Get the Right Mix of Bricks and Clicks

Get the Right Mix of Bricks and Clicks Davis Felella Gill Carvell Van Der Bosch Barry Wilson EMBA TEAM CHICAGO University of Illinois Executive MBA Program BA 490 X 1 E-Business & Commerce Mgmt Professor Michael Shaw February 8, 2003

E-Business Management 490 X 1 Case Study: “Bricks and Clicks” The Manager’s Dilemma --Should we integrate our Internet business with our traditional business OR should we keep the two separate?

E-Business Management 490 X 1 Case Study: “Bricks and Clicks” The Click-and-Mortar Spectrum Strategic Spin-Off (Barnesand. Noble. com) Partnership (Rite. Aid & Drugstore. Com) SEPARATION • Greater Focus • More Flexibility • Access to Future Funding Joint In-House Venture (KBKIds. com) Division (Office. Depot. com) INTEGRATION • Established Brand • Shared Information • Purchasing Leverage • Distribution Efficiencies

E-Business Management 490 X 1 Case Study: “Bricks and Clicks” Barnes and Noble Their Goal: l To compete with Amazon. com. Why this Goal? l Because Amazon was eating their lunch.

E-Business Management 490 X 1 Case Study: “Bricks and Clicks” Barnes & Noble What steps did they take to achieve their goal? l l Created a separate division and ultimately spun it off as a stand alone company. Implemented new management structure that was entrepreneurial. Benefits included faster decision making, flexibility and access to available capital for internet startups. Barnes & Noble maintained 40% ownership.

E-Business Management 490 X 1 Case Study: “Bricks and Clicks” Barnesand. Noble. com – What Happened? l l l Lost 90% of equity in 3 years. CEO resigned after one year. Sacrificed more than they gained: – l Forfeited marketing opportunities by not promoting the web site in their stores. Barnes & Noble stock recovered from the e-commerce losses in 2001…and then declined.

E-Business Management 490 X 1 Case Study: “Bricks and Clicks” What did others learn from Barnes and Noble? l The benefits of integration are too great to abandon. l The “Manager’s Dilemma” should be modified to be: What degree of integration makes sense for OUR company?

E-Business Management 490 X 1 Case Study: “Bricks and Clicks” Office Depot Goals: l Polar Opposite of Barnes & Noble l Tight integration of physical stores and Internet. l Internet viewed as ‘‘just another channel’’. Why? l Existing catalog infrastructure, including delivery services. l Existing IT infrastructure which maintained current inventory levels at all locations, among other things. l Low involvement product with high cost procurement with mostly B 2 B customers

E-Business Management 490 X 1 Case Study: “Bricks and Clicks” Office Depot How? l l l Order for delivery next business day or refer to a local store for pickup. Provide information on in store availability Detailed product information on website B 2 B customer enhancements, such as individual purchasing limit. Design inter and intra net offering

E-Business Management 490 X 1 Case Study: “Bricks and Clicks” Office Depot Results: l l l Increased traffic at physical sites-prompt “for store pick up” to drive incremental sales Cannibalization of catalog business increases profitability Now head to head with Staples who has integrated it’s web business after large $$$$ losses Office. Max does 180 million in e-business without commercial linkage Eliminated all “virtual” competitors Office Depot - $1. 5 Billion in e-business sales.

E-Business Management 490 X 1 Case Study: “Bricks and Clicks” Office Depot

E-Business Management 490 X 1 Case Study: “Bricks and Clicks” Office Depot l First to announce a Spanish language site. l Currently do 13% of global sales via e-business. l Maintain Viking brands (Direct Mail/Catalog) site. l Multi-division structure: – – – Stores Business Services Catalog - International - Call Centers - Depot. com

E-Business Management 490 X 1 Case Study: “Bricks and Clicks” KB Toys Goals: l l l New infrastructure for e-commerce Take advantage of strong brand name Take advantage of Brain. Play’s Internet experience Why? l l Zero Internet experience at KB Toys. Toy shoppers are highly price sensitive.

E-Business Management 490 X 1 Case Study: “Bricks and Clicks” KB Toys How? l l $80 M invested in joint venture, 80% stake in Brain. Play. KBkids name leveraged their image while allowing expansion into other products. Emphasis on easy return policy at its stores. Boards of directors included representatives from each company.

E-Business Management 490 X 1 Case Study: “Bricks and Clicks” KBkids Results: l l Little cannibalization at mall stores which rely on impulse purchases Physical stores increased buying power. Today: l l Back to KB Toys, management buyout of division from parent company, now privately held. Purchased e. Toys in bankruptcy.

E-Business Management 490 X 1 Case Study: “Bricks and Clicks” Rite. Aid Goal: l Internet presence fast through strategic partnership with Drugstore. com Why? l l l Convinced it was the future way of doing business Drugstore. com had strong investors available, limiting Rite. Aids risk. Drugstore. com had the internet experience.

E-Business Management 490 X 1 Case Study: “Bricks and Clicks” Rite. Aid How? l l l Purchased a 25% stake in Drugstore. com Both brands promoted at each destination (coupons, labels, etc. ). Separate identities maintained. Appearance of integration to customers. Integrated business functions.

E-Business Management 490 X 1 Case Study: “Bricks and Clicks” Rite Aid Results: l l Drugstore. com now has access to PCS Healthsystems customers, which approves their reimbursement. Flexibility for customers that often need prescriptions immediately.

E-Business Management 490 X 1 Case Study: “Bricks and Clicks” Rite Aid-Drugstore. com Today l l Prescription Refills Stock – l around $60 in 1999 to $3. 00 today l l GNC Relationship l Drugstore. com is a glorified porn site Stock – Around $80 in 1999 to around $3 today GNC relationship

E-Business Management 490 X 1 Case Study: “Bricks and Clicks” Four Business Dimensions (5 actually) Brand l Management l Operations l Equity l Competition l

E-Business Management 490 X 1 Case Study: “Bricks and Clicks” Brand l Strong existing brand adds credibility to the Internet site. l Less fear of credit card fraud, important to customers l Extending brand identity to the Internet can inhibit product offerings to maintain commonality.

E-Business Management 490 X 1 Case Study: “Bricks and Clicks” Management l Draw on current expertise with integration. l Encourage innovation with separate management.

E-Business Management 490 X 1 Case Study: “Bricks and Clicks” Operations l Leverage existing distribution and/or IS capabilities. l Build new state of the art systems at large cost.

E-Business Management 490 X 1 Case Study: “Bricks and Clicks” Equity l Retain and gain entire value of internet operation. l Spin off and limit risk. l Spin off and ensure access to capital (less of a factor today? )

E-Business Management 490 X 1 Case Study: “Bricks and Clicks” Competition l Are you entering a no-win situation? l Is it possible that your rival is not accountable for a profit for years to come? l What would you have done if you had been a manager at Barnes & Noble?