Retail Blog

Sometimes it makes perfect sense for a big retailer to stop selling online.

In the early days of the web, there was much debate in retailing about the importance and necessity of jumping into the e-commerce game. While the prospect of this new sales channel was exciting, there were many unknowns. Retail IT departments didn’t understand the new technology. Merchandisers wondered whether enough people would use credit cards on websites. And everyone wondered what it all meant on the backend.

Many of the larger retailers, newly sporting the label “brick-and-mortar”, moved forward cautiously. Indeed, Wal-Mart shuttered its e-commerce site during the 1999 Christmas season rather than let mounting technical problems affect any of its customers. This cautiousness made room for the rise of the many “pure-play” e-commerce retailers who hoped to challenge established retailing. Soon enough, however, the unknowns around e-commerce became known. The established retailers, building in some cases on the mistakes of the pure-plays, moved into e-commerce and used their existing brand recognition to crush the new upstarts. Only a handful survive to this day.

That an established brick-and-mortar retailer should also have an e-commerce site thus moved from point of debate to conventional wisdom. But depending on your business model, you can still be a big retailer and be wise to avoid selling online.

The June 21, 2007 announcement by Pier 1 that it is shuttering its e-commerce operation may look like a desperate cost-cutting measure to some. To be sure, Pier 1 is in real financial trouble. They are in many ways similar to TJX, another established retailer that discontinued e-commerce operations for its T.J.Maxx and HomeGoods brands in 2005. However, I suspect this is a move both would have made regardless of their finances.

Here’s why: digital content and inventory.

E-commerce Operations 101

One of the biggest operational headaches for any e-commerce retailer is provisioning digital product content. In order to sell a product online you need multiple images, description copy, and other product information. E.g., to sell sheets you need threadcount, and to sell cameras you need megapixels. There are many companies that exist to ease this burden for retailers one way or another. Most of the time this involves getting the content from suppliers or manufacturers who are willing to help as part of promoting their own business.

In those cases where it can’t get existing content from such helpful sources, a retailer must pay to have it created. This means shipping products to a studio, writing copy, assembling products and taking their pictures, counting threads, etc.. This is very expensive and easily costs up to $150 per SKU.

A retailer selling online also needs a reliable inventory of a product to sell against. This might mean that, in addition to its stores, the retailer puts some of the stock in its own warehouse for fulfillment. Or it might mean having a good 3PL or drop-ship partner. In any case, it is a huge customer service headache to accept orders online for products that are out of stock. A headache, but not the end of the world. Usually such items can backordered, and stocks replenished. However, it is customer service death to accept orders online for products that are out of stock and will never be in-stock again.

It’s the Business Model

Properly dealing with digital content and inventory requires that retail merchandisers carefully plan which products to sell, how many to buy, where to send them, and when to discontinue them. But both TJX and Pier 1 have business models based on sourcing serendipity - A.K.A. “opportunity buys”. For TJX, it means picking up a truckload of liquidated clothes and distributing them to nearby stores. For Pier 1, it means buying out the excess inventory of an Asian wicker factory and selling directly to American consumers. In both cases, there will be no supplier or manufacturer in the middle who is interested in creating digital content to help sell the products. In both cases, once the supply of a given product is sold out, there is virtually no chance for replenishment.

TJX initially tried to pay for the creation of content for its products, but soon found out that the task was impossibly expensive. How many different styles of shirt were on that truck anyway? Are pictures needed for all of them? What about these three lamps that were included? Similarly, there were inventory headaches. How many of those shirts should be held in reserve for fulfillment of online orders? What in-store sales are missed because the items were set aside for the online store? If this was TJX’s experience selling products online, I bet Pier 1’s is similar.

Shareholders of Pier 1 stock should take heart. Other financial issues aside, the shuttering of their e-commerce operation is likely a signal that things are moving in the right direction. The realities of an e-commerce operation are fundamentally at odds with their core business model. This step backward is really a step forward.