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Old Dogs, New Clicks

During the past 10 years, E-commerce has changed dramatically. Is your company keeping up?
Russ Banham, CFO IT
June 22, 2005

Executives who think that the dot-com collapse, channel conflict, and consumer fears of identity theft have combined to make E-commerce strategy a low priority should think again. Ten years after Amazon.com and eBay made "E-tail" a household word, companies in many industries are taking a second look at E-commerce, and finding ways to overcome old problems and tap new opportunities.

Last year, E-commerce sales hit $69.2 billion, and while that equates to less than 2 percent of all retail sales, it is a startling 23.5 percent jump from the previous year. Analysts believe the online channel may account for 7 percent of all retail sales by 2010. That's a potential increase of nearly $200 billion, which means companies that were turned off or got burned the first time around have plenty of incentive to try again.

And many are. No longer seen as a separate entity (with its own dreams of IPO glory), today's E-commerce effort is framed as an integral part of a multi-channel sales-and-marketing strategy predicated on giving customers what they want the way they want it. That means company strategies vary widely. One retailer's Website may sell a fraction of the inventory displayed at its stores, while another may sell quite a bit more. Some see their E-commerce platforms as the carrot enticing customers into their shops — or, if they are manufacturers, into the shops of their channel partners. Others see E-commerce as a way to reach customers who can't, or won't, shop any other way. Rather than build dot-coms because their competitors have them — often the motivation 10 years ago — companies today think deeply about the purpose of their E-commerce effort before giving it life.

They are also thinking about how to give it life, and again the lessons of the past are proving invaluable. Many companies have learned that they don't need to build their own Websites or conduct postsale order fulfillment, inventory management, or customer service. If a business is built around shipping palettes to Nordstrom stores rather than shipping individual products to customers' homes, why should it restructure its entire operation to accommodate the E-tail channel? There are a host of companies that will provide everything from Website software to logistical support to customer service — and some even provide it all. The upshot is that, far from worrying about being "disintermediated" by new Web companies, old-line firms can partner with these service providers and maintain their dominant positions.

"What's really startling is that E-commerce is being dominated by traditional retailers, and not by entrepreneurial companies and travel Websites," notes Bart Weitz, a professor and director of the Miller Center for Retailing Education and Research at the University of Florida. "During the last ten years, traditional retailers have learned how to use the Internet as a tool to develop better relations with their customers, to really know their [buying] preferences. When I walk into a store, nobody knows who I am. But when I venture into a company's virtual store, I am a known entity with specific preferences. This information now carries over into all my interactions with that company."

But plenty of credit is due to Amazon.com and eBay, the pioneering dot-coms that essentially defined the space by encouraging consumers to confidently key in their credit-card numbers and trust that the merchandise would arrive on time. Both companies built a consumer-value proposition based on reliability and dependability. "They created trust, and that was a huge thing in a self-regulating environment," says Patti Freeman Evans, retail analyst at Jupiter Research.

Reason to Believe
According to Erik Brynjolfsson, director of the Center for eBusiness at the Massachusetts Institute of Technology, they also proved that the Internet is an extremely effective low-cost channel. "It is too expensive for me to sell my aunt's old chair in the attic to someone in Idaho," he says, "but thanks to eBay, I can do that very cost-effectively. Transaction costs on the Internet are but a fraction of what they would be offline."

And while current investment in E-commerce technology is lagging the growth in E-commerce sales, analysts expect companies to soon wake up and realize that the potential for solid ROI is there. "Companies have learned that the Web is a very profitable channel," says Carrie Johnson, principal analyst at Forrester Research. "After the bubble burst, it didn't look as though most companies believed the Web could actually become profitable and contribute to the bottom line. Now we know the majority of online sellers are profitable and there are ways to do business economically that satisfy both Wall Street and internal P&L objectives."

Increasingly, companies are discovering that in order to be a successful online seller, you must first be a savvy buyer. Sorting through the many outsourcing options can be daunting, but companies say it's worth it. And often they speak from painful experience.

A case in point is Linens 'n Things. With its 500th store recently opened, the $2.7 billion retailer has a solid brick-and-mortar presence on which to build — or rebuild. When the company launched its first E-commerce platform five years ago, it handled order fulfillment in-house and operated its own call center. It then decided that E-commerce wasn't its core competency. "We looked at where we could gain some opportunity and decided to outsource parts of our E-commerce strategy," says Kathy Kimple, vice president of Internet operations. "We evaluated all the permutations out there. For example, we played with keeping the Web design and the call center, and outsourcing the fulfillment piece. We talked to Amazon.com, to Fry, to fulfillment companies like SubmitOrder and ClientLogic, and before long, it started to look like a menu from a Chinese take-out. Ultimately, we decided to outsource the whole kit and caboodle to GSI."


Launched in 1999, GSI Commerce was founded on the belief that if online sales were to account for just a fraction of a company's overall sales, then investment in the technology, not to mention the fulfillment and warehouse end of things, had to be kept low. "E-commerce today makes up 2 to 3 percent of business transacted per merchandise category and will maybe grow to 7 or 8 percent in five years. But that still doesn't justify making huge investments in it," says Michael Conn, senior vice president for corporate development at GSI. "We saw an opportunity to aggregate the business of numerous retailers onto a single platform that provides more features and functionality than they could develop independently."

GSI competes with Amazon.com in offering a comprehensive, single-source E-commerce outsourcing option (see "Amazon Finally Clicks," Spring 2004). "Amazon.com and GSI are going head-to- head on every single deal," says Forrester's Johnson. "GSI is the leader right now." She points out that Amazon.com is challenged by channel conflict — being a seller itself, while also offering a technology platform to other sellers. The irony of that is hard to miss, given that similar channel conflicts initially prevented several brick-and-mortar companies from pursuing the online channel. But now GSI can count everyone from Timberland, Reebok, and palmOne to Major League Baseball and even the Public Broadcasting Service among its clients. "We store the goods, take orders from customers, and then pick, pack, and ship the order from two massive fulfillment centers in Kentucky. We even do gift wrapping, gift cards, refurbishment of returned items, and monogramming of soft goods like towels," Conn notes.

What sold Linens 'n Things on GSI was "the continuing cost of technology and the need to hire more people with expertise" in IT to run things, Kimple says. "GSI has the ability to leverage the expenses and capital required to run a world-class Internet business — thanks to the partners that send checks to them every year. They have a high sense of urgency when it comes to delivering a great experience for our Internet guests, who often go online to do research and then come into our stores to buy."

But some companies have found that a soup-to-nuts outsourcing approach is not for them. Take the case of The Finish Line, a $1.2 billion retailer of athletic footwear, clothing, and accessories. Like Linens 'n Things, it initially launched a homegrown E-commerce platform several years ago. By 2002, it had outgrown the capabilities of its Website but had developed critical expertise in order fulfillment, customer service, and inventory management. Wanting to upgrade the bad but keep the good, it decided to make a larger investment in its Website "to give our merchandisers and marketers more tools to get the message in front of the consumer," says Kent Zimmerman, The Finish Line's director of E-commerce. "With our old site, every time there was a problem, we just threw new servers at it or wrote new code."

The retailer, with 625 stores nationwide, tapped Art Technology Group (ATG) to design a new Website that offered the ability to customize promotions to consumers by testing and measuring how each individual uses the site (see "Counting More Than Clicks"). "We learned, for example, that our customers prefer to see a page with a single shoe in six different colors, rather than a shoe in just one color, even if that color has been their preference in the past," says Zimmerman. The new site is helping The Finish Line win more sales and reduce product abandonment — "where someone fills up a shopping cart and then inexplicably leaves the site before paying," he explains. Recently, the dot-com added a "sneak peek" program in which customers get updated information on the next hot sneaker before it hits store shelves. "We're starting to embrace the site as a research tool to drive more traffic into our stores, rather than just another retail channel," says Zimmerman.

ATG's Website software offers the ability to perform standard transactions — like search, order status, or product information — as well as more-sophisticated cross-selling and up-selling personalization services, including the ability to "morph" the site as a customer moves through it, targeting him or her with specific products based on buying preferences.

In between the do-it-all approach of an Amazon.com or GSI and the relative specialization of a company like ATG is a vast middle ground, where companies such as Fry offer a blend of consulting and technology. "We provide everything you need up to the actual fulfillment — someone putting the product in a box and shipping it to the customer," says David Fry, founder and CEO.

Fry walks customers such as T.J. Maxx through their online options. "Companies come to us and say they want to create an online presence, but they are not sure what that involves," he says. "We talk with them about the merchandise that might best be sold online, and how we would develop and host the site. We also provide the servers and infrastructure to get the Website running, and then integrate it all into the company's fulfillment system, inventory system, customer-service system, and credit-card processing. They do the purchasing, credit-card clearing, marketing, and merchandising, as well as manage the site. Essentially, they are the merchant and we are the store."


Waterford Wedgwood USA went to Fry in August 2002 to launch its first E-commerce site. The maker of fine crystal and collectibles had previously sold its products only through specialty shops and retail department stores like Macy's and was concerned about the effect that E-commerce would have on its longstanding retail relations. "We fretted about channel conflict," says Jennifer Korch, director of Internet marketing at Waterford.com. "We had sold only to brick-and-mortar establishments, from large retail stores to gift shops. Our customers were concerned about Waterford's E-commerce plans, and we needed to educate them that a Website, even one predicated on direct-to-consumer sales, actually complements their business."

While the company has yet to assuage all traditional outlets, it is making headway, Korch says, particularly when it comes to online programs designed to push consumers to stores. "For example, we use the site to tell consumers about limited-run items that are available only to members of the Waterford Collectors Society, a paid membership organization, at specified stores. These are high-priced, beautiful items, and we rely on human interaction to sell them," she says. "We also promised retailers that we would never sell any product on the Website at a lower cost than it would be in a retail environment."

Fry's software is at the heart of Waterford.com, and Fry works closely with Waterford's IT and marketing departments to ensure that customer order data is transferred back and forth from the Website to Waterford's order and inventory system. "Fry offers the technical knowledge to run an E-commerce business, including Website development and hosting," says Korch. "We do everything else in-house, including customer care and distribution." The latter, she says, was challenging, because the company was used to being a wholesale manufacturer that shipped big palettes to stores, versus being a retailer that ships to customers one at a time. Waterford reengineered its warehouse operations to fulfill individual orders — twice each day, customary warehouse operations halt to give Waterford.com's Internet orders priority.

Given the challenges and risks involved, why bother? "Our reach is just so much larger online," says Korch. "We offer a more comprehensive selection of items online that cannot be matched by any store." Despite that, she says, "we see the site as a branding tool first and a selling tool second."

Analysts caution that the economics and convenience of outsourcing can be at odds with the desire to integrate all sales channels as tightly as possible. It can be done, but it requires careful oversight of your outsourcing providers, making sure that their current and future capabilities are in line with your needs. As Weitz says, "Even if you give away the store, you don't want to give away the store."


A Decade to Remember

In the 10 years since eBay and Amazon.com began to ring up sales, E-commerce has been through a stunning series of ups and downs. Here are some highlights.

1995
Amazon.com sells its first book online; eBay launches; Netscape goes public at $28 a share and ends the year at $139 per share; Netscape and Microsoft add Secure Sockets Layer technology to Web browsers, facilitating safer E-commerce.

1996
Sergey Brin and Larry Page create Google.

1997
EBay sells its millionth item: a Sesame Street Big Bird toy; IBM launches $4 million media campaign to encourage E-commerce.

1998
Congress investigates whether online travel entity Orbitz violates antitrust law; the FTC warns Websites to tighten their data-protection policies; the Internet Tax Freedom Act provides a three-year moratorium on levying sales tax on Internet purchases (extended for five years in 2000).

1999
The business.com domain name sells for $7.5 million; Amazon.com reaches its 10 millionth customer; Wall Street analyst Henry Blodgett says, "The [Internet] plane can still climb, but not too steeply..."

2000
Nasdaq average plunges 63%, and the Dow Jones drops 16%; the Pets.com sock puppet sells for $20K (on eBay); Yahoo and eBay are hit with large-scale denial-of-service attacks, sparking security concerns.

2001
EBay lists its half-billionth item; the number of U.S. Web users surpasses 100 million; a Forrester survey finds that more companies cut E-business budgets than increased them, and many said more cuts were likely.

2002
Netflix goes public; the University of Maryland creates a Website, businessplanarchive.org, to chronicle the dot-com collapse while there's still something to chronicle.

2003
Apple launches iTunes, bringing some order to bear in online music sales; a survey finds the B2B E-commerce market is seven times larger than the B2C market, as brick-and-mortar companies tap the power of the Web.

2004
Toys "R" Us sues Amazon.com over an exclusivity agreement; Google goes public at $84 a share; online holiday shopping tops $23 billion, a 25% rise from 2003.


2005
The Supreme Court removes barriers to interstate (i.e., online) wine sales; businesses scramble to meet new data-security standards imposed by a consortium of credit-card companies.


Counting More Than Clicks

If you build it and they come, how will you know? For as long as companies have been involved in E-commerce, they have been attempting to measure Website traffic and the ultimate business value of an online presence. A class of software known as Web analytics now constitutes a $258 million market, according to IDC, and will increase to nearly $400 million by 2008.

Not only is the market growing, it's also changing. The initial users of Web-analytics tools were Web masters and IT staffers, says Gartner analyst Bill Gassman, and they focused on technical information, such as the top 10 pages viewed. Today, leading vendors of Web-analytics software, such as WebTrends, Omniture, WebSideStory, Coremetrics, and others, design their products to meet the needs of ROI-oriented business users who are far more interested in who buys from a site (and why) than who visits it.

"[Customers now want] segmentation data so they know who is buying what, and they are interested in the results of advertising campaigns," explains Gassman. "They also want to find out why people are not doing exactly what the company would like them to do on the Website."

But companies need to be careful, warns Forrester Research analyst Bob Chatham. According to a study he recently authored, the data that organizations get from Web-analytics applications may be a lot less accurate than they expect. One problem is a shift in technology: earlier software relied on log files, which essentially count computers, not people. That is, the files sometimes count as a single visitor all people who access a Website from the same IP address (all employees of a given company, for example). And the software may fail to "see" people who visit a Web page that has, in the interest of efficiency, been cached (stored temporarily on another server) by the ISP.

Newer products use page tags, or small units of code on a Web page, that transmit information about any browser that loads that page. These tags enable companies to track a visitor as he or she moves from one page to another.

Chatham cites one Forrester client who discovered that a shift from older Web-analytics software that used log files to newer versions that use page tags resulted in an apparent 40 percent change in traffic. But even with the use of newer technology, monitoring Websites is tricky. Site developers often forget to tag pages, which hamstrings data collection. Some software arbitrarily defines a Web session as a 30-minute visit and, once that time expires, counts that same visitor again. And in what is perhaps the biggest challenge, many users now disable the "cookie" function of their Web browsers (a small ID file created when they visit a Website) in order to protect their privacy, which makes it impossible to recognize them as return visitors.

"Web teams need to develop a set of best practices around the use of tags," says Gassman. "It's a huge change, but it means the difference between 'comfort information' and truly actionable information." This may be that rare case in which companies must battle information underload. — Alan Earls




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