Retail, e-Tail,... or Both?
By Jules Abend and Penny Gill -- Supply Chain Management Review, 5/1/2000
Ten years ago, if you had started tossing out terms like dot-coms, pure plays, click-and-mortar, and e-tailing, people might have thought you were speaking a foreign language or were crazy. Today, the crazy ones, it seems, are those who have not picked up the lingo—or worse, haven't refocused their business strategy on that powerful force known as the Internet.
From an esoteric concept for sharing research to a widely heralded but little used information highway, to an indispensable tool for virtually every segment of business and of society as a whole, the Internet is no longer in its infancy—but it's hardly mature, either. And no one appreciates that fact better than the traditional retail industry, which is facing perhaps its biggest challenge since the birth of the big-box discounters.
As Ernst & Young's second annual Internet Shopping Study, published last year, notes, "Consider today to be akin to the 1960s, when regional malls, chain stores, and other novel retailing concepts were beginning to reshape consumer shopping habits. As the year 2000 beckons, the online shopping landscape—a blur for the last four years—is starting to take shape. Eventually it will reconfigure the supply chain of many consumer goods and services—retailers, wholesalers, and other parties that come between producers and consumers."
To understand the criticality of a supporting supply chain infrastructure, one need only look at the highly publicized failures of the Toys R Us online shopping venture last Christmas. That unfortunate experience taught us that there's a lot more to e-tailing than putting product photos on a Web site. Not to single out Toys R Us (because there are surely dozens of other examples) but the giant toy retailer's experience also shows that even companies with a strong consumer franchise and brand identity cannot necessarily translate that equity from their physical store to an e-commerce venture without the right supply chain strategy and systems.
Integrating the Virtual and the PhysicalWith online sales growing in the triple digits (albeit from a very small base), it has become blindingly clear that traditional brick-and-mortar retailers cannot just stick their heads in the sand and hope e-tailing will go away. So the question becomes not whether to launch an e-tail venture but how (or whether) to integrate the Web-based "storefront" with their physical one.
That is a question with which many retailers—even those with an established online presence—are currently grappling. What makes this question so difficult is that the challenge hits home in every aspect of the business and most particularly in the supply chain. In fact, in this brand new marketing channel, even the "pure play" companies that exist only on the Internet are groping for solutions to order fulfillment, inventory flow, efficient warehousing, and product returns.
Granted, the Internet-only retailers don't have nearly the same infrastructure costs that traditional retailers do. But being unencumbered by infrastructure may not necessarily be a blessing. Daryl Plummer, head of the Gartner Group's Internet and new-media practice, made the following observation in U.S. News & World Report: "The companies with warehouses, supply chain management [prodecures], and solid customer service are going to be the ones that survive."
That thought takes tangible shape when you consider the case of Amazon.com. Amazon is inarguably the largest online retailer but has yet to show a profit after more than four years in business. One reason the giant dot-com continued to post significant losses last year was its need to spend $300 million on building five million square feet of warehousing space.
Notes Richard J. Sherman, an executive with EXE Technologies and frequent speaker on supply chain trends, "I think there's more money being made at this time in e-commerce than is publicly acknowledged, but a lot of money is being lost as well. And I think that's happening because of the haste with which some of these companies set up their dot-com businesses. If you look at Amazon.com, the original premise was that of a virtual corporation. Within less than a year, it opened 17 distribution centers. That wasn't considered; it was an afterthought. When physical distribution, logistics, and supply chain strategy is an afterthought to the business, I wouldn't count on it being profitable."
Yet with most retailers starting online ventures, it does seem to take some time before the back-end processes receive as much attention as the front end. That issue is being addressed by Shop.org, a trade association of online retailers and suppliers with nearly 400 members. The association's recent Eretailing 2000 Conference focused almost exclusively on back-end topics like how to physically fulfill the Internet order and manage inventory efficiently.
"When retailers go online, the first year is spent figuring out their site presence and the design and technology that runs it," Elaine Rubin, Shop.org's chairman, says. "Once they've figured out all of those intricacies, then they turn their attention to the offline, back-end supply aspect. And there is a great need for information on back-end operations and how they translate to building customer relationships. It's not just offline or pure online retailers that need to figure this out, either. Even cataloguers need to re-evaluate their processes, since their legacy systems ... may not supply the same-day shipping or real-time inventory information that's critical to meeting the level of expectation of online shoppers."
Obviously, the department stores, mass merchants, and specialty retailers working to become e-tailers are finding out that they have entered a twilight zone. They are coming to the sometimes scary realization that turning virtual sales into real business involves figuring out how to pick and pack individual boxes vs. pallets or truckloads. And it means resolving such sticky consumer-service issues as returns and exchanges.
If anything is clear at this point, it's that with e-retailing, there is no "right" direction to pursue. As consultant Lauren Freedman, president of The E-Tailing Group, says, "Are retailers carrying the same goods online as in the store? It depends on the merchandise they sell and how far along they are in the evolution of their Web site. Are they using the same buying staff and sourcing? Typically they'll try to leverage their existing resources—but again, it depends. What are they doing for distribution and fulfillment? Some are internal, some are outsourced, some use their stores, some use distribution centers. In other words, there is no clear business model."
An Opportunity in the MakingOne reason the supply chain infrastructure picture is still so hazy is that the Web itself has been commercially viable for only about six years. And in terms of e-commerce, it didn't really come of age until 1998. That year, online sales to consumers jumped to the $7 billion to $8 billion range, according to most estimates. Last year saw sales more than double over 1998 figures (Forrester Research puts the total at $20.2 billion). Yet all of the activity still accounts for only 1 percent to at most 3 percent of total retail sales, which were nearly $3 trillion last year.
Hard numbers are difficult to come by. Furthermore, they often differ dramatically depending on their source. Across the board, estimates from various researchers place e-sales for 2000 anywhere from $10 billion all the way to $100 billion. Forrester, for instance, projects this year's sales at $38.8 billion, climbing to $64.2 billion next year, and zooming to nearly $185 billion by 2004.
One big factor needs to be considered in these volume estimates. The research firms are estimating online business only. In their calculations, there are no official figures from the Commerce Department, which only this year has started to separate Web sales from catalog and other direct-mail sales activity.
A true, "official" picture of online activity won't emerge until mid-2000, says Rosalind Wells, chief economist for the National Retail Federation (NRF), the world's largest trade association, whose members encompass all retail formats and channels—online and otherwise. Wells explains: "We know that Internet sites for shopping have proliferated and that many more people browsed and shopped. But measuring the impact of e-commerce is very difficult at this point as government data are not yet available. Until now, the reporting of mail-order sales has included Internet sales. For this reason, the growth trend in mail order has surpassed all other retail formats." This is reflected in the three-month snapshot of retail sales growth shown in Exhibit 1. It shows the Internet-influenced mail-order trend line outstripping those of the other retail channels.
- The American Express Retail Index found that the number of consumers who shopped online grew from 6 percent to 16 percent in 1999. Among those shoppers, almost one in five used the Internet to buy at least half of their holiday gifts.
- The Boston Consulting Group and Shop.org estimate that online sales for the past holiday shopping season showed 270 percent growth in the number of orders placed by consumers and 300 percent growth in revenues enjoyed by retailers over 1998 figures. In addition, the size of the average order was up 8 percent over the level reported the year before.
- Looking at the new year, the NRF/Forrester Research Online Retail Index, in conjunction with Greenfield Online, reports that consumers spent $2.8 billion online in January alone—or more than half of what was spent during the entire '99 holiday season. The average online expenditure that month was $202.59.
What a wake-up call! As they arise from their slumber, more and more of the initially reluctant deep-pocket retailers are starting to invest real time and money in the online business. They are creating new alliances and organizations to become true, direct click-and-mortar operators in order to take bigger bites out of a potentially large e-consumer pie—one that's still baking.
One market that's already bubbling is Generation "Y"—those consumers in the 13 to 23 age bracket. The results of a survey conducted by market research firm Strategic MindShare shows that the "Y-ers" spend $1.2 billion online annually and that they will shape the Internet over the long term. Taken during the summer and fall of 1999, the survey not only applied traditional research methods such as focus groups and one-on-one interviews but also sent researchers to sporting events, favorite hangouts, and stores.
Retailers also are paying attention to reports from Greenfield Online that nearly 40 percent of American households now are on the Internet and that, as a consequence, household routines are changing. In particular, some 71 percent of adults are logging on when they get home from work, and a fourth stay online all evening, according to Greenfield. Half say they are watching less TV, although 52 percent say they watch TV while they're online.
Brick-and-Mortar ResponsesExactly what the brick-and-mortar retailers will do with this information remains to be seen. Seemingly, a big advantage that they have over pure players is brand recognition and a resonance with customers. When Wal-Mart and Kmart, or Federated, or The Gap, set their sights on a target (no pun intended), watch out! To date, the responses have been varied and sometimes muted. Of the few that have created or bought separate but still tethered companies, Wal-Mart is perhaps the most notable. The juggernaut retailer had less-than-thrilling results from its initial internal efforts to find a voice on the e-channel. So it recently established a separate organization, Wal-Mart.com, in conjunction with a venture capital firm, Accel Partners. (For more on the start-up, see the sidebar on page 46.)
In another twist, Nordstrom's raised $16 million from venture capital partner Benchmark Capital to form a subsidiary, Nordstrom.com. But Nordstrom is keeping its e-commerce group in-house and is retaining ownership of the new subsidiary. According to Dan Nordstrom, CEO of Nordstrom.com, the venture capital firm provides a critical strategic advantage because it has a more entrepreneurial, fearless Web mentality.
Taking note of the separate but equal concept, Sherman of EXE Technologies indicates that a number of companies are looking at the valuations that accrue by spinning off dot-coms as separate businesses. He explains: "It's an indication to me that Wal-Mart, for one, sees great opportunity and value in the new entity. [It] spun off the e-commerce piece and is utilizing and leveraging the brand name buying power, which at some point could go public on its own. That clearly validates the whole dot-com model and the [vision of the] Internet as a shopping channel. You're going to see other companies doing similar things—a lot are testing the waters, initially with outsourcing. Once they've proved and established that channel, they very quickly have the opportunity to bring it back in-house."
Some e-observers believe that big-box dedication to e-commerce could change the pure player picture, with fewer individuals or small start-ups daring to go against the establishment. Others feel there's plenty of room for everybody in an endless e-tail universe, including the "online malls." One such virtual entity is FashionMall.com, which entered the arena in 1994 and currently has more than 90 retailers and manufacturers on its site. The Gap, The Limited, Coach, Liz Claiborne, Tommy Hilfiger, and Brooks Brothers are among its participants.
Ben Narasin, the FashionMall's creator and unabashed booster of online malls, says: "Both consumers and clients are finally getting it! In the first 20 days of February (2000), 3.5 million people visited our site. That's about 30 million raw hits. We do something that everybody needs to have done. We drive traffic to clients. And we signed as many new businesses in the first month of the fourth quarter as we signed in the trailing six months."
Looking over the e-landscape, Narasin believes that, unlike the discounters and catalogs, many of the major department stores are lagging behind. "You have Macy's.com, and Bloomingdale's.com," he says. "After that, there isn't much there. There are major stores that are doing nothing more than pulling merchandise from their floors and having store personnel ship it. That is just not a scaleable way to grow the business." Indeed, Deloitte & Touche research shows that only 49 of the top 100 retailers currently have Internet shopping sites.
From a supply chain perspective, however, there is some evidence that traditional department stores are beginning to make strides in the online race. Don Gilbert, the NRF's senior vice president of information technology, expects most traditional retailers over the next three to seven years to move toward an IT-based model that embraces the Internet. That model will have intranets within the stores, with point-of-sale systems that are browser-based for access both in the stores and in homes. These point-of-sale systems will connect to the headquarters location and the distribution center as well as to extranets at manufacturers' facilities and at financial institutions. This integrated system will greatly facilitate the flow of inventory, information, and funds.
In this way, Gilbert notes, the stores can measure total business as well as e-business, know what's selling, fulfill orders, and replenish goods. Federated and a number of the association's other members are going this route.
Yet even as their Internet sophistication advances, the brick-and-mortar retailers have to struggle with a new way of moving goods to market. Sherman of EXE Technologies spells out the difference, as he sees it, in the way product handling and logistics have changed with the advent of the Internet. "We used to deal with full truckloads and full pallets," he says. "Then in Quick Response, we were dealing with cases, less-than-truckload. In the dot-com world, we're looking at parcel management, item picks. We used to ship to 400 to 500 locations. Then in the Quick Response days, we started shipping to 5,000 to 6,000 locations. In the dot-com world, you may be shipping to 80 million locations."
The Third-Party SolutionAs retailers attempt to cope with two distinct fulfillment channels, they are assigning a significant part of the fulfillment responsibility to third-party providers. (For more on the third-party logistics option, see the sidebar on page 49.) A number of new third-party options and players have emerged largely in response to the e-tail imperative. One such example is Grand Rapids, Mich.-based Progressive Distribution Services Inc., a turnkey e-commerce and fulfillment resource. The company recently introduced @store, a service that allows retailers to process Web orders directly to their brick-and-mortar stores for same day customer pick-up or delivery.
Company President John McGovern is far from optimistic about the traditional retailers' ability, at least in the short term, to cope with Internet activity. In his view, there are gaps in their home-grown systems operations that can compromise a key ingredient for success: customer service. "In a consumer direct-response environment," McGovern says, "there are several different pieces that need to be accommodated that don't have to be dealt with at point-of-sale. One is back order control. In POS [point-of-sale], customers walk up to the register and have the products in their hands. If the goods aren't in stock, it never becomes a transaction. But when it's a direct-response purchase and the item isn't in stock, most of the time customers are just as happy to have the supplier keep track of the order and ship it at a later date."
Another piece that becomes a little more complicated is the returns processing cycle, where the customer sends merchandise that needs to be credited or exchanged back to a central shipping point or possibly to a brick-and-mortar store. Right now, there seems to be little consistency in the procedures for managing the reverse flow for online purchases.
Then there's distribution management. McGovern thinks that the majority of stores lack the tools necessary for a direct-order environment. "Distribution in support of a chain of stores differs from customer-direct support," he says. "A facility that supports 500 stores is sending goods out in waves, filling trucks, and going to locations on a scheduled basis. A customer-direct order, on the other hand, is almost unique each time. Customers come into the system randomly and have to be processed. So for a retailer, it may be more cost-effective to establish a separate inventory with a specialized distribution center than it would be to try to convert an existing distribution center."
At the same time, many see an advantage to nurturing the inherent synergies of a physical store base working in tandem with an online storefront. Exactly how to integrate the two, however, is the sticking point.
For instance, Home Depot plans to begin selling product online mid-year and is looking at ways to leverage its storefronts as distribution centers. "Ideally, we want to let customers shop on their own terms," company spokeswoman Carol Schumacher told Stores magazine in its December 1999 issue. "But the reality is that we'll have 1,900 stores in four years. That's 1,900 distribution points. So we're looking closely at a scenario where the customer orders online and can pick up his order at a local store."
Handicapping a Hazy FutureIt's quite obvious that no one knows how the Internet will evolve and ultimately change consumer buying habits—and by consequence, the entire consumer supply chain. But one thing is certain, the brick-and-mortars want a piece of the action and are on a steep learning curve as they nervously forge ahead.
As Frank J. Drazka, managing director and head of technology investment banking at Paine Webber Inc., told Business Week: "We're only at the beginning of this. There are still many questions. Like can the physical businesses adapt fast enough? Can they adapt a model that works for them without jeopardizing their base business? They're using technology to change, but digital businesses are using it to create."
The ace in the hole for the brick-and-mortar companies, however, may well be their existing infrastructure—a resource that the pure Internet players have to lease, borrow, or build. To the extent that they can leverage these resources, while developing an online strategy that complements but does not cannibalize their mainline business, the traditional retailers stand a very good chance of surviving—and more likely than not, prospering—in an e-future.
| Author Information |
| Jules Abend and Penny Gill cover the retail industry for several leading publications. They are regular contributors to Supply Chain Management Review. |
|
View All Blogs
