Online Retail Success Lies Behind the Scenes

SAN MATEO (06/12/2000) - Online retailers that think they are in the retail business could be headed for trouble. Business-to-consumer selling via the Web, according to Tom Hennings, president and CEO of OrderFusion, an e-commerce software vendor in San Diego, has more in common with direct and catalog sales than with true retailing.

Hennings says many dot-coms and brick-and-mortar stores that took to the Web have failed to understand the difference. When stocks are low at physical stores, the retailer orders in bulk from a supplier, who loads up a pallet of goods. But online retailers typically need one or two items at a time, preferably from the warehouse. This was the alleged beauty of online retailing: that it would offer a more direct, cost-effective route to the consumer.

"Warehouses and wholesalers know how to ship pallets," Hennings says, "but they have a terrible time with 'eaches.' This is the problem that direct marketers, such as L. L. Bean, solved a long time ago."

But many online retailers have not. Retail success online hinges on what happens behind that fabulous Web site: logistics and fulfillment, payment systems, systems and policies to handle returns, customer service, and, running through it all, integration. Without these the site won't scale, and customers who once loved the Web store will quickly turn fickle and point their browsers elsewhere.

This monstrous problem involves multiple technology and business issues, which is why many online retailers are outsourcing logistics, fulfillment, and customer service functions. Still, others figure that if you want something done right, you had better do it yourself. For example, Webvan Group Inc., an online market, in Foster City, California, that currently operates in San Francisco and Atlanta, employs a system of highly automated distribution centers owned by the company.

The company's strategy isn't cheap. One Webvan distribution center costs US$35 million; the company has two in place now and plans to have five in operation by the end of the year, according to Gary Dahl, vice president of distribution at Webvan, who says this ambitious rollout doesn't make him nervous.

"Construction of these distribution centers is the drumbeat that sets the rhythm for everything I do," Dahl says. "We planned for it since the very beginning."

Hollis Bischoff, vice president for e-business strategies at Meta Group, in Los Altos, California, says that if Webvan succeeds, the company will transcend the grocery business.

"They [Webvan] are engaged in the war to the door," Bischoff says. "Their real competitors are not other online grocers like Peapod, but the delivery giants like FedEx and UPS."

Dahl agrees. "In the long run, these [FedEx and UPS] are our real competitors," he says. "There are probably only a few players that customers will really trust to take that last step across the threshold. And who do you trust more than the person who handles your groceries?"

Chicago-based Peapod takes a slightly different approach. "We do supermarkets on the Web and plan to stick to that," says John Furton, CIO of Peapod.

Nevertheless, Peapod, like Webvan, wants to own as much of the supply chain as possible and has made a significant investment in integrating its Web site with back-end systems.

But unless your company has deep pockets, such do-it-yourself models are hard to emulate. Fortunately, other options exist. For example, Soundwaves.com, a music retailer in Houston, chose an outsourcing strategy.

"We had a static Web site that didn't really do anything," says Alex D'Eath, IT Manager at Soundwaves. "We were trying to find a way to sell CDs all over the world."

Soundwaves turned worldwide operations over to Globalfulfillment.com, a company in Sunnyvale, California, that specializes in providing fulfillment services to online retailers.

"We own the brand and the portal Web site," D'Eath says. "But if you click on the 'shop online' button, you are immediately sent to a Globalfulfillment server. Everything from credit card authorization to final shipment is handled by them."

Soundwaves must share its profits with Globalfulfillment, but D'Eath says it is worth it. "We know retail, and we have a viable name in our market," D'Eath says. "The partnership with Globalfulfillment extends our reach and lets us stay focused on building our brand."

Martin Butler, chairman of the Butler Group, an analyst firm in Redding, England, says it makes sense for online retailers to form such partnerships.

"Here in Europe there is a stronger realization that logistics and fulfillment are the keys to making [online retailing] work," Butler says.

Martha Bennett, an analyst at Giga Information Group, in Windsor, England, says this means there is a real opportunity for direct and catalog merchants. "One catalog sales company in Germany has already spun off their logistics operations, and they plan to sell that service to dot-coms," Bennett says.

Bennett adds that online retailers could soon face competition from this sector.

"If some of these catalog companies decide to get serious about moving to the Web," Bennett says, "they will eat a lot of the dot-coms for lunch."

Integration tales of woe

Those who have not backed up their Web sites with integrated logistics and fulfillment systems are quickly learning to regret it. "[Logistics and fulfillment] is the single most differentiating factor in determining success or failure for online retailers," says Martha Bennett, an analyst at Giga Information Group, in Windsor, England.

Take Argos as an example. All the Milton Keynes, England-based consumer electronics company wanted to do was offer an online special on television sets. To accomplish this, the company used a spreadsheet to populate the Web site with prices. But the data was entered manually and no control processes were in place to check the work, according to Bennett.

The result was that television sets sold for three pounds, or about five American dollars. Thousands of orders ensued, and Argos almost went bankrupt.

"[Argos] would have gone into receivership [bankruptcy]," Bennett says, "but they were saved by an arcane point in English precedence law."

Another case Bennett cites involved a German online drugstore, and this one resulted in a $300,000 box of disposable diapers. The error occurred because, after the customer placed the order, the price had to be rekeyed by hand into the order fulfillment system.

"It is incredible that this error got as far as it did," Bennett says. "The customer's account was actually debited."

Bennett says these examples show how badly some online retailers have miscalculated what it takes to do business on the Web.

"Companies are behaving as if the normal control processes don't matter online," Bennett says, "when just the opposite is true."

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