The big chains weigh in

Large retailers boost investments in their sites, forcing everyone else to play a better 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.

J.C. Penney, noting that 90% of its web customers also shop its stores, is placing more emphasis on coordinating cross-channel marketing and merchandising, using data on its online customers’ shopping behavior to better understand customer demand, and planning to continue making JCP.com, which had $1.5 billion in sales last year, a more attractive place to shop, Boylson says. “JCP.com will become the face of our brand,” he says.

Wal-Mart, while by far the largest retailer in terms of stores and total sales, is also taking several steps to reach its goal of making Walmart.com, No. 14 in the Internet Retailer Top 500 Guide with more than $1.5 billion in 2007 web sales, “the most visited and valued online retail site, by making it easier for customers to shop Wal-Mart both in stores and online,” a spokesman says. Wal-Mart has plenty of room to grow. Its online sales were less than half of 1% of total sales last year, compared to 5% for Sears and nearly 8% for Penney.

Like Penney, Wal-Mart figures that close to all of its online customers also shop its stores, and so it is investing in ways to give shoppers the cross-channel experience they expect, the spokesman says. For example, it’s attracting more shoppers online through a Site to Store program that allows Walmart.com shoppers to have their orders shipped to their local Wal-Mart store at no charge.

50 million page views

Walmart.com has also served up more than 50 million page views to visitors taking advantage of the beta version of its Find in Store feature that lets them search local stores for availability of electronics, video games, baby products, home furnishings and jewelry.

Walmart.com is also continuing to build out its consumer-generated product reviews, which as of last month included more than 300,000 reviews, the spokesman says.

Not to be outdone by rivals, Sears Holdings—including the operations of Sears, Roebuck and Co., Kmart and Lands’ End—migrated its retail sites to an upgraded e-commerce platform last year designed to support more cross-channel shopping, including allowing customers to order online in a store as well as pick up in the store orders placed online.

“Multi-channel represents the potential for a sustainable growth vehicle for our company and represents an opportunity for us to unify and integrate the customer’s experience,” the retailer says in its 2007 annual report.

To be sure, big retailers are looking to their web-focused strategies to continue their strong online growth—strong, that is, relative to their total growth if not to market growth—while trying to spread more of that growth into their stores. In their most recent fiscal years, J.C. Penney grew 15% online while declining 0.2% in overall sales; Wal-Mart grew 25% online vs. just under 9% overall; and Sears climbed 9% on the web against a 4% drop in total sales.

Setting new goals

While the largest retailers keep trying to raise the bar of multi-channel retailing, however, smaller retailers are finding plenty of tricks of their own. They’re defining their competitive positions and deploying technology and business strategies to support them.

ShoppersChoice.com operates its namesake web site as a retailer of general merchandise, but in recent years has discovered its real strength is in operating niche sites like OutdoorKitchensDepot.com and ElectricGrillDepot.com. While their names make it easier for consumers to find them in Internet search, the sites are designed as one-stop-shops in their niche areas with extensive product lines and hundreds of videos and written content on how to operate them. The sites are designed to make it as easy as possible to buy products that can cost thousands of dollars, Hackley says.

“If big retailers throw unlimited resources at our market, they may take a piece of the pie,” he says. “But what they won’t do—what I don’t think they can do—is provide the kind of special attention to customer needs that we do.”

Being a relatively small retailer has also made it easier to quickly roll out special services like monogramming, which ShoppersChoice now offers with its own monogramming equipment for grill covers and other products. After acquiring monogramming equipment and an experienced operator earlier this year, the retailer was offering the service within a week and a half, Hackley says. It attracted 50 orders in the first week.

Personal service

Hackley also provides extensive product training to his customer service employees. He also takes extra steps to maintain strong relations with suppliers to ensure his drop shipping partners meet the company’s goal of shipping orders within 24 hours, if not on the same day orders are received—a step large merchants with thousands of suppliers would be hard-pressed to take, he contends. “I meet suppliers all the time and buy them dinner,” he says.

An emphasis on strong customer service and fulfillment practices pays off in several ways, says Kugelman of Goldspeed. By focusing on personal service, including requests for ring engravings not usually offered by large jewelry retailers, he says, Goldspeed has received hundreds of favorable comments including many with pictures and videos of customers and their products.

Now Goldspeed is planning to build on the customer feedback stemming from its service reputation by inviting more customers through personalized e-mail requests from Kugelman to submit comments, photos and videos of themselves with their jewelry purchases. Goldspeed is also developing a dedicated section of its site where customers will be able to load and share their content and eventually send it from Goldspeed.com to social networking sites like YouTube.com and MySpace.com.

Retailers like Hackley and Kugelman say one of their advantages is being able to quickly move on new merchandise or new e-commerce technology. Goldspeed, for example, figures it can be more selective in making advantageous buys on the wholesale jewelry market based on hot styles and volatile pricing than behemoths who must buy far ahead of time in larger volumes.

Being more responsive

On the technology front, Goldspeed relies on an e-commerce platform developed in house with flexible architecture to support quick rollouts within weeks of add-on technology, Kugelman says. “It’s more important now in this tough economic market to be more responsive than ever to the customer,” he says.

For example, to better engage shoppers with a more personalized shopping experience, Goldspeed recently deployed within a few weeks technology from MyBuys for providing more effective online cross-sells and upsells and for sending out personalized marketing e-mails to shoppers who abandon shopping carts. “That’s already producing a good ROI,” he says.

While large merchants like Penney also sell jewelry online with special offers, their broader scope makes it more difficult to target customers with useful product offers, Kugelman figures. “The big guys have multiple criteria that we don’t have to meet, such as trying to get customers to open more credit card accounts or purchase non-jewelry items,” he says. “They can’t delve into personalized offers like we do.”

In many cases, technology most known for giving big retailers an edge is available to smaller merchants as well. Digital Element, for example, provides IP geolocation technology to Ace Hardware Corp. that automatically recognizes the IP addresses and ZIP codes of visitors to AceHardware.com; the vendor makes the same technology available to smaller retailers starting at about $500 per month.

“Some retailers who operate regionally use this technology to refer visitors from outside their selling area to other retailers, earning referral fees,” says Rob Friedman, executive vice president of Digital Element.

100-day launch

The new eVanity.com deployed in 100 days on a hosted, software-as-a-service platform from MarketLive with the technology flexibility Schmelz says he needs to compete with his more established multi-channel competitors.

Part way into the deployment, for instance, he decided to add moving images of models on the home page. The video images, designed with a white background to make the models appear as if they had just walked onto the page, were designed by Fargo, N.D.-based Network Central Inc. using content delivery technology from Akamai Technologies Inc. With the open and flexible technology of the MarketLive platform, the new imaging was deployed without delaying the site’s planned debut, Schmelz says.

In addition, working for a relatively small company, Schmelz was able to make the decision to add the moving images quickly and without having to move the request up the chain. He figures the rapid movement on that decision has benefited Vanity by providing an online partner that extends the chain’s fashion-forward image on the web and caters to its customers’ expectations of a Web 2.0 rich media online shopping experience.

And because the MarketLive platform operates in an on-demand environment, eVanity can get the power available to a large retailer without having to invest in more infrastructure than it needs, he says.

“We get the same operating power as larger retailers when we need it, but we don’t need to invest in 100 servers to run our system all the time,” he says. MarketLive also came pre-configured with order management technology from OrderMotion Inc. to support fulfillment. The MarketLive platform costs about $75,000 in start-up fees plus an annual subscription starting at under $100,000 based on a retailer’s revenue.

Cutting the red tape

Schmelz, a former e-commerce manager for a large hardware and home improvement retailer that could be slow to make changes in product lines or online shopping features, says he enjoys the ability at a smaller retailer to make changes more quickly with technology as well as business strategies.

“In the fashion world we have to be on the cutting edge,” he says. “If we see some sudden shift in the market—for example, miniskirts are out—we can pop them off our site and replace them with long skirts in a new online presentation within hours. Being a smaller, more nimble retailer, I can make adjustments on the fly unlike when I was in a red-tape environment at a larger retailer.”

The ability to react quickly to take advantage of new technology and strategies in merchandising and marketing, experts say, is the ace in the hole for smaller retailers. “The toughest thing is that Internet retailing changes so quickly,” Okamura of J.C. Williams says. “The bar keeps getting raised and customer expectations keep ramping up. But smaller retailers with the right strategy can differentiate from large retailers and excel.”

paul@verticalwebmedia.com

Investment boom

Investment in the web by big retailers will increase even more as top executives at the largest retail chains become more aware of the power of the web in driving multi-channel sales, says Kasey Lobaugh, direct-to-consumer practice leader at consultants Deloitte LLP.

Many retailers today, he says, don’t realize that store sales preceded by visits to retail web sites account for about 20% of sales and online-only sales for another 7%, accounting for 27% of total sales in one way or another driven by the web.

“Today, most retailers only see it as a 93%-7% split, where the 93% of sales are in stores and 7% online; they don’t realize that 20% of store sales are influenced by the web,” Lobaugh says.