The software side of Sears

Having invested US$75 million in its online retail operations last year, Sears is reporting huge success, proving once again that 'click-and-mortar' companies have a better chance of emerging winners in the dot-com game.
Written by Richard Williamson, Contributor
In its day, the sears, roebuck & co. catalog represented one of the most advanced retailing tools ever conceived. Through the phonebook-size publication, residents of rural America could order everything from cowboy hats to prefabricated houses, while expecting fair prices and reliable delivery.

Sears still publishes catalogs today, but the cutting edge is Sears.com, a sophisticated online operation that has achieved remarkable popularity while moving steadily toward profitability.

Sharing the assets and management of the retailer's brick-and-mortar operation, Sears.com broke into the ranks of the top 10 online retail sites this year, surpassing Dell Computer and Ticket master in unique visitors, according to Jupiter Media Metrix. Against its traditional competitors -- J.C. Penney, Kmart's BlueLight.com, Target and Wal-Mart Stores -- Sears has managed to achieve first place in three of the first seven months of the year, according to Jupiter. Wal-Mart also managed three first-place rankings, while Target came out on top once.

Sears.com had 3 million unique visitors in July, compared with US$20.5 million who went to online retail powerhouse Amazon. com.

While other retailers have struggled to deal with the complexities of apparel sales, Sears bypassed that market after research indicated trouble with returned merchandise and low profit potential. Instead, the retail giant is defending its turf by selling major appliances, home, garden and recreational equipment, among other products.

While most retailers might see the idea of selling a dishwasher online as a no-win proposition due to high transportation costs, Sears saw online sales as a way to defend its leadership in a major market while taking advantage of a well-established service and delivery system. In keeping with its conservative, profit-oriented approach, Sears conducted exhaustive research before plunging into washers and dryers.

"We now have over 2,200 appliances online," says Dennis Honan, Sears' head of online retailing. "When we launched, we didn't just think about buying an appliance online, we thought about how we can make the experience better."

The depth of information on appliances is designed to help shoppers pick a product, even if they plan to buy it in a store, Honan says. Sales clerks often see shoppers carrying printouts from the Sears.com site, he says. In addition to selling its own Kenmore appliances, Sears offers the other major brands, providing pricing, detailed comparisons and multiple images of the products.

"Major appliances is a Sears strength," says Sears spokeswoman Ann Woolman. "We have 38 percent of the market. If you put the No. 2 through [No.] 15 retailers together, that's our market share."

Seven months after its online appliance launch in April 1999, Sears.com became an online hardware store as well. After beginning with its trademark Craftsman brand, the site now offers 120 brands of tools. Transferring Sears' lead in lawn tractor sales to the Web seemed a natural progression. Less prominently, Sears.com operates a parts site with 4 million components on sale.

Online success has not come cheap. last year, sears invested US$75 million in its online retail operations. After enduring the taunts of pure online operations in the early days of Internet retailing, click-and-mortar merchants are clearly emerging as the winners in online sales. "The reason bricks-and-clicks is successful is that's what the American consumer wants," Honan says. "They want the integrated experience."

Heather Dougherty, a Jupiter retail analyst, agrees. "All of the retailers that had existing infrastructure are coming to profitability quicker," she says. The success of click-and-mortar operators is one reason Amazon, the leading online retailer, is partnering with established retailers such as Circuit City. Through the partnership, Amazon can sell a television without incurring the high cost of delivering it to the buyer's home.

Like the Amazon-Circuit City deal, Sears plans to offer in-store pickup of products sold online. The arrangement is certain to pull more shoppers into the stores, where they can make additional purchases.

While Sears.com is expected to be profitable on its own sometime next year, company officials say the site is already boosting the company's overall revenue. "If you looked at the site in terms of in-store influence, Sears.com would be profitable right now," Sears' Woolman says. "Sears.com influences about 10 percent of in-store purchases of major appliances, and that's about US$500 million a year. One of every 20 purchases of home office or home and garden products is influenced by the site."

Analysts agree with that view of online impact for brick-and-mortar retailers. "For every $1 spent online, $5.50 is going to be spent offline as a result of research done online," Dougherty says. "So, the Internet has a powerful impact."

When retail executives get down to calculating the returns on investment (ROI) for their Web efforts, they are forgetting to turn their eyes offline, according to a recent report from Forrester Research.

"Multichannel retailers looking for ROI from their e-commerce investments without taking companywide returns into consideration are like nomads in the desert hoping to happen upon a lake," says Lisa Allen, research director of Forrester in Cambridge, Mass. "Chances are it just won't happen. Retailers have to recognize the cost savings, efficiencies and incremental revenue that an e-commerce site contributes to the company as a whole."

Sears' online operation allows the company to improve efficiencies with a central database, improved inventory, and better information for employees online and off, Sears' Honan says. Despite that ability to track merchandise and inventory through a central database, Sears has no plans to launch online apparel sales anytime soon, he says.

Jupiter's Dougherty agrees that plan makes sense for Sears. But other retailers would be remiss to leave clothing out of their online stores, she says. "Sears has taken an interesting strategy, different than others, focusing on products where they know they can do well — hard goods, such as DVDs, rather than apparel," she says. "For someone like Lands' End, it makes sense to sell apparel and invest in things like virtual dressing rooms."

While online sales still amount to a drop in the bucket compared with Sears' overall sales, the growing online sales trend is promising. A Shop.org study conducted by The Boston Consulting Group shows the North American online retail market is expected to grow 45 percent in 2001, to $65 billion.

"While consumer demand continues to propel growth, online retailers have wrestled with operational issues and improving their performance in key areas such as customer acquisition and buyer conversion," says Elaine Rubin, chairman of Shop.org. "There is a steep learning curve in becoming an online retailer. Those players that were unable to excel in all facets of this complex business just didn't make it to the end of 2000."

At Sears, the online sales channel is rock solid, company execs say — far from the flimsy image of hundreds of failed dot-coms. "Online is able to deliver a great experience," Honan says. "Online will prove just as valuable as the catalog was."

* Sears, Roebuck & Co. invested US$75 million in its online operations last year.

* The company won't separate online revenue from overall sales, but officials say Sears.com's sales for 2000 were four times its sales for 1999.

* The company estimates Sears.com influences more than US$500 million of in-storepurchases of appliances.

* Although Sears is adding new merchandise to its online inventory, the company has no plans to offer apparel.

* Lawn tractors are among the site's most popular items.

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