The Levi Lesson
Born during one gold rush, Levi Strauss has walked away from the current one. Are more manufacturers close behind?
By MargaretAnn Cross
With brands so brawny that it needed a pair of Internet stores for selling them, Levi Strauss & Co. looked every bit like a New Economy upstart a year ago. Not only did the jeans maker seem to “get” e-commerce, but it was willing to step on the toes of retailers already selling its products to prove the point. In a controversial move, Levi made its sites the sole source for buying its denim and Dockers online. A year later, the company’s decision to shut down its cyber cash registers is as much an example of shuffling corporate priorities as what the Internet cannot do—yet—for a company’s fortunes.
Faced with declining revenue, shrinking market share, plant closings and layoffs, Levi says it could not justify the hefty, ongoing investments needed to upgrade its Web operations and keep them competitive. So its sites will only concentrate on marketing and special promotions.
Though a Levi spokesman insists that Internet sales were meeting expectations, he says the company must focus on strengthening relationships with bricks-and-mortar retailers. The new direction supports that goal, while the old one contradicted it. In fact, Levi accompanied its e-commerce reversal with news that department store giants, Macy’s and JCPenney would be selling its products online in time for the Christmas shopping season last year.
Yet some observers look no further than the company’s Web site, saying Levi bungled its prospects for success by launching a site long on gimmicks, but short on simplicity. Without disputing the company’s financial constraints, observers say Levi ignored a retailing basic: Make buying easy.
A shopper wanting to order a pair of jeans, for example, had to click four levels into the site just to begin scrolling through a wide selection of styles, with little help sorting out their differences. And access to shopping carts was nearly hidden. “It was absolutely awful,” says
Harly Manning, an analyst at Forrester Research, Cambridge, Mass. “I’ve got to believe Levi would be much more encouraged about selling online it it had seen better sales results.”
The Levi story illustrates the difficult transition that manufacturers face in selling direct to consumers online. Along with world-class site design and navigation, Web stores need a crackerjack back office that can handle order processing, fulfillment and customer service in a highly personalized fashion.
It’s a business orientation so different that many decide to stick with traditional retailers, says Tom Reynolds, national director of Ernst & Young’s retail and consumer products practice. “Manufacturers simply aren’t equipped to do direct sales.”
Many apparently recognize this because only 5 to 10% of manu-facturers sell direct on the Web. But manufacturers can’t afford to ignore the Internet, either. “When companies have a strong brand, they have to be online for brand support,” says Harry Wolhandler, vice president of research at ActivMedia, an online consulting firm in Peterborough, N.H. “That doesn’t mean they have to sell products.”
High risks all around
Manufacturers brave enough to stake a claim in e-commerce soon realize that they risk alienating the retailers already carrying their goods or tarnishing their brands with poor fulfillment or clunky Web sites that don’t perform.
What’s more, executives in charge of e-commerce initiatives at most manufacturing companies often must work hard to win wide-ranging support for Web stores and teach their colleagues to think in terms of one-to-one sales.
Getting that buy-in from senior management wasn’t easy at VF Corp., the maker of Wrangler, Lee, Healthtex and other clothing brands. Amy Robinson, electronic commerce manager for VF Services Inc. says she spent months talking with senior management about the opportunity and trying to sell it.
Robinson backed her sales pitch with research touting the success clothing retailers were having online and the numbers of consumers streaming into Internet shopping sites. VF executives started to listen. “We had to overcome the risk factor of going direct against our retailers. And that’s still a major concern,” Robinson says. “But e-commerce is too big an opportunity for us not to participate in.”
VF recently launched its first Web store, www.healthtex.com, which features children’s clothing. Even though the site has met or exceeded goals for sales and traffic—drawing more than 4,000 unique visitors a day—Robinson and her team have struggled to make the effort work internally. “It’s been a challenge working with management to make decisions about how to allocate resources, production and inventory,” she says. “Using resources for consumer sales runs counter to our normal business.”
Robinson already has seen merchandise set aside for the Web store shipped out of the warehouse because a retailer requested it. “It’s easier to sell $15,000 worth of merchandise to a retailer than to let it sit in the warehouse so that we have a complete line to sell on the Web site,” she concedes. “The loyalties lie in serving our retailer customers.”
Clunky sites
Because most manufacturers are closely familiar with their merchandise, most are good at creating product descriptions but their site designs are often clunky, says Charles Gerlach, director of e-strategy for the technology industries practice at Mainspring, in Cambridge, Mass. “They just haven’t made the investment.”
Fulfillment troubles are even more common, Gerlach says. Some of the first customers to visit bugleboy.com encountered some snags. As a result of disjointed computer systems, customers were allowed to put out-of-stock items into their shopping carts, which delayed many orders, says Brian McCarthy, director of online commerce at Bugle Boy Industries, Simi Valley, Calif.
A fix became a priority when Internet sales continued to get the attention of the company’s executives. Since then, Bugle Boy has integrated its checkout and fulfillment systems, which prohibits Web shoppers from purchasing merchandise that is not in the warehouse.
Bugle Boy, which outsources much of its Web store operations, also has improved the transfer of orders from its Web store into its mainframe system. Once the company gets the orders from its Web host, it sends them to its warehouse, where workers have learned to handle smaller orders.
The online store is part of Bugle Boy’s retail division, which also operates 280 factory-direct outlet stores across the country. Though declining to give details, McCarthy says he expects the Internet store to top sales at its outlets: “By 2003, we think 3 to 7% of our total sales will be online.”
Online sales also are gaining importance at Timex, says Michael Floros, the company’s manager of e-commerce. Timex, which has sold watches online since 1997, cast a vote of confidence in its e-store by investing in a redesigned site late last year. The old site, produced by the watchmaker’s information technology department, was simply an electronic version of a catalog aimed at retailers. Today, product development and marketing teams have molded the site to consumer tastes, says Sally McKenna, the company’s Webmaster.
Thinking one-to-one
Site development teams even went back to the drawing board and revamped product categories when research showed that shoppers weren’t finding what they wanted on the old site.
Few customers, for example, were familiar with one of Timex’s most popular lines, the Expedition series, by name. But that’s how the old site listed its selection of casual weekend watches. Now, a category simply labeled “Outdoors” cues customers to the collection. “The biggest challenge for manufacturers is to change the thought process,” Floros says. “When you sell direct, you have to worry about the message that is going out to the end user.”
What Floros and a host of other manufacturing executives stand to gain is hands-on experience with their customers at every stage of the sale; a primary reason why many will become online merchants. With their own Web stores, for instance, manufacturers take total control over what consumers see. Timex can display its watches in groupings it can only suggest to retailers, Floros says. And the company can supplement product listings with pages and pages of content. In contrast, retailers often don’t have the space or the time to distribute such in-depth product descriptions.
Timex also has found that its technology watches sell much better online than they do through traditional retail channels. Floros says retailers haven’t been big supporters of the company’s pager and data link watches (the latter uses Microsoft software to store appointment and address information). “Our technology products have done extremely well on the Web because of the type of consumers shopping on the Internet,” he says. “And because people can find them.”
VF also sees the Web as an ideal way to learn more about its customer base and to offer them more—an advantage that will drive the development of additional Web sites showcasing its brands.
Healthtex, for example, displays its entire product line inside the ever-expandable walls of its Web store, and it uses online contests and other promotions to collect more information about its customers than it can offline. “The Internet gives us, a chance to play an entirely different role,” Robinson says.
Strengthening relationships with customers is what will lead more manufacturers to sell their products on the Web, according to Mainspring’s Gerlach. That’s especially true for companies that make high-image products like cosmetics.
Clinique and Avon already are finding that their customers know what products they want to buy, says Wolhandler, and many want the convenience of buying them directly from the manufacturer online.
But many industry observers question whether manufacturers can have it both ways. Can they protect their relationships with retailers while capitalizing on the Internet revolution?
“Manufacturers are treading very carefully,” maintains Ernst and Young’s Reynolds. “They are trying to understand how to do this without creating conflict. They don’t want to do anything that is going to jeopardize their brand equity or the relationships they have with retailers.”
To protect relationships with retailers and meet customer needs for strong fulfillment, manufacturers are getting creative. Some feed Web orders from their sites to retailers, who then complete the fulfillment process and ship the orders out.
Others are creating new brands—and new Web companies that can start a fulfillment system from scratch—to sell products online.
Proctor & Gamble has teamed with a venture capital firm to launch a new line of personalized cosmetics at Reflect.com. And VF uses e-commerce to connect with retailers in new ways. The company’s priorities are to launch more business-to-business Web sites than consumer sites.
Retailers who sell Healthtex, for example, could go to a Web site to view the product line and place orders well before consumers could. Plus, VF will provide electronic data and images to retailers that sell VF clothes on their Web sites.
Merchants also can leverage the new e-commerce fulfillment area VF has set up in its warehouse—which can ship one item at a time—to fill their own Internet orders. “We’re going to stay focused on serving retailers for most of 2000,” says Robinson, “because that’s our core competency.”
In PC sales, consumers meet makers
Iffy relations with traditional retailers and confidence in brand names have combined to send would-be PC buyers direct to manufacturers. “Computer manufacturers started shipping direct because stores weren’t knowledgeable about their products,” says Harry Wolhandler, vice president of research at ActivMedia, a consulting firm in Peterborough, N.H.
By logging on to a manufacturer’s site, consumers nonplussed by the help they get in computer or office supply stores can peruse page after page of product information. On top of that, says Wolhandler, retailers add too much cost to computer sales, especially as prices continue to fall.
Gateway and Dell moved first to market their products directly to consumers through catalogs and direct sales forces. Putting those operations to the Web was a natural, says Charles Gerlach, director of e-strategy for the technology industries practice at Mainspring, Cambridge, Mass. “One of the things that made Dell and Gateway very good at selling online was that they had that direct-selling infrastructure in place to start with.”
Dell has made the most out of selling direct. “Its success has completely unsettled that industry,” says Gerlach. Founded as a direct-to-consumer company, Dell began selling computers online in 1996. Today, Internet sales have hit $30 million a day and make up more than 35% of the company’s revenues, says John Fruehe, business manager for Dell online. By year’s end, Dell forecasts online sales will command half of its revenue.
The Internet is an especially strong selling venue because each computer can be customized by the manufacturer for the person ordering it, Fruehe says. Customer typically visit dell.com a half-dozen times to gather information before making a purchase. “The Internet allows us to get close to our customers,” says Fruehe, “to meet their needs directly.”
An antitrust iceberg?
A s manufacturers define their Web strategies—and their relationships with online retailers—many are trying to control the sale of their goods on the Internet. That raises antitrust concerns. Laws from traditional sales channels usually apply. But it’s a good idea to watch what’s emerging in this area, says Richard E. Donovan, a partner in the New York office of Kelley Drye & Warren and head of the law firm’s antitrust and trade regulation practice.
What antitrust concerns do manufacturers have?
On one end of the spectrum, manufacturers are asking if they can reserve the right to sell their goods on the Internet for themselves. On the other end, companies are looking for broad exposure. They want to allow anyone to sell their products, but they want to know if they can restrict how the products are displayed, for example. Each implicates antitrust and trade regulation laws.
Are companies legally able to restrict who sells their products online?
The Supreme Court basically has said that manufacturers have the right to restrict who sells their products, with several factors that may create exceptions, such as market penetration. This applies to mail-order sales, and it should apply to the Internet.
What should retailers be thinking about?
A retailer should not assume that just because they sell a product in a bricks-and-mortar store they can sell it on the Internet. Putting a picture of an item on a Web page is very different from having the product sitting on a store shelf. That is especially true if the retailer is involved in advertising the fact that they have the product to sell. A picture on a Web site is likely to have the product’s name on it, and that is probably a trademark. A retailer’s distribution agreement with a manufacturer may not cover this. 
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