NETTING IT OUT

Today’s retailers are all struggling to provide a seamless branded customer experience across distribution channels and interaction touchpoints. Catalog merchants are opening retail stores to boost sales. Bricks-and-mortar retailers are adding Web sites and catalogs. Retailers refer to this blended nirvana as “multi-channel” retailing.

For many years, total catalog sales have been running 10 percent of total retail sales in North America where the catalog shopping tradition is strong; a lower percentage in other parts of the world. According to Jeff Bezos, CEO of Amazon.com, online shopping will probably never exceed 10 percent of total revenues for traditional brick and mortar retailers.

Yet, today’s retailers know that catalog merchants and online merchants have a big advantage: they know more about more of their customers. And each channel has been proven to reinforce the others. You can drive customers to the store and to your Web sites by sending them catalogs. Customers browse online and buy in the store. Or they browse in the store and shop online.

Today’s retailers have also come to realize that modern consumers have become quite demanding about the quality of the customer experience they receive as they cross channel and touchpoint boundaries.

We’ve identified eight core competencies that we believe multi-channel retailers need to master in order to thrive in the Customer Economy. Sears, with its recent acquisition of Lands’ End, stacks up pretty well on all eight counts.

THE SEARS/LANDS’ END SAGA: SO FAR SO GOOD!

The most surprising acquisition of 2002 was that of Lands’ End by Sears Roebuck & Co. (announced in May, completed in June). Yet, this deal could well be the most strategic move that Sears’ CEO Alan Lacy has made in turning around the embattled mass-market retailer. Although Lands’ End’s 2002 revenues of $1.6 billion were only 4 percent of Sears’ 2002 revenues of $41 billion, Lands’ End brings a set of direct merchandising core competencies back to Sears.

While the Lands’ End acquisition by Sears took many consumers by surprise, it wasn’t news to the retail industry. Apparently, Lands’ End founder Gary Comer, who owned a majority of Lands’ End’s stock, was looking for an exit strategy. Working with an investment banking firm, Comer sought the best available opportunity to sell his firm.

Bill Bass, Lands’ End’s SVP for E-Commerce and International, explained to me that Lands’ End was seeking a bricks-and-mortar partner that could become its engine for growth. Lands’ End’s executives knew that the company’s prospects for growth in retail sales were constrained as long as it limited itself to catalog and online sales.

To grow more aggressively, Lands’ End needed to have a broad distribution through a traditional bricks-and-mortar channel. Lands’ End’s execs wanted to grow their bricks-and-mortar footprint much faster than would be possible by financing that expansion from current operations. Lands’ End had 18 retail stores, including discount outlets, before the merger.

Sears, on the other hand, was struggling to attract customers to its soft lines. Most customers think of Sears as the place to go to buy appliances and tools. Sears has been unsuccessful in gaining traction in apparel and white goods, despite its catchy ad campaign, “The Softer Side of Sears.” Although Sears was rolling out its own private label apparel brand, called Covington, gaining customers’ interest in Sears as a destination to shop for clothing for the family was clearly an uphill battle. The Lands’ End brand and reputation for high quality, comfortable clothing for the whole family would give Sears a jumpstart if it could capitalize on the Lands’ End brand.

The Sears/Lands’ End combination made a lot of sense for both parties.

For Sears, Lands’ End can become, if managed properly, the flywheel to catalyze and to drive cultural change throughout Sears. Sears abandoned its direct merchant roots when it scaled down its catalog business and replaced it with a consumer credit business. The Lands’ End direct merchant culture could help Sears become more customer-centric. We are optimistic that the meshing of the two retailers’ gears will go reasonably smoothly (with only a little sputtering).

Of course, it’s still early in the marriage. The honeymoon is barely over. And, based on the dismal track record of many mergers, the larger culture may win out in the end. If Sears’ mass market retail culture stamps out Lands’ End’s direct merchandising culture and innovation, Lacy’s $1.9 billion bet won’t pay off, and Lands’ End’s customers will lose a trusted partner.

Core Competencies for Retailers in the 21st Century

We believe that there are eight core competencies required to excel in retailing in the 21st century. These are the capabilities that any retailer (business or consumer) will need to master to thrive in the customer economy. Retailers will need to master:

1. Building and maintaining customer trust, loyalty, and value
2. Customer-friendly direct merchandising
3. Investing in and leveraging e-catalog expertise
4. Excelling in the ability to efficiently create and maintain branded customer experiences as “stores-within-stores”
5. Providing seamless cross-channel brand experiences
6. Offering customer-configurable, build-to-order goods
7. Excelling in lean manufacturing and dynamic just-in-time supply chain management
8. Providing a profitable mechanism for inventory liquidation

As you’ll see, Lands’ End has done a great job on most of these. Since all these are also competencies that Sears has also worked on throughout its 115-year heritage, we are optimistic that the combined competencies of the now-merged multi-channel retailer will make Sears more...