May 31, 2011, 5:05 PM

Follow the money

Retail chains invest online, but hope to lure web shoppers into their stores.

Lead Photo

The Home Depot Inc. which typically opens up to 200 stores worldwide per year, this year expects to add fewer than 10. Meanwhile, the big home improvement chain has embarked on a three-year plan to invest $1.1 billion in its supply chain and in technology, with much of that budget earmarked for the web.

"From a capital allocation point of view, historically, it was all about the stores," says Hal Lawton, Home Depot's president of online. "In the last three years it has been in our distribution network, and in the coming two years it will be in technology and the web."

While Home Depot does not project web sales, e-commerce has become an increasing focus of the retail chain's efforts to boost sales in recent years. And it's not just the sales that take place on that the retailer is concentrating on. Forrester Research estimates 48% of store sales this year will be influenced by the web, and 53% by 2014. Home Depot recognizes that its ability to close sales in its 2,200 bricks-and-mortar stores increasingly depends on presenting information online that will draw shoppers into its physical locations.

"We are embracing the recognition that over 50% of all sales are influenced by the web," Lawton says. "We are embracing this and we are investing behind it, whether it is in buy online, pick up in store, or increasing our assortment of products online."

Nor is Home Depot alone among major retail chains in shifting investments to the online channel this year. More investment in the web was a common theme as retail chain CEOs reported their 2010 financial results early this year, in many cases pointing to tepid comparable-store growth that stood in stark contrast to double-digit growth in web sales (see chart on page 70).

In the case of retail chain Toys 'R' Us Inc., for example, the web accounted for only 5.6% of sales in 2010, but 60% of growth.

The web is taking a larger share of sales in many retail categories, growing from 14.4% of apparel sales in 2009 to 16.4% in 2010 and to 30% of consumer electronics sales in 2010, up from 28.6% a year earlier, according to MasterCard SpendingPulse, the research arm of MasterCard Worldwide.

In response to these trends, several of the largest retail chains are moving this year on web-related initiatives, often seeking to use their stores in combination with the web and mobile applications to offer services—such as order online for fast in-store pickup—that can't be matched by web-only retailers like market leader Inc. While most of their moves represent copying services that a few retail chains have offered for several years, some chains are coming up with new ideas, such as employing iPads and bar-code scanning with mobile phones, to give tech-savvy consumers reason to come to their stores.

Shifting investments

Besides Home Depot, here are some examples of retail chains moving money to the web:

  • Consumer electronics chain Best Buy Co. Inc. plans to shave off $70 million to $80 million in capital expenditures over the next three to five years by reducing its bricks-and-mortar square footage by 10%. Meanwhile, it expects to double its web sales to $4 billion in the next 5 years.
  • Williams-Sonoma Inc. projects $135 million to $150 million in capital expenditures in 2011—one-third of that for e-commerce and the supply chain that supports it. "The Internet is our fastest-growing channel and a key component of our future strategy," CEO Laura Alber told investors in reporting fiscal 2010 results. Web sales grew 26.2% in 2010 and now represent more than one-third of revenue. "We are planning to increase our Internet investments next year to capitalize on the significant opportunity we see ahead," Alber said. "The Internet has changed the way our customers shop, and the online brand experience has to be inspiring and seamless."
  • Department store chain Belk Inc. launched last year a $150 million e-commerce investment initiative. "Our margins are so much higher online, that's why it's such a growth area for us," says Ivy Chin, head of e-commerce at Belk. "We are beating our margin plan huge." Belk's 2010 web sales jumped 70% to $34.8 million. Among new initiatives: enabling store clerks to order items out of stock in a store from web fulfillment centers for delivery to customers' homes.

Is it in stock?

Many retail chain initiatives are aimed at customers who buy both online and in stores, recognizing that those multichannel shoppers are four to six times more profitable than shoppers who only frequent one channel, according to Fiona Dias, executive vice president of strategy and marketing at GSI Commerce, an e-commerce technology and services firm that is being acquired by eBay Inc.

Office supplies retail chain Staples Inc. is among those going after shoppers who use more than one sales channel. "Consistent with a number of externally run surveys, we find that our cross-channel customers are significantly more engaged and generate more revenue and margin than single-channel customers," says Anabela Perozek, head of marketing at "Customers who buy in our store now rely on the web, and we are very aware of that."

Aiming to appeal to those shoppers, Staples three years ago enabled web shoppers to check local store inventory. Perozek says the response has exceeded expectations. Although she would not say how many consumers use it, Perozek says: "The number of queries per day has been averaging double what we expected, and during peak promotional time, that volume can jump almost five times what we expected."

Home Depot introduced the online inventory-check feature in January, and the customer response has been so strong that the chain plans to expand on it by offering buy online, pick up in store, Lawton says.

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