It Takes More Than Rudolph: E-Tailers Gear Up to Fill Holiday Orders

The issue of service over the holidays is critical for companies hoping to win the loyalty of online consumers.
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E-Santa may get caught in a traffic jam.

Think Dec. 23 ... Fifth Avenue ... rush hour. Now transfer that scene of bumper-to-bumper traffic and shoulder-to-shoulder humanity to the online world, where millions of pointing and clicking holiday shoppers may well cause an online gridlock.

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This holiday season, online shoppers are expected to spend $6 billion. While that's still less than 1% of total retail expenditures, it's double what consumers spent online last Christmas. In December, e-tailers will have to cope with 58,000 transactions a day, or double last year, according to

Jupiter Communications

.

The onslaught of new shoppers will put greater stress on the backend operations where order-processing facilities, not fancy graphics, are responsible for ensuring that a click here becomes a package there. If snafus chase away online shoppers it will disappoint a lot of companies and their investors.

Online veterans like

Amazon.com

(AMZN) - Get Report

and

eToys

(ETYS)

are spending furiously. Amazon is adding more than 3 million square feet of distribution space, while eToys, in addition to building a 400,000 square-foot warehouse in Danville, Va., hired fulfillment specialist

Fingerhut

, a division of

Federated Department Stores

(FD)

, to ensure no toy is left unshipped.

"The major e-tailers are paranoid that there'll be a shakeout this Christmas," says Jeff Boudreau, a principal with

Kurt Salmon Associates

, which has performed consulting services for eToys. "They are pulling out all the stops to protect their hefty stock prices."

Also at risk are bricks-and-mortar retailers that are new to the Net like

dELiA*s

(DLIA)

,

American Eagle Outfitters

(AEOS)

and

Abercrombie & Fitch

(ANF) - Get Report

, although they have less to lose should packages pile up because their stores still generate the majority of sales.

Despite best-laid plans, many online companies may be underestimating the challenge of fulfilling 50% of their annual sales in a three-week period. Boudreau says he's already noticing mounting tension between e-tailers -- who are demanding more square footage and support services -- and the companies they've contracted with to handle the nitty-gritty of storing, packing and shipping. These so-called third-party fulfillers are groaning under capacity constraints of their own.

"It will be a blood bath," predicts Dick Metzler, president of

Keystone

, a division of

Hanover Direct

(HNV)

, which handles distribution and delivery for several large retailers.

Slow delivery can start a backlash against online shopping in general, warns Stacie McCullough, an analyst with

Forrester Research

.

"Our fear is that customers aren't going to get their packages and they will be really turned off, not just from that merchant, whom they'll probably never order from online again, but from e-commerce in general," she says. "That could end up causing a big dip in online sales."

A look inside some click-and-mortar retailers offers a glimpse into the behind-the-scenes drama that's sure to play out in the warehouses of many companies this December.

Fossil

(FOSL) - Get Report

sold $305 million worth of watches and accessories last year mainly through department stores. But the company considers its 4-year-old e-commerce unit important enough that it began readying its Web site for the current holiday season last March. The mission: to prevent orders from backing up as they did last year when the company relied on the same computer system and personnel to fill individual online shipments as it did for bulk department-store orders.

"In the past year, online customers are wanting their products quicker -- like the next day," says Matthew Brown, Fossil's group manager of e-commerce. "So a one- or two-day backup is a really important issue."

Although Fossil still handles online fulfillment from the same two warehouses near its headquarters in Richardson, Texas, it has created an assembly line dedicated to e-commerce. Employees are armed with handheld scanners, which flash up-to-the-minute orders from the Web site. Pickers, as they are called, pick the watches, sunglasses or wallets from a rack and place them in boxes sailing down a conveyor belt to be gift-wrapped and sent along.

For the month of December, orders are expect to grow tenfold to 1,000 a day, Brown says. He estimates that for every five minutes the system is down between high traffic hours of 10 a.m. and 2 p.m., Fossil could lose as much as $1,000 in sales.

Specialty retailer

Sharper Image

(SHRP)

, rang up e-commerce sales of $5 million last year, the first year that its Web site was operational. This year the company expects online sales to hit $30 million, or more than 10% of the company's total revenue. The Sharper Image is relying upon systems developed in 22 years as a catalog and store retailer to ensure it can handle average daily shipments that could reach 15,000 in December, or 5 times its normal volume.

One way it plans to get all those packages out the door is to have certain high-volume products arrive in the warehouse already packaged. For instance, the company is promoting its version of a crystal ball called the "Q Ball" for the holidays, which arrives at the warehouse in individually wrapped silver boxes. All that's left to do is stamp the shipping address on the box, says Tracy Wan, Sharper Image's president. She says the system, which she calls her SWAT team, cuts fulfillment time in half.

Sort of like taking the subway on those late December gridlock days.