FULFILLMENT: Building back-end.com

Web marketers once touted their virtual warehouses as a competitive advantage they enjoyed over traditional catalogers. By acting as a drop-shipper, without the expense of back-end staff and systems, they could remain lean and mean, and pass the savings on to buyers.

But by adhering to this model, Internet-only marketers provided catalogers that were expanding online with an edge: superior service. “When some of these virtual companies started out, there was virtually no customer service,” says John Hough, a spokesman for online computer cataloger Egghead.com, which folded its retail and print catalog divisions last year. “Customers had no way to contact the company for returns or track their orders. Customer service was overlooked.” The $148.7 million Egghead.com handles most of its fulfillment inhouse, though it does use third-party fulfillment for sale items.

Now, however, catalogers may be losing their service edge. Online-only marketers such as supermerchant Amazon.com and educational toys marketer Toysmart.com have already begun acquiring distribution centers. Amazon now has more than 3 million sq. ft.of distribution space, most of which was acquired within the past year. And in April, retailer Toys R Us spent $30 million to buy a state-of-the-art Memphis facility primarily for its Internet business.

In expecting to grow without a fulfillment operation, Web marketers misunderstood the importance of customer service and maintaining control over what Bill Kuipers, a partner in operations consultancy Spaide, Kuipers & Associates, calls the final link between the company and the customer. “There’s an enormous amount of competition in e-commerce,” he says. “And it has forced some to realize that there is an important operations and logistics piece to the puzzle.”

“The distribution model that e-commerce merchants thought would work didn’t work, and it won’t work in the future,” says Walt Mulvey, chief operating officer of Cameraworld.com, an $80 million photography equipment cataloger/retailer. “I think we are starting to see a blur between traditional direct marketing fulfillment and Web fulfillment.”

For $610 million Amazon.com, “the single biggest advantage [of handling fulfillment inhouse] is controlling our customers’ experience,” says chief logistics officer Jimmy Wright. “Customers are demanding service. They want their product now. They don’t want to hear about backorders. They want service, and the ‘Net marketers that differentiate themselves will be more successful over time.”

That’s the reason start-up Toysmart.com decided to fulfill inhouse from the get-go. “As a start-up, you have but one chance to make a lasting impression on your customer. We are the last link to the customer,” says Wayne Teres, director of logistics for the Waltham, MA-based marketer.

The cost of service

Teres wouldn’t disclose how much it cost Toysmart.com to establish its back-end operations, but it couldn’t have been cheap. Multititle cataloger Hanover Direct, whose Keystone Fulfillment subsidiary provides back-end services for 16 marketers, spent at least $20 million to integrate complex warehouse management systems that track order entry, order fulfillment, inventory management, returns, and the customer database. Then there’s the cost of staffing the facility, not to mention the expense of building or leasing the warehouse itself.

Costs no doubt figured in the decision of online marketer eToys to outsource its fulfillment to Fingerhut Business Services, the Provo, UT-based fulfillment division of multititle mailer Fingerhut. But the Santa Monica, CA-based eToys has also said that by outsourcing the back-end – order processing and fulfillment, warehousing, shipping, payment processing, customer service, and merchandise returns – it can concentrate on marketing and merchandising its product.

Not surprisingly, Norm Chaney, president of Dallas-based fulfillment services provider ASD Systems, thinks companies such as eToys are making the right choice. “E-commerce marketers should concentrate on their core competencies, such as marketing and merchandise,” he says. “As far as warehouse and back-end are concerned, you never know what kind of volume you’ll have. There are no benchmarks.”

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