Sometimes, success in adding another channel of distribution is not about big things like sales projections, warehouse space, vendor reliability, or shipping efficiencies.
Clark Koch, director of distribution for outdoor gear and clothing retailer REI, can attest to this. One of Koch’s challenges over the past several years was to find a way to store the flies used by fly fishermen. The flies, sold one to a small package, are high-margin items that are as delicate as they are tiny. Much of the success of REI’s foray into Internet retailing depended on finding a way to store the flies so they could be picked to fill orders with the least amount of trouble.
“It was a challenge, and it was something we had to react to rather quickly,” says Koch. In this, he is not alone. There is hardly a traditional retailer who has added another channel, be it direct mail or Internet, who hasn’t faced the same sort of challenge — often from places least expected.
Sometimes, the potential irritant is in the warehouse. Sometimes, it’s in the call center, where employees who are used to dealing with customers on the phone must contend with the imprecisions of e-mail while offering the same kind of service customers get in traditional retail outlets. And sometimes, it’s in the front office, which must devote resources to the new channel to solve problems they had never considered.
“You need to decide, and to make it very clear throughout the company, that each channel is going to present the same face,” says Sandy Geiselman, vice president of consumer operations and logistics for Pfaltzgraff, a tabletop manufacturer with wholesale, outlet, catalog, and Internet channels. “That’s more important than most people realize.”
Here, then, are four examples of traditional retailers who faced obstacles in adding a new channel, and how they overcame those obstacles.
Storing it up
REI has had a retail presence on the Internet for almost as long as that has been possible. The REI Web site went up in September 1995, supplementing the company’s 59 stores and quarterly catalog operation.
The Internet intrigued REI, says Koch, because it seemed to allow expansion of inventory — both in total SKUs and in breadth of SKUs — while reducing costs. In some respects, that has been true. But REI, located in Sumner, WA, needed to make several adjustments along the way to reach that goal.
REI’s plan was to add two major merchandise lines — fitness equipment and fly fishing gear — while cutting costs by eventually eliminating the catalog and reexamining the shipping process. In the end, the company did add products and cut costs, but it didn’t work exactly as planned. Fitness equipment, difficult to ship and store, didn’t last, and the catalog remains. The company’s customers missed it, and didn’t use the Web site as a replacement. REI had discontinued the catalog at the beginning of 2000, but brought it back for the fourth quarter that year, and it has been a fixture ever since. Says Koch: “Turns out that wasn’t a good decision.”
But adding fly fishing equipment, once the logistical problems had been solved, was. The flies, in particular, were problematic. They couldn’t be stored together — mixing the small packages would have made picking orders a nightmare — but the warehouse wasn’t set up to store so many small items separately. The solution: a bin box configuration, set up in a rearranged area of the warehouse. The system has worked so well that REI has added flies to select retail locations.
Along the way, the company profiled its average catalog and online order, and discovered that it was small enough to take advantage of the U.S. Postal Service’s priority shipping program. Koch says the change from UPS (“We had been a large UPS shipper”) cut costs significantly, while allowing REI to continue to guarantee two- to three-day service.
“Some of what we did with the postal service was a leap of faith,” says Koch. “Everyone knows their reputation. But we did our homework, talked to people like Amazon.com who use them, and we have been able to minimize our costs while ensuring on-time delivery.”
When the Pfaltzgraff Co. added a fourth channel in 2001, managers had an idea they might run into some trouble with their catalog database. What they were less sure about was how they would tackle the problem.
“We knew we were probably be going to be sending duplicate catalogs, and we knew we didn’t want to do that,” says Sandy Geiselman, the vice president of consumer operations and logistics. “But we didn’t know if we would have the resources to do the analysis to arrive at a solution.”
The impetus to find a solution came after Pfaltzgraff debuted its Internet site to complement the York, PA-based company’s wholesale, retail, and direct mail channels. In the past, says Geiselman, catalog duplication wasn’t as big a concern. Wholesale purposely didn’t share customers with retail, and there wasn’t that much of an overlap between retail and direct mail. The 77 retail stores are outlet-based; direct mail focuses on discontinued patterns and products.
The Web site changed that. “The Internet turned out to be a very logical way for us to sell our aftermarket products that we don’t sell to wholesale accounts,” says Geiselman.
So well did the Web site work, in fact, that the company discovered that the catalog duplications — including the cost of mailing and printing extra books — were becoming very expensive, says Geiselman. “When we finally applied the resources to analyze the problem, the numbers were obvious. The payback was going to be dramatic when we stopped the duplications.”
Which is what happened in the first quarter of 2002. An outside firm purged the customer database of duplications, and the company hired a director of database management to oversee ongoing efforts to prevent double and triple catalog mailings.
One key to the relative ease with which the project was accomplished: Pfaltzgraff’s customer database software was state-of-the art, says Geiselman, thanks to constant upgrades since its installation. Another bonus is that the company can use its updated customer information to set up a coupon program to move catalog customers to the Internet, which will further reduce costs.
“One of the most important things for us,” she explains, “is avoiding channel conflict. We’re still very dependent on our wholesale accounts. What we use the other channels for is to capture additional sales beyond the first purchase, since that first purchase is what our wholesale accounts are concerned about. We are always trying to work off the back end of the business.”
Warehousing without a warehouse
Technology is supposed to reduce costs and increase margins. Just ask any consultant. This time, though, Denise Incandela thinks Saks Direct has found a way to make that promise come true.
“Is this going to be the future? It might be,” says Incandela, COO of Saks Direct, the Internet and catalog operation of New York City-based Saks Fifth Avenue Enterprises. “No one has really done it before, and we’re confident we can make it work.”
Saks Direct’s plan, which started at the end of February, called for closing its warehouse and funneling catalog and online orders through its 62 stores. The stores, Web site, and call centers are connected with locator software, designed to allow them to talk to one another. Orders would be filled and shipped from the store that had the merchandise, with a lead group of stores first in line to fill orders. The goal is to ship orders within two days, the same time frame the warehouse system used.
It’s not quite real-time inventory, says Incandela, but it’s close. And the benefits are impressive: eliminating the cost of the warehouse, reducing inventory (not only in the stores, which can use excess merchandise to fill outside orders, but inventory that would sit in the warehouse), and significantly increasing gross margins.
These advantages should more than outweigh any additional fulfillment costs caused by reconfiguring the system. “A warehouse is the easiest solution,” she says, “but is it the best one for our business?”
In this case, Saks doesn’t think so. The decision was easier to reach after the company sold its $100 million Folio catalog business in 2001, which meant that the successor program centered on a store branding book would be much smaller. In addition, the company’s Web sales are still comparatively small.
“We just don’t have the volume to make a warehouse cost-effective,” says Incandela. “If this business suddenly becomes huge, then we would have to reconsider. But for right now, our priority is executing this successfully.”
To that end, Saks has developed a variety of manual checks and balances. Stores will monitor the order process, reporting on fulfillment efficiency; a quality assurance team will test the system and spot potential problems. And, says Incandela, the system won’t be a success, no matter how much money it saves, if Saks’ customers aren’t satisfied.
“We are not going to jeopardize our customers’ experience,” she says. “We’ve thought this through from every angle, but we don’t want to denigrate the brand. Our customers have high expectations, and we want to live up to them.”
Underneath it all
When Maidenform Worldwide added a retail Internet site two years ago, the simplest and most cost-effective way to service the site seemed to be outsourcing. So Bayonne, NJ-based Maidenform, the lingerie manufacturer and outlet retailer, hired a third party to answer customer questions, process and fill orders, handle paperwork, and run reports.
“We thought originally, before we had learned about e-commerce and we didn’t know as much as we thought we should know, that the easy solution was going to be outsourcing,” says Cindy Davis, Maidenform’s senior vice president of retail and licensing. “We thought these companies had been there, done that, and we hadn’t.”
Yet a year later, company execs were aghast at the results. Outsourcing was not nearly as cost-effective as they thought it would be, and customer service was inadequate at best. The third party’s menu of services turned out to be a menu of add-on costs for items like phone time, returning e-mails, and postage. Shipping fees paid by customers was covering only half of what the third party was charging Maidenform.
Meanwhile, non-Maidenform employees were trying to explain Maidenform products to customers. This is always a potential pitfall with outsourcing, but it was especially troublesome given Maidenform’s products, says Davis. Case in point: Customers with hard-to-find bra sizes want to know which bras come in that size, regardless of style, she says. But the Web site was set up to search by style, and call center employees were trained to answer questions by style.
“So we came to grips with the problem for the second year, and ran the P&L analysis, and we realized we could have our own personnel and our own warehouse,” says Davis. “That turned out to be the correct solution. The difference has been night and day. Our sales have grown by leaps and bounds.”
Making the transition easier was the realization that the firm that hosted the Maidenform Web site included self-fulfillment software as part of the hosting package. The software, says Davis, handles every conceivable chore, from report generating to printing the packing slips. That meant all Maidenform had to do was find warehouse space, which was relatively easy.
A couple of numbers, including increased sales, show how effective the change has been. First, the new system has flipped the cost of shipping. Today, customers pay almost all of the costs, which is what the company’s goal had been all along. Second, all customer calls and e-mails are returned within 24 hours. That, too, was always the goal, but it’s much easier to monitor since the call center is using Maidenform employees.
Jeff Siegel writes for Forbes, American Way, and other magazines. He lives in Dallas.
These days, when companies talk about adding channels of distribution, they mean Internet sites or catalogs. But it wasn’t always that way. At the beginning of the 20th century, the trendy channel to add was stand-alone retail — that brick building that has come in for so much abuse lately.
Sears and Montgomery Wards, then the two largest mail-order houses, did as much as 95% of their business through the mail as late as 1925. But each was forced to add stores (Sears in 1925, Wards in 1926) by changing consumer habits, says historian Gilbert Fite. The rural shoppers who bought so much merchandise by mail were becoming wealthier and less isolated. That meant they could afford to own cars to drive to towns to go shopping. No longer did they have to wait for products to arrive by mail. By 1930, Sears’ mail order volume had dropped to 54%.
And, in a note that will probably make today’s distribution and fulfillment managers cringe, Fite writes that delivery times a hundred years ago were about what they are now — three to five days. Two innovations accounted for that impressive performance: rural free delivery of mail, which started in the 1890s, and parcel post, which began in 1913.