E-Business Models: Clicks & Bricks Hook Up

FRAMINGHAM (03/15/2000) - Let's say you collect caps. Baseball caps, college team caps, sportswear brand-name caps, visors. You know that Lids, the hat specialty store in the mall, will give you one hat free for every seven you purchase. So you visit your nearest Lids store. You buy two. You hit the Lids in another mall. You pick up two more. But you still want three others that you couldn't find at either retail outlet. Not to mention the freebie.

No problem.

You can ask either store to order the hats, then pick them up and pay for them later. Or you can pay now and Lids' warehouse will ship them to you directly.

Or you can go home, get on Lids.com and place the order yourself.

No matter how you split up your purchase, the headgear headquarters knows when you hit the magic number and qualify for the bonus hat.

If you've got a coupon or a gift certificate, you can redeem them at the store or at Lids.com. You can return merchandise in person or by mail, regardless of where you bought it--a departure from the standard operating procedures of many companies that run their internet and physical-world businesses largely as separate ventures. The Westwood, Mass.-based company keeps a record of everything you've ever bought from Lids, anyplace, anytime. Online or off.

"If we're going to dominate the brick-and-mortar world, we want to dominate the internet as well," says Nancy Babine-Kucinski, president of the self-described category killer that sells 10 million hats a year. "We didn't see [Lids.com] as a separate business entity, because we couldn't imagine that our customers saw it that way. The customers see Lids as a brand"--no matter where they're seeing it.

In a nutshell, that's what click and mortar is all about.

It's been less than a year since the term, attributed to a Charles Schwab executive, entered the lexicon. But it's quickly become more than a clever sandwiching of mouse click and brick and mortar. It signifies a monumental shift in thinking about how existing companies weave e-commerce into their business plans. They no longer think in terms of offline or online. It's offline and online. Bricks and clicks.

Today it may seem painfully obvious that companies should serve customers in as many venues as possible: online, by phone or fax, by mail or in person. Some industries, notably airlines and some veteran mail-order catalog businesses, have mastered the integrated approach. But, of course, until recently most companies viewed brick-and-click efforts as entirely separate, if not downright mutually exclusive, ventures. These days, though, even some internet pioneers are working harder to keep one foot in the physical world. Consider Egghead Software of Menlo Park, Calif., which closed all its physical stores in 1998 to become online-only Egghead.com. Fast-forward to late 1999, when CEO George Orban implied that Egghead.com might soon go full circle by adding some brick-and-mortar stores to its web presence, saying that he believes "the biggest threat to online companies is from more-traditional companies."

That's a 180-degree turn from the conventional wisdom of just a year or so ago.

Back then, traditional companies dithered about getting online because they worried about competing with their existing distributors and retailers, or even with their own brick-and-mortar stores. They worried about spreading resources--human and financial--too thin. And many found themselves mired in questions about whether to charge sales tax online; currently, most charge for online sales only in states where they maintain stores.

Overall, though, click-and-mortar companies are more likely to agree with Brian Light, CIO for Staples, who expects the Framingham, Mass.-based company's e-commerce efforts to earn $1 billion annually by 2003. Asked whether those revenues might come at the expense of Staples' brick-and-mortar stores, Light says: "We'd rather cannibalize ourselves than have someone else come in and do it."

In fact, many companies find that their e-commerce sites actually drive traffic to their stores. At Sears.com, customers can do side-by-side product comparisons before clicking to buy tools or appliances. But many visitors use the site to gather information before heading to the Sears, Roebuck & Co. at their local mall. "We hear story after story about customers who go to the website, research what they want, print it out and bring it to the sales associate," says Dennis Honan, vice president and general manager of Chicago-based Sears.com. Because customers walk in the stores knowing pretty much what they want, salespeople can sell those drills, refrigerators and washing machines much faster, he says. Website customers can also apply for a Sears credit card, get instant approval online and apply it to the electronic transaction in progress--or to any later purchase, online or off. Says Honan:

"Our mission is to make it easy for our customers to do business with us, regardless of how they do it."

In other cases, stores drive traffic to sites. That's the idea behind the nearly 200 Gateway Country brick-and-mortar stores, which let customers test-drive Gateway computers online before ordering them from the San Diego-based company.

And yet concerns about channel conflict remain. In a move that sent shudders through the e-commerce world, Levi Strauss & Co. announced in October 1999 that it would halt sales of its own products on Levi.com and Dockers.com. The San Francisco-based jeans maker, which saw overall sales slump by more than $1 billion between 1996 and 1998, cited the high cost of running its award-winning sites even while insisting that online sales had been strong. But its exodus from e-commerce neatly eliminated another problem: the aggravation of Levi's retailers who worried that the website would draw customers away from their brick-and-mortar stores and who resented the manufacturer's ban on selling Levi's products on their own websites.

Levi's lifted the ban on at least two of its retailers--J.C. Penney and Macy's--which both began carrying Levi's products on their websites for the first time after the 1999 holiday shopping season. Herman Miller, the Zeeland, Mich.-based office furniture company, faced similar bitter complaints from its dealer and retailer networks when it began offering direct sales online; employees at San Francisco-based Charles Schwab feared losing their jobs when the company began offering cut-rate stock trades online.

To survive, most companies will eventually sell their wares both directly and through retail channels, offline and online, predicts Patricia Seybold.

"Customers want to buy direct," says Seybold, president of the Boston-based consulting group that bears her name. She dismisses the idea that companies can't effectively serve both online and offline customers. "That's pre-web mentality, that there's a scarcity of customers out there."

Ultimately, analysts say, any successful click-and-mortar business boils down to two attributes. First: It must be transparent to the customer. "Successful means seamless," Seybold says. Ideally, customers should be able to shop when and how they want: online, in a store, by telephone, by fax, by mail, even by e-mail.

Equally important: Everything must work perfectly. Success means "providing a best-in-class customer experience, regardless of channel," says Ana Chau, KPMG International partner for customer relationship management in consumer markets.

In addition, all companies selling anything online should know their customers' preferred channels, "whether it's the web for teenagers, brick-and-mortar stores for families or catalogs for senior citizens."

Often, companies must turn to outside partners to make sure they can deliver what they promise. Customers of the Suffern, N.Y.-based Dress Barn stores will soon be able to buy and return clothes and shoes in any combination of channels: stores, online or through a new catalog. "We're really trying to look at every aspect of the business and come up with the most customer-friendly system we can," says Executive Vice President David Jaffe. "Down the road, we want it to become one giant [in-house] system." For now, though, the Dress Barn's "seven-figure investment" relies heavily on third-party fulfillment for items ordered from its catalog and website; the company also used an outside web developer.

Combining clicks and bricks obviously involves establishing strong customer call centers, superior data-mining applications and onsite features such as personal shoppers and gift registries. But an increasing number of companies are also using in-store technology to drive traffic to their e-commerce sites.

The most popular: web-based kiosks that let customers and salespeople check inventory and order products right from the sales floor.

At first blush, that may seem counterintuitive: Why offer e-commerce in the store? But proponents say kiosks make sales by providing an instant information resource. At Sears, customers who come in without printouts in hand can visit the website, find the right drill or washing machine, then tell the sales associate: "See, this is the one I was talking about." Salespeople can then check inventory to find out whether and where the item is in stock. That can result in quicker sales--particularly important for salespeople who work on commission--because customers pretty much know what they want to buy before even talking to a salesperson. Of course, sales associates can still add value by doing things the website can't: answering questions, critically comparing features and demonstrating products. And they can make sales that might have otherwise been lost. If shoppers at some Bloomingdale's branches can't find exactly what they want in the store, they can stop by a kiosk, search for the product online and order it instantly, paying with a credit card.

Lids' stores, mostly located in malls and airports, tend to measure only a few hundred square feet. No single store could possibly contain the 10,000 different hats and accessories available from Lids.com. Instead, each sells regionally oriented merchandise: Boston Red Sox caps in New England, Seattle Mariners caps in the Northwest. A Massachusetts customer looking for a Mariners cap can find the right style and size on the store kiosk; a sales associate can then make the sale, ordering the hat from the chain's Randolph, Mass., warehouse and sending it wherever the customer wants. Or, working right from the cash register, the salesperson can find the nearest store with the right hat in stock and direct the customer there. Lids trains its retail sales staff to refer customers to Lids.com for out-of-stock items, rewarding stores with a percentage of all online sales.

Staples plans to put web-based kiosks with product catalogs in major urban airports, Light says. That way, executives traveling to business meetings or conferences can stop by the kiosk, order 100 folders or a new laptop printer cartridge, then have them waiting at their hotels, offices or homes when they get there.

"I don't care how customers get to us," says Jim Shanks, CIO of CDW Computer Centers, based in Vernon Hills, Ill. "Our customers are our customers, whether they come by fax, by phone, in our stores or online."

Unquestionably, it's a major undertaking for an existing brick-and-mortar company to get into e-commerce: Mary Modahl, vice president of research for Forrester Research, estimates the cost of launching and marketing a major e-commerce site to be at least $25 million to $50 million. But, she says, "I would argue that it's harder [for e-businesses] to establish a physical presence nationwide." In addition to maintaining a world-class website, most internet pure plays must develop the name recognition of brick-and-mortar brands like Sears, The Gap, Wal-Mart and Staples. It takes a tremendous effort for a web-based business to build its brand both on the web and in the physical retail world.

That's just what Vitamins.com is trying to do. The Falls Church, Va., company started out as an online retailer. Then it moved into the mail-order business by purchasing L&H Vitamins of Long Island City, N.Y., automatically inheriting that company's product line and its 350,000 catalog customers. "We think it's cheaper to acquire customers by buying a catalog and migrating those customers to the internet than by making a portal deal," such as partnering with a search engine like Yahoo or a service like America Online, says CEO Robert Haft (see "Marriages of Convenience," Page 81). "They're already acquainted with our products." The company combined all products from both companies in its database, integrating that with the L&H warehouse systems so that customers can find products quickly and have them shipped the same day.

Finally, the company began opening Washington, D.C.-area retail stores that, while clearly brick-and-mortar businesses, operate under the Vitamins.com name.

Each of the "demonstration stores," as Haft calls them, sells a sampling of the company's products; like Gateway's computer stores, they also contain web-based kiosks with product information and ordering capability. But, he emphasizes, the web remains the company's main retail channel. Stores are simply for customer convenience and to promote the brand in hopes of steering customers to the website.

Toysmart.com, an online toy seller launched in early 1999, opened a brick-and-mortar store in its Waltham, Mass., headquarters several months later. But its off-the-beaten-path location in a converted hardware store between an auto-body shop and a liquor store--rather than in a mall--shows that this particular toy store isn't just about high-volume sales. Instead, its physical outlet works like an ongoing, informal focus group and showroom for new products. Like the Vitamins.com outlets, Toysmart's offline presence offers just a fraction of the 50,000 items available on the web; and like Vitamins.com, the company maintains in-store kiosks. If customers don't find the right game or book or doll or Lego set in the store, they can go right to the web. Officials in the fast-growing company--which expanded from nine employees in February 1999 to more than 300 before last Christmas--also wanted to introduce themselves to the surrounding community, including a public elementary school a block away. The store lets kids and parents try before they buy. When something gets a lot of attention in the store, it's a safe bet that Toysmart will soon beef up promotions of the same item online too.

For all these click-and-mortar businesses, convergence hinges on making sure information moves seamlessly between channels. Lids accomplished that by synchronizing individual and retail store orders with each other as well as the company's warehouse. Commerce Exchange software from New York City-based InterWorld Corp. powers Lids' free-hat loyalty program, Headfirst, which rewards customers whether they buy online or in person. Customers can also tally or redeem their Headfirst points and return merchandise to either place; the website even explains how customers can measure their heads for the best-fitting cap.

Working with Fort Point Partners, a San Francisco consulting and systems integration firm, Lids also developed a cashless gift certificate. The product, essentially a debit card, helps Lids reach its primary audiences: kids and teenagers who can't yet buy online because they don't have credit cards. Armed with a prepaid Lids gift card, kids can order hats without borrowing Mom's Visa or hitting Dad up for a loan.

Lids' 50,000-square-foot warehouse serves both its 370 retail stores in 42 states and its individual internet customers worldwide. The company still relies on people to pick and pack the orders, whether it's one Michigan State University cap for a Big Ten football fan or 92 Boston Red Sox hats for the store closest to Fenway Park. But Lids claims a near-zero error rate in filling those orders, thanks to a bar-code system that identifies every hat from warehouse arrival to customer's head. Before Lids implemented that system, warehouse workers filled orders by reading microscopic numbers off printed order receipts, says distribution director Stephen Knauth. "The accuracy rate on this was not the greatest in the world," he acknowledges. Now employees use hand-held scanners to check bar codes every time a hat goes into a box, whether it's for an individual customer or a store. If the product selected doesn't match the order, the system refuses the transaction.

From that perspective, Lids no longer distinguishes between its retailers and its individual customers, Knauth says. "You are basically just another store to me," he says.

That philosophy is a folksier version of Patricia Seybold's advice for anybody aspiring to become a click-and-mortar contender: "Own your customer's total experience."

Anne Stuart is a former senior editor at CIO.

IN VOGUE Click-and-mortar retail efforts are on the rise. Here's a sampling of some projects in the works.

* Best Buy, a Minneapolis-based chain of consumer electronics stores, lets customers check the status of their service requests online. A customer who drops off an ailing television set or computer, for instance, can log in from home to find out whether it's been repaired and the latest diagnosis of the problem.

W.H. Smith Co., the British bookseller, began combining physical and online sales in December 1999. Customers can order online and have books delivered to their homes, offices or any W.H. Smith store, including those in airports and train stations they expect to pass through while traveling.

Walgreen's Co. launched an internet pharmacy billed as being totally integrated with the company's 2,800 retail stores. Customers can place, refill or transfer prescriptions, check the status of a prescription order and request same-day store pickup or request shipping to their homes. In a password-protected secure area, customers can enter their own insurance information and view their personal prescription profiles online, getting the same information retail pharmacists use at the counter. And Walgreen's says the effort hasn't hurt expansion plans: The Deerfield, Ill.-based company plans to open 450 more stores by August 2000. By 2010, the company says, it could have 6,000 stores in addition to its internet presence. -A. Stuart MARRIAGES OF CONVENIENCE Clicks snag bricks as e-business gets real Paradoxical as it may seem, online companies increasingly want to establish themselves offline as well, often by partnering with existing big-name brick-and-mortar merchants. In some of the biggest recent matches:

America Online joined forces with Wal-Mart Stores. AOL, the Dulles, Va.-based interactive services company, offers a lower-cost, Wal-Mart-branded version of its internet access service. Wal-Mart, based in Bentonville, Ark., promotes the service and AOL's other products in its ads as well as in nearly 3,000 Wal-Mart and Sam's Club stores.

Yahoo, the Santa Clara, Calif.-based web search engine and portal, teamed up with Kmart Corp. Yahoo offers free web access to users of BlueLight.com, Kmart's just-launched e-commerce site. In exchange, the Troy, Mich., chain of discount stores promotes Yahoo on its site and in its stores.

Microsoft invested $200 million in Best Buy Co., a Minneapolis-based consumer electronics and appliance retailer, in exchange for Best Buy's agreement to promote and sell the MSN internet service in its stores.

Brainplay.com, a Denver-based toy e-tailer, merged with KB Toys, a traditional toy seller in Pittsfield, Mass., to create KBKids.com. The new company's CEO, Srikant Srinivasan, has said that the deal was driven by "a fundamental belief that pure-play e-commerce is pass." -A. Stuart COINING A PHRASE It's everywhere now. But a year ago, nobody had used the phrase click and mortar--at least not publicly.

Credit for coining the term generally goes to David S. Pottruck, president and co-CEO of San Francisco-based Charles Schwab & Co. Pottruck used the catchy phrase in a speech at an internet conference in July 1999 as he described the discount brokerage's successful efforts to coordinate all its services so that customers can trade stock online, in person at its walk-in retail branches or by telephone, either using an automated touch-tone system or by talking to a call center representative.

In his speech, Pottruck predicted that future business success will hinge not on pitting brick-and-mortar companies against online-only efforts, but in successfully integrating the two. After all, Pottruck observed, "We're all embedded in the real world." And since then, click-and-mortar has quickly evolved into a cornerstone of netspeak, indicating, in Pottruck's words, the marriage of "the best of the physical world and the best of technology."

Number of times the phrase click and mortar has appeared in print and broadcast stories: January to June 1999: 0 July 1999: 6 August to September 1999: 87 October to November 1999: 252 Source: Lexis-Nexis -A. Stuart.

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