crucial things like page-loading times, even though it operates with rich media to spice up its office supplies listings with features like videos related to its sponsored NASCAR race car. And Office Depot hasn’t forgotten the stores; this year it plans to roll out about 100 of its new M2 format stores, which are designed to be both more aesthetically pleasing and easier to shop.

Experts say the leaders also have the ability to carry out an integrated multi-channel strategy that starts with support from top management and covers technology systems, merchandising, marketing and employee training-indeed, even customer training, showing shoppers how to benefit from the multi-channel shopping experience. "It’s a combination of multi-channel and customer centric strategies," Okamura says.

Office Depot forged ahead in 1994 with a fully integrated multi-channel infrastructure and policy, and it has never looked back, even though it went against the conventional business thought of the time that favored developing the web as a separate channel. "It was considered by Wall Street the wrong thing to do at the time," says Neil Stern, principal of retail consultants McMillan/Doolittle. "Those like Office Depot who thought of a holistic, multi-channel way to present their brand were considered too progressive at the time, but now are getting the benefit of having done that."

Several advantages

Starting its web strategy in an integrated environment brought Office Depot several advantages. It proceeded with a distribution system to support both store and direct-to-consumer deliveries; it realized strong sales and customer relationships with employees trained early on in the operation and importance of a multi-channel environment; and it improved customer service by having visibility into customer activity and inventory flows through an integrated infrastructure.

The company had had the foresight in the early 1990s, even before it launched its web strategy, to build a robust and scalable distribution network, Luechtefeld says. It completed the distribution system with common warehouse management systems in 1997-98, adding more warehouse capacity as sales volume grew. "We built with extra capacity in mind," she says.

Store personnel received special training in how to leverage the web as a selling and customer service tool. Store executives introduced the web site at several national sales meetings. The company developed instruction materials for store sales associates. And it provided online training on its web portal for store employees to learn how to use new tools like its online configure-to-order feature to help shoppers choose a computer as well as to show customers how to use OfficeDepot.com for ordering products. Office Depot also conducted contests for store employees to make them aware of how to leverage the web to help overall sales.

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