Big chains strive to harness the web
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.
Giving up
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."
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.
"Our move to the web worked because it was endorsed by our board of directors and encouraged by our CEO, and support was top-down and bottom-up," Luechtefeld says. "We started training and motivating our front-line employees, our call center employees and our outside b2b sales team. We started with the employees closest to our customers."
Longer customer uptake
Although training store employees was a way to introduce the web channel to shoppers, it was still difficult to persuade customers accustomed to store and catalog shopping to use the web. "The first few years were challenging," Luechtefeld says. "It took longer than expected for our customers to understand and see the value of the web in a multi-channel environment."
More retail chains are following Office Depot’s lead in focusing on a web-centric multi-channel strategy, a move that should result in consistently higher increases in online sales, experts say. But retailers have to make tough decisions about which parts of their operations to upgrade, and how far and fast to change. The choices can get tougher as the more progressive multi-channel retailers get further ahead.
Today, online sales have grown to the point where the web channel is commanding more respect from big retail chains. "It’s no longer a no-brainer to invest in a new store instead of the e-commerce channel," Okamura says. "Now the overall U.S. online retail market is heading over $100 billion a year, so the business model is changing."
Technology systems have also evolved in recent years to the point where they can better support big retailers in an integrated multi-channel environment, experts say. "Two or three years ago, there was no technology that could handle the e-commerce volumes of big retailers," says Tricia Walker, retail consulting partner at Accenture Ltd. "But now e-commerce technology is getting more robust, able to handle larger volumes across multiple channels."
Win or lose
Among the key things that differentiate big retail chains, adds Okamura, is the degree to which they deploy the best technology mix for both their store and web channels. "In the early days of e-commerce, it could be overwhelming to navigate a 50,000-SKU online store," he says. "But with new site search, comparison shopping tools and other technology, retailers can guide a smooth shopping process within a vast online selection."
To make its channel integration work, Office Depot uses a mixture of in-house and commercially available technology. It uses IBM’s WebSphere as its e-commerce platform, a customer data warehouse from NCR Corp. that gathers data from each shopping channel, web analytics from Coremetrics Inc. and site search and navigation technology from Endeca Technologies Inc. The in-house IT team has added special features like the online configure-to-order tool.
For Luechtefeld, Office Depot’s experience with the web has come full circle. After applying the experience it had built up in store and catalog retailing to launch the web channel as part of an integrated multi-channel environment, it continues to improve that environment by extending the capabilities of the web to other channels.
Office Depot’s combination of web technology, she says, helps it to both better understand its customers in each channel and tailor an online as well as multi-channel shopping experience to their needs, going beyond the kind of service it offered in the pre-web days. "We develop a profile of a customer’s primary shopping channel, the time they spend in it as well as in their secondary and third channels, and use that to assure that we’re timely and efficient in the way we talk to them in each channel," she says. "The more they shop with us, the more personalized it will be."
Quicker evolution
Office Depot will never stop seeking to improve its customers’ online as well as offline shopping experience, she adds. "We need to continue to innovate, add new technology and functions," Luechtefeld says, adding that Office Depot constantly checks out new technology applications. "But the pace that e-commerce technology continues to evolve is amazing. Our challenge is to choose the technology that is most beneficial to customers."
As other chains follow Office Depot’s lead in building a customer-centric strategy
that capitalizes on growth in online sales as part of an effective multi-channel
strategy, retailers who fall behind should heed a fair warning, Okamura says.
"The losers will be retail chains who can’t afford to develop an e-commerce
channel that integrates with their overall environment," he says.
paul@verticalwebmedia.com
Building on strengths
The office supplies business lends itself to a multi-channel environment, and experts say it’s no coincidence that ranked just after Office Depot in 2004 online sales is rival Staples Inc., where online sales grew 25% last year to reach $3 billion.
Among the advantages they’ve enjoyed is their history of catalog sales, which has helped them to understand how to combine the direct-to-consumer model with a store chain, says Neil Stern, principal of retail consultants McMillan/Doolittle. "Office supply merchants are clearly leaders in integrating multiple channels, coming to terms with the role of a web site and the function of stores," he says.
Channel consistency was high in the minds of Office Depot’s executives as they prepared to launch their first online channel, for b2b customers in 1994. "We had been working with our business customers for a long time, we knew them well and knew how to make a compelling shopping experience for them," says Monica Luechtefeld, executive vice president, business development and information technology, and e-commerce chief. Making the experience compelling meant saving them time picking out and ordering products, having the right products based on customers’ interests, and providing customer service that could cater to a shopper’s personal needs based on purchasing history.
Office Depot figured these same customers would expect a continuation of that level of service in the new online channel. "If I were a business customer shopping on our web site for the first time, I wouldn’t expect my history of sales to begin with my first online purchase, but to go back to include my past orders in stores and catalogs," Luechtefeld says.
When Office Depot launched its online channel, it made sure it was already integrated through back-end infrastructure supporting order management and customer service. "We’d made sure all features and functions worked across all channels," Luechtefeld says.
When it launched the consumer version of OfficeDepot.com in 1998, it continued the same policy but tweaked it for retail shoppers. Knowing that consumers like to check Office Depot’s Sunday advertising circulars for promotions, for instance, it makes the same ad circular available on OfficeDepot.com—on Saturdays. Customers can request e-mail alerts about when the circulars are posted online. "We allow online customers to view the circulars to create a shopping list to take to the stores," Luechtefeld says.
If those same customers choose to stay home and shop online, they have the option of clicking a button in the checkout process to request in-store pickup.
The key to driving sales online as well as in other channels, Luechtefeld says, is to make it clear to customers that they can shop any channel and get the same level of service. "We tried to think of this from the customer’s point of view, because they don’t think of us as three different channels—phone, stores and web," Luechtefeld says. "They think of us as a single brand."
