Furnishing the Digital Era

25 June 1999

Furnishing the Digital Era Evolving Electronic Commerce Part I: Manufacturers and Retailers

by Emily Davidow

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Inside: Evolving Electronic Commerce Part I.................1 Books, stocks, travel... ok......2 The manufacturer’s role.........3 Furniture A.I.D...................4 Tootsie Pop...........................5 Selling direct........................7 The retailer’s role..................7 Lower costs online?...............7 Logistics, logistics, logistics....8 The taxman cometh............10 What do you think?............11 Case Studies: Reebok International............2 Ethan Allen.........................4 DeBeers Diamonds..............4 Herman Miller.....................6 Frequently heard fallacies: Looking for lower prices.......5 Physical stores disappear.......9 Customers require F2F........11

onfusion abounds regarding what policies manufacturers should establish regarding their product lines being sold over the Internet. This inaugural issue of Furnishing the Digital Era focuses on the significant issues facing manufacturers, offers possible solutions and creates a forum for dialog and discussion.

In just four years, the Internet has become a vibrant marketplace for buyers and sellers all over the world. Companies are marketing their wares to individuals, individuals are marketing their goods and services to individuals, and individuals are marketing their services to companies as both customers and suppliers.

Electronic commerce reconfigures the supply chain of consumer goods and services - retailers, wholesalers, and old and new intermediaries that come between producers and customers. It is imperative of any business anywhere along this spectrum to understand why customers are going to the Web and how they can satisfy shoppers... or leave them frustrated. You will see case studies of electronic commerce throughout Furnishing the Digital Era. Some focus on home furnishings companies, others illustrate lessons for the home furnishings industry from outside.

Clearly, the customer is now in control. The rate of adaptation to the Internet exceeds all prior media (92 million Americans in the spring of 1999). The Web offers an unlimited choice of products and services and increasingly easy-to-use ways to find and filter what the customer wants. The old critical factor of business success — location — is mitigated when information knows no borders. Even the Internet cannot remain captive in the PC anymore, thanks to increasingly ubiquitous access through TV set-top devices, appliances, mobile phones and PDAs. Anyone, anywhere, can access almost anything. The cost of accessing information is usually free.

Digital Elements 99 Jane St 9C New York, NY 10014 (212) 784-2070 www.digitalelements.com

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REEBOK INTERNATIONAL www.reebok.com The issues of brand and profit dilution facing Reebok are exactly those facing the home furnishings industry.

On the Reebok site today, you can browse their entire shoe selection, then enter your location to find out where to buy.

An interactive map with your location and the 3 closest dealers appears along with address and phone contacts.

Although a quick search reveals many sources selling Reebok products online, no Web referrals are made from their site.

“With the Internet, you no longer control your face to the consumer. There are a lot of electronic pawn shops out there and it’s up to the manufacturer ... to control the flow of excess product to the consumer,” says Roger Wood, vice president of global e-commerce and direct marketing at Reebok. “But we can’t control it alone. The retailers have to work with us in partnership.” (The Industry Standard) In order to regain control of its online sales, Reebok will handpick a select group of online vendors to sell its products.

Reebok’s plan involves dubbing approved online vendors “Certified Reebok Internet Partners.” This initiative will apply to Web-only merchants as well as traditional retailers with an online presence.

This plan, similar to Furniture AID explained on page XX, allows the manufacturer to control brand image and customer experience, while satisfying customer demand and keeping them from turning to competitors offered freely online.

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Do you find yourself overwhelmed by the amount of information flowing through you everyday? Perhaps, but when it comes time to make an important purchasing decision, you will educate yourself on product evaluation criteria, brands and vendors in order to make an intelligent choice. Right now, your customers (and future customers) are sorting through their furniture buying decisions based on information collected online. While only 10% of consumers say they regularly purchase items online, 57% regularly use the Internet to research products and services they might purchase later.

A disconnect occurs when companies’ Web sites present an inwardlooking view of the organization rather than a customer-facing one.

Products not available over the Internet may not be taken into consideration when making purchase decisions — regardless of whether those purchases are consummated over the Internet.

Companies marketing home furnishings have great opportunities to inform and influence customer decision making, even if they aren’t capturing their orders online. Big-ticket items such as cars and boats were researched by 19% of the online shoppers but purchased online by only 2%. Even books, purchased online by 39% of the online buyers polled, were researched but not bought online by another 35%. (E&Y 1999) The Web is underestimated as a powerful tool for driving commerce through traditional channels.

Books, stocks, travel... ok. But furniture?

Industry after industry is being reshaped by electronic commerce. (See sidebar on p. 3) Existing players may adapt wholeheartedly early and reap great benefits or hold out until they have ceded market share to new players, formats and business models. Things may move a little more slowly in home furnishings than other industries, but they are a’changing. No one can stop these changes by ignoring them or wishing them away.

Furniture customers are changing Our customers are those in the household-formation stage of their life cycles. Our customers are computer and Internet savvy people. And our customers of tomorrow are many multiples more so. “Today, nearly half of North America use the Internet. We use it to communicate, to learn, to shop and to buy. It is as integral a part of our lives as the telephone,” said Mark Resch, Executive Vice President of CommerceNet. Women also contribute significantly to the growth in electronic commerce: over a nine-month period, the number of online purchases made by female users increased by 80%. (numbers from Nielsen/CommerceNet, 1999). People with PCs and Internet access at home are more likely to spend time and money in and on their home.

The retail landscape is changing What was once an industry dominated by national chains is now increasingly served by strong regional players and niche chains and

Furnishing the Digital Era

boutiques. Regional players want territory exclusives and the Internet disrupts all that by giving any dealer access to any other dealer’s territory. For many lines, the opportunity to compare price is novel, even if a customer cannot purchase the product online.

The lines between retailers and manufacturers are blurring rapidly as retailers import goods directly and manufacturers open their own retail channels. The inevitable extension for progressive retailers unable to sell their vendors’ products online will be to seek new vendors; and for progressive manufacturers without dealers serving the online channel to find new dealers or market directly to consumers.

The manufacturer’s role Exceptional vendors strive to create a brand name that exudes quality and inspires loyalty from satisfied consumers. Creating a quality product is only part of the equation, however. Finding retail partners who can stock, display, deliver and promote the product in a way that enhances the brand is the other essential part.

June 1999

Stock Brokerages The first quarter of 1999 has seen a record number of stock trades through the Internet, and shares of online brokerages soared to astronomical highs. Online trading volumes rose 30 percent to 35 percent to about 450,000 trades per day from the fourth quarter, according to a research report by Bill Burnham of CS First Boston.

The surge in online trading came despite overall market volumes rising just under 5 percent over the same period, which indicates that online brokerages are taking market share from traditional brokers.

According to Burnham, about one in seven stock trades now takes place in cyberspace, and that number is expect ed to grow.

Merrill Lynch, a firm accustomed to charg ing clients hundreds and thousands of dollars for securities transactions will now enter the low-cost online stock trading business. It is planning to spend several hundreds of millions of dollars to catch up technologically.

Travel The relationship between manufacturers and their dealer networks is a strong asset. We see a great opportunity for manufacturers to enlarge their market opportunity by leveraging that asset – and a great risk for manufacturers to lose that asset by ignoring it.

But knowing you have to do something isn’t the same as knowing what you have to do, and determining the best way to integrate the Internet into your business strategy can be difficult. Few manufacturers are accustomed to two-way communications with the consumer, their ultimate customer, beyond toll-free lines to find the dealer in their area. If customers cannot find and buy your products online, they may overlook your line entirely when researching their purchases. If they have an unsatisfactory online shopping experience, they may turn away from your brand forever and encourage others to do the same through oneto-many messaging over the Internet.

Online shoppers are generally focused on a specific task and go through three distinct phases when considering a purchase. At first, they explore, seeking both manufacturers’ messages and objective editorial information to balance them. As customers filter out signal from noise and evaluate their options, their site visits become narrow but deep.

Detailed product and service information and comparisons receive heightened attention along with tools that help people imagine products in their home. Provided they do not get frustrated by lack of options, quality information or level of comfort, they will then execute the transaction.

Purchases aren’t always as carefully considered as the model above. For many online transactions, it’s easy to see an advertisement, go to the store and make your purchase — all without leaving your ergonomic desk chair.

76 percent of major travel companies offer online booking. This market is expected to mature into a $29 billion business by 2003, which airlines are expected to dominate.

Airline tickets are the most popular online travel purchases, but many sites are offering services beyond air travel, such as bookings for rental cars, cruises and hotels.

Microsoft's Expedia reports it generat ed $2 million in first-quarter 1998 sales for nonair travel offerings. One airline even announced that it would be imposing a $1 fee on those tickets purchased offline, but rescinded in the face of mass condemnation of the policy. The fee would not even cover the savings incurred were the transaction to take place online: an airline ticket transaction costs the airlines $8 using the traditional system but only $1 online.

Music Purchases of music by 15-24 year olds dropped from 32.2 percent in 19 96 to 28% in 1998. Yet young adults are more int o music than ever. MP3 music files, downloadable off the Internet, were hardly a blip on the oscilloscope one year ago, yet they are the main reason for the drop in recorded music sales -- not to mention the increase in antacid sales to music industry execs. Labels are scrambling to create ecommerce alliances, yet songs are freel y available for the taking by performing a simple search on the Web. Amazon already offers MP3 and Liquid Audio downloads online; EMI announced Monday, June 21, that it will make its entire catalog of music available for purchase and direct download online using the Liquid Audio format which offers protection against pirac y.

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Furniture A.I.D. (Authorized Internet Dealer) Program

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E T H A N A L L E N www.ethanallen.com Ethan Allen’s Web site offers a complete product catalog and looks like a commerce Web site complete with shopping cart.

You can select by collection, item, price range and any combination and receive a listing of products with thumbnail images. Prices are listed as “starting prices”. You may add items that you are interested in to your shopping cart, and then a printout with complete product information and prices is provided to take to your local Ethan Allen store to make your purchase.

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At the High Point market in April, we began to circulate a document called “Furniture A.I.D.” asking manufacturers to imagine the power of collaborating with their dealers on an e-commerce strategy in which they drove traffic to Authorized Dealers that sold their products.

Control would be retained through a contractual agreement with dealers to uphold their standards and an unwritten promise to customers that they will have a fair and pleasant furniture buying experience.

We believe the vast majority of customers will continue to purchase furniture locally, but not before thoroughly researching their purchases online. People are shopping online to learn about what they want, where they can get it and how much they can expect to pay. It is more comforting to purchase locally. You know who you are dealing with and you know where you can go for service. Yet a small (but increasing) number of purchases will be made over the Internet and often made for reasons other than price: for items unavailable locally, unavailable instock locally and most of all for convenience. (See sidebar on p. 5 for more information on purchase motivators.)

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DEBEERS DIAMONDS www.adiamondisforever.com DeBeers launched a clever Web site to allow people to design their own engagement rings.

Visitors to the site can choose their own combinations of 7,500 bands, settings and stones or browse through preset selections. When the perfect combination is found, the specifications can be printed and taken to a local jeweler who will fulfill the order. All manufacturers are invited to participate.

It is not too big a stretch of the imagination to extend this concept to upholstery or case goods.

For companies that already implement visualization software for in-store use (ModaCAD, Intellitek), the most difficult work is already done.

There is a simple and easy way for the furniture industry to win by making it easy for the customers to get what they want—information and furniture! They want to buy our products, and they want to make an informed decision before coming into our stores by shopping online.

Furniture A.I.D. includes a written contract between manufacturers and their dealers and an unwritten covenant between manufacturers and their ultimate customers (individuals purchasing from dealers), ensuring them a quality experience.

Let’s see how this plan works, using the fictional manufacturer, Enlightened Furniture Company (EFC). The first step EFC takes is creating and registering a trademark or service mark for the program.

The logo or mark should include the words “Authorized Internet Dealer of Enlightened Furniture Company” on it. Authorized Dealers’ Web sites will feature the mark prominently in appropriate areas, and the mark will link back to Enlightened’s Web site, validating that the dealer is indeed authorized to carry Enlightened products.

Determining who qualifies to use the trademarked logo is solely the discretion of the manufacturer. The trademark is important for legal control reasons — unauthorized use or failure to surrender this trademark may result in immediate restraint of trade actions (and damages if applicable) brought by the manufacturer.

Enlightened’s web site refers customers only to the Web sites of dealers participating in the Authorized Internet Dealer program. This allows customers to complete their transactions and grants Enlightened control over the channels through which its products travel.

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Furnishing the Digital Era

June 1999

Dealers may choose to participate in Enlightened’s Authorized Internet Dealer program by contractual agreement. Here is an example of their agreement; other contracts may differ depending on the criteria important to each manufacturer.

Frequently heard fallacies: Internet shoppers are only motivated by finding a lower price online...

A. Authorized Dealers will: • have an attractive store and online display of the manufacturer’s product, • adequately stock the products that they sell, • appropriately advertise and promote the product, • maintain a well-trained sales and customer service staff, • deluxe all furniture before delivery, • deliver and service everywhere they sell and • handle customer complaints in a professional manner.

Certainly the prospect of finding lower prices on the Web is a strong motivation t o purchase online. Numerous tools1 abound that allow customers to compare prices for similar goods across retailers in a single place. But this certainly is not the only motivating factor. While each customer will place different values on each quality below, all qualities are significant motiv ators for purchasing online:

B. No dealers shall be Authorized Internet Dealers without serious commitment to the manufacturer.

C. When applicable, Authorized Dealers agree to offer the manufacturer’s products on their Internet site in accordance with the manufacturer’s minimum advertising price.

D. Authorized dealers will discontinue the use of the manufacturer’s trademark upon the receipt of a registered letter recalling its use.

In order to encourage customers to support traditional retailers, one could implement a system similar to Sony Electronics (www.sel.sony.com), that encourages a customer to enter their zip code when seeking where to buy products. A list of retailers near them appear, with a link to authorized online retailers below. Reebok’s interactive map powered system also works well, but they lose customers in the loop by not providing them with links to commerce partners online.

Furniture AID is easy and relatively inexpensive to implement; the rewards are great. No one is left out of the loop, and control over who may sell the products is regained by the manufacturer. After initial success with customers on their Furniture AID program, Enlightened Furniture would like to go further and offer all of their retailers an equal playing field online. Although a few of their dealers are already online, most are unprepared to offer their own promotional or transactional Web sites. They would like to enjoy receiving inquiries and the opportunity to satisfy their customers online. They are also concerned about the quality of customer experience on all of their AID sites — the merchandising of their product is not always as attractive and accurate as they would like. So they have come up with the Tootsie Pop program...

Tootsie Pop How many licks does it take to get to the center of a Tootsie Pop? It depends on a variety of factors, including the size of your mouth, the amount of saliva, etc. How many clicks does it take to get to

Convenience: The hours on the Web can’t be beat. Outdoor goods retailer REI reports 35% of its online orders are placed between the hours of 10pm and 7am when its catalog operations are closed.

Variety: Customers can find a larger selection shopping online where competing dealers are always a few seconds away than travelling from store to store. Even for customers located in large metropolitan areas that are well served by numerous retailers, shopping is frequently a time-consuming hassle; customers use the Web to filter out what brands and stores they really want to buy from before setting foot in a store.

Immediacy: This has always been an issue for home furnishings, and customer’s frustration is exacerbated by the promise of immediate gratification made by the Internet. Quick delivery is a large motivating factor for purchasing home furnishings online and off.

Furniture just isn’t suited...

The extension of e-commerce to almost any and all products and services is inevitable and rapidly becoming a reality. Successful online retailing does not depend on the nature of the product but on the ability of the retailer to leverage the unique features of the Internet to create a shopping experience that is enjoyable and offers value.

Contrary to popular perception, most pur chases made over the Internet are “consid ered” purchases (as opposed to impulse purchases), done after extensive thought and research. In fact, the majority of online buyers (5 2%) don’t use the Net to mak e spontaneous purchases, while only 12% said they do so frequently or regularly. Some 42% of online buyers plan their purchase and know what brand they want and/or the merchant they want to buy from. (figures from Ernst & Young’s 1999 Internet Retailing Report) continued on page 9

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HERMAN MILLER www.hmstore.com Herman Miller furniture has begun an ambitious plan to sell furniture directly to consumers over the Web at the risk of destroying its relationships with dealers. In the past, the company relied on a network of more than 400 contract office furniture dealers throughout the U.S. to sell its products to big companies. In the mid ‘90s Herman Miller began to target the SOHO market by selling through stores like Crate & Barrel and ABC . This deeply upset the contract office furniture dealers. When the online store was approved in 1997, the network of 200 retailers felt threatened as well.

Unlike manufacturers in other industries (Microsoft, Sony, Apple) that sell direct to consumers at list price, Herman Miller promises to match the lowest price on the net.

Although the full product line is not yet offered online, contract office furniture dealers will have to emphasize the unique services they offer in order to compete they can design an office, fix things and reupholster - and they will have to provide a rich shopping experience.

Enlightened’s furniture on a dealer’s Web site? The answer is as elusive as that of the eternal Tootsie Pop question. Enlightened has figured out a way to provide all of its dealers the opportunity to serve their customers online while keeping the quality of their products’ representation on all Web sites uniformly high. Enlightened provides their dealers and customers with the essential Tootsie Pop center and allows dealers to coat it with their own unique flavors.

The most expensive and time-consuming components of a successful Web site —whether it is made for a manufacturer or retailer — is the photography and detailed product information. Controlling the quality images and information a retailer provides can be a challenge for the manufacturer concerned about maintaining brand integrity.

One way Enlightened can increase consumer awareness and demand while maintaining brand integrity is by providing these essential elements for the retailers. Although the initial cost may be significant, its value may be even greater.

Enlightened’s full product catalog would be available online through their Web site and allow consumers to find authorized retail and online dealers from which to purchase the product. (Because they realize not everyone has high speed access to the Internet, they are taking the extra step and making it available also as a one-time file download and CD rom). Enlightened must keep the photography and product information updated, but it will be of uniform quality across the board, creating a level playing field for dealers and upholding the standards of the manufacturer. They may also set the minimum advertised price, starting price, or suggested retail price on the pages. They allow customers to select items that they are interested in, creating a wish list that they may print and take to retail stores in their area, or link to those products on Authorized Internet Dealer sites.

Authorized Internet Dealers would be able to create their own sites within the parameters of the official manufacturer’s Web site, but this way the information is guaranteed accurate and current. Those using dynamic Web sites that create product pages from database information can tap directly into Enlightened’s data for their own Web site, ensuring that it is always up to date without any extra effort required on the part of the dealer.

Enlightened initially saw three important goals for Tootsie Pop:

For further information, check out: “Herman Miller in the Hot Seat” from The Industry Standard: www.thestandard.com/articles/di splay/0,1449,3381,00.html

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1. They could accurately get their message out to the public in a timely manner.

2. Their retailers can get online quickly without a lot of labor costs.

3. Their customers can find accurate, timely information with real prices and close the loop by selecting a local retailer who carries it or purchasing online, thus taking them off the market.

Furnishing the Digital Era

Once they implemented their program, they realized that by supplying their dealers with high quality photography and product information rewarded them with higher rates of promotion and greater sell-through by their dealers in every medium.

Selling directly to the customer Selling direct is frequently mulled over in the mind, but rarely if ever brought into the open. Clearly this is not a decision to be made lightly.

The logistics required for selling to individual customers differs radically from shipping truckloads to regular dealers. Customer care requirements are multiples more intense. Miscalculating in any of these areas can burn bridges with dealers and customers. Even manufacturers already offering goods directly through company owned stores must consider carefully whether it is not better to leverage the distribution network already in place than to reinvent the wheel.

Manufacturers with a strong desire to try selling direct might be better dipping in their toes with a clearance outlet or a unique selection of merchandise not available in stores. Herman Miller is one manufacturer that sees the opportunity to expand to a market not currently served by its network of dealers. Read their story at the left sidebar and their dealers’ reactions on the right.

The retailer’s role Selling and offering customer service online isn’t as easy as it’s cracked up to be in those full page advertisements in the WSJ by Sun, Microsoft and IBM. It requires a large commitment of time and resources and often a complete retooling of your organization’s processes and logistics handling. Valuation and access to capital in the .com world is based not on profitability — nor even promise of profitability — but on marketshare and rapid development.

Although “Brick and Mortar” businesses thought the Web would slash high rent and payroll costs, most are still waiting for that miracle to occur. At the same time, “online-only” businesses are investing in huge warehouses and fulfillment facilities. The home furnishings industry has special challenges in store for online-only retailers, including complex logistics, deluxing and relying on manufacturer delivery times.

While the Web levels the playing field in the sense that the barriers to entry are low — anyone can set up a Web site — the costs of marketing a Web site so that it may be found amidst all the noise take up an amazing amount of revenues for online companies.

June 1999

How do dealers feel about Herman Miller’s Web efforts?

In a letter to The Industry Standard from March 8, 1999, Jay Berez, VP Marketing of BFI explains: Imagine the power of Herman Miller and its 200-plus dealer s collaborating on an e-commerce strategy in which ever yone drove traffic to a central site that sold Herman Miller products. The dealer driving the traffic would get credit for the sale and HM would still get the business. This is more powerful than the usual affiliate program. ...The relationship between HM and the dealer network is a strong asset. In e-commerce or other wise, marketing wisdom would seek to “enlarge the market opportunity” by leveraging that asset, not by ignoring it and certainly not by aggressively competing with it when there is another choice.

Alex Goodman, VP of Goodmans Office Furniture, a Herman Miller dealer in Phoenix, posts: "If you're worried about disintermediation, go open up a Dairy Queen franchise. That's a lot safer."

Lower costs online?

According to Business Marketing’s polls of 22 leading Web development and integration firms, a transactional Web site costs around $1 million to develop. But in electronic commerce, the Web site is merely the storefront tip of the business iceberg. The costs of maintaining and pro-

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Furnishing the Digital Era TRADITIONAL GOES

25 June 1999 R ETA I L E R

E N T I R E LY

V I RT UA L

E G G H E A D S O F T WA R E www.egghead.com Egghead Software, a leading 1980’s retail chain, decided that eliminating their physical locations would lower their costs and raise their profits. In 1998, they shuttered 93 stores and set out to operate entirely online as egghead.com. Fortune has not shined on Egghead’s online venture however, as Egghead lost $21.6 million on sales of $106 million for the first nine months of fiscal 1999 — 42% more than 1998. Expenses actually shot up to 34% of revenue in 1999 from 18% of revenue in 1992. Gross margins sunk to 10% this year from 20% in 1992. (numbers from Forbes.)

VI R T U A L G E T T I N G

R E T A I L E R S P H Y S I C A L

AMAZON.COM and T O Y S “ R ” U S www.amazon.com www.toysrus.com Amazon.com is constructing a seven-acre distribution center in Nevada along with two more in Kentucky to help speed up book, music and video deliveries that were taking up to a week to process. (They already have distribution warehouses in Washington state and Delaware). This followed Barnes & Noble’s (failed) attempt to purchase Amazon supplier Ingram Books and its 11 U.S. distribution centers. Toys “R” Us will spend $30 million on a 500,000 sqare foot warehouse in Memphis to service its Internet unit. These investments indicate that purely virtual delivery has serious flaws for companies focused on customer fulfillment.

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moting the site, fulfilling the business it creates and keeping up with technology improvements can drive costs to staggering highs.

Bluefly.com, a well executed off-price Web site, recently launched a house and home section. At a recent home furnishings conference, Ken Seiff, Bluefly’s CEO, pronounced that costs for building a great retail sites are extraordinarily expensive. The site itself is only the tip of the iceberg, and anyone planning to become a dominant player must plan on cumulative losses from $25 to $100 million. Andrew Brooks, president of Furniture.com, added that capital markets look at any business withan advertising expenditure to sales ratio of less than 1:1 as “small minded.”

Logistics, logistics, logistics...

One proudly held tenet of the Internet economy is that physical assets no longer play a major role in value proposition. Internet-only retailers with no physical investments to potect, no channel relationships to massage were rated the biggest online threats to traditional retailers.

Even Internet-only retailers seem to be investing in some serious physical assets as they attempt to solve the fulfillment challenge and manage rapid growth.

The effective transfer of goods is critical — whether the point of contact is a sales representative in a retail store or a click on a computer screen.

For many manufacturers and retailers, distribution historically has involved large shipments on pallets to a few locations rather than small mixed lots to thousands. Online selling frequently creates the need to build an entirely new distribution infrastructure.

Virtual invests in physical We see online retailers investing in physical warehouses: Amazon.com, Barnes & Noble and Toys “R” us have recently invested in large distribution facilities for their online ventures. (See sidebar at left.) Last year, Federated department stores acquired Fingerhut to gain their expertise as a catalog and fulfillment company for their traditional department stores.

In order to ramp up quickly and gain expertise that would take a great investment of time and money in-house, many online retailers are outsourcing their fulfillment. Wal-Mart Stores, Inc., the biggest retailer in the U.S., is making large steps to dominate electronic commerce, and has appointed Fingerhut Business Services to provide fulfillment. This allows them to leapfrog the logistics learning curve and become successful immediately. Wal-mart has been nominally online for a while, but has resisted expanding its Internet offerings until the company was certain it could maintain the level of service its customers expect.

Fingerhut also announced it would handle distribution for Internet toy retailer eToys.

Furnishing the Digital Era

Virtual invests in virtual Others are investing in networks of virtual warehouses to make sure their customers can get the goods. Web retailer iQVC, the online spinoff of the popular QVC cable-based shopping network, has developed a virtual warehouse system that allows it to deliver more than 100,000 products (50,000 more products than it stocks in its own warehouses and offers on TV). With a network of some 300 manufacturers, suppliers, distributors and fulfillment houses, iQVC can deliver those products to online shoppers within 48 hours of an order being placed. In 1998, the Web site rang up more than $50 million in orders among its shoppers - 70 percent women - who spent an average of $70 per order.

The store, which counts consumer electronics and 14-karat gold jewelry among its top high-margin home products, hosts up to 450,000 shopping sessions per week.

Furniture presents special challenges for logistics, including the necessity to deluxe merchandise before delivering to customers and high delivery costs.

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Furniture.com ships furniture direct from the factory, avoiding warehouse charges, and passing the savings along to the customer.

Although they offer delivery time estimates, they must also pass on manufacturers’ production delays and scheduling changes.

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Living.com, Andrew and Jay Busey’s home furnishings retail site scheduled to launch July 1st, recently purchased Shaw Furniture Galleries in Randleman, NC. This acquisition gives them 100,000 square feet of retail showroom space along with the ability to warehouse and deliver from their own facilities.

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BeHOME.com , Benchmark Industries’ Web site delivers all merchandise from its own warehouses in Olathe, KS. All items shown online are carried in-stock, and even special orders come to their warehouse first before delivery to the customer to ensure the customer gets the correct item in perfect condition. (Disclosure: Emily Davidow created BeHOME.com in 1994, see p.12)

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IKEA.com, one of the most delightful online home furnishings sites to explore for educational and inspirational decorating ideas, does not currently sell their products from their Web site. IKEA began offering telephone sales for its printed catalog last year and realizes — like Wal-Mart — that the infrastructure must be in place to effectively supply customer demand before plunging head-first into online commerce.

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Homepoint.com, recently renamed from Furniturepoint.com, ships to customers from its Lawrenceville, Georgia, warehouse.

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RTA specialty online retailers drop-shipping directly from manufacturers such as Sauder, Bush an O’Sullivan include: Advanced Furniture Outfitters (www.afo.com) and Furniture Online (www.furnitureonline.com).

June 1999

Frequently heard fallacies: Internet shopping will make physical stores disappear entirely Electronic commerce complements physical stores and will become an essential component to successful physical retail stores.

The stores themselves will not disappear.

Eventually, as electronic commerce becomes mainstream, there will not be ebusiness and e-commerce, only business and commerce.

At present, there are still many barriers to online shopping: 57% of households do not have a PC. 52% of households with PCs are online.

36% oh households with online PCs have purchased anything over the Internet.

Interestingly, the 36% who do shop online say that they purchase online with great frequency. (figures from Ernst & Young’s 1999 Online Retailing Report).

Online marketing, like other retail innovations, should lead to an expansion in total revenues across retail categories. This was proved by superstore retailers in the 1970s and 1980s. In the category of books, the introduction of superstores grew booksales more than what was predict ed by population and historical buying patterns. The online channel is likely to expand demand by improving the shopping experience.

Focus your vision ahead a few years, and you can imagine that all businesses will have an electronic interface to their activities. Customers will interact with your company in the way that is most appropriate for their action at that time. Weekend family shoppers may take a few days to come to a decision on what they have seen in a store, and decide at work. Rather than having to drive back out to the store, they can place their order online for pick-up or delivery. Conversely, shoppers from a rela tive distance can preview your goods online, then decide to make the trip out to see and purchase in person. Customer service questions don’t always arise during your normal business hours; being able to address them when convenient and receive a prompt response is a powerful incentive for your customers to remain loyal to you.

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Furnishing the Digital Era

Frequently heard fallacies: Customers need face-toface customer service You can receive indifferent and hostile service from any shopping channel - a mall outlet, department store or catalog operator.

It’s hard to get, train and retain people who are interested in filling orders and dealing with complaints. The most successful retailers are those that offer the best customer service, but service need not be experienced face-to-face to be meaningful.

A thoughtful e-mail, chat transaction or phone call can establish and feed relationships. Many customers turn to the Web because they would rather help themselves than rely on retail salespeople for accurate information and helpful service.

25 June 1999

In any category online, instant gratification is expected as the norm.

Furniture ordered directly or special ordered from the manufacturer — even under quick ship conditions — rarely qualify as instant gratification. (Exceptions include rugs and RTA.) The challenges facing the virtual home furnishings retailer, shipping directly from the manufacturer seem insurmountable at this moment in time. With home furnishings in particular, immediacy is a tremendous motivator to purchase.

Customers able to receive furnishings quickly are more likely to purchase online than purchase from a local retail store that forces them to wait 6-12 weeks (or more) for delivery. Sufficient inventory and wellexecuted distribution are significant factors for home furnishings retailers online.

Not all the rules for retail success are waived for success in the electronic shopping arena. An effective fulfillment organization — to both anticipate and fulfill consumers’ needs — is required. Failure to prepare technical and logistics infrastructures may alienate vast numbers of Web shoppers who will not give you a second chance when your competitors are only a click away.

Logistics companies such as Fedex and UPS are gearing up to provide extensive fulfillment services tailored for electronic commerce, and new intermediaries such as iShip.com are entering the fray with specialized services, but the size, weight and in-home requirement of most furniture deliveries excludes them from the reach of these programs. Freight and in-home delivery companies are waking up more slowly; great opportunity exists for those that can understand the new needs of retailers online.

The taxman cometh One of the great advantages online retailers have held will be disappearing soon. The Internet Tax Freedom Act, which provided a moratorium on taxes for Internet commerce for three years beginning on October, has spawned the Advisory Commission on Electronic Commerce (ACEC) to study federal, state, local and international taxation and tariffs on transactions using the Internet and Internet access.

The government sanctioned tax relief has been a tremendous boon to online retailers — particularly in home furnishings where the significant savings of sales tax offsets the significant costs of deliveries for outof-state purchases. "We learned early on that discriminatory taxation, or even the fear of discriminatory taxation, has the potential to slow significantly the growth of the Internet and electronic commerce," said Joseph Guttentag, senior advisor for tax policy at the United States Treasury Department.

Special treatment no longer necessary But it seems that online commerce has thrived exceedingly well — exceeding even the most positive predictions. The Department of Commerce’s latest report shows that the number of people with

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Furnishing the Digital Era

June 1999

Internet e-mail addresses rose 137 percent in the past year. Consumer sales over the Internet last year totaled about $10 billion, and they are expected to top $100 billion by 2003. Business-to-business electronic commerce came to $43 billion last year, and is expected to grow to $1.3 trillion by 2003. Guttentag is also aware of the legitimate revenue concerns of the states: "We must not allow the Internet to become a tax haven that drains the revenue governments need to provide the services that citizens demand, such as the education of our children and the safety of our neighborhoods."

What does it mean?

This has significant implications for home furnishings retailers online, accustomed to offsetting delivery charges with tax savings. Without the tax saving incentive to purchase out of state, local and regional stores able to provide merchandise at competitive prices in an efficient manner will reap great benefits. Unfortnuately, unless they are represented online, they may not be considered in the running when selecting a company to buy from.

Coming Soon: • Evolving Electronic Commerce Part II: New Models and Intermediaries • Logistics in-depth • Adding value to manufacturer-dealer relationships through Extranets • And much, much more! (If you want to share good examples of any of the categories above, please let us know.)

Partnership is required In this new environment, encouraging manufacturers to support Internet commerce and support their dealers in offering their wares online benefits not only online retailers, but traditional ones as well.

Even if you are not currently selling online or planning to sell online, you can encourage your vendors to help educate your customers about their lines and drive traffic to your stores. Well executed manufacturer Web sites drive traffic not only to online commerce, but offline as well.

When the playing field is level, the customer will choose to do business with the company that has the products they want (at competitive prices), fast and quality delivery service and customer service at the level they need.

What do you think?

Collaboration and partnership are needed if the home furnishings industry is to meet the challenges presented by online commerce.

Please join the discussion at www.digitalelements.com and add your comments, questions, insights and concerns. All voices are welcome and valued.

On the Digital Elements Web site, you can also sign up for a free email newsletter regarding breaking technology news that impacts the home furnishings industry. If you would like to receive this newsletter on a monthly basis, please take a moment to subscribe. Along with the newsletter, subscribers will access to members-only areas of our Web site featuring constantly updated in-depth research and ratings on all home furnishings Web sites, interviews and special reports.

— Emily Davidow

Furnishing the Digital Era is published monthly by Digital Elements, 99 Jane St 9C, New York, NY 10014; 212.784.2070; fax, 212.784.2071. E-mail us at info@digitalelements.com or visit us online at www.digitalelements.com.

Furnishing the Digital Era covers technology trends that impact every sector of the home furnishings industry.

Copyright 1999, Digital Elements. All Rights Reserved. No material in this pub lication may be reproduced without written permission. Subscriptions cost $595 a year in the US; $650air-mail overseas (or $595 for digital version only).

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Furnishing the Digital Era

25 June 1999

Furnishing the Digital Era SUBSCRIPTION FORM Please enter my subscription to Furnishing the Digital Era at the rate of $595 per year in the U.S. and Canada. Overseas print subscriptions are $650, with airmail postage included; electronic delivery available for overseas customers available at the rate of $595.

Furnishing the Digital Era is published monthly. Introductory special: subscribe now and receive $100 off the regular price ($495). (Offer good through July 31, 1999.)

All subscribers will receive, in addition to a monthly newsletter, regular e-mail or fax updates of breaking technology news with special pertinence to the home furnishings industry along with access to subscriber-only areas of our Web site featuring in-depth research and ratings on all home furnishings Web sites, interviews and special reports.

Name___________________________________________________________________ Title_____________________________________________________________________ Company_______________________________________________________________ Address_________________________________________________________________ City_______________________________ State____________ Zip______________ Country_________________________________________________________________ Telephone_________________________ Fax_________________________________ E-mail_____________________________ URL_______________________________ Method of Payment: ❑ Check Enclosed. ❑ Mastercard ❑ Visa

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Furnishing the Digital Era was born out of a crying need expressed by every sector of the home furnishings industr y, Furnishing the Digital Era offers timely and expert analysis of technology trends specifically as they apply to our industry. We will go beyond conventional wisdom and provide clear analysis of technology and commerce trends along with case studies, interviews and special reports.

We aspire to see the furniture industry come together to advance all stakeholders.

Industry after industry has faced a complete shift. It is now the furniture industry’s opportunity to embrace the changes and adapt, or ignore them and allow change to happen without the players we know today.

One retailer cannot be successful without the support of a network of suppliers, and one manufacturer cannot be successful without the support of a network of dealers.

We are not about establishing rules, creating organizations, or advancing our own interests (except by advancing those of the entire home furnishings industry). We know that in order to be successful, we must be in a thriving, consumer-facing industry.

Who is Digital Elements?

Digital Elements, founded by Emil y Davidow, created BeHOME.com — an award winning home furnishings pioneer Web site, as well as Web sites for manufacturers (Sealy Furniture by Klaussner, The Mitchell Gold Company) and sites for EDventure Holdings, an information ser vices company focused on emerging technologies. Presently, Digital Elements offers a variety of consulting services and formats to the home furnishings industry to integrate technology into their businesses.

Emily Davidow speaks regularly on issues of electronic commerce at Internet and home furnishings industry conferences an d events. She also founded Home Cinema Designs, a company that in vents furniture adapted for technology in the home and licenses manufacturers to produce a patented expandable home theater cabinet that adjusts to accomodate any TV. Experience in both the home furnishings and Internet commerce industry allow us a unique position to facilitate in the convergence of furniture, technology and commerce.

Upcoming Live Events: 29 June 1999 — “Beyond the Browser; Designing for Successful E-Commerce” and “Visual Tools Shootout” at the Web Design and Development 1999 in San Francisco, CA. http://www.mfweb.com 14 August 1999 — “Internet Opportunities and Strategies for Furniture Manufacturers” at the AFMA Marketing Division Meeting in Hilton Head Island, SC.