With online sales outpacing store sales, retailers ponder where to put resources now
By Mary Wagner
If holiday spending is any indication, a growing share of the consumer wallet is going online, relative to other sales channels. The eSpending Report from Goldman, Sachs & Co., Harris Interactive and Nielsen/NetRatings shows that for the first five weeks of the 2004 holiday season, shoppers reported spending 22% of their gift dollars online versus 20% in 2003. Correspondingly, the percentage of gift spending that went to stores dropped to 72% from 74% the previous year, while spending on catalogs held steady at 6%.
That suggests more consumer spending is going online, forcing retailers of all kinds to think carefully about where they invest their resources. "Capital is scarce," says Dale Achabal, director of the Retail Management Institute at Santa Clara University. "The question is, where are you going to get the biggest bang for your buck?"
More than sales
And while web sales are rising at the seeming expense of stores, it's not as simple as that, analysts say. Retailers should be cautious about knee-jerk reactions to channel shift without probing what lies underneath. It's that kind of short-sighted thinking that led a number of retailers to cut catalog mailings when web sales started to pick up, only to discover that sales in both channels then flattened out or dropped off.
In fact, several multi-channel retailers with robust e-commerce sites capped
their announcements of year-end results with news of store expansion to come. Luxury brand Coach, with nearly 200 U.S. retail stores, wants to bring that up to 300 a few years out. Best Buy has said it will build 73 stores in the U.S. and Canada over the next year. Research and consulting firm Global Insight Inc. forecasts that spending on retail construction in the U.S. will reach about $49 billion this year, an increase of about 12% over last year.
So, what's happening? For starters, it's becoming clear that sales don't tell the whole story, and channels have a much more complex and interdependent relationship than just which one generates the most sales. One example is the cross-channel role of the store pick-up option for online orders. The customer completes the sale online, but then goes into the store, where a good many encounter items they wish to purchase that are above and beyond their original online order. Are those incremental sales because the retailer has invested in its web site, in its store, or both?
Cross-channel influence
The rapid growth of web sales also masks another dynamic: part of that growth comes from the fact that the Internet is satisfying demand created in other channels. "A lot of people make the decision to buy something as the result of getting a catalog or because of an ad in the paper. But rather than picking up the phone, they punch it up on a web site and it's done," says Todd Barr, vice president at retail consultants Kurt Salmon Associates.
Barr's point is that now, closing the deal in one channel may just be the end point of a process in which other channels played a vital part. So the growing integration of channels means that the question for multi-channel retailers is no longer whether they should invest in stores or the web, but how they balance the ongoing investment needed by both. "Retailers that have the money to invest are continuing to open up new stores. But that doesn't mean they aren't putting dollars back into the web also," says Sunita Gupta, executive vice president of retail consultants LakeWest Group. "I am not working with any retailer that isn't looking at both."
Retailers' challenge now is to prioritize investments in either channel against the scale and timing of the expected return. How those priorities are set will vary according to retailers' individual circumstances. But the process starts with the same essential questions retailers must ask themselves about their brand strategy, their category and target audience, their stage of lifecycle, and what their competition is doing.
The answers to those questions may drive very different decisions on store and web investment priorities at different retailers. Often it starts with the level of competition a retailer faces. A retailer that is locked in a battle with a close competitor to build market share in the brick-and-mortar world will have to respond in kind. "If they don't keep building new stores, they know No. 2 is waiting to take the market," Gupta says. In that situation, stores may move higher up on the priority list.
Brand strategy
For other retailers with store systems that are 10 or more years old, staying competitive might mean putting dollars into store facelifts or upgrades. Others, still struggling to make their web site more user- and search-friendly than their competitors' sites, might spend on improvements at the web/customer interface before they invest in technology to tie a less-than-perfect site more tightly to their other channels on the back end.
Barr advises multi-channel retailers juggling store and web investment to think in terms of their brand strategy. Where the brand image includes both value and assortment, for instance, that should be consistent across all channels. Take Staples. The brand premise at Staples is that no matter what store a customer walks into anywhere across the country, Staples offers a comprehensive assortment of what's needed for the office, at reasonable prices. "For a retailer like Staples, whatever it does on the web needs to reinforce that brand premise," according to Barr.
Under that scenario, brand strategy dictates that a key driver of web investment is the effort to make sure the web is as much like the stores as possible. But web vs. store investment as informed by brand strategy can add up to something quite different at another type of retailer. Luxury retailer Neiman Marcus isn't after the mass-market penetration pursued by big-box retailer chains. It builds stores only where it finds the population density to provide a sufficient volume of high-end foot traffic, and it has direct-sale customers in locations where it doesn't want to build stores.
Category strategy
Because those customers aren't in a position to hop back and forth between store and web--and because web buyers are less likely to buy items such as expensive couture found in Neiman Marcus stores without being able to try it on first--the need for consistency that drives store and web investment at a Staples is less of a factor. Instead, Neiman Marcus invests in the web versus widespread store expansion as a way to bring selected elements of its brand to a national audience.
Category also affects how multi-channel retailers are prioritizing store and web investment. Best Buy, for example, with a thriving web site that ranks among the Top 10 largest online retailers in Internet Retailer's Top 300 Guide to Online Retailers, is nevertheless pursuing significant expansion in stores over the next year. "That makes sense," says Kirthi Kalyanam, director of Internet retailing at the Retail Management Institute. "If you look at the electronics category, there is a lot of shop-online-pick-up-in-store. Though the web has had an impact, a lot of transactions are still happening in stores, so stores are important."
Target audience figures into those investment decisions as well. Gupta notes that some retailers have customers more likely by their nature to use the web than other retailers do, and that can tip the scales on where to focus investment among channels. Electronics retailers, for instance, may be after a younger, Internet-proficient customer used to buying online. A retailer in the crafts industry targets a different demographic that may not be as accustomed to shopping--or buying--online.
For many retailers, prioritizing store or web investment also depends on their stage of lifecycle. For a specialty retailer that's already saturated the primary markets with stores, the potential growth from adding more in the same format may be minimal--one reason Sears is experimenting with its new Sears Grand format as it continues to invest in Sears.com. The choice such a retailer may face is that of opening up half a dozens more stores, or dropping some of that money into upgrading its web infrastructure, Achabal of the Retail Management Institute says. For another retailer in an earlier stage of market saturation, even a multi-million dollar investment in one store could pay off if the store succeeds in generating tens of millions in revenue. "You have to figure out what is the marginal return you are going to get from the investment," says Achabal.
Replacing aging systems
Other retailers can't afford to base their web/store investment priority solely on strategy--the age of their web infrastructure is making the decision for them. Many e-commerce sites launched by retailers in the late 1990s were never built for today's traffic and transaction volume, points out Kalyanam. "There are a lot of system upgrades they need to do on the web site just to stay in business and keep that channel working," he says. With more profitability from Internet sales, maintenance and upgrades put off when Internet sales volume was lower are easier for retailers to justify, he adds.
For many retailers, the goal of investment is not so much specifically to pump up either store or web sales, but is more about integration that encourages shopping and sales across channels. Study after study has shown that the customer who shops a retailer's multiple channels is the most valuable to the retailer. Forrester Research data, for instance, show that web buyers not only buy online, but buy big offline as well. According to an October 2004 report, web buyers spend an average of $92 online monthly, but $256 offline, 26% more than non-web buyers. 2004 data on Holiday 2003 from AMR Research showed that the multi-channel customer spent 53% more across channels than in the previous year; on average, more than $1,000. That compares with the non-multi-channel segment's average spending of $725.
Though it's less critical for some retailers than for others, depending on factors such as category and store penetration, the takeaway from these findings is that retailers win when they offer a shopping experience that's as seamless as possible across channels. To the extent that a retailer's web or store does not currently support that--or does--investment in that channel can move up or down the "to do" list. From that perspective, L.L. Bean, with a robust catalog and web presence, but limited stores, is working to build stores, according to Gupta. Best Buy is rolling out stores, but continuing to invest in an already healthy web site to knit the two channels more tightly together.
Build both
If there is one answer to the question of whether to focus investment in the store or web channel, it is that multi-channel retailers need to keep building both. Smart retailers are prioritizing their investment decisions from the basis of a fundamental knowledge of their operations, audience and objectives.
"You're seeing a lot of more thoughtful coordination in terms of strategy, brand image, and the tactics of how it all works with the consumer," Barr says. "We are not where we need to be yet, but we're moving in the right direction."
mary@verticalwebmedia.com
Steering cross-channel investment at REI
By Mary Wagner
When it comes to weighing investments in one channel vs. another, Recreational Equipment Inc. tackles that question through a steering committee it formed three years ago to evaluate proposed technology investments. The committee pulls in executives from IT, operations, sales, marketing and merchandising, including Joan Broughton, vice president of multi-channel programs at REI, and Sally Jewell, who is moving from COO to CEO. Ten years ago REI--like just about every other retailer--didn't even have a web site to manage, plan for, or fund. Now, the newer channel is demanding its fair share of resources from a bucket that also must support stores and catalogs.
But the question retailers often face is: What is that fair share? Today, the web site REI launched in 1996 brings in about 80% of the 15% of total sales that are direct sales, or about 12% of REI's sales overall. But that's not to say that the web channel gets 12% of REI's technology and marketing investment and stores get the rest. Instead, REI has developed a resource investment approach that views the web as an entry point to its store channel as well as a place to ring up sales on its own, Broughton says.
REI knows it gets the most from its resource investment when the dollars it pours into one channel also help lift another. So decisions on where and when to spend are based not so much on what's good for one channel as what's good for REI overall. Since REI has worked on technology to facilitate store pick-up of online orders, for example, the store-pick-up option has come to account for 30% of all web sales.
"We've also seen an incremental sales lift from those people coming into the stores," says Broughton. "It encourages people to have more visits to the stores. They're thrilled they don't have to pay shipping, especially on bulky items. And once they're there, they tend to buy something in addition to what they've already bought through the store pick-up program." Thus, investing in building the store pick-up option onto the web site has added to store sales.
Here's another example of REI's cross-channel investment approach: "We're building new stores at a fast clip, and one of the things we've found is that as we have a larger and larger population of store employees, they're tending to rely pretty heavily for product information on REI.com, which is the programming for the store kiosks," Broughton says. As a result, REI has made the decision as it opens new stores to roll up the cost of enough kiosks into the cost of opening each store. It's also putting additional kiosks into older stores--some only have one. Is that investment in its web channel, its existing store base, or its new stores? Under REI's strategy, the investment benefits all three.
There's a pro forma for every new store location and similar documentation required to prove out ROI for every major expenditure in the web channel, such as for a new site search engine, for example. The team makes the decision on proposals. "Not everybody gets what they want when they want it, but it's not about setting one group against another," Broughton says. "It's much more about looking strategically at what technology can do for REI."
