Chain Reaction

There’s nothing that gets the blood pumping faster in the hearts of traditional retailers than scrambling to beat the competition. In days of yore, big chains thrived on slugging it out for customer loyalty with price wars, upstaging each other with lavishly sponsored holiday parades and stealing away the competition’s most personable department store Santas.

National retailers are experts at battling each other in the bricks-and-mortar and catalog world. But now, aware that an interactive medium is here with the potential to draw huge new crowds of shoppers, department store and mass merchandise chains are taking their competitive wars to a new battle ground: the Internet.

With their big budgets, big systems and big inventories, chains such as Bloomingdale’s, JC Penney, Kmart, Macy’s, Nordstrom, Sears and Wal-Mart aren’t just throwing up token Internet storefronts. They’re bent on dominating Web shopping in the same way they built themselves into multi-billion dollar chain store giants.

But the medium is so new, no chain has a lock yet on a successful selling formula. Instead, they are experimenting with approaches and changing their tactics and strategies with a frequency that causes traditional merchants’ heads to spin. “The Internet offers unlimited potential,” says Kent Anderson, president, Macys.com, San Francisco. “The Web has no physical restraints and offers unprecedented ways to build highly personalized shopper relationships.”

The big chains are hoping to dominate Web selling, just as many dominate traditional selling. To gain Web market share, big chains can leverage their deep financial pockets, direct catalog arms and national distribution systems. Unlike local merchants moving to the Web or virtual merchants who must build up customer credibility, national retailers enjoy instantly recognizable brands and legions of loyal shoppers.

“Traditional retailers already have the public’s trust,” says Pamela E. Stubing, associate director, national retail consumer products, Ernst & Young LLP, New York. “If consumers shop online at Sears, they just expect their credit card transaction will be safe and their order handled properly.”

But trust is only part of the equation. National merchants will have to demonstrate that they can fulfill customers’ Web expectations. And that means changing their whole approach to retailing.

Being nimble is all

Successful Internet merchants are nimble. They don’t wait months to give the buying public what it wants or hand out rain checks if an item isn’t in stock. Successful Internet merchants also know the art of one-on-one Web marketing and fulfilling individual Web orders. And that is where the big chains face serious challenges.

“We’ve only started to figure out this medium,” says Dan Nordstrom, co-president, Nordstrom Inc., Seattle. “We are 30 seconds into a marathon.”

To make the transition to Internet retailing, department stores and mass merchandisers are:

• Forming stand-alone electronic commerce companies or separate internal subsidiaries.

• Offering merchandise online that exceeds the number of items found in a typical department store.

• Moving more catalog functions to the Internet.

• Extending marketing strategies that work in traditional retailing to Internet selling.

“There is going to be a day soon where nearly every retailer must be on-line and the public is certainly going to expect the big anchor stores among them,” Nordstrom says. Because Internet merchandising is so unique and different from traditional retailing, several chains, including May Department Stores Inc., Dillard Department Stores Inc., Neiman Marcus Group and Kohl’s Department Stores Inc., don’t have any immediate plans to sell online.

In January, Saks Inc., formerly Proffitt’s Inc., named William E. Halsam, a former convenience store chain and travel center executive, to be its president of electronic commerce strategies and special consultant for long-range planning. But Saks is just beginning to figure out its Internet selling gameplan.

Many chains are reluctant to move to the Web in a big way because they’re worried about losing existing customers or making a bad investment on a sales medium as new as the Internet. “Their biggest fear is losing foot traffic,” says David C. Edelman, vice president, The Boston Consulting Group, Toronto. “Some chains haven’t figured out what merchandise categories they want to offer on the Internet or if the investment without more online shoppers is worthwhile.”

The big chains making the most splash are those that didn’t want to be hampered by trying to move a bricks-and-mortar operation to the Web. Thus they are focusing their Web selling efforts on setting up separate electronic commerce arms. Sears, for instance, began merchandising on the Internet in December 1997 when it opened a Web store and started selling hand tools.

At the time, the chain’s corporate marketing department headed up all Internet sales initiatives. But as Sears began fleshing out its strategy, Sears executives realized they needed a separate Internet unit that could operate across multiple internal divisions. A small, but focused team of Web selling executives could cut through red tape and reach key corporate decision makers in vital support areas such as merchandising, distribution and information technology quickly.

A separate entity

Another priority was keeping up with the constantly changing electronic commerce market. Sears wanted its Internet arm to be entrepreneurial and its management team concentrating on Web merchandising categories where the chain could capitalize on its most popular product brands such as Craftsman tools and Kenmore appliances. Sears executives achieved their objective by forming Sears Online, a concentrated Internet sales and marketing affiliate, and selecting a project leader experienced with both the inner workings of the company and with a strong knowledge of Internet technologies.

Today, Sears Online is busy conducting customer focus groups and combing through Sears’ marketing database of 100 million households to learn more about Web buyers and their purchasing preferences. “We are focusing on speed and getting it done fast,” says Alice M. Peterson, vice president, Sears Online, Hoffman Estates, Ill. “Large organizations have a lot of structure so there can be efficiencies in getting the scale and good effects of being big. This unit will take advantage of that scale without getting slowed down.”

Unlike Sears, many big retailers are still trying to figure out where electronic commerce fits in their overall corporate structure. But unless it’s separately funded and staffed, it’s easy for a small Web store operation to get overlooked in the structure of a large national chain. And that’s precisely the reason Federated turned its first electronic commerce venture, macys.com, into a stand-alone company.

Originally, Macys.com was designed only to be an on-line extension of Macy’s West. But today, Macys.com is an independent Federated company complete with its own five-year business and marketing plan. And being a separate unit is helping macys.com focus on its main strategy: becoming a high-end Web retailer.

“Making us separate lets us concentrate on building up Macy’s business and brand on the Web and helps Federated learn lessons that can be applied to other subsidiaries,” Anderson says. “Electronic commerce is just too important to get lost in the shuffle.”

Once a retailer establishes its separate online division, the next step is to determine what is most likely to sell on the Internet. Just as they’ve done in the real world, large merchants are offering an incredible depth of merchandise over the Web. Their strategy: using their merchandising clout to grab more Web business by offering the Internet shopping public anything and everything it wants.

A case in point is Wal-Mart. A typical Wal-Mart store stocks between 40,000 and 230,000 items. Yet when it comes to the Internet, Wal-Mart is betting that bigger is better. At wal-mart.com, consumers can click on several categories and shop for about 250,000 products.

Bigger is better

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Wal-Mart built itself into the world’s biggest retail chain by providing more merchandise at lower prices than the competition. The same strategy holds true for the Internet. With robust systems and automated ordering and fulfillment links to 51 national distribution centers, Wal-Mart is diversifying its Web store offerings.

In 1997, Wal-Mart moved into online food and began offering Internet shoppers one-day delivery on fresh seafood products.

More recently, impressed with the success of Dell Computer Co., which is pulling in millions of dollars in Internet orders each day, Wal-Mart began selling custom-made computers.

Through an arrangement with ACI Micro Systems Inc., a small Colorado Springs, Colo., computer manufacturer and distributor, shoppers can click on wal-mart.com, fill out an electronic order form and purchase a custom-made personal computer for as little as $622.

“Our customers have come to equate shopping at Wal-Mart stores with excellent service, quality products, and low prices,” says Glenn L. Habern, Wal-Mart senior vice president, new business development. “Our goal is to make those same retailing qualities available to all the Wal-Mart online shoppers.”

Big chains have another advantage they can leverage: their catalog operations. Many have long experience selling direct to customers and that experience can be useful in setting up a Web operation. And it gains the big retailers an advantage over smaller or start-up competitors because catalog operations and sophisticated order intake and fulfillment systems can be put to work almost immediately on the Web.

For now, department stores will continue to mail their books. But as electronic commerce catches on, more chains want their best customers clicking through their electronic catalogs and ordering online. In November, Sears expanded its Internet store to include thousands of selections from its venerable Wish Book.

Penney has added more than 3,500 catalog items to its Web store and introduced an electronic form that allows customers to enter an item from the paper catalog and order it electronically over the Internet.

Penney recently linked the Web store to its six national fulfillment centers and featured jcpenney.com in holiday television commercials. And with more advertising and completely integrated systems, Penney is launching its most ambitious project yet: putting its entire Big Book catalog of 5,000 items online by June.

“When we got into this, Internet shoppers were mostly male and the selling categories were limited,” says Richard E. Last, executive vice president, JC Penney international catalog division, Plano, Texas. “Now we know Web selling is shifting. People want more than books and computers. They’re looking for electronics and home furnishings.”

A lot to lose

Over time, Penney has refined its merchandising strategy, especially in apparel, to concentrate on private label brands, including Stafford For Men, St. John’s Bay, Hunt Club and Arizona Jean Co. And when its Big Book catalog goes live on the Internet, Last believes the private label brands will help differentiate Penney from other online catalogers. “We have a lot to risk losing if our customers can’t find the items they want when they want them on our Web site,” Last says.

But Penney isn’t the only department store chain expanding its online catalog. Nordstrom’s Web store debuted in October with limited electronic catalog features. Nordstrom customers could click on the Place-a-Catalog-Order page and view men’s and women’s apparel. It took Nordstrom years to diversify from chain stores into paper cataloging. Yet in only a matter of months, Nordstrom is expanding its Internet business and putting its direct sales catalogs online. In January, nordstrom.com began featuring all items carried in Nordstrom, The Catalog and in February it launched an interactive version of Nordstrom 2nd Nature, a women’s apparel book. Last fall only about one-third of the chain’s catalog items were available electronically, but now that total has risen to 61,500 products.

“The Internet one day soon is going to supersede catalogs as a sales channel and we must begin to understand that,” says Dan Nordstrom. “They will be looking at slow motion videos of merchandise and using their computers to complete the buying process.”

Flashy electronic catalogs are certainly a tool traditional retailers can use to attract shoppers to their site. But more important is implementing the right marketing strategy to keep them buying and coming back. To achieve results, some retailers such as Kmart are taking merchandising and marketing strategies that work in their physical stores and extending them to the Internet.

Such an approach can create a high profile and instant traffic and credibility for a Web site. Over the years, Kmart has reinvented its stores to focus on a strong program of private labels endorsed by celebrities such as actress Jaclyn Smith and home entertainment and life style doyenne Martha Stewart.

And now that same concept will remain a principal element of Kmart’s Web plan. “We are not trying to pioneer this market,” says Marisha K. Geraghty, divisional vice president, electronic commerce, Kmart Corp., Troy, Mich. “We are going to stick with what we know best and use resources to get into just the right categories.”

Tried-and-true methods

When Kmart’s Web store went live in September, the site targeted busy young professional mothers with specialty health products such as vitamins and workout clothes designed by well-known fitness expert and model Kathy Ireland. To draw women to its Web site, Kmart hired a New York Internet advertising agency to develop a central marketing message, In Shape for Life, and featured Ireland prominently in daily interactive chat sessions on fitness, health and family topics. “The target for this e-commerce category is moms and our Internet strategy is targeting particular customer segments with information, interaction and unique products,” Geraghty says. Kmart’s approach to electronic commerce is conservative and that attitude is typical of other national retailers.

Because the cost of building a first-rate Web store is so high, even deep-pocketed chains are worried about getting a pay off on their investments.

A national retailer can build a basic transaction-enabled storefront for under $2 million.

But if the retailer wants a high-end site entirely integrated with all back-end computer systems, electronic links to key product distributors and equipped with the hottest Internet marketing applications such as customer profiling, the cost can top $20 million.

Throw in millions more for national advertising campaigns or signing exclusive marketing deals with big portal companies such as America Online and Yahoo, and the start-up costs for electronic commerce can top $30 million. “The entry costs even for a national chain aren’t cheap if they want to do it right,” says Carol A. Ferrara, senior research analyst, The Gartner Group, Stamford, Conn.

Because the business is so competitive, electronic commerce executives at large national chains aren’t talking openly about sales and future profits yet. Most will say only that recent online holiday sales met or exceeded expectations.

But as the Internet retailing wars heat up and even more virtual merchants, catalogers and brand name manufacturers open Web stores and start selling to the public, those national chains scrambling to go online believe their timing is impeccable.

“The Web is a great way to build traffic because it completes the brand experience,” says Barbara Geiben, manager, Internet strategies, Bloomingdale’s, New York. “It’s more than just an opportunity to sell online. The Internet is a tremendous medium and marketing machine that can create business across all channels, including bricks-and-mortar.” •

How the Internet
can boost foot traffic

Macys.com President Kent Anderson has good advice for big retailers worried about losing their physical store traffic to the Web: Don’t be.

A well-planned Internet store can generate both online and in-store sales. Strong editorial content and descriptions of more than 250,000 items on the Web site helped Macy’s attract more shoppers to its bricks-and-mortar locations during the Christmas shopping season.