Learning a lesson from the big guys in online retailing

In my last two columns for Gifts & Dec (July and August 1999), I outlined the reasons why you, the specialty retailer, should be developing your own Web site, if you haven’t already done so. At about the same time, I attended the eTail ’99 conference in Chicago, where more than 400 retailers gathered to hear 32 online retailers discuss their strategies for success and the issues they face, such as branding, cannibalization, channel conflicts, customer relationships, technological developments, fulfillment strategies, and management commitment. Sponsored by Worldwide Business Research (www.wbresearch.com), the event offered a close-up look at how the big boys are playing the game, and tips that smaller retailers can use in their own Web sites.

The successful companies at the conference all shared one essential element: commitment from the top. Retailers like Nordstrom and Borders have hired top-level people to develop and manage their online stores, and the results reflect this. They have also set large budgets for their online ventures. For example, Toys "R" Us recently budgeted $80 million for its new online store.

Jonathan Morris, executive vice president at Bluefly.com, suggested that managers ask questions and use the results to shape a business model before beginning an online site. Is your objective to acquire new customers, to enhance your legitimacy with existing customers, to strengthen your brand, or to block the competition? What is the lifetime value of your shopper? What does it cost to acquire a customer?

Most e-tailers believe that e-commerce is about brand, price, merchandise, traffic, conversion, and technology. Chuck Davis, senior vice president at Disney’s online business, isn’t one of them. "E-commerce is all about the consumer," he said. "What do we know about Net users? They are younger (37 vs. the 44 average for U.S. adults); smarter (40 percent are college graduates); have better demographics (52 percent are male, and 46 percent have kids in the household)." He added that Web surfers are ambitious, in a hurry, and prone to multi-tasking; in short, they are adopting the computer and the Net as part of their lifestyle.

Everyone at eTail ’99 agreed that technology is the key to success. Without a good back-office system to handle orders, your online venture will fail. One company purchased a mainframe computer before it opened its virtual doors in October 1998. Venture capitalists thought the owner of the company was nuts for making that expenditure, until December 10. Until then, the company was averaging 25 orders a day; but on December 10, it suddenly got 10,000 orders. Another company fashioned a major online promotion for its mall; it was so successful that one merchant received 4,000 orders in one day, and, unable to handle the volume, asked if the promotion could stop.

Your Internet venture must be integrated into your business as a whole if it is to succeed. Borders, for example, has implemented a concept called "retail convergence." According to Rick VanZura, senior vice president of Internet and fulfillment services, the company has fully integrated its distribution center with its back office, in-store processing, point-of-service business, and Internet operation. Each Borders store will soon contain a kiosk that is connected to the Net. A customer who can’t find a particular book in the store can look it up online and place a special order. Borders offers other in-store and online cross-selling services, such as bounce-back cappuccino coupons, crossover gift certificates, in-store returns for products purchased online; promotion of physical store events on the Web site, and in-store marketing for the Web site. Using retail convergence, Borders hopes to bridge the Internet and brick-and-mortar worlds, creating a business that is bigger than the sum of its parts.

A good Web site is not only integrated, but globalized. In each of the 11 most wired countries, more than 10 percent of the national population is online. And some four trillion email messages pass through the Net each day. Recognizing the global nature of the Internet, Dell has broadened its focus to include a multicultural audience. It now has Web sites in 42 countries and 21 languages. The company now does 30 percent of its Internet sales volume internationally.

Channel synchronization was another big issue at eTail ’99. How do manufacturers sell online and not lose their normal distribution channels (i.e. retailers)? According to Angela Kapp, vice president of special markets and new media at Estée Lauder, the average conversion rate for a Web retail site is less than 5 percent; in other words, roughly 95 percent of visitors don’t buy. For this reason, it’s important to focus on new customers instead of on replenishment. If the brands you are selling online are "destination brands" (i.e., household names), you can sell direct to the consumer; if they aren’t, you will have a harder sell.

We’ve all heard department store founder John Wanamaker’s famous quote: "Half of my advertising is wasted. Trouble is, I don’t know which half." While it is easier to track results online than it is in brick-and-mortar retailing, you still need to look at the total picture and consider alternative methods of advertising, according to Kathy Brio, CEO of the Strategic Interactive Group. For example, online banner ads have a $30 CPM (cost per thousand), whereas television ads have a $10 CPM.

While we may be entering a brave new era in retailing, old-fashioned merchandising still rules. Sam Salkin, vice president of merchandising at Greentree.com, suggested that you include this week’s best selling items on your home page. Greentree.com did this and increased sales of those items by 300 percent. Heidi Messer, president of Linkshare, noted that her company has a customized "virtual storefront" on its home page, which is very similar to point-of-purchase displays in a traditional store.