Virtual Retailers Get Real
- By Colleen Frye
"Clicks and bricks"—the integration of online e-tailing and offline retailing—is the new prevailing wisdom in the business-to-consumer (B2C) space. That integration encompasses not only melding the technology underlying new Web applications and legacy back-end systems, but unifying a customer's Web shopping experience with their in-store shopping experience. For many businesses, this will mean giving online shoppers the option of having their purchases delivered, or picking them up themselves at a local storefront where they can also exchange items. While orders coming online today are likely to come from PC-based browsers, shoppers in the future will be placing their orders via Webphones, WebTV, PalmPilots and other devices. And in-store shoppers may want to surf on kiosks to order merchandise not currently stocked locally.
In a recent report, the Boston-based Yankee Group stated, "the integration of local brick-and-mortar stores and online retail operations will improve the convenience of online shopping and increase consumer satisfaction. By allowing consumers to pick up or return their online purchases at retail stores, brick-and-mortar chains can eliminate consumer concerns about high shipping costs, delays in Internet purchase deliveries, and product return logistics." By 2001, the Yankee Group predicts that most retail chains that have online e-tail efforts will "begin using their retail stores as return or fulfillment centers for online purchases."
CampusHub.com, for example, a portal for college bookstores, is using a click-and-brick strategy for its online efforts. A spin-off of Lincoln, Neb.-based Nebraska Book Co.—one of the nation's largest used textbook wholesalers serving more than 3,000 campuses—CampusHub.com "is taking advantage of the fact that all Web site instances represent actual bookstores that have a physical store presence," explained Rick Little, senior specialist, e-Commerce development at Perot Systems, Dallas. CampusHub.com is the second phase of an e-commerce system Perot Systems has developed for Nebraska Book Co.
"Students are initially drawn to the CampusHub virtual mall through their local bookstore's site," added Little. "One advantage of this relationship is that students have the option of picking up merchandise at the bookstore, rather than having shipments sent directly to them. Returns are also easier to facilitate through the bookstore."
In addition, he said, "Students have a high affinity with their local campus bookstore and can relate their Web purchasing experience to the 'brick-and-mortar' location. Once into CampusHub through the bookstore's site, additional products and student services are available that extend what the bookstore can offer its customers. CampusHub has the advantage of a large, centrally located hub of products and services, while benefiting from the distributed local bookstore presence."
And in the not-too-distant future, the addition of in-store kiosks and Web-enabled point-of-sale systems (POSs) will further blend the click with the brick. According to the recent report, Mixing Bricks with Clicks, from Cambridge, Mass.-based Forrester Research, 80% of brick-and-mortar merchants interviewed that also sell online intend to add kiosks to most stores, and one-third plan to Web-enable cash registers.
While many "pure-play" Internet retailers have been under siege of late—burning through cash at an incredible rate and failing to produce any hint of a profit—Forrester Research reported that 83% of merchants interviewed found that offering multiple channels results in an overall increase in sales. So traditional brick-and-mortar companies that are moving to e-commerce as another sales channel—and have the advantage of existing warehouse and distribution systems, a customer base, brand recognition, established employees and a technology architecture—have much to gain.
By 2004, according to Forrester, 70 million households will have Internet access, and 80% of those households will shop online. And those shoppers will begin to spend more money, according to research firm IDC, Framingham, Mass. IDC projects that by the end of this year, 29% of people who go online will purchase a good or service, and that percentage will swell to 38% by 2003. IDC also noted that the size of the average transaction is growing, with $1.6 trillion expected to be spent on Internet commerce in 2003.
A click-and-brick strategy poses both business and technology challenges. For traditional companies formulating an e-commerce strategy, there is fear of the unknown on the business side, said Christian Mouritzen, director of marketing at Capita Technologies, Newport Beach, Calif., an e-business development and integration company. "For a company that has brick-and-mortar stores and a direct sales force, and is looking to embrace the Internet, there are issues such as, 'If we start selling on the Internet, will we eliminate stores and our brick-and-mortar investment? And are we replacing rather than increasing sales?' The key question is, 'How is the Internet going to add incremental revenue to what we do today?' The second challenge is on the systems side: 'How do we transition our current system to the Web without sacrificing our last 20 years of investment, and when are we going to see ROI even if we buy new software?'"
One of Capita's clients, Chicago-based Fannie May Candies, decided to add e-commerce as another sales channel and to leverage its existing back-end systems. The retail company is owned by The Archibald Candy Corp., which owns Fanny Farmer Candies. Between Fannie May Candies and Fanny Farmer Candies, there are 330 company-owned shops in 22 states.
Fannie May Candies, said Capita Technologies' Mouritzen, "realized they could reach a much broader audience by getting on the Web, and it wouldn't prevent people from continuing to go into the chocolate stores. Their view was to create a more hybrid organization and it was important to add some of the services you get in the store to the Web, like build your own box of chocolates."
"In general, Fannie May had to begin thinking differently," said Gwen Stansu, the firm's marketing manager. "We've been around 80 years, and a lot of our consumers are older people who grew up with Fannie May. We recognized the need to target younger consumers, but across all channels. We know just by being on the Internet we're hitting younger consumers."
Fannie May had an e-commerce site prior to contracting Capita, "but everything was manually handled; now it's integrated into their order fulfillment system," said Capita's Mouritzen. The technology Capita chose for Fannie May's Web site is Net Commerce from IBM, with the WebSphere application server.
In developing its e-commerce strategy, Fannie May did three things that not all companies do: they involved IT, they integrated their Web application with their back-end systems, and they integrated e-commerce into their business model.
"In many cases," explained Capita's Mouritzen, "the Internet [development] is usually housed in a separate group, not part of sales or senior management; it could be part of marketing or IT. So they have a Web site and they're selling products, but everything stops there. They get an order, they print it out, and they hand carry it or E-mail it to order fulfillment and accounting. It's treated as a separate side business.
"The way to integrate it, from a systems perspective," he continued, "is to change the way communications and transactions take place in the company. Transactions coming in on the Internet go directly to order fulfillment, inventory management, accounting and sales so they can follow up, and customers get an immediate response back because inventories are checked in real time."
Improved customer service
Enhancing customer service was one of the goals of Jean Coutu Group's e-commerce strategy. Jean Coutu Group is the largest retail chain of pharmaceutical and para-pharmaceutical products in Quebec, and the second largest in Canada. The company contracted Compuware Corp.'s services organization to develop its Web site. Initially, the site offered just corporate and marketing information. The first B2C application was a prescription-renewal system.
Gilles Gauthier, project leader, pharmacy systems at Jean Coutu, said the company wanted to be the first in Canada to offer a Web-based refill system. "Our objective was to give better service; to enable our customers to leave their refills on the Web 24x7, even when stores are closed, and [for customers to be able to] specify the pharmacy where they want to pick up their prescriptions," he said. "We wanted to reduce the bottlenecks at high-volume pharmacies. With prescription growth at nine percent to 10 percent, we had a crunch to develop new workflow technology to better service all of our customers."
Jean Coutu already had a centralized prescription-renewal system in place, linking pharmacies over a private, frame relay network. Gauthier noted that they did not want to change the current workflow in the pharmacies, and not all of the pharmacies had access to the Internet. The problem was how to move this application to the Web without disrupting the existing system.
The solution, an Internet front end interfaced with Jean Coutu's existing AS/400, was a joint effort by Compuware and Gauthier's MIS group. According to Jean-Franois No‘l, Compuware Digital Development Center manager, Compuware developed the application using Cold Fusion and Microsoft SQL database server on the back end. All customer information captured in tables is then sent to a COM object that Gauthier's group developed; this object then sends the transaction to the AS/400.
"We didn't want to access the AS/400 straight from the Web server," explained Jean Coutu's Gauthier. "From the AS/400, a message is sent to the pick-up pharmacy, where it's displayed on their screen. They can print out a label or process it immediately." He said the work queue is refreshed locally every time they finish with a customer order.
Eventually, said Gauthier, they will add a delivery option for Web-based refills. As they redevelop their pharmacy system from a DOS-based to an NT platform, Jean Coutu will add other features such as a more automated workflow that captures information like the time an order is processed. They are also looking at capturing e-mail addresses from orders placed via the Web, which they currently do not do.
Although Gauthier said that Canada is 18 to 24 months behind the U.S. in terms of e-commerce, and there is currently no equivalent to the U.S.-based drugstore.com breathing down their necks, the pressure is on, particularly for the U.S.-based Brooks chain of pharmacies, which Jean Coutu owns. Indeed, IDC reports that in the U.S., the online market for pharmaceutical, health and beauty products will surge from less than $250 million in 1999 to more than $18 billion in 2004. The online market for prescription drugs will account for more than 80% of this revenue, or $14.8 billion, according to IDC.
Still, Gauthier feels they have some time to analyze the market and avoid the things that did not work in the U.S. "There is some pressure," said Gauthier, "but percentage-wise, people walking into the stores exceeds what can be done over the Web. It's still in its infancy."
While large retail chains like Jean Coutu are developing their own Web sites, smaller chains and independent stores are turning to portals as a key component of their e-commerce strategy development. As these portals move from phase one—Web-enabling brick-and-mortar stores—to phase two—more automation and integration with back-end systems—the eXtensible Markup Language (XML) is rising to the fore as a key technology.
For example, the e-commerce system that Perot Systems developed for Nebraska Book Co., called WebPrism, interfaced each bookstore's site with a corresponding bookstore back-office point of sale and inventory control system. "The architecture developed followed a straightforward e-commerce [browse, shopping cart, checkout] implementation, with the exception of providing for customization by each individual bookstore," explained Perot Systems' Little.
"Due to the proprietary nature of some of the legacy systems' ISAM data structure, Perot opted to replicate the data to a Web-accessible SQL Server 7.0 database," he added. "Perot developed a custom XML messaging layer to transport product and associated catalog structures to SQL Servers. As orders are taken online, order information is transported through the same XML messaging layer back to the bookstore's back-office system for processing. Order fulfillment is conducted by the bookstore's back-office system."
The second phase of the project is CampusHub.com, which added a central repository of third-party products and services. "Perot Systems was required to develop a central repository of third-party products and services that allow Web-enabled browse and purchase of CampusHub items by [Nebraska Book Co.'s] Phase I WebPrism front-end product—or any other Web front end that wants to participate with CampusHub," said Little.
Perot chose the E-biz Integrator from Englewood, Colo.-based New Era of Networks (Neon) as the middle-tier messaging transport layer. "For all messages that need to be transported, a meta-data format is defined inside the Neon rules engine. Messages sent to Neon are posted to a Neon adapter. The role of the adapter is to convert a message originating in a proprietary format into the generic meta-data format. The generic message is passed through the hub and on to its destination. Upon reaching its target node, the message is converted from the generic meta-data format by another adapter belonging to the target node," said Little.
"For all participating nodes in the Neon network, each node only needs to know how to communicate with its adapter," he noted. "Once messages are converted into a meta-data format, they can utilize the target node's adapters to convert the message into a format recognized by the target node."
Added Little, "When an order is placed on WebPrism, or any other participating front-end provider, for a CampusHub.com product, the order is passed to CampusHub through the WebPrism adapter. All communication between CampusHub and WebPrism is XML-based."
Atlanta-based Peachtree Network, an online grocer serving parts of the U.S. and Canada, serves as a portal for regional grocers. The next phase of its Web site will also utilize XML, said Jeremy Lee Jonas, president and chief operating officer. Peachtree Network developed an automatic transfer protocol installed at the grocer's end, so prices and products are uploaded to peachtreenetwork.com daily, via a proxy server model. The auto FTP file sends the information to a central database server, where Peachtree runs automated scripts that filter the data, put it into categories the Peachtree inventory team built, and then gets the data to the live server. When a customer places an order on the Web site, Peachtree notifies the grocer via E-mail or fax. The customer can choose to pick up the groceries or have them delivered. In all cases, the customer pays the grocer.
"Integration with [the grocers'] back-end systems is premature," said Jonas. Indeed, while IDC projects online grocery spending to grow from less than $200 million in 1999 to more than $8.8 billion in 2004, the research firm believes there are many obstacles to overcome.
"Integration between accounting, fulfillment and payments systems will evolve. Occasionally a grocer with a higher end back-end system will want that information integrated, and we'll send them a batch file reflecting the format that they need to receive it in, and they can automatically put it into their systems," said Jonas. "Our new platform will be developed with XML to complement all the design elements of the new applications. Each grocer might have a different look and database. XML is by far the best for that."
Peachtree built its site on the Netscape Enterprise platform using Livewire tools, said Jonas. The plan is to move to Java-based Web application tools, Java Server Pages, JavaBeans and Enterprise JavaBeans, using XML and XML stylesheets. "We're trying to please a lot of grocers," he added.
Similarly, food.com has to please a lot of restaurants. As a portal for restaurants' take-out and delivery services, food.com has to communicate constantly with its participating restaurants for menu and price changes. "Everything we transmit to a restaurant is via XML; it's the core of our message system," said Robert Mayfield, chief architect of the San Francisco-based company. "The data is transmitted via XML objects and translated at the site back to a format they can use." Food.com is using the Bluestone Total-e-B2C platform, from Philadelphia-based Bluestone Software, which incorporates Java, Java Server Pages, XML and other industry standards.
Right now most orders are sent from food.com to the individual restaurants via an interactive voice response (IVR) system or fax. Mayfield said the company has initiatives underway to connect directly to a restaurant's POS system.
That is exactly what Domino's Pizza of San Diego is doing, and the payoff is an "increase in pizza bandwidth," said Robert Mackey, director of marketing. Mackey said there are five Domino's franchises in San Diego county, comprising 40 stores. His role is to help with the development and implementation of Internet ordering for all stores in the county.
Customers place their orders using the QuikOrder.com Web site from Chicago-based QuikOrder Inc. QuikOrder.com is built around the Cache post-relational database from InterSystems Corp., Cambridge, Mass. Each customer order is then transmitted via modem to the restaurant. In Domino's case, the order goes directly to the POS system.
"The only way it made sense was to take an order and have it transmitted directly to our store POS or store computer systems," said Mackey. "There were other options, but none that were truly non-human-intervention Internet ordering. We wanted the customer to place an order and to have no humans in the chain until it was time to make, bake and take the pizza."
Said Mackey, "An order is transmitted via phone line to our store, and automatically inserted into our system. It shows up on the store monitor and a driver slip is printed out if it's a delivery, and a slip for the box and the customer's receipt. It's seamlessly entered into the system. Customers pay our drivers at the door." Mackey said a credit-card payment option is under development, which QuikOrder will be handling.
Mackey, a marketing guy who has become the Internet guy, is typical of many e-commerce efforts, said Seema Williams, senior analyst, Forrester Research, and author of the Mixing Bricks With Clicks report. "IT is not running the dot.com stuff. It's run by some techno-guy in marketing. As it gets more complicated, it will probably be outsourced or shifted to IT if they can come up to speed fast enough."
Jean Coutu's Gauthier acknowledges that his organization was tied up with the Y2K crunch when the e-commerce effort began. "We had very little to do with the Compuware team until we decided to do Web refills. It did concern me, but I knew we didn't have the resources at the time to take care of it, and I knew we had to get on the Web. The Web is still a separate entity. Maybe eventually we'll take it under our control, but for now we'll keep going with [Compuware]."
Or maybe, as Forrester suggests, a new position will arise at companies like Jean Coutu—that of vice president of channel integration. As merchants continue to bring their online and offline selling together, they will be adding kiosks and wireless devices to the mix.
Dark Horse Comics Inc., Milwaukie, Ore., is a case in point. The comic book publisher currently has a chain of six retail stores in the direct comics market, and an affiliated Web site, thingsfromanotherworld.com. "Within six months all inventory of all stores will be avail-able through our Web site. You'll be able to pick up the merchandise at the store or have it shipped directly," said Dale LaFountain, vice president of IT. In moving toward a click-and-brick strategy, LaFountain also expects to have a kiosk in place within six to 12 months at their store located at Universal Studios in Los Angeles.
Dark Horse is using WebCatalog, an e-commerce and Web publishing platform from Smith Micro Software Inc., Aliso Viejo, Calif., for its Web site. "It's critical to get the integration [of the retail sites and the Web site] completed," he said. "We have a limited scope in our market with our retail locations. We have four stores in Portland and two in Los Angeles. We have very high traffic in L.A., and low [traffic] in Portland. Things that sell in those areas are extremely different, but would sell extremely well online. Our audience potential is so much greater."
With the kiosk, "we could add 200,000 new products with no inventory risk," said LaFountain, allowing an in-store customer to order merchandise from the online inventory. LaFountain said this effort will be managed by the IT department.
In the future, though, Forrester's Williams said that organizations like Dark Horse will need a vice president of channel integration to evaluate which devices provide the best return and to coordinate online, mobile and store selling teams.
According to Forrester, the biggest challenge for retailers will be to upgrade existing technology to synchronize these new points of interaction. Look for software vendors to roll out a new type of tool that Forrester is calling a channel manager. The tool, said Williams, "will take a single piece of data and reapply it across multiple channels. There is a certain intelligence needed, for example, selling online vs. offline, and a way to codify those channel-based business rules."
Bringing online benefits to in-store shoppers, and vice versa, as well as collecting and analyzing customer information coming in from all channels, will be the heart of a click-and-brick strategy.