When major retailers first went into the online retailing business, they pursued two distinctive strategies. One group, perceiving the web as a new frontier that required entirely new methods, built separate organizations for their Internet operations, complete with new systems, fulfillment and marketing infrastructures. Circuit City was among the many major chains that opted to rest its web business on its existing infrastructure, and the computer retailer believes that has been the key to its success on the web. “We got an enormous 40% margin advantage by using the infrastructure of our stores,” Senior Vice President and CIO Dennis Bowman told his audience at the eTail 2001 Conference in New York.
Bowman was comparing Circuit City’s results on the web with published figures from another major chain, the name of which he did not disclose. Fully one-quarter of that advantage, he said, was attributable to Circuit City’s use of its existing warehouse facilities, compared to the chain that built a dedicated distribution system for its web operation. In fact, he noted that Circuit City actually improved the efficiency of its existing distribution system when it added web sales. The reason: shipments to stores preparing for the Christmas season occurs in summer and early fall; pick-and-pack shipments of products to web shoppers occurs in the two months prior to Christmas.
Bowman attributed another one-quarter of the profit margin advantage to marketing. “We leveraged existing marketing assets and reduced affiliated marketing to key accounts rather than signing hundreds of affiliate programs, many of which provide little benefit,” he said. Another 7% margin gain came from using the same order fulfillment and customer service operation and a 4% advantage came from using data systems that were already in place. “We did everything internally; they used consultants,” Bowman told the group, referring to the other chain. “We host our site inside our data center; they outsourced.”
His recommendation for retail chains building a web business: “It’s easier to utilize your existing infrastructure for the web than it is to build the massive Internet sales volume that’s necessary to support an entirely new infrastructure for an e-tail operation.”
Other profitability hints offered by Bowman involve the design of the web site itself. The best sites, he said, focused on upgrading the relevancy of the search function, developing strong personalization capabilities, and improving the ease of checkout. Doing those things right, he said, can result in a three-to-one conversion advantage over web sites that perform below average on such functions.
Finally, Bowman cautioned retailers to avoid the notion that the web requires a 24/7 customer service back-up simply because the site is online all the time. “Most of our web customers contact us via e-mail, and they are satisfied with a response within 24 hours,” he explained. “We decided that a 24/7 customer service operation to support the web wasn’t worth it because you don’t get credit from the marketplace for it. And it costs a lot of money. So why do it?”
Leveraging the power of existing retail operations to support the web, said Bowman, must go beyond back-end infrastructure and right to the store managers themselves. “When we went on the web, we went to all of our stores and did a road show to get support for store managers,” said Bowman. But Circuit City created incentives for the store managers to support the web by crediting to stores the sales they fulfill from the web. “Fifty percent of our customers who order from the web pick up their merchandise at the store (to avoid shipping charges),” noted Bowman. “Giving the stores credit for those sales was huge, because it means the stores execute fulfillment of those orders very well. And it means that the web site gets a big thumbs up from managers in the field.”
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