July 30, 2008, 12:00 AM

The big chains weigh in

Large retailers are stepping up their investments in e-commerce, forcing all online retailers to raise their game.

At Sears Holdings Corp., same-store sales at Sears and Kmart retail chains declined 8.6% for the quarter that ended May 3, the company lost $56 million and shuttered 62 stores, yet the company increased investment in its online and multi-channel operations by $10 million. “We will continue to invest in our future by hiring talented leaders and improving our online and multi-channel capabilities,” says Sears Holdings interim CEO and president W. Bruce Johnson.

Sears is not alone: Wal-Mart Stores Inc. has introduced into Walmart.com such features as Ship to Store and Find It in a Store and has populated its site with 300,000 customer reviews. J.C. Penney Co. Inc. has been trumpeting its strategy of making JCP.com the center of Penney’s customers’ shopping experience.

“The biggest opportunity by far is making JCP.com more centralized,” executive vice president and chief marketing officer Michael Boylson told the Internet Retailer Conference in a keynote address in June. “We’re positioning JCP.com as the future hub of our business model.”

Running faster

What all this attention from the behemoths of retailing means is: smaller web retailers, look out. When the likes of Sears, Wal-Mart and J.C. Penney decide the Internet is where their future resides-and when they are clearly going to make major investments in it-smaller retailers could get steamrolled if they’re not ready for the competition.

“It’s going to make everyone run faster,” says Mike Hackley, co-founder and CEO of $14 million-a-year web-only retailer ShoppersChoice.com LLC, which specializes in niche product web sites, such as BBQGuys.com and UltimatePatio.com. “The big guys can invest in great customer service and cutting-edge technologies, and they could come in and leave us in the dust.”

Until now, big chains, despite their national brands and huge resources, have not been a threat to online retailers. They account for 40% of online sales, according to the Internet Retailer Top 500 Guide, and they have ceded 31% of the market to online-only retailers, who were earlier to recognize and exploit the opportunity. In addition, chains’ online growth is the slowest of any segment of online retailers, with sales up 18% in a market that grew 22% last year.

But with the web accounting for most-if not all-of the growth at some chains (see Internet Retailer, April 2008, p. 37), chains can no longer afford to dither on the sidelines while web-only merchants and catalogers grab market share. Furthermore, the decision by Moody’s Investors Service to take online sales into account when assessing the financial viability of large retailers will only put more pressure on them.

“Market leaders like J.C. Penney are making greater investments in e-commerce because more senior managers today better understand the opportunities they have,” says Jim Okamura, senior partner at consultants J.C. Williams Group.

So chains’ new focus could leave smaller online competitors in the dust-but it doesn’t have to if smaller retailers are smart about their own investments and retailing strategies. The investment opportunities are expanding and choices are not getting easier-for example, retailers should at least look into a future mobile version of their e-commerce site to support shopping from a cell phone, says Paula Rosenblum, managing director of research and advisory firm Retail Systems Research LLC.

But by offering the right products with effective online marketing and strong online shopping experiences, smaller retailers can always get in front of the big guys, Rosenblum says. “With interesting products that show up high on search rankings, small retailers can survive and thrive regardless of what the big retailers do,” she says.

Know thyself

Retailers who expect to succeed in this market have to clearly understand their own strengths and weaknesses. “A retailer has to pick one, maybe two, areas where they figure they can clearly excel versus their competitors,” Okamura says. “This must be grounded in a core strategy of how a retailer differentiates itself from others-for instance, by being smaller and more nimble.”

Okamura suggests a framework he calls the four Ps for thinking about where to excel. “Product, pricing/promotion, place of shopping, and processes like fulfillment and customer service,” he says.

Lacking a large size doesn’t have to be a detriment-to the contrary, it can be an advantage, experts say.

“We’ve seen large merchants get more aggressive in our market since last year,” says Neil Kugelman, CEO of Goldspeed.com, a web-only jewelry retailer that has built its business on personalized shopping features and service to about $15 million in annual sales. “We see them in our same channels with Google search and banner ads. But most large merchants are focusing on many different categories-they can’t possibly be as nimble or dedicated to the customer as a smaller merchant.”

Small-company infrastructure can also support market-driven strategies. “With the idea that the web is the great equalizer, the smaller guys have an incredible opportunity to do a lot more interesting things,” says Tiffany Riley, vice president of marketing at e-commerce platform provider MarketLive Inc. “They can be faster and more nimble in deploying new technology, compared to larger retailers who tend to have customized web sites requiring teams of programmers to make changes.”

Vanity, a Fargo, N.D.-based 200-store women’s apparel chain, was responding to a wake-up call when it decided earlier this year to launch its first retail site, eVanity.com.

“For J.C. Penney to take a large step into e-commerce, along with Wet Seal, Buckle, Abercrombie & Fitch and others directly in our market, it justified for us what we needed to do online and multi-channel,” says Robert Schmelz, general manager of e-commerce.

Rather than just launch a basic start-up site, eVanity took extra steps to launch with home-page video designed to engage shoppers with models showcasing several outfits as they walk across the page. “As a smaller merchant with our first online shop, we wanted to convey ourselves as having class and sophistication,” Schmelz says, an approach easier to accomplish online than offline.

Raising the bar

Indeed, keeping up with the biggest and most established retailers isn’t getting any easier as the big competitors try to raise the bar of competition.

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