Executive Briefings

Click-and-Mortar Retailers Prevail While Dotcoms Fade

Retailers with multiple sales channels are proving to have a distinct advantage over web-only competition - if they can get their supply chains in line.

Two years ago, you would have been hard pressed to find the words "cautious" and "internet" in the same sentence. Traditional retailers were scrambling to build web sites to compete with the new breed of internet-only "e-tailer." And analysts were predicting the demise of many brick-and-mortar chains at the hands of electronic sellers.

Some of the more levelheaded merchandisers held back, however, waiting for the dust to settle. And today, with the economy stalled and countless dotcoms in bankruptcy, it is the old-line operations with multiple sales channels that are left standing. Some of the strongest are those who took their time to create solid web sites, which are still growing in sales and functionality.

One such laggard is Casual Corner Group Inc. Based in Enfield, Conn., it operates around 1,000 retail stores in the U.S., mostly in malls, under the names Casual Corner, Petite Sophisticate and August Max Woman. Its web site didn't debut until September 2000.

The decision was anything but sudden. Leading up to the launch date were nine months of building a stable, attractive e-commerce site, says Stefano Gaggion, vice president of management information systems. And for five years prior to that, Casual Corner labored to install a new system that could support multiple channels from the same software and business processes.

 

 

 

 

 

"There was a lot of hype and overblown expectations."

 


 

 

 

Casual Corner had no illusions about conquering cyberspace, or shutting down stores in favor of web sales. In part, the web site was a means of catching up with early adopters, says Gaggion. But its primary rationale was the need for another way to reach existing customers. Through e-mail and the internet, the company can keep buyers apprised of promotions, new products and selling seasons. The site changes every four to six weeks, at the same time Casual Corner changes its store displays, and the two maintain a common look.

Casual Corner is one of many traditional retailers to treat the internet as another channel, not an end in itself. In fact, even the best e-commerce sites are having a tough time surviving without the backing of a chain of physical stores.

In the early days of the internet, pure dotcoms, with their seemingly low overhead and lavish media attention, appeared to have the upper hand. But public confidence in e-tailing quickly began to wane, as orders arrived late, incorrect, or not at all. The new breed of merchandiser, it seemed, lacked basic supply-chain expertise - the ability to fill an order as promised.

"There was a lot of hype and overblown expectations," says Chris Newton, senior analyst with AMR Research Inc. in Boston, Mass. "Folks started to go back to the brick-and-mortar stores."

Meanwhile, venture capitalists were tiring of dotcom losses and withdrawing their support. That left store-based retailers like Casual Corner, who could afford to enter the e-commerce market slowly. They could gradually add product to their web sites while continuing to generate cash. "Pure plays," says Newton, "didn't have anything to fall back on."

The Road to Profits
Embracing the internet hasn't been easy. J.C. Penney Co. Inc., whose web site some analysts consider among the best in the retail business, lost $40m on its internet venture in 2000. (Chairman and CEO Allen Questrom told analysts last August that he expects to turn a profit on web site sales in 2001.) But
the strongest indication of the primacy of multi-channel re-tailing might have come this year, when Amazon.com, the biggest merchandising name on the internet, inked multi-year deals with three major retail chains: Toys 'R' Us, Circuit City Stores and Borders Books. Customers can order product online and pick it up at stores, or have it shipped directly. Amazon.com, with its nationwide network of modern warehouses, will handle fulfillment for its retailer partners.

In essence, web-based Amazon, which has never made a profit, seems to be acknowledging the need for a backbone of retail outlets. "To sell a very high volume of product - in the hundreds of millions of dollars - is almost exclusively the domain of multi-channel retailing," says Paul Ritter, analyst with The Yankee Group in Boston.

"The economics don't work for most single-channel dotcoms," agrees Evie Dykema, senior analyst with Forrester Research Inc. in Cambridge, Mass. One problem is the huge volume of returns - around 20 percent of internet sales, by some estimates. Buyers over the internet find it easy to order different sizes or colors of an item, then return what they don't want. (The fact they couldn't try on the item in the first place only increases the chance of dissatisfaction.) Many retailers allow goods purchased on the web to be returned to their stores, eliminating the need for customers to stand in line at the post office or parcel shipper.

But Amazon's new partners are admitting something as well: their need for an e-commerce expert to help with the fulfillment side. Most retailers with new web channels are unskilled in the art of shipping small packages to demanding customers in a matter of days. They simply can't handle the huge volumes of orders that are generated by web sales, let alone the massive numbers of returns. What's more, web sales tend to be far less predictable than those in stores, says Razat Gaurav, director of marketing in the transportation and logistics group of Dallas-based i2 Technologies Inc.

Those with prior catalog operations might have an easier time adjusting, but they still must deal with the intense service requirements of the internet age. "The traditional retailer who has never been a direct marketer has the challenge of going from full case to piece pick," says Kevin Boyanowski, managing director in the retail and wholesale practice of McLean, Va.-based KPMG Consulting Inc. Often that means a whole new operation within the warehouse - or even a separate facility.

Not for Casual Corner. Its determination to start slowly has allowed the retailer to keep web fulfillment within the same central warehouse that supports its network of stores. The company's warehouse management system (WMS), from Atlanta-based Manhattan Associates, supports both store replenishment and direct shipping. Employers pick a day's worth of orders in bulk, breaking down individual orders only as a final step.

Internet orders are treated as a "dummy store" and routed to their own cart, says Rusty Marsh, director of implementation services with Manhattan. "The whole model has a minimal effect on day-to-day operations," he says.

Casual Corner also integrates such processes as credit-card authorizations and sales data gathering. And the process of handling inbound goods - ordering, receiving and putaway - are identical. "We didn't duplicate anything," says Gaggion.

All that will likely change as the web site catches on. While e-commerce sales exceed those of any single store, they remain a small percentage of Casual Corner's total sales. As they increase, says Gaggion, "we'll probably reach the point where we need to split inventory and have physically different locations."

A 'Rat's Nest'?
Dykema says retailers are working hard to integrate their stores and web channels. And while systems "are a bit of a rat's nest," the advantages of a hybrid model are too compelling to ignore. Traditional sellers can get better deals from vendors by pooling their purchases. Customers appreciate having multiple buying options - the speed and convenience of web and catalog ordering, and the ability to see or return product at a physical store.

Each channel has its particular strengths, says Dykema. Catalogs are well suited to creating brand awareness, web sites help consumers during the decision-making process, and stores are best at closing sales. In short, she says, "the retailers who are able to satisfy more sophisticated needs will be those with all three channels."

The precise method depends on the retailer. "Industry is still trying to work through and find the model," says Bruce Welty, senior vice president of industry and analyst relations with EXE Technologies in Dallas. Options include creation of a stand-alone dotcom division, as in the case of Barnes & Noble forming Barnesandnoble.com. That approach acknowledges the differences between doing business through stores and over the web, especially the high service demands of the latter. But some analysts say the big bookstore chain has sacrificed its ability to integrate operations and marketing between the two channels.

A second option is the store-pick model, with store stocks acting as standing inventory. Grocery chains and even some dotcoms have taken this path, which Welty says is a means of assessing demand without a large up-front investment. It contrasts with the approach of pure net grocers such as Webvan, which went broke after building state-of-the-art warehouses, yet failed to generate enough sales to justify their high cost.

Still another strategy is to acquire a dotcom e-tailer, as in the case of the Netherlands' Royal Ahold taking over online grocer Peapod. And finally, some retailers lacking web fulfillment expertise are choosing not to acquire it at all. Instead, they're outsourcing that piece to third-party specialists, many of whom cut their fulfillment teeth on catalog merchandising. (See "E-Commerce Fulfillment Puts the Squeeze on Delivery Cycle Time," GL&SCS, August 2001.)

The Channel Gap
Whichever way a company goes, its systems must be able to sustain multiple sales channels. i2's Gaurav says companies can function with a single software package for handling orders and shipments, but must model the variables according to the unique needs of each channel. "The internet channel is quite different," he says.

EXE, a WMS provider, picked up fulfillment expertise with the January 2001 acquisition of AllPoints Systems Inc., which had about 30 customers in the retail, food, grocery and replacement parts sectors. EXE's customers strive to create single-source inventories, upon which they can draw for stores and direct sales.

Bridging the gap between ordering and fulfillment can be especially difficult. Radcliffe Systems Inc., based in Toronto, Ont., supplies the execution link for a number of web portals and e-tailers. After receiving an order, it passes back information on inventory availability, manages the movement of product within the warehouse, and provides the customer with various shipping options.

Most retail distribution centers are built around handling full cases, pallets and bulk shipments, says Fred Radcliffe, president of Radcliffe Systems. "E-tailing is a different kettle of fish," he says. Still, his company, like many of its competitors, allows for multiple operations within a single warehouse, or integration between separate facilities.

Some key problems remain to be solved. Chief among them is the data interface between retailing and e-tailing. At the store level, information comes mostly through point-of-scale scanners, which do a good job of tracking purchases but not identifying individual buyers. On the web, sellers have access to a wealth of consumer intelligence, although it might not filter down to the retail database.

Nor can they make quick decisions about where to route finite quantities of product. It's one thing to coordinate the flow of orders to a large network of stores. It's another when a web channel is competing for the same inventory, says Richard Cardozo, director of industry solutions with Industri-Matematik International (IMI) in Mount Laurel, N.J.

 

 

 

 

 

Retail Dcs are built around bulk shipments, but e-tailing is a different kettle of fish.

 


 

 

 

One possible solution lies in the basic technology that goes into customer relationship management (CRM) packages. Manufacturers have used it to integrate the order processes of multiple product lines. IMI layers that functionality atop traditional order management and supply-chain execution software, so that retailers can present one face to the customer.

They may or may not be drawing from the same pool of physical inventory. That piece of the prioritizing model has yet to be developed. "There's no right answer," says Cardozo. "There may never be."

"It's fine to centralize all picking operations in the same warehouse," says Noah Dixon, director of industry strategy with McHugh Software International in Waukesha, Wis. But the facility must have enough doors to accommodate multiple modes of shipment. And geographic requirements might vary. Dotcom distribution tends to be centralized, while stores are served through a series of regional distribution centers. (Amazon built multiple warehouses to handle different types of products, not just regions of the country, says Dixon.)

McHugh's WMS software can sustain dual picking methods, but its users mostly prefer separate distribution facilities, Dixon says. Casual Corner aside, full-scale parcel manifesting isn't often found in facilities that ship to retail stores. Even Gaggion admits to the likelihood of rethinking Casual Corner's distribution strategy as web sales grow.

One area of software development still ripe for improvement is returns processing. Dixon says retailers aren't yet coping efficiently with the flood of returns from web-based channels, both in terms of execution and administrative processing. "We're looking to improve that area with a total solution," he says.

Order Management Woes
Physical warehousing and transportation aren't the only parts of the supply chain where hybrid retailers run into trouble. Order management still poses a significant challenge. Retailers must be able to accept orders from stores, web sites, catalogs, even in-store internet kiosks. All must be managed in a coordinated fashion so that the customer has one harmonious experience with a given retailer, says Newton.

Direct selling requires an order process tied to precise customer expectations, says Scott Pulsipher, director of demand solutions with Yantra Corp. in Tewksbury, Mass. Retailers should be able to handle special orders and items that aren't part of regular inventory. Instead, they're likely to be dealing with customers on a channel-by-channel basis, relying on multiple systems with minimal overlap.

Yantra's order-management system utilizes a rules-based engine to determine which fulfillment process applies to a given order. The system can also be tied to those of third-parties, should the retailer decide to outsource the web fulfillment portion of its business. Even then, says Pulsipher, there are times when it must ship direct or perform other services that a third-party can't provide.

Setting up multiple sales channels is the easy part," says Scott Zahn, vice president of business development with Optum Software in White Plains, N.Y., another purveyor of order-management systems. "It's how you deal with the processing once you have the order in-house." Catalog customers, who previously settled for ground delivery within an unspecified period, are now checking the status of their shipments online, often several times a day.

Optum, too, has a sophisticated set of rules for funneling orders through the proper pipeline. But technology isn't the chief impediment to the success of hybrid retailing, says Kelly Vizzini, vice president of corporate marketing. "It's very easy to throw people at the problem," she says. "It's much more cost-effective to change the process."

Even the best fulfillment systems in place today are far from perfect. Casual Corner has laid the groundwork for a hybrid retailing model, but will continue to add features in line with growth and changing customer needs. Says Gaggion: "It's like adding doors and windows to a house."

Two years ago, you would have been hard pressed to find the words "cautious" and "internet" in the same sentence. Traditional retailers were scrambling to build web sites to compete with the new breed of internet-only "e-tailer." And analysts were predicting the demise of many brick-and-mortar chains at the hands of electronic sellers.

Some of the more levelheaded merchandisers held back, however, waiting for the dust to settle. And today, with the economy stalled and countless dotcoms in bankruptcy, it is the old-line operations with multiple sales channels that are left standing. Some of the strongest are those who took their time to create solid web sites, which are still growing in sales and functionality.

One such laggard is Casual Corner Group Inc. Based in Enfield, Conn., it operates around 1,000 retail stores in the U.S., mostly in malls, under the names Casual Corner, Petite Sophisticate and August Max Woman. Its web site didn't debut until September 2000.

The decision was anything but sudden. Leading up to the launch date were nine months of building a stable, attractive e-commerce site, says Stefano Gaggion, vice president of management information systems. And for five years prior to that, Casual Corner labored to install a new system that could support multiple channels from the same software and business processes.

 

 

 

 

 

"There was a lot of hype and overblown expectations."

 


 

 

 

Casual Corner had no illusions about conquering cyberspace, or shutting down stores in favor of web sales. In part, the web site was a means of catching up with early adopters, says Gaggion. But its primary rationale was the need for another way to reach existing customers. Through e-mail and the internet, the company can keep buyers apprised of promotions, new products and selling seasons. The site changes every four to six weeks, at the same time Casual Corner changes its store displays, and the two maintain a common look.

Casual Corner is one of many traditional retailers to treat the internet as another channel, not an end in itself. In fact, even the best e-commerce sites are having a tough time surviving without the backing of a chain of physical stores.

In the early days of the internet, pure dotcoms, with their seemingly low overhead and lavish media attention, appeared to have the upper hand. But public confidence in e-tailing quickly began to wane, as orders arrived late, incorrect, or not at all. The new breed of merchandiser, it seemed, lacked basic supply-chain expertise - the ability to fill an order as promised.

"There was a lot of hype and overblown expectations," says Chris Newton, senior analyst with AMR Research Inc. in Boston, Mass. "Folks started to go back to the brick-and-mortar stores."

Meanwhile, venture capitalists were tiring of dotcom losses and withdrawing their support. That left store-based retailers like Casual Corner, who could afford to enter the e-commerce market slowly. They could gradually add product to their web sites while continuing to generate cash. "Pure plays," says Newton, "didn't have anything to fall back on."

The Road to Profits
Embracing the internet hasn't been easy. J.C. Penney Co. Inc., whose web site some analysts consider among the best in the retail business, lost $40m on its internet venture in 2000. (Chairman and CEO Allen Questrom told analysts last August that he expects to turn a profit on web site sales in 2001.) But
the strongest indication of the primacy of multi-channel re-tailing might have come this year, when Amazon.com, the biggest merchandising name on the internet, inked multi-year deals with three major retail chains: Toys 'R' Us, Circuit City Stores and Borders Books. Customers can order product online and pick it up at stores, or have it shipped directly. Amazon.com, with its nationwide network of modern warehouses, will handle fulfillment for its retailer partners.

In essence, web-based Amazon, which has never made a profit, seems to be acknowledging the need for a backbone of retail outlets. "To sell a very high volume of product - in the hundreds of millions of dollars - is almost exclusively the domain of multi-channel retailing," says Paul Ritter, analyst with The Yankee Group in Boston.

"The economics don't work for most single-channel dotcoms," agrees Evie Dykema, senior analyst with Forrester Research Inc. in Cambridge, Mass. One problem is the huge volume of returns - around 20 percent of internet sales, by some estimates. Buyers over the internet find it easy to order different sizes or colors of an item, then return what they don't want. (The fact they couldn't try on the item in the first place only increases the chance of dissatisfaction.) Many retailers allow goods purchased on the web to be returned to their stores, eliminating the need for customers to stand in line at the post office or parcel shipper.

But Amazon's new partners are admitting something as well: their need for an e-commerce expert to help with the fulfillment side. Most retailers with new web channels are unskilled in the art of shipping small packages to demanding customers in a matter of days. They simply can't handle the huge volumes of orders that are generated by web sales, let alone the massive numbers of returns. What's more, web sales tend to be far less predictable than those in stores, says Razat Gaurav, director of marketing in the transportation and logistics group of Dallas-based i2 Technologies Inc.

Those with prior catalog operations might have an easier time adjusting, but they still must deal with the intense service requirements of the internet age. "The traditional retailer who has never been a direct marketer has the challenge of going from full case to piece pick," says Kevin Boyanowski, managing director in the retail and wholesale practice of McLean, Va.-based KPMG Consulting Inc. Often that means a whole new operation within the warehouse - or even a separate facility.

Not for Casual Corner. Its determination to start slowly has allowed the retailer to keep web fulfillment within the same central warehouse that supports its network of stores. The company's warehouse management system (WMS), from Atlanta-based Manhattan Associates, supports both store replenishment and direct shipping. Employers pick a day's worth of orders in bulk, breaking down individual orders only as a final step.

Internet orders are treated as a "dummy store" and routed to their own cart, says Rusty Marsh, director of implementation services with Manhattan. "The whole model has a minimal effect on day-to-day operations," he says.

Casual Corner also integrates such processes as credit-card authorizations and sales data gathering. And the process of handling inbound goods - ordering, receiving and putaway - are identical. "We didn't duplicate anything," says Gaggion.

All that will likely change as the web site catches on. While e-commerce sales exceed those of any single store, they remain a small percentage of Casual Corner's total sales. As they increase, says Gaggion, "we'll probably reach the point where we need to split inventory and have physically different locations."

A 'Rat's Nest'?
Dykema says retailers are working hard to integrate their stores and web channels. And while systems "are a bit of a rat's nest," the advantages of a hybrid model are too compelling to ignore. Traditional sellers can get better deals from vendors by pooling their purchases. Customers appreciate having multiple buying options - the speed and convenience of web and catalog ordering, and the ability to see or return product at a physical store.

Each channel has its particular strengths, says Dykema. Catalogs are well suited to creating brand awareness, web sites help consumers during the decision-making process, and stores are best at closing sales. In short, she says, "the retailers who are able to satisfy more sophisticated needs will be those with all three channels."

The precise method depends on the retailer. "Industry is still trying to work through and find the model," says Bruce Welty, senior vice president of industry and analyst relations with EXE Technologies in Dallas. Options include creation of a stand-alone dotcom division, as in the case of Barnes & Noble forming Barnesandnoble.com. That approach acknowledges the differences between doing business through stores and over the web, especially the high service demands of the latter. But some analysts say the big bookstore chain has sacrificed its ability to integrate operations and marketing between the two channels.

A second option is the store-pick model, with store stocks acting as standing inventory. Grocery chains and even some dotcoms have taken this path, which Welty says is a means of assessing demand without a large up-front investment. It contrasts with the approach of pure net grocers such as Webvan, which went broke after building state-of-the-art warehouses, yet failed to generate enough sales to justify their high cost.

Still another strategy is to acquire a dotcom e-tailer, as in the case of the Netherlands' Royal Ahold taking over online grocer Peapod. And finally, some retailers lacking web fulfillment expertise are choosing not to acquire it at all. Instead, they're outsourcing that piece to third-party specialists, many of whom cut their fulfillment teeth on catalog merchandising. (See "E-Commerce Fulfillment Puts the Squeeze on Delivery Cycle Time," GL&SCS, August 2001.)

The Channel Gap
Whichever way a company goes, its systems must be able to sustain multiple sales channels. i2's Gaurav says companies can function with a single software package for handling orders and shipments, but must model the variables according to the unique needs of each channel. "The internet channel is quite different," he says.

EXE, a WMS provider, picked up fulfillment expertise with the January 2001 acquisition of AllPoints Systems Inc., which had about 30 customers in the retail, food, grocery and replacement parts sectors. EXE's customers strive to create single-source inventories, upon which they can draw for stores and direct sales.

Bridging the gap between ordering and fulfillment can be especially difficult. Radcliffe Systems Inc., based in Toronto, Ont., supplies the execution link for a number of web portals and e-tailers. After receiving an order, it passes back information on inventory availability, manages the movement of product within the warehouse, and provides the customer with various shipping options.

Most retail distribution centers are built around handling full cases, pallets and bulk shipments, says Fred Radcliffe, president of Radcliffe Systems. "E-tailing is a different kettle of fish," he says. Still, his company, like many of its competitors, allows for multiple operations within a single warehouse, or integration between separate facilities.

Some key problems remain to be solved. Chief among them is the data interface between retailing and e-tailing. At the store level, information comes mostly through point-of-scale scanners, which do a good job of tracking purchases but not identifying individual buyers. On the web, sellers have access to a wealth of consumer intelligence, although it might not filter down to the retail database.

Nor can they make quick decisions about where to route finite quantities of product. It's one thing to coordinate the flow of orders to a large network of stores. It's another when a web channel is competing for the same inventory, says Richard Cardozo, director of industry solutions with Industri-Matematik International (IMI) in Mount Laurel, N.J.

 

 

 

 

 

Retail Dcs are built around bulk shipments, but e-tailing is a different kettle of fish.

 


 

 

 

One possible solution lies in the basic technology that goes into customer relationship management (CRM) packages. Manufacturers have used it to integrate the order processes of multiple product lines. IMI layers that functionality atop traditional order management and supply-chain execution software, so that retailers can present one face to the customer.

They may or may not be drawing from the same pool of physical inventory. That piece of the prioritizing model has yet to be developed. "There's no right answer," says Cardozo. "There may never be."

"It's fine to centralize all picking operations in the same warehouse," says Noah Dixon, director of industry strategy with McHugh Software International in Waukesha, Wis. But the facility must have enough doors to accommodate multiple modes of shipment. And geographic requirements might vary. Dotcom distribution tends to be centralized, while stores are served through a series of regional distribution centers. (Amazon built multiple warehouses to handle different types of products, not just regions of the country, says Dixon.)

McHugh's WMS software can sustain dual picking methods, but its users mostly prefer separate distribution facilities, Dixon says. Casual Corner aside, full-scale parcel manifesting isn't often found in facilities that ship to retail stores. Even Gaggion admits to the likelihood of rethinking Casual Corner's distribution strategy as web sales grow.

One area of software development still ripe for improvement is returns processing. Dixon says retailers aren't yet coping efficiently with the flood of returns from web-based channels, both in terms of execution and administrative processing. "We're looking to improve that area with a total solution," he says.

Order Management Woes
Physical warehousing and transportation aren't the only parts of the supply chain where hybrid retailers run into trouble. Order management still poses a significant challenge. Retailers must be able to accept orders from stores, web sites, catalogs, even in-store internet kiosks. All must be managed in a coordinated fashion so that the customer has one harmonious experience with a given retailer, says Newton.

Direct selling requires an order process tied to precise customer expectations, says Scott Pulsipher, director of demand solutions with Yantra Corp. in Tewksbury, Mass. Retailers should be able to handle special orders and items that aren't part of regular inventory. Instead, they're likely to be dealing with customers on a channel-by-channel basis, relying on multiple systems with minimal overlap.

Yantra's order-management system utilizes a rules-based engine to determine which fulfillment process applies to a given order. The system can also be tied to those of third-parties, should the retailer decide to outsource the web fulfillment portion of its business. Even then, says Pulsipher, there are times when it must ship direct or perform other services that a third-party can't provide.

Setting up multiple sales channels is the easy part," says Scott Zahn, vice president of business development with Optum Software in White Plains, N.Y., another purveyor of order-management systems. "It's how you deal with the processing once you have the order in-house." Catalog customers, who previously settled for ground delivery within an unspecified period, are now checking the status of their shipments online, often several times a day.

Optum, too, has a sophisticated set of rules for funneling orders through the proper pipeline. But technology isn't the chief impediment to the success of hybrid retailing, says Kelly Vizzini, vice president of corporate marketing. "It's very easy to throw people at the problem," she says. "It's much more cost-effective to change the process."

Even the best fulfillment systems in place today are far from perfect. Casual Corner has laid the groundwork for a hybrid retailing model, but will continue to add features in line with growth and changing customer needs. Says Gaggion: "It's like adding doors and windows to a house."