Less than a month into the New Year and the e-retailer and marketplace announces plans for three additional U.S. fulfillment centers.
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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.
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."
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.