The secret of e-tail success

The secret of e-tail success

Online retailers that think they are in the retail business could be headed for trouble. Business-to-consumer (B2C) selling via the Web, according to Tom Hennings, president and CEO of US-based e-commerce software vendor OrderFusion, has more in common with direct and catalogue sales than with true retailing.

Hennings says many dot-coms and brick-and-mortar stores that took to the Web have failed to understand the difference. When stocks are low at physical stores, the retailer orders in bulk from a supplier, who loads up a pallet of goods. But online retailers typically only need one or two items at a time, preferably from the warehouse. This was the alleged beauty of online retailing: that it would offer a more direct, cost-effective route to the consumer.

"Warehouses and wholesalers know how to ship pallets," Hennings said, "but they have a terrible time with ‘eaches'. This is the problem that direct marketers, such as L. L. Bean, solved a long time ago."But many online retailers have not. Retail success online hinges on what happens behind that fabulous Web site: logistics and fulfilment, payment systems, systems and policies to handle returns, customer service, and, running through it all, integration. Without these the site won't scale, and customers who once loved the Web store will quickly turn fickle and point their browsers elsewhere.

This monstrous problem involves multiple technology and business issues, which is why many online retailers are outsourcing logistics, fulfilment, and customer service functions. However, some retailers figure that if you want something done right, you had better do it yourself. For example, US-based Webvan Group, an online grocery delivery service, employs a system of highly automated distribution centres owned by the company.

The company's strategy isn't cheap. One Webvan distribution centre costs $US35 million; the company has two in place now and plans to have five in operation by the end of the year, according to Webvan's vice president of distribution Gary Dahl, who says this ambitious rollout doesn't make him nervous.

"Construction of these distribution centres is the drumbeat that sets the rhythm for everything I do," Dahl said. "We planned for it since the very beginning."Hollis Bischoff, vice president for e-business strategies at Meta Group, said that if Webvan succeeds, the company will transcend the grocery business.

"They [Webvan] are engaged in the war to the door," Bischoff said. "Their real competitors are not other online grocers like Peapod, but the delivery giants like FedEx and UPS."Dahl agreed. "In the long run, these [FedEx and UPS] are our real competitors.

There are probably only a few players that customers will really trust to take that last step across the threshold. And who do you trust more than the person who handles your groceries?"Rival e-tailer Peapod takes a slightly different approach. "We do supermarkets on the Web and plan to stick to that," said John Furton, Peapod's CIO.

Nevertheless, Peapod, like Webvan, wants to own as much of the supply chain as possible and has made a significant investment in integrating its Web site with back-end systems.

But unless your company has deep pockets, such do-it-yourself models are hard to emulate. Fortunately, other options exist. For example,, a US-based music retailer, chose an outsourcing strategy.

"We had a static Web site that didn't really do anything," said Alex D'Eath, IT manager at Soundwaves. "We were trying to find a way to sell CDs all over the world."Soundwaves turned worldwide operations over to Global, a California-based company that specialises in providing fulfillment services to online retailers.

"We own the brand and the portal Web site," D'Eath said. "But if you click on the ‘shop online' button, you are immediately sent to a Globalfulfillment server. Everything from credit card authorisation to final shipment is handled by them."Soundwaves must share its profits with Globalfulfillment, but D'Eath said it is worth it. "We know retail, and we have a viable name in our market. The partnership with Globalfulfillment extends our reach and lets us stay focused on building our brand."Martin Butler, chairman of UK-based analyst the Butler Group, said it makes sense for online retailers to form such partnerships. "Here in Europe there is a stronger realisation that logistics and fulfilment are the keys to making [online retailing] work," Butler said.

Martha Bennett, an analyst at Giga Information Group, said this means there is a real opportunity for direct and catalogue merchants. "One catalogue sales company in Germany has already spun off their logistics operations, and they plan to sell that service to dot-coms," Bennett said, adding that online retailers could soon face competition from this sector.

"If some of these catalogue companies decide to get serious about moving to the Web," Bennett said, "they will eat a lot of the dot-coms for lunch."Those who have not backed up their Web sites with integrated logistics and fulfillment systems are quickly learning to regret it. "[Logistics and fulfilment] is the single most differentiating factor in determining success or failure for online retailers," said Bennett.

Take Argos as an example. All the England-based consumer electronics company wanted to do was offer an online special on television sets. To accomplish this, the company used a spreadsheet to populate the Web site with prices. But the data was entered manually and no control processes were in place to check the work, according to Bennett.

The result was that television sets sold for three pounds, or about eight Australian dollars. Thousands of orders ensued and Argos almost went bankrupt.

"[Argos] would have gone into receivership," Bennett said, "but they were saved by an arcane point in English precedence law."Another case Bennett cited involved a German online drugstore, and this one resulted in a $US300,000 box of disposable diapers. The error occurred because, after the customer placed the order, the price had to be re-keyed by hand into the order fulfilment system.

"It is incredible that this error got as far as it did," Bennett said. "The customer's account was actually debited."Bennett said these examples show how badly some online retailers have miscalculated what it takes to do business on the Web.

"Companies are behaving as if the normal control processes don't matter online," Bennett said, "when just the opposite is true."

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