Feature Article - April 2009
While buffeted themselves by the economic turbulence, online retailers have been spared the battering of their main competition: bricks-and-mortar stores. E-retailers are finding ways to turn the gaps left by store closings to their advantage.
By Don Davis
By brute force, the economic crisis is accelerating the shift in retailing to the Internet.
While retailers shutter tens of thousands of bricks-and-mortar stores, few are making severe cuts in their e-commerce teams. In fact, many e-retailers see a big opportunity for retail web sites to appeal to increasingly price-conscious consumers at a time when physical stores are cutting back on staff and inventory, or disappearing altogether.
“As Internet retailers, we have the ability to be more lean than bricks-and-mortar competitors, and that translates into savings for customers,” says Bernard Luthi, vice president of marketing and merchandising at Newegg.com, a web-only computer and electronics retailer. “It’s our opportunity to serve not only customers who are comfortable shopping online, but those who were more inclined to shop bricks-and-mortar stores who suddenly realize those choices are declining and the prices they can get online are more attractive.”
To be sure, online retail is not immune to the economic downturn—the 4.9% decline in fourth quarter web sales reported by the U.S. Commerce Department is proof of that. And e-commerce managers are being cautious with their spending, seeking to preserve cash at a time when credit is hard to come by and the recession shows few signs of abating.
But many are finding low-cost ways to fill the gaps that are emerging as stores close their doors. Those strategies include using drop-shippers to increase selection without buying inventory, linking up with local retailers in areas where major stores have shuttered, and adding more information to e-commerce sites so consumers new to the web can find answers to their questions—making the web site play the role of the increasingly scarce store salesperson.
Those e-commerce managers, including some that work for retail chains, aim to take advantage of the battering being absorbed by online retail’s biggest rival: the conventional retail store.
While there were nearly 1.1 million retail stores in the U.S. in early 2008, according to the Bureau of Labor Statistics, 148,000 of them closed during the course of the year, the most since 2001, according to the International Council of Shopping Centers. After accounting for store openings, the net decline in retail stores was about 3-4%, says ICSC chief economist Michael P. Niemira. And ICSC estimates another 73,000 stores will disappear during the first half of this year.
Retail employment is also down nearly 4% from early last year, according to the Bureau of Labor Statistics. With retailers cutting back on employees at stores still open, as well as laying off workers from shuttered stores, there is an opportunity for online retailers to provide the kind of service many stores no longer can offer, says Donna Hoffman, co-director of the Sloan Center for Online Retailing at the University of California-Riverside. “Service in stores is godawful,” Hoffman says. “Companies can’t afford employees anymore.”
These developments present opportunities for online retailers, and some are taking direct aim at wooing consumers who previously shopped at bricks-and-mortar stores in their categories.
For instance, Christian Friedland, president of web-only home furnishings retailer Improvement Direct Inc., has his sights set on former shoppers of the higher-end Expo chain that parent Home Depot Inc. recently closed down. He’s expanded the use of video and stepped up a program of photographing multiple views of items so a consumer, including one accustomed to handling an item in a retail store, can see all sides of the product.
“We are focusing on improving media offerings to make the customer experience more positive, so when the former Expo buyer visits the web site they have a showroom-like experience,” Friedland says. In recent months the e-retailer has been doing more training of customer service representatives, including using top salespeople to train others, “to accommodate showroom buyers that don’t have a lot of options now that Expos are gone.”
Similarly, when consumer electronics chain Circuit City laid off many senior store employees last year, before it finally gave up and liquidated the chain, online electronics and general merchandise retailer Buy.com accelerated the addition of product videos to its site. Buy.com shoots the videos in high definition in its own studio, using manufacturer representatives to explain the products.
“This is something we’ve been doing for two years, but Circuit City made it more popular when they got rid of their top layer of sales folks,” says Neel Grover, president and CEO of Buy.com. “That’s when we put out more of this content.”
He says the manufacturers explain their products on the videos better than most store employees can. “Even at other big stores, it’s hit or miss whether you’ll get somebody who understands that specific product,” Grover says. Buy.com now has several thousand videos on its site, each typically about three minutes long, Grover says.
The e-retailer also has taken advantage of store retailers, including Circuit City as it neared bankruptcy, declining to buy merchandise they had been allotted by suppliers. Manufacturers offer Buy.com such excess inventory at low prices as long as Buy.com promises to promote it, says Grover.
He recalls one e-mail offering a deal on 42-inch flat-screen TVs that went out at 4 a.m.; by 7 a.m. the entire allotment of over 1,000 sets was gone, illustrating how effective a major retail web site can be in moving excess inventory quickly. Overall, Buy.com’s sales were up by more than 10% during the holiday season over the prior year, and by 20% in January, Grover says.
Another way to profit from the recession is to target regions where store closings, or the lack of stores to begin with, have created a gap in a retailer’s category. That’s the strategy being employed by Leiberts Royal Green Appliance, which has operated a large appliance store in the New York City suburbs for 60 years but launched its first transactional web site in December 2008 on a platform from ShopVisible LLC.
Recognizing it was late to the party, Leiberts sent out a mailer to kitchen designers and dealers around the country that are outside of major cities and thus may not have easy access to stores with a wide range of appliances, says Rob Satran, senior vice president of business development.
Leiberts offered them an affiliate relationship in which Leiberts sets up a sub-site for each dealer with the dealer’s brand, offers a commission to the dealer, and presents a custom package of appliances suited to the affiliate’s clientele. Consumers who shop through the affiliate’s site get a 2% discount off Leiberts standard prices and each affiliate has a dedicated customer service representative to ensure the consumer or dealer calling will be served by a familiar voice.
Leiberts, whose showroom in a suburb of New York City takes up nearly a city block, is targeting the kind of smaller markets where the nearest Sears or Home Depot may be many miles away. “We want to bring the online independent appliance dealer to those locations,” Satran says. “For those areas, it’s a very good option that’s not been out there before.” After two months, Leiberts had signed up 11 affiliates.
Even some online retailers that had a lousy holiday season are bullish on their prospects—in large part because their store competitors are doing worse. That’s the case at online jeweler Blue Nile Inc., whose fourth quarter sales were down 23% compared to a year earlier. That’s not so bad, given that MasterCard reported total luxury spending was down 34% during the period, with jewelry among the poorest-performing product types in the category, Blue Nile president and CEO Diane Irvine told analysts in February.
She noted the number of bricks-and-mortar jewelry stores decreased by 5% in 2008 and that more jewelry chains filed for bankruptcy early in 2009. “The consolidation in the industry creates further opportunities for Blue Nile,” she said. “With relatively low fixed costs, low inventory and low capital requirements, we are able to operate with strength in the economy.”
Improving the experience
She said Blue Nile intended to improve the customer experience on its web site, including product-visualization features, and enhance its international offering by adding local currency payment in the 35 foreign countries to which Blue Nile began shipping last year. She noted that Blue Nile expanded abroad without building offices or warehouses outside of the U.S. “It’s all about the technology,” she said, underscoring the ability of web retailers to expand their reach at relatively low cost.
Blue Nile did lay off some workers in January, as did a few other online retailers. They include handbag and luggage retailer eBags, which cut its workforce by 30% in the fall, and shoe retailer Zappos, which laid off 8% of its employees. TV and web retailer HSN cut its headcount across the company by 3%.
But more have not cut their e-commerce teams. These include merchants that sell mainly or exclusively on the web like Newegg.com, Improvement Direct, Richlund Ventures (operator of CompactAppliance.com), Buy.com, eHobbies, Drugstore.com and Replacements Ltd., as well as manufacturers that sell online like Junonia and Case-Mate, and retail chains Staples and Title Nine.
The recession also contributed to eBags’ decision to close down a U.K. operation it had set up four years ago with the hopes that it would be the launching pad for the web-only retailer’s expansion into continental Europe. While the U.K. operation was not yet profitable, it was growing and the company might have kept it going if the economic climate had been more favorable, says Peter Cobb, senior vice president and co-founder of eBags.
While a few e-retailers have been forced to retreat, the recession has turned into a rout for many retail chains, leading them to not only close stores but also buy more cautiously. That’s led retailers to seek low-risk ways to offer more merchandise on their sites, expanding online selection as physical stores cut theirs.
One way to do that is to develop relationships with suppliers that drop-ship merchandise to the retailer’s customers. That way, e-retailers don’t take on the risk and carrying costs of buying inventory, says Sean Cook, CEO of e-commerce technology provider ShopVisible.
Richlund Ventures, operator of CompactAppliance.com, is among the online retailers pursuing that strategy, and has found the recession has made suppliers increasingly willing to fulfill orders on a drop-ship basis.
“The economy has brought some vendor partners around who weren’t so interested in working with us in the past,” says Jason Roussos, president of Richlund Ventures. “As distributors and local businesses dry up, they’re more open to distributing online.”
Roussos says the company has expanded use of drop-shippers in recent months, allowing it to offer a wider product selection with little risk. “We’re able to sell inventory and not have to pay for it until we take orders from our customers,” Roussos says.
The company, whose original business model was built around drop-shipping, is using that strategy more as it expands into new non-appliance categories, including coffee and cutlery, under a new brand, LivingDirect.com. Given the economic climate, it’s also looking for low-cost ways to promote the new microsites under the LivingDirect.com brand, such as the Kegerator site aimed at beer enthusiasts. Roussos says the company has hired an employee to focus on building buzz for such sites on blogs and online forums, and was planning to engage a public relations firm that specializes in such marketing to back up that effort.
The drop-ship approach to expanding merchandise selection appears to be increasingly attractive to a wide variety of retailers.
While Drugstore.com was already expanding its selection through a deal with direct-from-supplier fulfillment specialist CommerceHub before the recession took hold, the economic slowdown has not slowed down that program, says Julie Johnston, vice president of over-the-counter product merchandising.
The web-only retailer added 10,000 SKUs last year, bringing its selection to more than 45,000, at least three times the number of items at a typical bricks-and-mortar drugstore, she says. The drop-ship option has allowed Drugstore.com to expand into such bulky items as walkers and bathroom safety aids that would have been hard for the company to warehouse and ship.
Some products have sold well enough that Drugstore.com has begun stocking them itself. “But for the most part, it’s a way to offer a much broader assortment to our customers risk-free.” As evidence that others are picking up on the drop-ship opportunity, CommerceHub, a fulfillment service of Commerce Technologies Inc., says it handled 19% more drop-ship orders in 2008 than the year before.
Chains and the web
Office supplies chain Staples, the second-largest online retailer by revenue after Amazon.com, also has stepped up its use of drop-shippers, one of many steps it has taken to make extra sure it meets the needs of its core small business customer during the recession, says Pete Howard, senior vice president of Staples Business Delivery.
“We’re accelerating everything we can do to keep our best customers, to make it easy for them to do business with Staples, even if they happen to be spending less,” Howard says. “We want to emerge from this recession with a healthier customer list.”
With the help of drop-shippers Staples has added such product categories as janitorial, mailroom and security supplies. Aiming to be the source for more of its customers’ needs, it also has added an online bookstore selling business-related books, something Howard says would be hard to do in every Staples store because of limited shelf space. “Assortment expansion is something you can do online that you can’t do in a store as much,” Howard says.
The web also offers ways to cut costs. Another retail chain, Title Nine, which sells yoga and running outfits and other activewear for women, has trimmed costs by mailing out 6% fewer catalogs this year, while sending marketing e-mails just over twice as often as it had been. The e-mail click-through rate has held steady, “which is great since we have increased our e-mail marketing,” says Janis Abbingsole, operations director.
The chain also has introduced web-only specials each Wednesday. “Many weeks we’ve sold out,” Abbingsole says. Online sales are up modestly this year over last, she says.
Junonia, a manufacturer and online retailer of swimsuits and other apparel for larger women, also has cut back 30-40% on catalog mailings to new customers, because they are not responding as well as before, says Anne Kelley, founder and chairman. But she says Junonia has held steady on catalog mailings to previous buyers, as their conversion rate has not deteriorated.
At a time when more consumers are looking to the web for bargains, online retailers are providing more of them. Drugstore.com is offering coupons that instantly reduce the price in the customer’s shopping cart, Johnston says.
More suppliers are willing to offer coupons now, and Drugstore.com has made them more visible, putting a coupon tab on the home page of the e-commerce site early this year. The retailer rotates 75 to 100 coupon offers each month, Johnston says, and consumers are responding.
“We’ve seen over a 100% increase in our redemption of coupons over the last six months,” she says. In terms of traffic, the coupon tab is now among the top five of the 24 tabs on Drugstore.com’s home page, she says. Drugstore.com reported sales were up 2.9% over the previous year in the fourth quarter when the online retailer attracted 406,000 new customers, 8% more than during the same period a year earlier.
Recognizing that more consumers are bargain hunting, shopping search engine TheFind.com recently began highlighting in search results products that are on sale or for which coupons are available. The site presents coupon offers it obtains directly from manufacturers or from sites like Savings.com. Initial findings show search results with such offers were being viewed 30% more often than others, says Siva Kumar, CEO of TheFind.com.
Newegg.com has responded to the economic downturn with more promotions, including a daily Shell Shocker offer on its home page that it introduced in the middle of last year and emphasized more in the fourth quarter. Luthi attributes the heavy promotions with helping increase sales on the Friday after Thanksgiving by 169% in value and 193% in total orders. The number of buyers nearly tripled, he says.
Newegg.com, whose sales increased 10.5% last year, has stepped up its marketing slightly in 2009. And while putting an extra emphasis on sale items, Luthi says the retailer continues to emphasize what it sees as the pillars of its business: product selection, informational content and customer service.
Those selling points are crucial for taking advantage of the opportunity to attract new online shoppers. “We’re going to continue to market that,” Luthi says, “because the typical bricks-and-mortar customer still needs more convincing to come online for that first purchase.” Once someone makes a purchase, Newegg is confident that shopper will come back: about 70% make repeat purchases, Luthi says.
Other online retailers are hoping to keep customers coming back by offering rock-bottom prices, among them Appliance Zone LLC, which offers a low price guarantee to consumers shopping for parts. The web-only retailer is intent on keeping costs low so it can live up to that promise, but faced a problem recently caused by its rapid growth.
The e-retailer has doubled its sales to $750,000 per month since relaunching its site as ApplianceZone.com in October, and was planning to add three customer service agents to answer the phones. Instead, CEO Jim Allen pulled the toll-free number from the web site early this year and now encourages customers to ask questions by live chat, making use of the BoldChat system from Bravestorm LLC the retailer employs. He says some of his agents can handle as many as a dozen or more text chats at a time, whereas a typical phone call ties up an agent for four to six minutes.
“Taking down the phone number was kind of a risky move, but we did have a record week last week,” Allen said last month. Allen says cutting phone center expenses helps keep prices low and meet the needs of consumers who may be trying to fix appliances themselves rather than call a repairman. “A few dollars means a lot to a lot of people,” he says.
Given the reduced level of consumer expenses, many web retailers are cutting back on expenses, and one of the easiest spending categories to tweak is bidding on search engine ads, because it can be quickly raised or lowered as business dictates. Spending in that area was flat to slightly down during the first several weeks of 2009 for retailer clients of online marketing firm SearchIgnite.
Several retailers say they are paying closer attention to what they bid on ad placements on search results pages. For instance, eHobbies CEO Ken Kikkawa has cut back in search advertising for some products that are in short supply because of cutbacks at manufacturers. “We intend to reactivate those campaigns when suppliers are able to ship again,” Kikkawa says. “That’s something in the past we might not have paid as close attention to.”
At Replacements Ltd., uncertainty over the economy led the company to revise its budget for the year seven times over a period of two-and-a-half months, says Jack Whitley, senior vice president of e-commerce. The company ultimately decided to defer major expenditures on information technology and distribution center improvements, but slightly increase online marketing spending, Whitley says.
With many companies of all types cutting back on advertising, Whitley is finding some attractive opportunities to test online marketing methods, such as lead-generation services, without the commitment that vendors previously required. “Where a company may have required a $15,000 to $20,000 commitment in the past, we are now able to get tests for between $1,000 and $5,000,” he says. “This allows us to test more venues, and increase our chances of finding something that works.”
Whitley says the company’s plans could change if the recession deepens. “But for now we’re spending at or above the level last year in our online campaigns, and expanding some of them,” he says. He’s been able to sustain spending because web sales, which represent 75% of the orders Replacements receives for missing pieces of silverware and dinnerware sets, have remained strong during the recession. Sales were up 9% in December over the previous year, and continued to climb early this year.
Strong sales begets the courage to invest. And that’s one of the main things online retailers need today to navigate through the recession, says Junonia’s Kelley. “Courage and cash,” she says. “That’s what the times demand.”