Operation Online

The nation`s PXes used to have a captive audience: Personnel stationed on military bases who took advantage of the discount pricing that PXes offered to military members and their families. But with Wal-Marts, Targets and other discounters near many bases, and the military as wired into online shopping as the general population, the PXes today face a new challenge: keeping up with the rest of the retailing world.

Thus the Army and Air Force Exchange Service has embraced the web for selling to its base of customers and adopted many of the cross-channel marketing techniques that mainline retailers are adopting.

Best-kept secret

"The Exchange Online Store is one of the best-kept secrets in the multi-channel world," notes Jim Okamura, a Chicago-based senior partner of retail consultancy J.C. Williams Group. "They are a quiet success, and are continuing to grow by finding new ways to promote the site to members and educating them on how to buy online."

Eight years after launching a web version of the Post Exchange, the Army and Air Force Exchange Service is steadily growing online revenues and expanding its inventory. Buoyed by in-store and web-based marketing campaigns and the addition of thousands of new products, AAFES is reporting that its Exchange Online Store in 2004 generated $126 million in sales, up 10% from 2003 and 67% greater than 2002. Even at that level, the web accounted for only 1.6% of the AAFES`s annual revenue of $7.9 billion.

AAFES.com also hosted an average of 1.5 million visits a month in 2004, up 20% from a year earlier. The online store markets 25,000 items to more than 11.5 million AAFES members and ships more than 450,000 orders monthly.

Virtual Vendors

One of the ways that the AAFES has learned to compete online is to offer products from other retailers, much as Amazon invites other retailers to sell in the boutiques at Amazon.com. Starting with Dell Inc. computers in October 2002, AAFES offers thousands of additional items to customers through its Virtual Vendor initiative. More than 45 online retailers, including such major sellers as Dell, FTD.com and BooksAMillion.com, are linked to the AAFES site and offer special deals--such as discounted pricing and free shipping--to members who visit the partners` web pages via the links.

AAFES has processed more than 100,000 orders through the Virtual Vendor system since the beginning. Last year, Virtual Vendors accounted for 24% of all orders at AAFES.com. "Response has been very good," says Mike Westphal, AAFES senior vice president of marketing.

But that`s not the only way that the online PX is expanding inventory. AAFES.com over the past several years has greatly expanded its line of major appliances, computers and peripherals, video games, music, fine jewelry and outdoor living goods, Westphal says.

Many of the newer goods are aimed at younger military personnel who tend to be technologically savvy. Westphal says such items as iPods and MP3 music players are hot sellers, and he scouted for additional products at the Consumer Electronics Show in Las Vegas in January.

Package offerings

The Exchange Online Store also is increasingly encouraging members to purchase packages of products instead of individual items. A recent catalog, for instance, illustrated how rugs, chairs, lamps and coffee tables available from the web site would function as a set.

To further spur recurring business, AAFES is enhancing its online customer service while providing financial incentives to web shoppers. The organization is offering free shipping on many orders when members pay with their propriety AAFES credit card, and is enabling online buyers to return unwanted merchandise to any brick-and-mortar facility.

Online chat assistance also is provided 24 hours a day, with approximately 150 staffers manning the call center. Westphal calls customer service a "key competitive differentiator" and says AAFES this year will be refining its procedures and training techniques.

Yet, even though its activity is escalating, the online store faces steep competitive challenges. Because AAFES targets all customer segments, it must contend for business with a powerful and diverse range of retailers with large catalog and online operations.

AAFES has an advantage in being able to more easily obtain detailed customer purchasing data, Okamura says. Because only active and retired military personnel and their dependents are eligible to shop at the online store, and they must have an ID to access the site, AAFES knows the demographics of buyers and can closely track their spending patterns.

Researching for the stores

Such information enables the Exchange Online Store to market items that are most in demand by the different consumer groups, Okamura notes. "The service maintains good records and understands which customers are accessing specific parts of its web site," he says. "That enables them to make better decisions on the types of merchandise that should be offered."

AAFES is also able to leverage its multi-channel presence to market the web site. AAFES typically promotes the site through bag stuffers at checkout, over an in-store radio network broadcast to 660 PXes around the globe, through an in-store television network, in the 15 product catalogs and supplements that are mailed annually to members and via advertising in weekly PX sales tabloids.

While Department of Defense regulations prohibit AAFES from sending e-mail solicitations to customers who do not request such materials, members can visit the web site and sign up for e-mail and direct mail promotions for the online PX. Such materials include a monthly newsletter listing additional brands being carried by the online store, as well as its new retail partners.

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Marketing strategies are often crafted in response to customers` buying habits. For instance, Westphal says AAFES in 2004 distributed a catalog featuring major appliances, and created supplements displaying outdoor living and electronics products, as a result of growing member interest in those categories.

The organization leverages the Teradata data warehousing and analytics applications from Dayton, Ohio-based NCR Corp., and monitoring, reporting and analyzing technologies from McLean, Va.-based MicroStrategy Inc.

This year the Exchange Online Store is targeting customers who have not placed an online or catalog order for at least 18 months by sending them a free 600-page catalog that normally sells for $5 "to refresh their memory about the business," Westphal notes.

The 6-inch catalog

All catalog merchandise--as well as thousands of additional items not listed in the book--are sold online. "The catalog would be six inches thick if it included all AAFES products, and the production expense would be exorbitant," he says. "The dot-com is a more cost-effective way to list and sell goods."

Indeed, Westphal attributes the Exchange Online Store`s solid revenue growth in part to the increasingly larger assortment of items available through its web site.

Most brick-and-mortar locations range from 25,000 to 130,000 square feet and lack the space to hold all the products needed to accommodate AAFES` diverse customer base, he says. Shoppers include active duty and retired military personnel ranging from privates to generals and their families, reservists and National Guard members.

The Army and Air Force Exchange Service operate 3,150 stores around the globe, including 52 newer facilities in Iraq, Afghanistan, Qatar, the United Arab Emeritus, Kyrgyzstan, Uzbekistan and Djibouti. More than $3 million worth of merchandise ordered online last year was shipped to personnel serving in Operations Iraqi Freedom and Enduring Freedom in those countries. Store managers in the Middle East and elsewhere also will place online orders for customers without Internet access.

In addition to making it easier for members to obtain products, the Exchange Online Store also is being positioned by AAFES as a key vehicle for determining if there is sufficient customer interest in specific items to warrant their inclusion in on-base stores.

Some of the organization`s newer operational methods will likely mimic the best practices of leading online sellers, and could include addition of technologies that make web sites more functional and user friendly, Westphal says.

Mirroring

"It is important to mirror what competitors are doing to successfully grow their businesses," he notes. "Companies such as Wal-Mart, Target, Nordstrom and Neiman Marcus have an advantage because they typically target distinct customer segments. We must focus on all consumer groups and market goods that cover all price points."

About 80% of AAFES product orders are generated online, and Westphal says he expects the web to account for 82% of orders by 2006. The remaining orders are placed by telephone or mail.

One of the necessities for continued growth is staying current with the most efficient operating strategies and tools, he adds. The Exchange Online Store currently is replacing its legacy systems with newer-generation hardware and software so orders can be initiated and processed more quickly.

Westphal will only say that AAFES has spent "several million dollars" to build and maintain its processing systems, and that the operation remains profitable.

The organization, meanwhile, has created a foundation that is likely to result in continued expansion, Okamura says. He notes that the executive management team in AAFES` early years took direct marketing courses to be more astute in targeting members.

Head-to-head

And as additional customers move farther away from brick and mortar facilities, the online store will become an increasingly important shopping vehicle.

But the Exchange Online Store still faces the daunting task of competing for business with highly recognizable and experienced Internet sellers. "Going head-to-head with formidable retailers, such as Wal-Mart, or savvy e-commerce companies, including Lands` End, is a major challenge for AAFES," Okamura notes. "Especially because some traditional retailers also target the military sector."

He adds, however, that AAFES is keeping up with the industry`s growth pace. "Being able to offer multiple buying channels to members makes perfect sense because of AAFES` far-flung customer base," Okamura adds. "Providing convenience is a key and effective selling point."

Richard Mitchell is a Wilmette, Ill.-based freelance business journalist.