Mind Games

No one is talking about the New Economy these days. If you had to choose one word to describe the mood of retailers as they face the new year, “uncertainty” would be at the top of the vocabulary list. Multichannel retailers cite concerns about the war on terrorism, the anthrax scare, and the depth and extent of the recession. Though unwilling to make bold pronouncements, most still seem to feel cautiously optimistic that the economy will grow in 2002. Well before Sept. 11, retailers had focused not on sweeping changes but on refinements — cutting costs, wringing greater efficiencies from all areas, and taking customer service up another notch.

Online upturn

Though retailers don’t expect much of an uptick in total sales, they do seem confident of expansion in online channels. Their confidence is based largely on continued growth in e-commerce, improved Web sites, stronger merchandise offerings, and marketing strategies aimed at pushing consumers to the Internet.

“Everybody’s trying to figure out what’s going to happen,” says Debbie Woodward, vice president of operations for Orion Telescopes and Binoculars in Watsonville, CA. “I don’t think anyone has solid answers about what next year’s going to look like.”

Consumer electronics retailer Crutchfield Corp., based in Charlottesville, VA, expects a fairly level year. The company’s catalog business has slowed, but its Internet sales are expected to rise from about 40% of total sales to about 50%. “We’ve been around for 28 years, and we’ve always taken great care of our customers, provided good products with great value, and that’s helping us out right now,” says Kurt Goodwin, Crutchfield’s vice president of operations.

The effort of New York City-based apparel retailer J. Crew to migrate its catalog customers to the Web seems to be working. Catalog sales have declined from nearly $231 million in 1998 to $178 million in 2000, while online sales have grown from $22 million to $107 million for the same period. The company expects to close 2001 with about $120 million — $130 million in Internet sales and anticipates continued growth ahead. “The high growth and hubris of the late ’90s has definitely faded away,” says Dave Towers, vice president of e-commerce operations for J. Crew. “Today’s attitude is one of operating and running a Web site as a regular business — implementing initiatives that improve ROI and making sure investments pay back.”

Three-year-old Cooking.com, headquartered in Santa Monica, CA, is projecting 30% — 40% growth for 2002. That’s not nearly as dramatic as the 100% — 150% annual increase the company has been used to, but Cooking.com intentionally hit the brakes over the past year, shifting its focus from boosting the top line quickly and at any cost to slow, steady growth aimed at profitability.

In the aftermath of Sept. 11, fear of terrorism at malls led to speculation that consumers would prefer to shop by catalog or online. Then anthrax started showing up in the mail, which led to speculation that consumers would fear receiving catalogs and packages at home. But anthrax has had so little impact on direct marketers’ businesses to date that 92% of catalogers, direct mail marketers, and non-profit organizations responding to a Direct Marketing Association (DMA) survey conducted in late October 2001 said that they had no intention of changing their mailing plans. Those who did reduce their mailings did so in response to the sagging economy.

All in the mind

We can expect to see continued hybridization as retailers with one or two sales channels expand. Online shopping has evolved over the last few years from a novelty to a solid buying channel. The DMA’s State of the Catalog/Interactive Industry Report 2001 found that the Internet generated 13% of all catalog sales in 2000, up from 9% in 1999. Most catalog companies now have Web sites, and with those infrastructures in place, retailers are now focused on upgrading their sites to enhance customers’ shopping experience, cut costs, and increase efficiencies.

The bursting of the dot-com bubble means that there are fewer pure-play start-ups for catalog/Internet companies to compete against. It may also have opened the door wider for more partnerships between traditional brick-and-mortar retailers and online businesses, such as the alliances forged last year between Amazon.com and Toys ‘R’ Us or between Hallmark Cards Inc. and gift merchants such as RedEnvelope and Cheryl & Co.

“A tremendous opportunity is opening up,” says Alan Cohen, vice president of operations for Carushka Bodywear, in Van Nuys, CA. “The consumer is still shopping online, and if there are fewer people to sell stuff to the masses, the people who survive are going to do real well.” One cost reduction initiative at Carushka is to reduce call time in its call center by offering discounts and perks to catalog customers who order online.

Lillian Vernon recently unveiled its $4.5 million revamped Web site. The site, which used to offer just the gift marketer’s bestsellers, now offers every item the company sells, is run by more servers than before, and features an enhanced search engine and increased speed. IBM and Jacada have fully integrated and synchronized Lillian Vernon’s back-end systems to provide a real-time, seamless shopping experience.

J. Crew has completed a six-month process with Catalytic Architects to upgrade its Web site with version 5.1 of Dynamo application server software. The site intentionally lacks the kind of gee-whiz effects many online sellers use to try and dazzle visitors. “Our goal is to simply give customers what they want,” says J. Crew’s Towers, “which is to buy a sweater, a pair of pants, or a shirt, and have the Web site facilitate their shopping experience.”

Crutchfield is tweaking self-service aspects of its Web site so customers will have a one-step process for tracking packages and, for those who pay on installment plans, the ability to check the status of their accounts. Orion is also enhancing its system. “We’re building the system to be able to support all of the product promotions, discounts, and free gifts that our marketing department will want to offer customers, both through e-mails and the printed catalog,” says Woodward.

Mind the store

Increasingly, catalog/Internet companies compete with brick-and-mortar retailers like Office Depot, headquartered in Delray Beach, FL. Office Depot has expanded online, maintains call centers, allows customers to purchase from any channel, can deliver merchandise or have it ready for pick-up at a local store, and allows customers to make exchanges or returns through any channel they wish. In addition to its store, catalog, and Web channels, Office Depot features voice activation on its phone line and is rolling out electronic “store portals” at its brick-and-mortar locations. The portals will contain pricing, inventory, and all of the other data needed by store managers, district managers, and regional vice presidents to better understand store operations and improve customer service.

Crutchfield’s Goodwin agrees that inter-channel competition has raised the bar for retailers of all sorts. “Our primary competitors are brick-and-mortar, so we have to be really responsive from a fulfillment standpoint,” adds Goodwin. “More and more, we’re going to be competing with the guy down the street where a customer can drive and pick up an order the same day.”

Retailers are continuing to improve customer service, most visibly these days with expanded choices that have the extra benefit of cutting costs. For instance, Lillian Vernon is planning a nationwide rollout for the ReturnValet service it’s been testing. Offered in partnership with Newgistics, ReturnValet gives customers a storefront option for dropping off a return un-packaged rather than having to go through the hassle of wrapping and shipping it back themselves. “Return Valet is saving us money by making the returns process more efficient,” says David Hochberg, vice president of public affairs for Lillian Vernon.

Cooking.com recently broadened its shipping choices from three options to four. “Customers have always asked for a cheaper shipping option,” says Bryan Handlen, the company’s vice president of logistics. “Preferably, they’d like to pay nothing. But the reality is, shipping is a very expensive part of Internet fulfillment.”

Mind your manners

Improving costs and efficiencies is always paramount for multichannel retailers, but the current economic climate makes it even more important. Cooking.com cut costs last year largely by not making the kinds of major investments in infrastructure that were required during the company’s start-up years.

Like many other dot-coms, Cooking.com is spending its marketing dollars now where it gets a better ROI. Instead of advertising across TV, radio, newspapers, and the Internet — all of which helped build brand awareness in the company’s formative years — it is focusing on Internet advertising and doing some direct marketing, and is bringing in the same number of sales at far less cost.

“Marketing costs across the Internet on a cost-per-order basis have fallen off dramatically,” says Handlen. “They were in the $50 to $100 range in the past few years. Now they’re in single and low-double digits.”

At Orion, says Woodward, “We’re in a constant mode of streamlining operational processes to increase efficiencies in terms of our shipping, and our IT project list is pages long in order to accomplish that. They’re typically small things that will incrementally add to efficiencies.” The company’s plans for larger projects, such as synchronized integration of its Web site with back-end systems, are on hold while management waits and sees what happens with the economy.

Crutchfield is always looking for ways to tweak productivity, and is working closely with all of its vendors to get them to do as much as they can for as low a cost as possible. “Some of this economic downturn has contributed to a whole lot more competition among vendors for businesses like ours,” says Goodwin. “We’re getting great offers and proposals from our long-distance providers and small-parcel carriers. We’re confident that we’re going to be able to control costs and, hopefully, cut costs in many areas.”

Dana Dubbs is a freelance business writer living in Escondido, CA. She can be reached by phone at (760) 432-9444 and can also be reached by e-mail at ddubbs@pacbell.net.

Mind Over Matter

According to the DMA’s State of the Catalog/Interactive Industry Report 2001, 95% of catalogers now define themselves as multichannel retailers.

  • 50% catalog/Internet
  • 45% catalog/Internet/retail
  • 3% catalog only
  • 2% Internet only

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