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Embracing a Multichannel Strategy
As the online consumer market continues to grow, retailers are discovering that the multiple-channel model is the best way to meet customer demand.
Posted Apr 27, 2001
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Thanks to recent and rather sobering setbacks in the U.S. economy, many U.S. executives not previously committed to a multichannel strategy have experienced a remarkable epiphany. Admitting that pure-play is powerless, they have submitted to a higher marketplace authority that says multiple touchpoints are critical for businesses that want to stay competitive and build profits.

In other words, the "click, click, click" of yesterday's economy has evolved into the more Darwinian mantra, "click, brick, paper, voice."

And understandably so. The "clicks and mortar" strategy combines the advantage of offering customers greater access to and awareness of your company's products and services with strong operations and inventory management.

"We think the most successful strategy is for existing brick-and-mortar companies to basically build the Internet into everything they do, because the asset of your customers needs to be leveraged throughout the organization--stores driving traffic to the Web, the Web driving to stores. That's the only way to do it," says John Sheldon, associate director, e-business architecture at Dialogos, a customer development consulting firm headquartered in Boston.

Customer demand is one of the strongest drivers of multichannel models. The quest for convenience has drawn many consumers to clicks-and-mortar retailers that give them a choice of making their purchases on the Internet, through a catalogue or from a store. Many of these companies will allow purchases made online to be returned to local outlets.

"Customers want to be able to return merchandise using the method that is most convenient to them, whether it's by mail or at a store location," says Dennis A. Veltre, founder of Clicks &
Mortar Consulting, a Bayside, New York-based firm specializing in the retail market.

The majority of traditional companies have long leveraged multiple channels in marketing to customers, selling and cross-selling products, and managing inventory and fulfillment. Their operational models offer such advantages as strong brand presence and relatively low customer acquisition costs. The newer Internet channel offers powerful personalization technologies and a customer-centric focus that is important in retaining customers in today's challenging marketplace. Combining these advantages creates the competitive edge and efficiencies companies need to survive.

Making the Multichannel Model Work

To leverage this multichannel model, companies must develop a strategy that makes sense for their particular business and product category. "It all depends on where you are in the food chain right now," says Miki Tsusaka, Boston Consulting Group's vice president director of the consumer practice. "What is your current level of sophistication and understanding of your customer base? And what is the objective? Is it to retain every single customer you've got? Is it to buy new customer names because you're nobody and you need to get to that scale? Is it to sell customers the next category?" Once you have identified that objective, she says, only then can you determine what level of investment--in
technologies and in partnerships or acquisitions--makes sense.

"After all, you do not want to buy a nuclear engine if you can
paper-and-muscle the job through at the outset."

The extent to which online and offline elements function together to better serve the customer will determine the organization's future success. The challenges involve not only the technology, but also the ways in which information from each division is leveraged across the organization to promote business goals. From a purely technological perspective, integrating legacy systems with newer e-commerce front-end and back-end systems is both time-consuming and painful. While common architecture should govern distribution, the methods of distribution themselves must remain distinct for online and offline channels. "You will run a real inefficient operation if you don't have different methods and techniques for [online and offline]," observes Veltre. "You cannot work with a common inventory very easily, because in an online environment, you have to be able to reserve the stock and be able to promise it to the customer at a moment's notice."

Challenges notwithstanding, most industry analysts agree that the clicks-and-mortar approach to retailing is a winning proposition. The dollars-and-cents value of the strategy is well illustrated by the success of Gap, whose gap.com has been selling online since 1997. Sales have increased dramatically at Gap during this period, not merely because of incremental online revenue, but
because the different channels, both offline and online, drive customers to buy--and to buy more. For example, the Gap's in-door campaign to collect shoppers' e-mail addresses has broadened its online marketing base, increasing online traffic. Overall, customers who shop online and in the stores spend 50 percent more than single-channel customers.

Cannibalization Concerns

The benefits of opening an Internet channel can be compromised when companies don't address their concerns over the cannibalization of established channels of business by the online breed. The concern is a legitimate one, particularly in cases where a retailer may have too many stores, says BCG's Tsusaka. "I think the Gap right now is over-stored. In an over-stored environment, it's interesting how these organizational tensions arise if your dot com is too competitive." This tension is mitigated, she notes, by the fact that many online Gap customers who return items to the chain's physical stores actually make additional purchases in the process. Even so, for many over-stored companies, the solution is not necessarily to minimize online activity, but to reduce the physical network--if that's what makes sense for the customer base.

Tsusaka stresses that the right strategy is the one that most benefits the customer. "The act of cannibalization, if it's to your own benefit and your customer's, I don't think is bad," she observes. "It's cheaper for a catalogue company to send me fewer catalogues each year. If I start shopping on the Net, you might be able to send me a smaller catalogue. The act of cannibalization is not a bad proposition to you at all, as long as there aren't huge negative repercussions to your physical store network. At the end of the day, the online business is not going to be 50 percent of your core."

The very fact that, to maintain and grow a healthy customer base, traditional companies are increasingly migrating online while Internet companies are exploring traditional channels suggests that the one channel's domination of the customer relationship to the detriment of the other is an unlikely threat for the majority of companies. And the risks of relying on a single-channel strategy are probably greater than not.

"In my opinion, nobody in the retail space is going to be content with one channel," says Veltre. "When you're one-channel, and the customer expectation is to have the convenience of choosing between a store, a Web site or a catalogue," he concludes, "you're going to lose that customer."

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