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The Internet offers a powerful connection between retailers and customers, but managing this tool among a portfolio of distribution options demands marketing prowess and a juggler's skill

By Rebecca Lindell

The problem of integrating multiple channels has never been easy. But the Internet has added a level of complexity that challenges even the most experienced retailers.

Consumers now have at their fingertips more information about products and pricing than ever before. Web buyers are pickier and savvier, using the Internet to research purchases before completing them elsewhere. How are retailers to determine the best mix of infrastructure and strategy to truly leverage the power of the Web across all channels?

Those who have not addressed this question yet are late to the game. Online commerce still accounts for less than 6 percent of all retail sales, but as a channel the Internet clearly has come of age. Technical advancements and the spread of high-speed Internet service have made the Web a more comfortable place for a growing number of shoppers. Meanwhile, e-commerce sites have become easier to navigate, more customer-friendly and reliable.

Read the related story: "Internet security: The keys to the online store"
The maturation of the Internet market was apparent during the 2005 holiday season, when online purchases accounted for 27 percent of all spending, up from 22 percent the previous year and 16 percent in 2002, according to research firm Nielsen//NetRatings.

"There's a level of confidence that consumers have that online shopping really does work," says Mohanbir Sawhney, the McCormick Tribune Professor of Technology. "We've reached critical mass. The Internet has finally become just another way to shop."

More and more, that evolution is being led by classic brick-and-mortar retailers that have awakened to the Internet's potential as a sales channel. Amazon and eBay, two sites synonymous with online retailing, still dominated Internet sales during the holidays. But the fastest-growing sites were traditional merchants that have leveraged the power of multichannel marketing, offering customers more than one way to buy a product or service while expanding their opportunities to interact with that customer.

Wal-Mart was the third-most popular site during the holiday season, with Target, Best Buy and Circuit City close behind. Other traditional retailers, including Neiman Marcus and L.L. Bean, said that for the first time their Internet sales outpaced telephone orders from their popular and well-established catalogs.

"If you're any company that's worth its salt, there's absolutely no way you can avoid the Internet," says Louis Stern, the John D. Gray Distinguished Professor Emeritus of Marketing. "You're going to use it either as a primary channel or as a complementary channel, because that's what your competitors are doing."

Web sites have been refined to the point that shoppers can place orders with a single click, rate and recommend items, and chat with customer service representatives. Customers are getting ever closer to experiencing the merchandise, browsing the contents of books and compact discs or "trying on" apparel in online dressing rooms. Shipping has become less expensive and delivery more reliable.

The maturation of the Internet, which is in part also the story of widespread broadband adoption, has opened up a world of opportunity to traditional retailers, allowing them to reach customers who might not browse their stores or catalogs. Such shoppers may well be drawn to a Web site that will enable them to find what they're looking for quickly.

The multichannel trend has worked the other way, too, leading a number of catalog and Internet retailers to open traditional stores to capture customers still more comfortable shopping the old-fashioned way. Catalog retailer Coldwater Creek, for example, had no brick-and-mortar stores as recently as eight years ago. Now, the women's apparel merchant counts more than 150 shops across the country. "You need to interact with the customer in a way that's convenient for them," says Eric Anderson, associate professor of marketing. "If you're customer-centric, multichannel is the way to go."

Consumers are also exploiting the multichannel environment, using the Internet to bargain-hunt and research merchandise before heading into a traditional store to buy an item. Such behavior has blurred the distinction between channels, Sawhney notes, adding that firms must think about serving their customers in a more holistic way.

"I don't think there's a hard and fast dichotomy between brick-and-mortar and online retailers," Sawhney says. "Think about the last time you made a significant purchase. You might locate it online, find a couple of reviews and some information on the price, and then go into a store to buy it. Was that an online or offline purchase?

"Every brick-and-mortar retailer has to open another front online," he concludes. "They have to use the store to complement the online experience and vice versa." This will be easier in some categories than in others, Sawhney admits; apparel makers will always face more of a challenge marketing their wares online than, say, book or music sellers, who can enable customers to sample their products via downloads from the Web.

But virtually all traditional retailers have a point of presence they can leverage in ways that purely online stores can't, Sawhney concludes. He cites Circuit City's offer to customers to buy an item online and pick it up at their store within 24 minutes, "guaranteed."

"That's a good, synergistic use of the Web site," Sawhney says. "You can't do that if you're only an online store." 

If the opportunity presented by the Internet channel is abundant, so are the potential pitfalls. It can be difficult, for example, for merchants to find a cost-effective balance between their Internet sites, catalogs and traditional stores. Anderson notes that while catalog orders can be more costly for a company to process than those placed over the Internet, return rates tend to be lower.  Reducing the returns of orders placed online remains an ongoing challenge for retailers, but one worth surmounting, because, as Anderson says, "once you get people to order over the Internet, they tend to stay on the Internet."

An even bigger issue for multichannel retailers is pricing. The Internet has introduced a degree of transparency that would have been unimaginable a decade ago, catching retailers — and customers — by surprise.

"Many people weren't aware that firms price according to local conditions until the Internet came along," Anderson says. "They'd go into a store in one area and see something on sale for one price, and then go online and see it for another price. The Web made it salient that prices weren't the same."

Many retailers have responded by setting the same price across the board. Others have established the Internet price as the lowest price, but as Stern says, "that puts one channel in competition with another channel. If they displace each other, or customers start saying one of your channels is acting at cross-purposes to other channels, then you've created a monster. You've got to keep your channels from stepping on each other's toes or confusing the customer."

Companies can prevent that by ensuring that each channel delivers the service outputs for which it is best suited, Stern says. For the Internet, those would be convenience, ease of use and access to information.

 For all the effort and expense involved in developing the Internet as a retail channel, the impact it will have on the bottom line for traditional retailers remains unclear. 

"Firms believe that multichannel buyers are typically better customers," Anderson says. "It is true that customers who buy from multiple channels will spend more money than customers who buy from just one. For example, Saks claims that multichannel buyers spend five times more than single-channel buyers.

"But if you're a firm that is investing in multiple channels, that doesn't mean you're necessarily going to increase what your customers spend on you," Anderson adds.  "You're simply creating more options for purchasing. Your best customers will tend to shop across all your channels, but this does not imply that offering multiple channels causes customers to spend more at your company." 

Even so, traditional firms are well advised to make their online channel the best it can be. The Internet has become the channel of choice for many customers, and firms without an online presence risk losing sales to competitors, Anderson says.

Furthermore, "online channels are not just about purchasing; they are also about providing information," Anderson adds, citing findings that eight out of 10 consumers have searched online for an automobile before arriving at a dealer showroom.

Such exposure emphasizes the need for traditional retailers to strengthen their Web presence even if such investments do not instantly translate to the bottom line.

"Every brick-and-mortar retailer has to be a clicks-and-mortar retailer," Sawhney says. "They have to give the online channel the attention it deserves."

©2002 Kellogg School of Management, Northwestern University