Sept. 11, 2000

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Retailers Find A Winning Mix

A hybrid of bricks and clicks becomes the optimum model for merchandisers

By Rich Levin

More on general merchandise retail:

Industry Charts: Retail: General Merchandising sidebar: Petroleum Retailer Branches Out Into High-Tech Services sidebar: After Slow Start, Sears Leaps Into E-Retailing Staples To Improve Product Access With Kiosks (8/28/00) Borders Wants To Read Its Customers Like a Book (8/21/00) Internet Week Office Depot's IT unifies sales outlets through Web data access (8/21/00)

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ine months ago, prospects looked bleak for the nation's largest retailers. While they poured all their IT resources into huge year 2000 projects, a wave of Internet retailing startups emerged and appeared poised to steal market dominance.

The picture now looks a lot different. Traditional branded retailers are fighting back--holding on to terrestrial customers, launching big online business-to-business initiatives, and beginning to make an impact in Web sales. It's true that some pure E-retailers have grabbed significant market share and consumer mindshare--but they've also run into well-publicized problems in achieving profitability and in order fulfillment, while some have cut back or even closed.

During the past year, general merchandisers have built a strong foundation for E-commerce by integrating corporate, operational, supply-chain, and marketing systems with Internet-based applications. "People were questioning whether traditional retailing would survive," says Carol Ferrara, retail research director at Gartner Group. "The pendulum has swung back in the other direction. It's now obvious that a hybrid of bricks and clicks is going to be the optimum model."

While year 2000 remediation slowed retailers' movement to the Web, it also provided an opportunity to adapt existing systems for the back-office integration that future Web efforts would demand. "There was this perception that Y2K was a total nonstarter, that traditional branded retailers wasted billions and lost critical time in the race to the Web," says Don Gilbert, senior VP of IT with the National Retail Federation, an industry group in Washington. "But, in fact, it was money well-spent. The traditional branded retailers were slow to appreciate that they had major competitive advantages if they leveraged their substantial technology assets and if they integrated their sales channels. Once they recognized this, they used Y2K, in part, to lay the ground-work for later Web efforts."

That's the case at Sears, Roebuck and Co., which plowed about $158 million into year 2000 repairs from 1994 to 2000. The company is reaping the benefits of that investment, in what CIO Jerry Miller calls the "Y2K ripple effect."

"When you look at 1999, we were no different from most retailers," Miller says. "Our No. 1 objective was to get through the year change successfully. It was the largest IT project in our history, and it set the tone for the cross-functional Web development efforts that followed." That foundation has let Sears move rapidly in launching 10 E-commerce Web sites, which represent different departments, this year. The result: With 1.7 million Web visitors, according to market-research firm Media Metrix, Sears was the second-most-visited online department store in June, just behind J.C. Penney Co.--although both still have a long way to go to catch up to the 14 million site visits of top Web retailer Amazon.com Inc.

Providing the integration between Web and back-end systems that makes E-commerce possible is a top priority not only at Sears, but at virtually all the retail IT leaders heading up this year's InformationWeek 500. Almost as important: reducing time-to-market for enterprise E-commerce and E-business initiatives.

Retailers realize that to compete, they have to complete E-commerce projects in a few months--in stark contrast to the multiyear project cycles common at large retail IT shops not so long ago. "Y2K was the last long-term project IT will see," says Andy Kaufmann, president of the Association of Information Technology Professionals. "The Web life cycle is three to six months, with E-commerce apps being under the greatest pressure for fast deployment. If it takes over six months to deliver new functionality, the business will evolve faster than IT can keep pace."

Roddy Kerr, executive VP and CIO of Belk Stores Services Inc., a privately held chain of 210 department stores in Charlotte, N.C., agrees. "We've gotten out of the business of long-term systems projects and are now doing targeted E-business solutions," Kerr says. "The business is evolving so fast, applications that look great on paper are obsolete before they're delivered, unless they're done at Web speed."

As with other traditional retailers, Belk spent the bulk of 1999 playing catch-up to pure-play E-retailers. However, while working through Y2K and other pre-Internet architectural issues, the 112-year-old company laid the groundwork for a transition to E-business.

Belk tossed its proprietary merchandise ticketing system. In its place is an IP-based radio-frequency ticket-scanning network. Employees brandishing wireless handheld laser scanners zip around stores to ship, receive, and count inventory, check prices, and check out customers. That modernization effort was followed by a wholesale upgrade of the retailer's 6,500 point-of-sale devices to IBM terminals based on Web technology. "We pretty much cleared the deck of those long-term projects in '99," Kerr says.

Now on deck: Belk's Web store initiative, slated to debut this month. The company's new E-store is built around Blue Martini Software Inc.'s Customer Interaction System, a retail merchandising, marketing, and E-service solution built in Java and C++. Underpinning the Web store is an Oracle8i database, served up by seven Sun E-250 Web servers and E-450 app servers running Solaris 2.7, load-balanced by two IBM RS/6000s. The goal of the Web store is to leverage Belk's formidable retail operational and technology assets.

"Our Web store is another store location," Kerr says. "Our challenge is to afford our customer the opportunity to engage us via the channel of their choice--mail order, telephone, or over the Internet. The customer experience should be consistently excellent."

Opening up existing systems to the Web can pay off in other ways, too. Service Merchandise Co., a $2 billion multichannel retailer focused on jewelry and home products, spent the last year adapting dozens of business systems so they could be accessed via the company's extranet by internal buyers, external vendors, and carriers.

One of the largest of these applications is Service Merchandise's new Web-based load optimizer, a technology that was previously available only to the store's own analysts. Now, the company's vendors, transportation carriers, and buyers can work collaboratively on the Web. Together, they find the most economical delivery routes between facilities. By collaboratively optimizing deliveries nationally, Service Merchandise ends up footing the bill for fewer and shorter routes.

This provides enormous savings. "We have driven in excess of 10% of inbound freight costs out of our supply chain from this one application alone," says Danny Schunk, VP of IT for Service Merchandise, in Brentwood, Tenn. "That's probably up in the seven-figure range in terms of savings."

Retailers' IT integration efforts don't end with consumer sales. They're also working on supply-chain initiatives such as industry exchanges, with two major groups of retailers announcing initiatives in recent months.

Carrefour, British retailer J Sainsbury, Kroger, German retailer Metro AG, and Sears are building GlobalNetXchange to handle and streamline their approximately $140 billion in annual purchases. Another international group of big store chains is planning the WorldWide Retail Exchange, which promises to facilitate trading among 12 retailers that have more than 100,000 suppliers and partners and sales of more than $450 billion a year. Participants in the retail exchange include Albertson's, CVS, Kmart, Safeway, Target, and Walgreens in the United States; Auchan and Casino in France; Royal Ahold in the Netherlands; and Kingfisher, Marks & Spencer, and Tesco in the United Kingdom. The exchange is being built with software and services from E-business allies Ariba, IBM, and i2 Technologies.

Individual retailers are also working on streamlining their own supply chains. Belk, for example, gives suppliers access to its data warehouse via its Web-store technology. Belk's vendors and partners can analyze retail sales data by store, vendor, style, and product number. "We're tying all of our stores and vendors through our data warehouse," Kerr says. "It's become the primary integration point."

Other retailers are finding new ways to exploit their most valuable asset: massive customer databases--some with as many as 100 million specific customer profiles--built over the past five years and overflowing with rich historical information not only about customers but also about stores, vendors, and products sales.

Hannaford Bros. Co., a $3.4 billion retail grocer with 155 stores ranging from Maine to South Carolina, worked with point-of-sales systems provider Productivity Solutions Inc. to outfit three stores with four to six self-checkout lanes each. Shoppers can cart items through separate checkout lanes and scanners, bag their orders, and swipe their debit or credit cards to pay. If consumers like the self-checkout lines, they'll save Hannaford millions in clerical costs alone.

How would shoppers respond to the unfamiliar, imposing technology? Hannaford found out by funneling customer information captured at the points of sales back to its data warehouse. Shoppers' behavior was analyzed to determine if self-checkout is ready for wide use. "Fully 27% of our customers want to check themselves out, because it's faster," says Hannaford CIO Bill Homa. "It's the way to go."

Clearly, traditional branded retailers aren't the paper tigers some people suggested 12 months ago. "We're still a ways away from when people can order a dozen green peppers on their Web browser and FedEx can deliver it," he says.

Sears' Miller adds that general merchandisers didn't take what Wall Street said about the doom of the land-based retailer too seriously. "We may have lost the first round, but there are more rounds to come, and I think we're doing a pretty good job," he says. "We're ready to go toe-to-toe with retailers in any channel."

Illustration by Jeffrey Fisher
Photograph by Brian Smith

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