Paul, another interesting viewpoint on E-tailing from a firm you are very likely familiar with...
John
A Behind-the-Screens Glimpse of an
Internet Retailer
By LESLIE KAUFMAN
ead south on Interstate 5 from downtown Seattle and you
cannot miss the huge, terra cotta office tower that
commands the horizon from a nearby peak.
The structure is the new home of Amazon.com, the
ever-expanding Internet retailer that most other Internet retailers
worship and strive to emulate. The Amazon creed is to break
the budget on acquiring new customers -- on the theory that big
profits will come later, once the company's name is established
and the Web's lower operating costs make it impossible for
brick-and-mortar competitors to keep up.
But drive another 20
minutes down the highway
from this shrine to
E-commerce, and you
come to an undistinguished,
low-lying office park in the
industrial suburb of Kent.
Here, an E-business with a
very different philosophy is
blossoming: rei.com, the
Internet division of the
outdoor gear and apparel
retailer Recreational
Equipment Inc.
Though rei.com is small
compared with
Amazon.com -- only $50
million in annual sales
versus $610 million -- it is
similarly dominating in its
market. One of every $100
spent on outdoor gear this
year will pass through
rei.com.
Like Amazon's
management, the people
who run rei.com are proud
of their results and have big
plans for the future. But
unlike Amazon, rei.com
turns a profit. Recreational
Equipment Inc., generally
known as REI, also
operates real-world retail
stores, giving the outdoors
company a first-hand basis
for comparing the online to
the old-line business
models. REI's experiences
run counter to the main
assumptions that have
grown up around
E-commerce and have
contributed to the
stratospheric stock prices
of Web retailers like
Amazon.
Contrary to the myths,
rei.com says:
Running brick-and-mortar
stores has turned out to be
not a liability but a huge
advantage. The operating
costs of the Web site have
consistently gone up -- not
down. Whatever the barriers
that Internet technology may
pose to potential rivals, that
advantage has been largely
offset by the start-up's own,
daunting technical
challenges.
"This is not an inexpensive
way to do business," said
REI's chief operating officer,
Dennis Madsen. "As most of the pure plays have shown, there
is not a lot of profit in it, and I don't see the economics changing
in the foreseeable future."
Which is not to say that REI doesn't view E-commerce as an
important part of the company's future. Nor does it mean that
industry experts see REI as a bumbler. "They are a great
company," said Kate Delhagen, a senior E-commerce analyst
with Forrester Research. "I use them all the time as my poster
child for success."
As a behind-the-screens look at REI's Web operation makes
clear, the point is simply that online retailing is one tough
business. That is true even for an offbeat company like REI,
whose quirks have offered serendipitous advantages.
REI, which was founded in 1938, is a cooperative, which means
that at the end of each year, 85 percent of its profits are divided
among 1.5 million customers who have paid an annual
membership fee. REI was receptive early on to the Internet,
going on line in September 1996, at a time when most
traditional retailers were still taking a wait-and-see stance.
REI also benefited from the demographics of its active,
outward-bound customer/members -- a whopping 83 percent of
whom have Internet access at home or at work, almost double
the national average. Finally, having a catalog operation that
already brought it more than 5 percent of the company revenue
by 1996 gave the retailer an important head start in
warehousing and distribution.
Yet even with these advantages, the effort to build rei.com into a
viable Web business has been far from a cakewalk for the
executive in charge of the Internet start-up: Matt Hyde, a tall,
sinewy 36-year-old mountain climber.
Hyde, who is now vice president for online sales, has been with
the company since he graduated from Oregon State with a
degree in geology but quit twice, once in his mid-20s to start a
business that ran climbing trips in exotic locales like
Afghanistan and Chile. He compares building a Web site to
ascending an oxygen-less 23,000-foot peak: "You do it because
it's a challenge, not because it's fun."
It is Hyde who is listkeeper for the most common Internet
business myths, and his favorite is the idea that a physical store
is more expensive to run than a Web store.
Amazon's founder, Jeffrey P. Bezos, has been known to brag
that he employs but a third of the staff of his biggest competitor,
Barnes & Noble, to achieve a proportional amount of book
sales. Internet ventures may have smaller staffs, Hyde
concedes, but they must pay those staff members considerably
more.
"Technical people are a lot more expensive than part-time
salesclerks," he said. Now, for example, REI's flagship store in
Seattle employs roughly 300 people, while all of rei.com has but
60. Yet Hyde says the payrolls for that store and for rei.com
come out to about the same.
Soon, he says, the balance will tilt toward the Web site, as the
cost of the site's payroll rises steadily. Competition for
information-technology expertise is so fierce that every three or
four months Hyde reviews published studies on salaries in the
industry and, if he is lagging, automatically offers raises to his
technical team. The industry average for a skilled technical
position, like programmer or systems manager, is about
$80,000 a year.
Hyde also rebuts the notion that operating real stores -- with four
walls, air conditioning, shelves to restock and so on -- is more
expensive than keeping their virtual counterparts running. It is
true that the average REI store costs $6 million, including
everything from building costs to new fixtures, and is remodeled
every 5 to 10 years. Rei.com, in contrast, spent $500,000 for its
original opening, including all machinery and programming. But
the rei.com upgrades have never ceased -- and probably never
will, according to Rod Ketchum, the operation's beefy,
pony-tailed senior Web adviser.
Ketchum said he had ordered four
upgrades in the last two months. The most
recent was a $500,000 overhaul by IBM to
enable the system to use its processing
power more efficiently. Rei.com has also
rebuilt its Web page from the ground up
twice, completely remodeling such features as the search
engine and the graphics, and will do so again next March. Minor
changes will also be made when rei.com officially links up with
Outside magazine's new Web site next month.
None of this has been cheap. Hyde estimates that he has spent
in excess of $15 million since 1996 on upgrades and
remodeling.
But Hyde, who previously managed REI's adventure travel
program and its direct-mail operation, had expected the
technology costs. Some other expenses have come as a
surprise.
In setting up the operation, Hyde thought he could piggyback off
the photographic, distribution and warehousing capacities of the
company's catalog operation. But for displays in its catalog, for
example, REI shoots film, and rei.com managers quickly
realized that digital images worked better for the Web. So Hyde
has had to build three $20,000 stations for digital photography.
The vaunted advantage of a Web site is that it can offer a far
more complete selection of merchandise than a catalog or even
a flagship store. Rei.com keeps 56,000 items in stock. Apparel
styles change twice a year; "hard" goods like tents, sleeping
bags and bicycles are redesigned by their manufacturers
annually.
Which explains, in other words, why the best-known Internet
merchants sell mainly books and compact disks. Such items
are standardized and do not require the same merchandizing
finesse as, say, REI's Gramicci Serpentine knit cotton shirt or
the Dagger Delta Expedition Kayak. As Bill Curry, an Amazon
spokesman, said, his company "either scans in the covers or
gets the images from the publisher."
From kayaks to crampons, rei.com ships 93 percent of its
Internet orders within 24 hours. That is 3 percent better than last
year, but it is still not as fast as Hyde and Koch would like. They
are planning a new "just in time" system that would allow them to
process orders within an hour of placement.
But unlike booksellers, which work mostly with a handful of
distributors accustomed to shipping small quantities of their
products at light speed, REI has more than 1,000 vendors.
Some have modern assembly-line operations that can deliver
products overnight. Others, like Metolius Mountain Products, a
tiny company in Oregon that makes rock-climbing harnesses,
cannot work as quickly. Hyde has been bringing his vendors to
the warehouse in small groups to explain the Web business and
to help find ways to operate at Internet speed, but he
acknowledges that "these things take time."
Because rei.com is not publicly traded -- and its executives say
it is not likely to go public because they are not interested in
losing control to the market -- it does not have access to a
bottomless well of outside capital. The parent company, which
does $587 million in sales annually, has been supportive
enough that the start-up has had to make few sacrifices. Still,
some belt-tightening has been unavoidable.
Among the cuts that caused some soul-searching was a recent
decision to give vendors the job of writing the detailed product
descriptions that appear next to the photos on the Web. That
was a distinct departure for a retailer that prides itself on
knowledgeable in-store salespeople who can interpret the
baffling array of capacities and features that high-tech outdoor
gear offers.
Yet, while Hyde acknowledges that he envies the venture-capital
or stock-market riches of Internet pure plays, he does not cede
them the online advantage. "There is a very synergistic role
between online and retail," he said. "It is just a matter of
leveraging your advantages."
Marketing, as expected, is a big advantage. Surveys show that
most REI Web customers already knew the retailer's name
before they logged on.
Meanwhile, feared disadvantages like cannibalization -- that is,
that the Web operation would take customers from REI stores --
have not been borne out.
True, REI estimates that 50 percent of the folks shopping with
them on line are repeat customers. But the company has found
that customers who are "multi-channel" shoppers -- using stores
and the Web, say -- spend on average $15O more a visit than
single-channel shoppers.
"This is really about being able to serve our best customers
better," explained Shelley Olds, rei.com's marketing manager.
And, presumably, to get them to spend even more.
Some American retailers have talked of using the Internet as a
way to sell globally without opening stores overseas. Today
rei.com plans to open a Web site in Japanese, japan.rei.com.
But that is prelude to, not in place of, opening a Japanese store,
as REI plans to do in Tokyo next April.
Hyde explained that having a real store in Japan would benefit
his entire Web operation, because obstacles like tariffs,
exchange rates and customs regulations can make it costly and
cumbersome to ship overseas.
He predicts that within a year rei.com will sell more than any one
of the company's stores. "If this becomes a lot easier, and for
some reason the technology and operation costs go down, I still
do not think we are going to make a big profit," he said. "I don't
think our customers would let us get away with it, and I don't
think our competition would let us get away with it. For now we
are just trying to eke out a business."
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