Leveraging the Internet

Although not every e-commerce retailer publishes a catalog or opens bricks-and-mortar stores, it has become virtually imperative for all retailers to operate online. At the very least, single- or dual-channel retailers are finding that Web sites are mandatory for relaying information to consumers, even if they do not sell merchandise via the e-commerce channel. However, customers spend more with a retail brand when they can shop across multiple channels, and multichannel shoppers are much more likely to be loyal to the brand for an extended time.

During the Main & Wall session “Leveraging the Internet,” moderated by Tom Cagnina, managing director, David N. Deutsch & Co., attendees learned how retailers utilized e-commerce to increase performance. For instance, Gary Beer, who served eight years, until August 2007, as the CEO of Smithsonian Business Ventures, explained how the Washington, D.C.-based museum complex grew revenues by expanding its multichannel presence.

Smithsonian generates more than $200 million in annual revenue through magazine publishing and retail operations that include catalog and e-commerce sales, as well as museum stores and off-site stores.

“The dot.com store is a traditional extension of our catalog. Although it only grew revenue 10% over a five-year period, we would have lost sales without it,” explained Beer.

E-commerce also enabled the museum operator to test more products than traditional store inventories could accommodate, and in some departments this had a dramatic impact.

“Over a five-year period we grew top-line revenues 20% in travel and books [merchandise],” he continued. “Sixty percent of that 20% was facilitated by the Internet’s ability to [support] an expanded merchandise offering.”

Additionally, Smithsonian augmented its portfolio with airport-based stores. “Only 50% of D.C. conventioneers visit the museums,” noted Beer, so the airport stores penetrated an unserved but viable market.

Although multiple channels provide synergistic benefits, all channels cannot be measured by the same performance standards. For instance, Beer noted that the average price point for a bricks-and-mortar sale was $17, but the average catalog order totaled $100.

Fellow Main & Wall panelist Don Steiner, managing partner of Webster Capital, Waltham, Mass., discussed how to understand profitability and ROI relative to different channels.

Prior to founding Webster Capital, Steiner spent eight years as founder and CEO of Cornerstone Brands, which included popular catalog and Internet retailers such as Ballard Designs, Frontgate, Garnet Hill, Smith and Noble, The Territory Ahead and TravelSmith Outfitters.

“There is a tradeoff between the capital expenditures necessary for a physical store and the higher advertising costs associated with attracting Internet customers,” explained Steiner.

Transitioning from a capital-expenditure mentality to an online-investment mentality has proved difficult for some retailers, who might not blink at spending $1 million to open a new store but would have strong reservations about investing $1 million to purchase a keyword search.

Advertising for one channel will benefit other channels as well, but the total impact of cross-channel marketing will be difficult to completely quantify. Steiner cautioned, “If you mail catalogs, and send e-mails, and buy a keyword, you have to ask: ‘Are you overspending to reach your customer?’ It comes back to identifying the cost of attracting a sale.”

“Marketing costs on the Internet can be 30%, 40% or even 50% of sales, but marketing costs for catalogs are typically 15% to 25% of sales and even less for stores,” he continued.

His advice was to err on a “small scale,” test campaigns and analyze results before deploying on a large, pervasive scale. His approach clearly worked at Cornerstone, which grew from revenues of $150 million in 1998 to $750 million by the time he sold the company in 2005—and Steiner attributed much of that growth to the Internet.