Home' Technology Review : January February 2014 Contents 66
MIT TECHNOLOGY REVIEW
business report — beyond the checkout cart
Store” button to its online store. It turns
out many shoppers like to browse and pay
online but prefer to actually pick up that
TV themselves—they just had no way of
doing it before.
As he later told investors, when
Durchslag got to Best Buy in October
2012 (he’d previously worked at Expedia,
the travel booking site), the chain’s web-
site was in “a 10-year time warp.” It didn’t
have on-site recommendations, prices
didn’t match those in its store, and it took
eight clicks to buy anything. Its rewards
program and well-known support desk
team, the Geek Squad, had their own
databases that didn’t talk to one another.
That was a problem. About 25 per-
cent of all consumer electronics sales take
place online. But Best Buy hadn’t kept up.
Online sales are still only about 6 percent
of its revenues.
Best Buy has since made more than
200 changes to its online store. The num-
ber of clicks to make a purchase has been
cut to three, and now Best Buy takes into
account where people live, serving up, say,
air-conditioner specials to New Yorkers
who log on during a heat wave.
Another problem to fix was that Best
Buy was operating its online division and
stores separately. Durchslag says that pre-
viously, if Best Buy’s online distribution
center was out of an item, the customer
would simply get an out-of-stock notice.
They were losing those customers even
though Best Buy stocked similar inventory
at its stores, one of which is no more than
a 15-minute drive from 70 percent of the
Best Buy has since begun testing
whether it can increase its inventory by
turning stores into distribution centers.
Having started with 50 stores, it is add-
ing inventories from 150 more stores to
its website for the 2013 holidays.
Durchslag says retailers are still trying
to understand consumers’ new behaviors.
He says that since the “Pick Up in Store”
No Profit? No
its massive investments in technology
shape the future for all retailers.
● Why do some stores succeed while oth-
Retailers constantly struggle with this
question, battling one another in ways
that change with each generation. In the
late 1800s, architects ruled. Successful
merchants like Marshall Field created
palaces of commerce so gorgeous that
shoppers rushed to come inside. In the
early 1900s, mail order became the “killer
app,” with Sears Roebuck leading the way.
Toward the end of the 20th century, ultra-
efficient suburban discounters like Target
and Walmart conquered all.
Now the tussles are fiercest in online
retailing, where it’s hard to tell if anyone is
winning. Retailers as big as Walmart and
as small as Tweezerman all maintain their
own websites, catering to an explosion of
customer demand. Retail e-commerce
sales expanded 15 percent in the U.S in
2012—seven times as fast as traditional
retail. But price competition is relentless,
and profit margins are thin to nonexis-
tent. It’s easy to regard this $186 billion
market as a poisoned prize: too big to
ignore, too treacherous to pursue.
Even the most successful online
retailer of all, Amazon, has a business
model that leaves many people scratch-
ing their heads. Amazon is on track to
ring up $75 billion in worldwide sales
this year. Yet it often operates in the red;
last quarter, it posted a $41 million loss.
Amazon’s founder and chief executive
officer, Jeff Bezos, is indifferent to short-
term earnings, having once quipped that
when the company achieved profitability
for a brief stretch in 1995, “it was prob-
ably a mistake.”
Look more closely at Bezos’s company,
though, and its strategy becomes clear.
Amazon is constantly plowing cash back
into its business. Its secretive advanced-
research division, Lab 126, works on next-
generation Kindles and other mobile
devices. More broadly, Amazon spends
heavily to create the most advanced ware-
houses, the smoothest customer-service
channels, and other features that help it
grab an ever larger share of the market.
As former Amazon manager Eugene Wei
wrote in a recent blog post, “Amazon’s core
business model does generate a profit with
most every transaction ... The reason it
isn’t showing a profit is because it’s under-
taken a massive investment to support an
even larger sales base.”
Much of that investment goes straight
into technology. To Amazon, retailing
looks like a giant engineering problem.
Algorithms define everything from the
best way to arrange a digital storefront
to the optimal way of shipping a pack-
Money lost by Best Buy in 2012
Price competition is so relentless that it’s easy to regard
e-commerce as a poisoned prize: too big to ignore, too
treacherous to pursue.
button was added to its online shop, 40
percent of shoppers on Bestbuy.com have
chosen that option. No one could have
predicted that, because no one had tried
it before. “When it comes to omnichannel
innovation,” says Durchslag, “I don’t think
anybody’s doing it really, really well, espe-
cially for consumer electronics.”
— Michael Fitzgerald
12/6/13 11:28 AM
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