Virtual Voyageur

You can't get much more "old world economy" than Hudson's Bay Co. The 330-year-old company's name is synonymous with a group of adventurers who explored and settled vast chunks of northern and central Canada, as they sought to chart the elusive Northwest Passage and to expand fur trading routes around Hudson's Bay in the late 1600s and early 1700s.

But just as coureurs des bois and merchant voyageurs of old extended the borders of the New World, the venerable retailer is now looking to expand its own boundaries with a push into the new world economy of the Internet.

With a relaunch of its www.hbc.com Web site planned for October, Hudson's Bay Co. (HBC) is about to make its first major foray into e-commerce. Up until now, HBC has not had in place a company-wide e-commerce strategy that encompasses all aspects of its business, including The Bay and Zellers. Instead, HBC has preferred to take a cautious approach by moving small portions of the company on-line in sequence.

The company's www.thebay.ca and www.zellers.com Web sites have functioned primarily as marketing sites, with small pockets of on-line ordering capability within each of the sites. HBC's first e-commerce effort was an on-line toy catalogue that was added to the Zellers site in October 1998. That was followed quickly by the HBC Outfitters site (www.hudsonsbayoutfitters.com), launched in November 1998 along with a now-defunct brick-and-mortar leisure lifestyle store in downtown Toronto. Then came the addition of a baby furniture and layette catalogue to the Zellers site in June 1999.

Another key focus for Zellers in recent years has been enabling the on-line redemption of reward points earned by the company's Club Z loyalty program customers. In 1998 alone, billions of Club Z points were redeemed on-line. In the meantime, The Bay has been expanding the functionality of its on-line gift registry, which started as a bridal registry in 1998, but has since had baby, anniversary, men and women gift registries added to it.

All told, the revenue from HBC's early on-line selling efforts totalled roughly CAN$3 million or CAN$4 million.

PRODUCT BREADTH AND DEPTH

HBC's plan going forward is to amalgamate all of its individual e-commerce efforts into one comprehensive hbc.com shopping site. According to HBC president and CEO George Heller, HBC has the broadest assortment of product expertise in Canada, through its combined efforts in the mass market (Zellers), department store channel (The Bay) and specialty store channel (the company's new Home Outfitters division).

"Over time, with hbc.com, we'll be able to offer the breadth of our assortment to the breadth of the Canadian consumer," Heller explains. "Whether you're talking about health and beauty aids or you're talking about designer fashion, we have the expertise within HBC. We want to make that expertise widely available to obviously the widest audience."

Unlike an off-line customer who will usually make a choice between shopping at a mass market store or a department store, on-line consumers are primarily looking for the widest product selection available at reasonable prices, Heller says.

"In the bricks-and-mortar world, you have some people who never shop in the mass channel, some people who never shop in the department store channel, and some people who are specialty store customers. They segment themselves before they even go shopping," Heller says.

"When people go on the Web to buy, it is basically a planned item they want to buy. They go there because they have a predetermined notion of what they want to buy," Heller says. "It's far more product driven on-line."

The challenge this creates is HBC's Web site needs to be able to satisfy the full range of customers by offering a wide breadth and depth of product selection. "Bricks-and-mortar retailers have always chosen the target customer they are going after," Heller explains. "When you look at the world of e-tailing, you really don't know who your customer is. You have no idea who's at the end of the computer connection."

To meet the initial need for breadth and depth of products, hbc.com will relaunch in October with less than 10,000 items offered for purchase on-line, says David Poirier, executive vice-president and CIO of HBC.

"We're not taking the big bang approach," Poirier says. "It's going to be very much evolutionary. We're going to build functionality gradually and respond to the needs of people, because the Canadian market for on-line shopping is still to be made. We think there's still a lot to learn from Canadian consumers on what they really want their favourite Web sites to do for them."

LESSONS LEARNED

HBC has already learned a lesson or two from its early Web efforts.

"What we found from [operating] all of those sites is you can actually communicate with the customer," Heller says. "It's almost interactive because you can do things like wish lists so that customers could tell you what they are looking for."

The "wish list" concept was first used by HBC on its Outfitters site, then incorporated into the Zellers baby catalogue site, and later tied into The Bay's gift registry. "Obviously, you'll see it in the new Web site, too," Poirier says.

Gathering direct feedback from Web customers, plus using customer data generated through the credit card and loyalty programs offered by The Bay and Zellers, will enable HBC to start tailoring its Web offering to meet its customers' interests.

Of special note, the Outfitters Web experience demonstrated there was a huge appetite among customers for what Heller calls "historica". Customers are interested in HBC's long history, which constitutes a large portion of the company's corporate overview on its hbc.com site.

But the biggest lesson, apart from the all-important factor of having a wide breadth and depth of products available, has been to ensure product orders are fulfilled on time every time, Heller says.

"Whatever you're going to do, do it extremely well. Start off where you can get your hands around the product assortment, so you can guarantee delivery," Heller says. "As you get the kinks out of the system, you can quickly ramp up in terms of increasing the breadth of assortment that you're going to carry vs. going way broad and way wide and then finding out that you run into difficulties and the customer loses confidence in you."

Traditional retailers who choose to expand into e-commerce need to keep in mind the same principles of customer service that exist in the physical world also apply in the on-line world. "It's the same promise you have to make to a customer if they walk into your store -- that they get ease of shopping, they get competent assortments and the merchandise is there when they want it," Heller says. "It is a contract with your customer."

HBC takes its reputation very seriously, to the point that in early 1999 it made the decision to forego finishing its hbc.com e-commerce site in time for the 1999 holiday buying season, opting instead to focus on making it rock solid for this year's shopping season. When your company is as old as HBC, upholding traditional values of customer service is essential to preserving corporate identity and ensuring continuing customer respect for your good name.

"The issue for us, and why we've been taking our time, was to make sure when we were putting up our name, which is 330 years old, that we could deliver what we said we were going to deliver to the customer. That goes beyond just putting up a Web site," Heller says.

"You can't just go 'Shazam' and you have this site, and either it takes you forever to navigate it -- it takes you 24 clicks to get where you're going -- or you finally get there and the product doesn't show up or it shows up late."

Poirier emphasizes that the incentive behind HBC's e-commerce plans is to improve customer service, not to build up an e-business in order to take it public, as is the focus of many dot-coms in the market.

"Our race isn't to IPO anything," Poirier says. "We want to serve our customers better, and the only way we're going to do that is to make sure we live up to their expectations."

LEVERAGING EXISTING ASSETS

Wherever possible, HBC tries to leverage its existing infrastructure and integrate its on-line operation with its off-line one. This includes using or integrating with its existing network, warehouse management system, supply chain management technology, call centres and distribution centres.

For example, the warehouse management system that drives the Zellers Club Z redemption operation will also support hbc.com's order fulfilment process.

"That means we can do fulfilment whether it's an item to a customer vis-a-vis e-tailing or it's a Club Z redemption or a corporate client redemption," Heller says. "That's how we're getting a ton of leverage [off the existing business.]" The hbc.com operation is even able to take advantage of the buying power and merchandising expertise of The Bay and Zellers, Poirier explains. "So hbc.com merchandising people won't be chasing all over China looking for the newest developments and newest items," he says. "That will be done by The Bay and Zellers buyers with hbc.com in mind, and they will coordinate that effort once they come back."

By leveraging HBC's existing assets, hbc.com can operate much more "thinner" than a start-up dot-com organization, Poirier adds. Another major advantage hbc.com has over a start-up is its well-developed customer base.

"There are many millions of customers who have our Bay and Zellers credit cards," explains Gary Davenport, vice-president of IS for HBC. "Many millions of Canadians have Club Z cards. As we move forward, that is a great asset for us to use in terms of reaching out to our customers."

Apart from using customer information stored in its large data warehouse to improve the customer experience on its Web site, HBC can also promote hbc.com through existing communications channels with its customers.

"Between Zellers and The Bay, we put out almost 14 million flyers a week. There are always credit card statements going out every month, so we have an ability from the marketing cost point of view to leverage what we're doing already," Heller says. "It doesn't cost us anything to promote hbc.com, whereas a lot of dot-coms spend a fortune just trying to get themselves noticed."

Poirier adds that many HBC customers have provided their e-mail addresses and have begun communicating with the company electronically. He points out that promotion between HBC and hbc.com is a two-way street.

"We want to drive sales and attraction to our stores using the on-line capabilities," Poirier says. "We'll use hbc.com and the Zellers and Bay Web sites to promote initiatives within the stores."

As an example, the Bay Web site has extensive information about cosmetics which helps to reinforce the company's in-store expertise in this area, Poirier explains.

THE BOTTOM LINE

What remains to be seen is the ultimate profitability of e-tailing, Heller says. Over the course of his 34-year retail career, Heller says, it has become obvious that everybody in retail has figured out there is the ability to leverage volume purchasing, transportation and distribution. "Quite frankly, bricks-and-mortars leverage the customer," Heller says.

He explains that in the brick-and-mortar retail world, customers help to reduce distribution costs by getting in their cars and driving to a retail store to buy a product. "That's what the retail selling price is based on, everybody figuring out all that leverage and the customer doing their part," Heller says.

In e-tailing, the seller is faced with absorbing the cost of distribution.

"There's no customer involvement, there's no leverage in the distribution, there's no leverage in volume because whether you ship one item to one person or you ship a carton of 24 items to a store there's not much difference in terms of cost or time," Heller says.

He cites the old retail joke about losing money on every item sold but making up for it in volume.

"If you have to uniquely pick, pack, label and ship [a product], and bear the cost of handling all that, you've got to make sure you're getting leverage.

Otherwise, the more you sell, the more it's going to cost you to sell," he says.

Heller says he would be very happy if next year HBC generated CAN$25 million in on-line revenue and learned a lot doing it.

"It's not just about the pure volume you can do with e-tailing," Heller says.

"It's also about being able to transact with the customer the way the customer wants to transact.

"We're quickly moving from 100 years of retailers pushing product to a customer, to the customer pulling what they want," Heller adds.

Sidebar: Renovating the House By Linda Stuart CxO.ca While Hudson's Bay Co.'s on-line business strives to leverage the existing company's assets as much as possible, some aspects of the on-line IT infrastructure require new or overhauled systems.

Rather than take a piecemeal approach to IT systems renewal, HBC has put in place a comprehensive strategy that encompasses not only the company's business-to-consumer (B2C) e-commerce initiative, but also its internal business-to-employee (B2E) intranet and business-to-business (B2B) portal.

To pull the three elements of its Web strategy together, HBC has created a separate division called HBC Online which is led by executive vice-president and CIO David Poirier. To help Poirier balance his time between off-line and on-line technology projects, the day-to-day operations of HBC's traditional IT organization are handled by Gary Davenport, the company's vice-president of IS.

"The whole idea we have for HBC Online is that each of those three elements -- B2C, B2B and B2E -- is focused on leveraging off our existing infrastructure, technologies, people and expertise," Poirier says. "It's not completely independent from the organization -- there is constant knowledge transfer between the areas -- but it does stand as a separate division."

When asked why HBC chose to put its CIO in charge of the on-line division, HBC president and CEO George Heller's answer reveals much about the company's approach to e-commerce.

"If you look at Hudson's Bay Co., the company is made up of professional retailers and merchants who have thousands of years of experience in product assortment. We have a ton of experience in merchandising, marketing and logistics," Heller says. "What we need is to make sure the vision going forward is the vision of today and tomorrow, not today and yesterday. David is well suited to making sure what we're building will stand the test of time."

Each area of HBC Online -- the intranet (HBCnet), the B2B portal (HBCbiz) and the e-commerce site (hbc.com) -- has one of HBC's executive vice-presidents in charge, whose responsibilities are to analyse what their respective organizations need in the way of functionality and communicate that up to Poirier. This way, Poirier can take a holistic view of HBC Online's technology strategy and ensure a consistent platform is put in place.

In an effort to achieve technological consistency, HBC has entered into a strategic alliance with IBM Canada Ltd., Microsoft Canada Co. and Oracle Corporation Canada Inc. that will see the three technology vendors work collaboratively with HBC to develop and implement an end-to-end e-business plan.

"The alliance is geared toward enabling us to achieve a total renovation of our IT infrastructure and capabilities, faster and for less cost," Davenport explains. "Some of it will be completely new, some of it involves fixing what we've got, but in the end we're going to renovate the house and they're going to help us do it."

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