InformationWeek

If REI's Japanese customers emulate their American peers, they'll use all three channels to buy hiking boots, sleeping bags, tents, kayaks, and other outdoor wares.

REI has managed something that's left many other clicks-and-bricks pioneers lost: combining the strengths of the real world with the virtual. The 62-year-old Kent, Wash., consumer cooperative began selling on the Internet as REI.com in 1996, and from the get-go, company managers intertwined REI's stores, telephone and catalog units, and Web site.

The strategy is delivering results. The company found that first-time REI.com customers spent 22% more when shopping in REI stores last year than they did in 1998. And 45% of online customers also made store, phone, or catalog purchases last year. "Channel synchronization does not necessarily result in channel cannibalization," says Matt Hyde, REI's VP of online sales.

REI's Web site lets the retailer experiment with its product line without having to drop products from the limited space in its 54 physical stores and its paper catalogs. In turn, the stores give the Web site credibility. "There's a tangible, real retailer behind that Web screen," says REI CEO Dennis Madsen. "That has a profound impact on consumer orders on the Internet. It gives us a significant competitive advantage."

In focus groups last year, REI asked customers what other products they buy. Fitness and fly-fishing gear topped the list, so the company last fall began selling such items--but only on the Net. REI spent 10 weeks building its online fitness boutique and five weeks on the virtual fly-fishing shop. Even if space were available, building these departments in a store would have taken at least six months. "In a physical store, we're confined by a box," Hyde says. "The Internet, frankly, allows us to grow and expand business."

But some of the country's most successful brick-and-mortar retailers have struggled online. Wal-Mart, for example, is in the midst of relaunching its Web site (www.walmart.com), creating a separate Internet company in order to allow more independence from the parent company. The same is true of Toys "R" Us Inc. (www.toysrus.com).

Most retailers haven't been willing to manage separate product lines in separate channels. "They want their offerings to be more or less synchronized through all their channels," says Scott Stirton, an E-commerce manager with Boston Consulting Group. REI also allows returns from online purchases at its retail stores. "That requires extra handling, so most retailers want their online returns to go straight back to the warehouse," Stirton says.

Also, REI.com holds onto the goal that has made its stores popular: making shopping an adventure for the outdoorsy person. "That's the real value of the site--not all the products available, but the content," says Barrett Ladd, a Gomez Advisors Inc. senior analyst who tracks the apparel industry. "It's all about lifestyle."

At REI's flagship store in Seattle, climbers can test rock shoes by scaling a 65-foot pinnacle in the lobby. Mountain bikers can test bikes in an obstacle-crammed, 580-foot-long trail, while hikers can check waterproof Gore-Tex parkas in a rain room. Similar test equipment is found at stores in Denver, Minneapolis, and Tokyo. "You can't replicate that experience online, but you can create a Web site that's complementary," says Mary Park, the company's VP of Internet technology.

REI.com tries to build a community for outdoor enthusiasts, who, through dozens of message boards, exchange stories about their adventures, seek guidance on products, and post snapshots of their travels. The site also includes primers written by expert users, covering topics such as how to choose gear and "If You Become Lost."

The integration of REI's real and virtual worlds can also be found in the Internet-linked kiosks and interactive cash registers inside the co-op's stores. The kiosks allow customers to search for items that aren't in stock and to use tools such as one that configures automobile roof racks for bikes, skis, and canoes. Registers are linked to the Web site as well, allowing cashiers to order and ring up an out-of-stock product.

REI's path in the virtual world hasn't been entirely smooth. In the mid-1990s, the company explored creating a computer-based employee information system, but bailed out when it saw the multimillion-dollar price tag. The kiosks now double as that system.

As an early entrant in Web retailing, REI employed a suite of E-commerce applications from Netscape, one of the few vendors offering such solutions in 1996. Then, too, REI was one of Netscape's biggest customers. That wasn't the case two years later, when REI's aging Web site approached its limits, and scalability became a concern. Requiring a major upgrade, REI switched to IBM, which at the time was making a big push into E-business. REI.com runs on IBM's Net.commerce Web server and DB/2 database.

Customers still complain that REI's Web site is a bit kludgy, requiring too many clicks to purchase one of the 75,000 products situated on 45,000 Web pages. In response, REI last month beefed up its homegrown search engine to make finding a product easier, and the company plans to rework the site to let customers identify a product, read about it, and purchase it in five or fewer clicks.

Applications for the Web site are mostly created in-house by a team of 33 developers, part of a 150-employee online staff. "Our Web site isn't merely a project; it's a business for us," Hyde says.

The Web site also has provided much of REI's growth. While overall revenue climbed a modest but healthy 6% to $621 million last year, online sales exploded, more than tripling to $41 million, or 6.6% of all revenue. By comparison, online revenue in 1998 equaled a mere 2% of total sales. Not surprisingly, REI.com's traffic is climbing as well, up 85% to 414,000 visitors in February from a year earlier, according to Media Metrix. Holiday shoppers jammed the site, with 632,000 people browsing and shopping at REI.com in December.

Should REI cash in on its online success by spinning the site off through an initial public offering? Today, the company remains a cooperative, just like when it was founded by 23 Seattle mountain climbers.

In an interview published earlier this year by management consultants Booz, Allen & Hamilton, Hyde suggested that wasn't going to happen: "If we were to spin this off, we would be in competition with our physical stores, and really, I want to be in collaboration with my physical stores." But Hyde and Madsen now say the cooperative could survive even if the Web site were spun off.

"The success of our business is based on a set of values that were born out of our cooperative," says Madsen, who became CEO in March. "Those values are ingrained in our business, irrespective of our financial structure."