Special Report: Online retail revolution

in Retail Group (IMRG).

Almost 40 per cent of the UK population did some of their Christmas
shopping online last year, and a quarter of the UK's online shoppers'
entire spend was over the Christmas period.

Unpredictable growth

But behind the scenes, traditional and pure online retailers had mixed
experiences with both the volume of sales and fulfilment targets.
Argos's website went off line for a period of several hours, many
supermarkets struggled to offer enough delivery slots and even venerable
food retailer Fortnum & Mason failed to deliver to 300 of their 73,000
orders, blaming a record high number of orders over the Christmas
period.

The good news is that the internet is now seen as a trusted shopping
medium, as companies have invested in building secure and user-friendly
websites.

"As consumer activity online has increased, so too has trust, and
experience has taught people that stores are generally reliable and
secure," says Matthew Tod, chief executive at web analytics firm Logan
Tod.

According to Mike Altendorf, managing director of software company
Conchango, the uptake of 'always on' broadband has contributed further
to growth.

"Customers are voting with their keyboards. The internet isn't just
about price any more - people do it because they want to and it's
convenient," he says.

But such growth in online shopping has brought with it a fresh set of
challenges, mostly for those high street retailers that also have an
online presence, the so-called 'clicks and mortar' businesses. These
multi-channel retailers, by definition, have to spread services over a
wider range of outlets, and this can mean that less time is devoted to
online offerings compared with pure internet retailers.

"High street retailers experienced outage problems because their sites
were overloaded with too many visitors at key times," comments
Conchango's Altendorf. "Those sites that performed best were the pure
online players."

Steve Palmer, vice president of marketing at Zeus Technology, which
develops products to help retailers cope with seasonal fluctuations in
demand, also believes the high street retailers failed to make the most
of Christmas web traffic. He puts this down to retailers' lack of
experience in the online field but, he says, planning for changes in
customer demand is key to a successful online shopping strategy.

"Problems that arose for retailers were mostly to do with huge
underestimation of demand and a lack of capacity to meet this," says
Palmer. "But to be able to manage surges in online traffic, marketing
teams would have needed to make predictions around May so that they
could have implemented systems in time."

Misjudging the high levels of demand over Christmas was a problem when
it came to fulfilment, too, for both the traditional and online
retailers.

Fulfilment house Zendor's experience highlighted the problem. "Our
clients give us a prediction of demand and we staff up to that and allow
ourselves a 10-15 per cent margin for contingency," says Keith Jordan,
fulfilment director. "For some, however, that simply wasn't enough
staff. On top of this, it can take two to four weeks to train employees,
by which time Christmas has gone. When this happens, we move people
around within the group, across accounts and between warehouses."

Underestimating demand

Stock control was another problem. "Stock levels are decided and
controlled by the client, and it's not easy to get extra goods over
Christmas," says Jordan. "Once you're affected it's too late because it
has all been bought.

Moving items around within the client's business, say from shops to
warehouses, if certain things are selling better online, can solve the
problem."

John Lewis proved to be one of 2005's best examples of a successful
clicks-and-mortar operation. Sales through the John Lewis Direct website
have grown 70 per cent every year for the past four years, and the same
was predicted again in 2005. In anticipation of continued growth, the
company strengthened its website operations and planned extensively to
ensure it could cope with processes from sales through to
fulfilment.

According to Alison Lancaster, head of marketing and catalogues for John
Lewis and Neil Weightman, commercial director of iForce, which provides
fulfilment for John Lewis Direct, there's no excuse for missing the
commercial opportunity that the internet offers.

"Clients' forecasting is improving, so we should really praise that,"
says Weightman. "In John Lewis' case, the projections were that business
would increase but these forecasts were exceeded. We work so closely
with John Lewis that we're treated as a store. We can both track how
we're performing and realign stock immediately."

iForce also credits its smooth Christmas with the implementation of a
new carrier management system. This allows the fulfilment house to see
whether a particular courier has a problem and, if so, divert deliveries
via a different partner carrier so that service levels can be
maintained.

"Our planning meant making sure everything was in place for Christmas.
This involves ensuring the website links to back-end operations and
fulfilment services," says John Lewis Direct's Lancaster. "By October
we'd already appointed a second call centre and secured a second
warehouse. It paid off and we had no major web downtime or fulfilment
issues."

There is serious profit, both in monetary and brand-value terms, to be
had from getting all areas of internet retailing right. And as the
example of John Lewis proves, being an established traditional retailer
does not mean it is impossible to get it right online, and on time.

All quarters of the industry are now advocating early planning, and more
developed contingency plans. Predictions from the IMRG are that total
internet shopping for the year will increase by 36 per cent, and that
shoppers, who this year spent an average of £816 each, will break
the £1000 spend-per-head barrier.

Zeus Technology's Palmer says that the importance of planning cannot be
stressed enough. "You've got to plan ahead - take your wildest guess and
add 50 per cent. Ask yourself the following: what if a campaign is
successful? What happens if millions of people suddenly come to your
site? And then put plans for this into practice."

COMMENT

Alison Lancaster, head of marketing and catalogues for John Lewis

The website is such an important marketing tool for us. We have to make
sure that our back-end systems stand up too and support the entire
buying and delivery process.

Conrad Bennett, technical services director, Webtrends

The danger for some retailers is that if their delivery slots aren't
available for their existing customers as a result of new customer
demands, then you've failed your loyal and valuable customers.

Mike Altendorf, managing director, Conchango

There will be a lot of website upgrades this year as some of the more
reticent retailers understand that websites are here to say.

These retailers will really need to strive for multi-channel
integration.

Neill Weightman, commercial director, iForce

The work starts now for 2006. If some clients decide to widen their
product offering, we need to know this as soon as possible, in case we
need to have a major stock change or allocate more warehouse space.

NEED TO KNOW

Top tips on customer service for internet shoppers

1. Automated emails A lot of retailers are using, or moving towards,
automated responses to keep customers informed at every stage of order
fulfilment. Keith Jordan from Zendor says: "The system is great because
it stops people wondering their goods should arrive. It's also
pre-emptive, and retailers can offer tracking information so the
customer can contact carriers to check where their goods are."

2. Cookies If your website can recognise return visitors, products can
be suggested to increase spend. "If people return to a site and you have
their details it makes it a lot easier for them to make a purchase and
makes them more likely to return again and again," says Steve Palmer of
Zeus Technology.

3. Provide information to prevent returns "We once had an iPod returned
because it didn't have any music on it," says Neil Weightman of
iForce.

"When people buy something they sometimes send it back because they're
confused or embarrassed. If you give them help and provide product
information on the website, then you can reduce the level of
returns."

4. Old-fashioned service and the human touch Alison Lancaster of John
Lewis will always use call centres for those segments of customers who
prefer to ask for help, rather than use online or self-help methods.

iForce's Neil Weightman, meanwhile, advocates apologising immediately
when you've made a mistake. "The customer is still always right," he
says. "And people still value being treated properly. Selling products
is not just about price on the internet - it's a service issue now
too."

5. Sing from the same hymn sheet Make sure that all links in the
e-retail and fulfilment chain are in close and constant contact, and
that you know each others expectations. If all areas stay close, when a
customer service problem does arise, problems can be fixed more quickly
and efficiently.

RETAILERS

WINNERS AND LOSERS

- John Lewis Direct's online arm saw a 76 per cent sales increase
year-on-year and, even at peak times, still had a maximum page loading
time of two seconds.

- Argos was the UK's largest online high street retailer over the
Christmas period, and even upped its Christmas Day sales by 50 per
cent.

- Online entertainment retailer Play.com's sales rose by 100 per cent in
the first week of December alone, at one point taking 488 orders per
minute.

- Fortnum & Mason's website orders increased by 75 per cent in the two
weeks before Christmas, but 300 of its 73,000 orders went
unfulfilled.

Source: John Lewis Direct, Argos, Play.com and Fortnum & Mason

CASE STUDY

Brief: To create a system capable of dealing with a high number of
online orders

Target audience: Buyers of gadgets

Supplier: In-house

Firebox.com offers the sort of gadgets, gifts and products that are
traditionally in high demand over Christmas. The internet retailer was
founded by university friends Michael Smith and Tom Boardman, and began
life in 1998 as Hotbox.co.uk. In 2004, the business had a turnover of
£8 million.

Firebox manages its business end-to-end, with the exception of final
stage delivery which is handled by partners such as Royal Mail and
Citylink couriers, and payment, which is outsourced to Secpay.

Both the site and customers are regularly updated on the stock
availability via automated technology developed in-house, and no money
is taken from the customer until a product is ready to ship from the
warehouse.

The bespoke programme allows customers to enter their order
identification number and email address online, and find out the current
status of their order via a central database. Emails are also sent at
every stage and, when the order has finally been dispatched, Firebox
emails again with a tracking number so customers can also track their
products there.

"Everything stood up brilliantly over Christmas," says Boardman.
"Obviously there are always little niggles but we got on top of them
very quickly because we do everything in-house. When you have 600
different lines and around 200 suppliers, there are always issues with
suppliers not giving you as much stock as you want and you sometimes
over-order, but there was nothing major this year."

Part of Firebox's success over Christmas was down to its "robust and
expandable" technology system, which allows the site to handle even
greater demand than it experienced over Christmas. The site does around
half its business in the last quarter of the year but is designed to be
able to cope with high visitor levels all year round.

Christmas 2005 saw an increase of over 100 per cent in orders in the
five weeks up until mid-December, with actual sales volume up 50 per
cent.

However, based on turnover and the level of orders placed, the number of
complaints received over the 2005 festive period actually declined.