Technology

Lands’ End Likes its Customers Where it Finds Them

The catalogue merchant's CFO has found the Web fits his firm's strategy perfectly.
Joseph RadiganMay 1, 2001

Don Hughes says he’s a “channel agnostic.”

At the end of the day, it doesn’t matter to Hughes, the CFO for catalog merchant Lands’ End’s, whether a customer makes her or his purchase through the company’s Web site, via mail-order, or on the toll free phone line.

Clearly, Hughes likes the Web’s potential for improving his operating margins. The retailer struggled in the last year as profits were squeezed, falling to $34.7 million in the fiscal year ended Jan. 26, 2001 compared to $48 million in the prior year. The weakening economy forced catalog and mail order merchants like the Dodgeville, Wisconsin- based Lands’ End to slash prices.

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But in this business climate, anything that can cut costs is an advantage at a time when sales growth is hampered, and Hughes has found his savings elixir on the Web.

Hughes insists he has no long-range targets to drive a set portion of the company’s revenue from its E-commerce activity, but he clearly likes the notion that Web sales cost less to handle.

In the last three years, the company’s mail order business has surged from sales of $138 million, or 4.5 percent of total revenue, in the fiscal year ended January 1999, to $218 million in sales, or 16 percent of revenue for the 12 months ended January 2001.

“It’s been a great customer acquisition vehicle,” Hughes says. The first indication of that is that roughly one fourth of the customers from the Web site are totally new to Lands’ End. The second affirmation of that statement is that the customers tend to be younger, mostly people in their early 40s as opposed to customers to the phone-in and mail-in service, who tend to be in the their late 40s or older.

It also helps that Web purchases don’t require catalogues, which are the single largest component of the company’s selling, general and administrative costs.

After cost of goods sold, SG&A is the company’s biggest expense item. Of the $560 million the firm spent on SG&A in its latest fiscal year, some $252 million was due to advertising expenses, and the vast majority of the advertising costs were made up of catalog mailings.

For Hughes, the biggest issue is that Web add to, and not detract from, Lands’ End’s shareholder value.

So far, it seems to be doing the trick.

“Long ago we made the decision that we were going to be a serious E- commerce player, and I’ve been very pleased with what we’ve done.” Hughes says. “Certainly, the red flag would be not to make investments that the customer doesn’t care about.”

From a basic financial standpoint, Hughes says Web orders are cheaper to process than those received through the company’s other channels, direct mail and phone in.

The lower expense of Web orders is made possible, in part, because the catalog merchant already had a large customer database. Essentially, the firm took its existing infrastructure and grafted a Web front end on top of it.

Bill Bass, Lands’ End’s senior vice president for E-commerce and international, says, “We didn’t have to go out and build a distribution infrastructure. We already had it in place.”

In a sense, catalog merchants and direct mailers are sitting right in the sweet spot of business-to-consumer E-commerce. They have a leg up on both the E-tailers, who lack the years of brand-name equity, and traditional retailers attempting to branch out into a bricks-and-clicks strategy but lack a huge data warehouse on their customer files.

“Companies that already have a direct sales business have done pretty well with their Internet business,” says Andrew Bartels, an analyst with Giga Information Group in Norwalk Conn. “They already had a direct- sales, unit-of-one fulfillment system,” which is the most expensive part of mail order technology infrastructure.

Kevin Noonan, an analyst with the market research firm, The Yankee Group, says “That’s why the direct marketers are sitting back and laughing at everybody. They sat back and realized that E-commerce is just another channel. This isn’t the be all and end all.”

Unfortunately, quantifying this advantage isn’t easy. Hughes won’t say what Lands’ End has to spend on individual transactions by channel, and Noonan says that even publicly traded companies don’t break out their revenue streams by individual sales channel. Nor do they itemize their costs by channel.

After all the crashing and burning in the dot com sector in the past year, it might take a huge leap of faith to buy the bold claims of a Web business, but Hughes and Bass say they have seen the Web’s future, and they like it.

But with a technology infrastructure already in place, does that mean that the Web effort is getting something of a free ride?

Not so, says Bass. The Web division has to pay for the portion of Lands’ End technology infrastructure it uses, and when a Web client is mailed a catalog, that expense is assessed against the Web division. “That’s just basic cost accounting,” he says.

There’s another advantage to the Web: customers who come to the Lands’ End’s Web site also tend to do business through other channels. They’ll order through the Web, by phone, or by mail order depending on when it’s convenient for them. What’s more, they usually have a higher purchase value per transaction.

Hughes says, “Our best customers are those who are multi-channel.”

That’s enough to make one agnostic a true Web believer.