Beyond point and click
Strolling the corridors of La Senza Inc.'s Montreal headquarters is like stepping into a '60s James Bond film. Beyond the controlled access point of this Dorval industrial-park bunker, an army of beautiful women toil for global lingerie domination. They lean studiously over unfurled diagrams of Seamfree panties; they talk of silk chiffon in hushed voices; they stare pensively at computer images of Brazilian lace thongs. Beneath luscious glossy posters of pouting models in Extasy Liquid Lift bras, the women of La Senza plot their campaigns while holding gossamer swatches to the light.
In this groovy secret empire of the ultravixens, only a handful of men exist - most notably, La Senza president Laurence Lewin. With his platinum hair, British accent and eternally lit cigarette, he's the kind of delightfully sardonic character that only Ian Fleming could have dreamed up. ("If you're cheerful, you can insult anybody," is a typical Lewinism served dry with a twist.)
Two years ago, e-commerce was being hyped everywhere and La Senza's Mode Squad was eager to join the revolution. "Lingerie is something that has always been ordered by mail," explains Lewin as we sit in his corner office. And even though his company did not have a mail-order division, he recognized that setting up a Web operation could be the next best thing. "A lot of women like to shop at home and a lot of men are lazy bastards." He grins slyly, pauses to take a drag off his John Player Special, then adds: "Or they like to buy gifts for the wife or the girlfriend, but they don't like going into lingerie stores. Logical common sense told us that the Web was the modern version of mail-order and we obviously wanted to cover as much of the world as we could intelligently handle."
Of course Lewin is referring to logical common sense circa 1999, a time when common knowledge dictated that traditional retail stores were doomed. It was an odd period in retail history. Time magazine had just named Amazon.com's Jeff Bezos "Person of the Year" (an honour previously bestowed on Martin Luther King Jr., Lech Walesa and Mahatma Gandhi) saying, "Plenty of reasons suggest that e-tail will crush retail." These reasons - which included infinite miles of shelf space, the ability to reach the world with a single point of sale, freedom from pesky things like store rent, sales clerks and shoplifters - were largely accepted without question by many analysts and were enough to justify investors' rewarding pure-play e-tailers with stock-market valuations that dwarfed their brick-and-mortar competitors. By 1999, eToys had a market capitalization of US$4.5 billion. In that same year, the market valued Amazon.com at US$32 billion, or almost double the combined value of Sears and Kmart.
And then reality hit, with a vengeance.
La Senza was only one of hundreds of companies that found out the hard way that Internet commerce, though often wildly popular with consumers, remains a difficult, almost universally unprofitable activity. As Lewin so pointedly puts it: "Regardless of what the media wrote every week about the wonders of the Internet, we discovered there wasn't all that much knowledge in the industry. Experts were making all these pompous statements about what was happening, but they didn't really know. It was like going on a flight and finding out that the pilot only read the manual an hour ago."
That's an apt analogy, considering the spectacular nosedives of more than 130 dot-coms around Christmas 2000, a time when North America's online merchants raked in $12.2 billion in sales, twice what they had during the previous holiday season. So with all those revenues pouring in, what went wrong? Look at the casualties list: eToys, Pets.com, Garden.com, Living.com, Furniture.com...
In the spring of 2001, few pure-play e-tailers remain and even those few - like Webvan, the popular U.S. grocery delivery service - are struggling. Even mighty Amazon is faltering as rumours abound of an alliance with bricks-and-mortar Wal-Mart. In Canada, three-year-old grocerygateway.com, the Toronto delivery service that has recently raised its minimum order and delivery fee as part of its quest to reach profitability, is one of the few pure-play e-tailers left alive.
In the scramble to explain what went wrong, analysts now admit that many of the supposed truths of online retailing were really misconceptions. The biggest misconception, perhaps, was the belief that virtual stores were somehow free of the physical trappings of our mortal world. They're not. Clicks without bricks are like little pigs in straw houses - a huff and a puff and they're gone.
What pure-play e-tailers and their investors came to realize is that there are huge costs to setting up online when you don't have an off-line existence. In addition to the obvious investment in computer hardware and software, e-tailers are confronted with the expense of customer acquisition, the price of setting up round-the-clock customer-service call centres and the often astoundingly high costs of managing inventory and delivering the product to customers. In the case of customer acquisition, for example, The Boston Consulting Group reports that in 2000, pure-play e-tailers spent US$82 to land each new customer, while bricks-with-clicks spent US$12.
As the pure-plays fall by the wayside, however, an increasing number of established stores are plowing forward. Why aren't they scared away? "Because the consumer is now there," says Jim Okamura of the J.C. Williams Group.
Though it's unlikely anybody's pulling in profits off their websites right now, that won't last forever. "The online market more than doubled in 1999 after growing 190% in 1998. In 1999, online revenues generated by North American retailers totaled US$33.1 billion. In 2000, the online market is expected to grow to US$61.1 billion," reported the Boston Consulting Group earlier this year. In Canada, according to research firm IDC, Web commerce generated $3.7 billion in 2000. "Bricks have less of the growth-at-all-cost mentality," says Okamura. "They control costs using merchandising skills to determine which inventory should be put online, as opposed to going hog-wild like the pure-plays."
Looking further ahead, many corporate executives expect their online operations to bring in 10% to 20% of their companies' total sales by 2010. How will they do it? By getting customers to use more than one channel - the store, the web, the catalogue. "A customer who shops more than one channel, spends more and shops more frequently," says Okamura.
So it's no wonder established bricks are embracing clicks, albeit cautiously, even as pure clicks are signing off. But launching into cyberspace isn't easy, as the following two case studies illustrate. For La Senza, the trip has been marred by a period of embarassment and disappointment. For Hudson's Bay Co., it's been a journey with relatively few bumps - so far.
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When it started down the e-commerce trail two years ago, La Senza envisioned its future website as something analogous to one of its luxurious state-of-the-art Extasy Liquid Lift brassieres - namely, an engineering marvel that customers would find simple, sexy and supportive. Laurence Lewin claims that, unlike its provocative lingerie, La Senza's e-commerce goals were modest in the extreme. The private company, which divulges little financial information, began its foray into online retail without a detailed mandate or even any sales targets.
Established in 1990 as a subsidiary of Montreal-based Suzy Shier Ltd., La Senza is an international lingerie powerhouse, believed to be second only to Victoria's Secret in worldwide specialty lingerie sales. There are 196 La Senza stores in Canada and another 85 outlets in Europe and the Middle East. La Senza consistently controls about 20% of the Canadian lingerie market, which translates to about $200 million in sales per year. This volume is all the more impressive, considering La Senza does virtually no advertising. The company relies on high-traffic-area store locations and a sophisticated Parisian feel to lure shoppers inside.
For its website, La Senza started out in early 1999 by accepting bids from e-commerce experts, none of whom were terribly impressive. Lewin found that their propsals were "extremely complex because I only imagined that with a website you filled in the text and the graphics and away you went. That's how it's done, isn't it?"
But little in e-commerce is that simple. The launch of LaSenza.com, originally set for May 1999, was delayed by five months. And even then, he says, "There were problems with navigation. The site looked good, but it was clumsy." As well, he maintains, "There were no management statistics. We wanted a French website. It didn't arrive. And it would never accept a major credit card. To compound matters, friends in Vermont told Lewin that LaSenza.com was unable to accept orders from any U.S. state with a Zip code beginning with zero - which includes all of New England, where much of La Senza's cross-border customer base resides. All in all, Lewin estimates that the glitches cost the company approximately 20% of its online sales.
Six months after his online operation began, Lewin shut LaSenza.com down, referring to it in the press as providing "awful customer service."
"The thing that people forget about e-commerce is that it isn't easy to do because you're no longer in the world of Web design, you're in the world of software design," says Vincent Flanders of WebPagesThatSuck.com. "In Web design you're just putting up pictures and things. With software design you have to have software that ties into your back end - with your database, shipping and handling."
Marketing the site was another problem. La Senza didn't want to go down the road that eToys took in the two years before it went bust, spending US$72 million in advertising. "You can build the most perfect site," says Lewin. "But unlike a shopping centre, where we know people will walk past the store, and if we present it right, they will come in, there's no guarantee on the Internet that they're coming in." He pauses and then turns very Zen-like: "I suddenly realized that if a website's on the net, and it crashes - will anybody hear it?"
Still, La Senza did many things right. The secret was all in leveraging - putting existing retailing resources to work for the e-commerce side of the business for little extra expense. The company's 170,000-square-foot Dorval warehouse, for instance, had plenty of room for an e-commerce order-fulfillment centre. La Senza treats its e-tail operation much like one of its mall outlets. Most of La Senza's online orders come in overnight. At the warehouse, six employees arrive at 7 a.m., grab the order printouts and a bar code laser gun, pick and pack, and have the bulk of the day's work ready for shipping by noon. And from the packages customers receive, they'd never know the goods came out of a drab warehouse. Every order is artfully arranged in a La Senza gift box that is sprinkled with peach-coloured scented beads, sealed with a fan-shaped sticker and topped by a greeting card.
This sort of attention to detail and rapid order fulfillment is no doubt facilitated by La Senza.com's limited product range, varying between 100 to 150 styles, plus accessories. (The average La Senza outlet, by contrast, has about 300 to 400 styles.) For a gargantuan retailer with thousands of products - like The Hudson's Bay Co., for example - developing a back end to an e-commerce business is another matter altogether.
La Senza.com was out of operation for seven weeks last fall. When it came back up, it was as a member of Yahoo! Canada's online shopping mall. In one fell swoop Yahoo! solved both La Senza's order-taking and marketing problems. "The relaunch," says Joel Teitelbaum, the company's vice-president of e-commerce and co-president of La Senza International, "cost next to nothing and potentially saved us hundreds of thousands of dollars." Yahoo! Canada gives LaSenza.com a prominent place on its portal page in return for a small monthly fee and a cut of online revenues - a far cry from the US$40 million that Barnes & Noble paid to America Online for a place on its portal and the right to be AOL's exclusive bookseller for four years. "Yahoo! Canada draws one billion page views per month," says Teitelbaum. "It gives us an added legitimacy." It also gives Lewin peace of mind. "The site's been absolutely rock solid," he says. "It's got an integrated back end and I'm delighted with what is being done. Now I feel we've got a proper business running."
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Last year, failed online fashion e-tailer Boo.com showed how easy it was to burn through US$120 million in only six months. For online companies with huge product inventories, the potential for creating a Boo-sized financial sinkhole is a scary reality. This fact goes some way in explaining why The Bay decided to undertake such a long, slow, strategic assessment before finally taking its late plunge into online retail.
Established in 1670, Hudson's Bay Co. is Canada's largest department store retailer. Its more than 500 stores, led by The Bay and Zellers chains, generate a combined $8 billion in yearly sales. For its online presence, Hudson's Bay Co. adopted a somewhat Gallic philosophy that could best be termed "simplicity, fraternity, frugality." In other words, leverage almost everything.
"The actual expense of what we're doing has been minimized," says Hudson's Bay executive Peter Kenyon. "We're not paying any occupancy space for the dot-com. Our fulfillment costs are extremely low, and we already advertise so it costs nothing to stick on a dot-com logo at the bottom of our ads." However, even with such a frugal approach, the company still dropped $15 million on its online store. If that seems like a lot, it's not when compared with the US$200 million spent on JCPenney.com or the $US80 million eToys forked out simply to set up its distribution system.
On November 22, at a press conference held in a suburban Toronto warehouse, Bay CEO George Heller stands proudly before a large-screen projection of his company's new website, hbc.com. "Web selling is still in its infancy," he says. "It's hugely complex and there are so many pieces that have to connect and connect properly, it's no wonder that so many have got it wrong."
Heller fairly beams at The Bay's clean and simple new website. However, the thing he's really showing off looms behind the screen. hbc.com's "back of house" is located in a one-million-square-foot warehouse, a space big enough to park a jumbo jet or two. Until recently, it housed only the merchandise for Zellers' Club Z loyalty program. Now, half the space is taken up by a new state-of-the-art picking rack - a five-storey tower of blue and orange steel scaffolding, stairs and conveyor belts. It is, in fact, the first five-level picking rack ever built in Canada.
After the press conference, Dave Alves, an hbc.com manager, escorts me up onto the racks that are home to the 5,000 or so items available on hbc.com. Alves explains that when an order comes into the fulfillment centre, a computerized order-management system named Catalyst sets the Rube Goldberg-like picking rack into motion. With each order, the computer sends a plastic bin, bar coded with information on precisely which items the customer has ordered, up the conveyor belts to the levels above. There, a team of stock pickers stands at the ready with pistol-gripped laser guns. As the bin rolls by each station along the line, a laser reads its bar code. If the laser discovers that one of the items purchased is located in this area, a mechanical arm pushes the bin off the belt. The worker at that station then points her laser gun at the bin's bar code, which tells her which items near her need to be picked. She shoots the UPC labels on the merchandise, places the items in the bin and puts the bin back on the conveyor belt. The computer then redirects the bin on to the worker nearest the remaining items to be selected.
Catalyst is smart enough to know if order fulfilment needs to be sorted by province. Through monitoring the laser guns, the computer also keeps track of how busy each particular worker is and can redirect bins on the conveyor belt toward idle workers or away from bottlenecks in the system. Bins with completed orders are whisked by belt back down to packing stations on the first level where the items are gift wrapped and/or boxed for shipping. Although the process seems complicated, hbc.com claims it works as slickly as a giant clock and has been stress tested to allow 10,000 customers to shop at the same time.
To battle the online version of Sears Canada, its chief competitor, hbc.com, needs this sort of grand capacity. It also needs all this efficiency to keep its online costs as low as possible. Sears.ca, after all, has its own leverage trick: because of its long-established catalogue business, Sears already has a fulfillment centre, and can keep shipping costs low by relying on its network of 2,100 agents spread nationwide in neighbourhood shops like dry cleaners and florists.
One way the Hudson's Bay Co. stayed lean was by forming a technology alliance with IBM Canada Ltd., Microsoft Canada Co. and Oracle Corporation Canada Inc. In exchange for providing HBC with a cost-effective and efficient e-tail showcase, the three technology partners benefited by being designated "preferred suppliers" of hbc.com.
The website that the three partners developed for The Bay sports a minimalist, crisp layout organized as rooms of a house. A static navigation bar on the left side of the screen makes it possible for shoppers to hop between any two products HBC offers in two, sometimes three steps. (How do you get from Godiva Chocolates to power drills? Click, click, click. Voila.) The Bay studied the sites of others and learned of the huge loss of business that can come when online shoppers get frustrated and abandon their shopping carts. Last year, according to Datamonitor, a New York-based market analysis firm, e-tailers lost approximately US$6 billion in sales when nine out of 10 shoppers abandoned their e-carts. Boston Consulting Group noted the same syndrome, but estimated the loss much higher, somewhere between US$15 billion to US$16 billion. The Bay addressed this problem in two ways: it made the site clean and simple, and it made sure that customers were always one click away from information on how to contact a service rep. In fact, setting up a call centre was a much bigger expense than The Bay originally envisioned.
Alves says the number of e-customers contacting the hbc.com call centre is huge because of the unease shoppers feel when there's no physical contact with a salesperson. Most of these customers contact the call centre, not to ensure their orders are going through, but to ask questions about products - for example: Does this vacuum cleaner have a warranty? How big is that toaster oven?
At the close of the press conference, the hbc.com stock pickers wander back into the warehouse from that day's extra-long lunch break and climb back up on the picking rack. As the first plastic bins of the afternoon ascend up the conveyor belts, the workers grab their laser guns and begin firing like space rangers. The computer notes their every move and the giant rack responds, sending the bins criss-crossing in an automated e-tail ballet.
George Heller conservatively expects hbc.com to generate up to $50 million in sales during the coming year. "We're the authors of our own fate in many ways," he says. "One would have to be a huge optimist to say that 3% to 5% of our sales would be online. But if I can deliver department-store goods and prices to communities where there is no department store, the future will be interesting."