Ca s eS t u d y 24;'

CASE STU DY

REI Climbs t he Web Mountai n

ashington-based Recreatio nal Equipment, Inc (REI) is the world 's

largest online retailer of outdoor gear. REI is a somewhat ,1l1 USUal company , Lloyd and Mary An derson , mounta in climbers from Seattle, Washington, founded REI in 1938 T he Andersons im portee!

a special ice axe from Austria for themselves and decided to set up a cooperative to

help their friends and other fellow outdoor enthus iasts acquire high-quality climbing and cam ping gear at reasonable prices , Today, REI is the largest consumer coop era­

tive in the United States, with nearly 3.3 million members who have paid a on e-time

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244 CHAPTER 4 Buildi n g an E-commerc e W e t. S, il e

m embership fee of $20 that entitles them to an annual divide nd eqll 1

of th eir annual purchases . And the business has grown. Today. R! [ ( ),

100 retail stores in 27 stat es, two online stores, an internat ional rn.iii or.l . ,

and REI Adven tures, a travel agel cy. Kiosks in every store allow U,,:>t ·, I

products at either of REI's Web sites: REI.com and REI-Outlet. con . Rf I \ rn. 9,000 people, and in 2006, gen erat ed over 1.16 billion in gross n '.( IHI

million of which comes from its on line stores. REI first start ed exploring the Internet in the urnmer of 199 1 1'- r

gone public, and e-commerce was jus gett ing started . As with manx iJ ISII , '

stories, REI's online venture b egan with se nior executives \' ho II (0' II!

potentially transformative pow er of the Web, and the mixture ot 0tJp 11 tl 1

possible th reat that it represen ted.

Many traditional bricks-and-mortar ret ailers at that time fea red ( d 111111 '" 11/'

their retail and/or catalog sal es if th ey in troduced an online sdl,;-, iut lr

n ightmare was that starting an online s tore wo uld m erely "steal" th r i: I' c. I} ( 11:-1

from their regular sales channels. But REI wasn 't deterred. As Den nis 1\1 (L 'Il

former president and chief execu tive officer, sa id, "We knew tha t if w. (!I,ll! II'

our customers who were looking to sho p with us onl ine, they wou ld tUII t'l (I

else online. It was never a question for us . Being on ine meant be tt e I St I. 11

tomer. Our exp erience has pro ven tha t cannibalization is largely a 11\ til n I

multi-channel cus tome rs are our best customers. For instar c. ( , I

custom ers who shopped bo th online and at store spent 11 4°, '1l0 ,

chan ne l customers. And custom ers who shop three channels- retail III

kiosks-spent 48% m ore th an dual-channel customers." REI charged Matt Hyde, who h ad previously helped st art REI 1\(,\, I "1

company's trave l se rv ice (an d wh o now serv s as the company 's 5( rio (,

dent of marketing and merchandisi ng) , with the mission of lau nc ru n I"

Web site on a budget of approximately $50 ,000 . At the tim e. 'etscap, company offering a complete e-co m me rce suite, so REI chose Nc ts c.i p: 5 \1 "

Server software installed on an IBll RS / 6000 se rve r. And although l l , L1,. ,

nized that REI was a re tailer by trade, not a progr amming shop, h: r h '.". I 1

des ign of the site in-h ouse, using off-the-shel f Web authoring tool s i .uh. I til, I

source creation of the Web site. The rationale : "When [we] took the leap , r t :\'1 r

we cou ld launch this compelling valu e proposition, and that it could 111 ni I

realized we needed to make this a core compe te ncy. It could n' t b. (Jill () I ,

T h e decision was not without its costs, h owever: managing RF I.r.o n " internally, with no outsourcing, stra ined REI's human resou n I I 1-\

discovered that finding people with the requisite skills could be di fficult 11,1,

if they could b e found , th ey we re a lot more expensive tl a I ~ I· I'

In September 1996, at a time when few t raditional retailers wen eve .r ()(t~ I

online sales, RELcom lau nch ed, promoted primarily through dirt' il 1

in-store notices. The first order arri ved 20 m inutes later. By Feb ruary j Cjll . . j

and his team knew they were on th e righ t track . Traffic was up by 50° t ,

months following Christmas. But that in itsel f posed a problem. As Hvue I 1

bers, "We chose Netscape early on , and th ey we re clearly the le ader [a t r,1 But not long after getting the syst em up , we reali zed that it was too Iirni t,) \ ,'

C a s eSt u d y 2t:-5

fr rn a few thousand people ch ecki n g out y our sit e to a mi llio n every «o a

J" yoUneed a lot of infrastru ctu re." t1

1I :,~so noted, "On the surface, e-commerce sounds re latively easy. It's not until H experience trying to in tegrate a high-volume, high-functionality Web site have '

Oll . ' o'na business processes and app licati ons th at you realize th at it's a lot harder . to e:US t»

III . eems. It 's like an iceberg-the view from the browser is only 10% of what it rhan It s

to build a su ccessful and profitable Web site ." ('l ke ~I had originally h oped to up grad e with Netscape, but, as Hyde said, "that wasn't

orking out."This time th ey had mo re of a choice , an d looked at offerings from all the \'I . r vendors including Microsoft , IBM, Broadv ision, an d OpenMarket. "Wh en youmaJo ' .

. nue comm erce packag es, there 's a huge learning cu rve. I was going to make this chtl ::; change once, but I wasn 't going to do it aga in, so I wanted to pick th e right package ... fo r the next seve ral years." In early 1998, REI decid ed on IBM's Ne t.Commerce server software. An importan t factor in th e decision was IBM's ability to preserve all the custom coding REI h ad done over the past two year s to conn ect its online store to its

legacy system. "I h ad h undreds of tho usands, if not m illions of dollars tied up in this [system], and we didn't want to throw it away. An d since Net.Co mmerce [would also lessen] the nee d to do custom coding in the future, it's a two-fold b enefit."

In August 1998 , REI lau n ch ed a second Web site, REI-Ou tlet.com, using Net.Commerce serve r software. Onc e REI-Outlet. com was successfully la un ch ed,

REI then turned to mi grating RELcom to th e new system, completing the mo e in

October 1998. In 2002, REI began a th ird re -b uilding of its Web site by standardizing on a single

platform , IBM's WebSphere, an integrated se t of e-corn m erce site de velopme nt and operational tools. Prio r to th is point, REI's e-com m erce in frastru cture was a mixture ofsoftware applications written both in-h ouse an d by a variety of different technology vendors. In th e period since REI's second re-bu ild in 1998, IBM h ad developed a suite of tools and functiona lities b uilt on standard s su ch as Java and Unix that included

WebSphe re Application Server, WebSphere Commerce, MQSeries Int egrator, an d IBM YisualAge for Java, all run ning on IBM pSeries Un ix-based computer servers, which can be configured with m ultiple pro cesso rs in ord er to scale with a business. By that

time, REI h ad come to the realization that it was less costly in the long ru n to rely on

a single vend or su ch as IBM to provide an integrated se t of e-comm erce applications, rather th an building the appli cations in-h ouse.

Today, REI offers more than 45,000 unique produ cts onl ine-m ore than in any of'­its physical stores-at prices th at are th e same as in the retail s tores; thousands of pages of in-dep th produ ct in formation ; an interact ive com m unity system; and a complet e adventure travel service. The outlet store, REI-Outlet.co m , sells merchan­dise that th e company buys specifically for the outlet.

REI's technology platform continues to rely on IBM pSeries and iSeries servers that link th e Web sites and stores to backend legacy datab ases that are used to store

product and cus tomer information (see figur e). The WebSph ere applications provide end-to-end b usiness to consum er commerce fro m shopp ing and checkout to fulfillment. Ord ers fro m th e Web site are processed as seamlessly as those from retail stores or m ail-order sales.

246 CHAPTE R 4 Buil di n g a n E- commer c e Web e

IBMiSeries Mainframe Server

IBM pSeries Database Server

IBM pSeries IBM pSeries Server for Server for REl.eom REI-Outlet.eom

Real-time Linkages - Non-real-time Linkages

The syste m appears to be working well. REI has won a "Best i I I «I

In novation" Reta il Systems Ach ievement award and b ee n named b I o -: Research as one of the be st m ulti-channel companies in Forres ter's .S. muir; ( .11

retail evaluation, which measures the top "0 things a re ta ile r must ell) t d I (

great multi-channel experience. REI scored highest for "custom e r exp: I r J t'

"technical integration ."

With its focus on an integra ted platform from a single ve nuo i I [I h

im plem en ted extensive customer features it ilizing the platform' s cap ihil iri. ~ 1

personaliz ed service and information , as well as m ore con venie nce for both tJI11111

and in-store shoppers. For instance, REI has the ab ility to re fer ne w web l ustoui. IS

nearby stores tha t are having sa les. It can e-mail coupons fo r bib lu-lme:

redeemable a t loc al stores or onli ne to customers who purch as. d I, t ,Cit. 1

WebSphere can drop an im age of h iking boots feat ured a t REI on to the ::-oc 1( rH

customer reading an REI "Learn and Share" article on backpacking.

REI' s clicks-and-bricks strategy has paid off handsomel \ . III lULl!"

improving relationships with exist ing customers, th e online st ores helve !I, 1PI ell

ate new cus tomers. About 36 % of th e online customers are no t I1lCmbLlS or llli FI ooperative, m eaning they are likely new customers, compared to 1'). I I- ' , I

retail cus tom e rs . And despite m anage m e nt's early fears , th e onl ine SLOr, \ r n . cannibalized tradi tional store sa les . In fac t , the opp osite has occu rred: T h. \\ IJ i

h as attracted n ew customers a n d strengthened th e relationshi p with ( is 'ns customers. Two services enabled by th e WebSph ere Commerce plat forn BF [ Jf(

Pickup service , and REI's gift registry, are a case in poi nt. REI Sto re Pickup s( r , 1(1

C a s e S: u d y 247

ovides in-store p ickup as a free ship ping option for o nline orders. To im ple me nt Plr , se rvice, REI combined its Web and s tore fulfi llmen t systems, sh ip ping p c

rner merchandise to th e stores on th e same trucks that deli ver the st o re 's (usco ,,, . 'eekl v stock ord ers . The service has proved to be a tre m e ndo us success

bl-\' ­In its first 12 mo nths, in-store pickups from online sal es accounted for $40 m ill ion . re\'enu e and they now account for about a third of online sales Todav, mo re In ' •J

than 40% of all ord ers ge ne ra ted on REl. co m 's Web site are de livered to st or es for ickup, nnd one-third of the customers who p ick up orders purchase a n addi tional

; 90 in merchandise during the visit. REI's mult i-ch annel gift registry is a no th e r example. Th e regis try can be set u p, monitored, and updated through an in-stor e kiosk , over the ph one, or a t RELcom . All modifications to the lis t or purchases are

updated to th e list in re al time . Acco rding to REI, gift reg istr ies crea te d on line bring customers in to its retail stores, many of w hom ar e firs t-time customers.

With th e ascenda nc y o f Goog le a nd search e ngine marketing, it ha s als o

become cr itical that REI's on line catalog pages appear in the first page of search

engine qu eries. REI worked with a Web firm called Net concepts to redesign it s Web pages, end th e pr actice o f using dynamic URLs for pages, and in ge nera l make th e catalog Web pages mo re frie ndly to search engine Web crawle rs so its pag es cou ld be prope rly read. T he resul t was a 200% ga in in "natu ral search" sales produced withou t making pay me nts to search e ngi nes . In 2006 , REI be gan using a so ftware service, Mercent Re ta il, to h elp it be tt er ma nage refer rals from comparison shopping portals such as Shop ping.com, an d manu facture r Web sit es . The se rvice,

which is int egra ted with REI's back-e nd reta il managemem software sy ste ms, helps REI ma in ta in brand an d merchandis ing consistency between its own Web sites a nd the variou s third-pa rt y s ites, and op tim izes the pro duct li nks se m to ea ch of its

chan ne l partners .

As a res ult of its efforts , REI has bee n rewarded with steadil y in creasing online sales, wh ich have gro wn from $ 111 mi ll ion in 2004 to $195 m illion in 2006 , a nd according to Internet Re tail e r 's Top 500 Guide, ranked first in th e o nline Spo rt ing

Goods marke t a nd 61st ove rall . Bu t REI isn 't satisfie d with just 20% a n nua l growth According to Brad Brow n , REI's vice preside n t of e-commerce a nd web stra tegy , "We wan t to grow mor e aggre ssively ." To do so , i t is im pleme n ting more rich media , videocas ts, and oth e r new tools . For exam ple , shoppers can watch a video O il how to cha nge a fla t bi cycl e tire . Lin ks for related produ cts appea r on the same page . Rich media applications from Heck Yes Prod uctions e na ble shoppers to se e prod­ucts in 3 D and from d ifferent angles . RSS is anothe r new tool tha t REI is using. As

you lea rn ed in Chapter 3, RSS is a da ta feed that delivers updated information fro m selected Web sites d irectly to a subscribe r's desk top REI uses RSS to dri ve traffic to

REI -Outle t.com's "deal o f the day ." Stayi ng atop th e Web mountain requi res constan t innovatio n .

-SOURCES "AbcutUs,"PE, Cf'l.

October 2007,'hancl,,1 Sta tements Recreational Equlpmem. Inc anc Sublldlane\ Report d tndspencenr ,:e C::'I~d

PIJDlicAccountants, jranr

Thorn ton. ,l orrl J . 2CO;'REI', OnlinePerformance Climbs.vitn

M~rc enl Retail." Marcn 2'j. :0: ­"Top500GUide. 2007 fdllIOO. : Internet Reraile!. 2007' Case Study' REI"" . NelConcepts.;om , lulv 28, 2006. ·'REl.com Expand, t~ Srcre P'ckup D'oqram, . totemet qeraJler, ~,~arc" 1) :006 "RE' Optimizes Salel Wln, (ross-channel Commerce Solution,' IB ~/ j Case 5tudv. August 2004. "How REI Scale': "n.' E-cornrnerce :VicuntJln. '

by Megan Santosus. e.o. May ',9. 200" , .,REI Named 3est I '

E·commerce Inno'l il l ien ' R EI.·~"m

.une 10,21J03; "REI Pefsrnall.::e.; Online Shoopmg Nllh WeoSohE 'P CommerceSUlle," IBMG'ebal Indu,;nel: REta il ( al e Studies, IBMCase Study, Aprrl 2003: ., ~, I u l t i · chan nel Bel t PraC;; C"1

Searl andREI.'by jim Crawford Forrester Researcn, C'ecemce­201)2, "REi rlamedOne Jf Bel' Multl·channel Retarlerl, ,.

REI corn,Ce,:ember i O. 200

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1 248 C H A P TE R 4 B u il din g an E -eo m ree Web S i t ",

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Case Study Questions

1.� Create a simple logical design and physical design for RE l.cOrl usir«, ,rr J "

tion pro ided in thecase study, supplemented as necessary by you 01: r

research.

2.� After reading the case study, identify the key reasons for REI.com\ ( , ~ l~

far.

3.� Visit REl.com and rate itsperformance on the eight factors listed In Table 4 if on a sca le of 1to 10 (with 1 being the lowest and 10 the highest). rn,lrlc rea sons for your ratings.

4.� Prepare a short industry analysis of the online outdoor sporting goods and apparel industry.Who are REI'sprimary competitors? How we ll have they developed mu lti-channel retailing?

III REVIEW

I{ Eye 0 Ne E P T S

•� Explain the process that should be followed in building an e-commerceWebsite.

Factors you m ust cons ide r when building an e-commerce sit e include .

•� hardware architecture

•� software

•� tel ecommunication s capacity

•� sit e design

• human resources

• organizational capabilities

The syst ems development life cycle (a methodology for understanding th- bi sines' objectives of a system and designing an appropriate solution) for bui ld ing -Ill

e-com merce Web site in volves five major steps:

•� Iden tify th e specific bu in ess objectives for the site and th e n develop . J!~ ,

system fu nction ali ties and in formation requirements.

•� Develop a system design specification (both logical de sign and phvsic di Ll' J n I

o� Build the site , either by in-house personnel or by outsourcin g all or par () responsibility to outside contractors.

•� 'Iest the system (u nit testing, sys tem testing, and acceptance testing).

o� Implement and maintain the site.

The nine basic business and system functionalities an e-commerce site ShCJL "

contain in clu de: