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 490X1 E-Business & Commerce Mgmt
Professor Michael Shaw
February 8, 2003
E-Business Management
490X1 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
490X1 Case Study:
“Bricks and Clicks”
The Click-and-Mortar Spectrum
Strategic
Spin-Off
(BarnesandNoble.com)
Partnership
(RiteAid & Drugstore.Com)
SEPARATION
• Greater Focus
• More Flexibility
• Access to Future Funding
Joint
In-House
Venture
(KBKIds.com)
Division
(OfficeDepot.com)
INTEGRATION
• Established Brand
• Shared Information
• Purchasing Leverage
• Distribution Efficiencies
E-Business Management
490X1 Case Study:
“Bricks and Clicks”
Barnes and Noble
Their Goal:

To compete with Amazon.com.
Why this Goal?

Because Amazon was eating their lunch.
E-Business Management
490X1 Case Study:
“Bricks and Clicks”
Barnes & Noble
What steps did they take to achieve their goal?




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
490X1 Case Study:
“Bricks and Clicks”
BarnesandNoble.com – What Happened?



Lost 90% of equity in 3 years.
CEO resigned after one year.
Sacrificed more than they gained:
–

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
490X1 Case Study:
“Bricks and Clicks”
What did others learn from Barnes and Noble?

The benefits of integration are too great to abandon.

The “Manager’s Dilemma” should be modified to be:
What degree of integration
makes sense
for OUR company?
E-Business Management
490X1 Case Study:
“Bricks and Clicks”
Office Depot
Goals:
 Polar Opposite of Barnes & Noble
 Tight integration of physical stores and Internet.
 Internet viewed as ‘‘just another channel’’.
Why?
 Existing catalog infrastructure, including delivery
services.
 Existing IT infrastructure which maintained current
inventory levels at all locations, among other things.
 Low involvement product with high cost procurement with
mostly B2B customers
E-Business Management
490X1 Case Study:
“Bricks and Clicks”
Office Depot
How?





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
B2B customer enhancements, such as individual
purchasing limit.
Design inter and intra net offering
E-Business Management
490X1 Case Study:
“Bricks and Clicks”
Office Depot
Results:






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
OfficeMax 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
490X1 Case Study:
“Bricks and Clicks”
Office Depot
E-Business Management
490X1 Case Study:
“Bricks and Clicks”
Office Depot

First to announce a Spanish language site.

Currently do 13% of global sales via e-business.

Maintain Viking brands (Direct Mail/Catalog) site.

Multi-division structure:
–
–
–
Stores
Business Services
Catalog
- International
- Call Centers
- Depot.com
E-Business Management
490X1 Case Study:
“Bricks and Clicks”
KB Toys
Goals:



New infrastructure for e-commerce
Take advantage of strong brand name
Take advantage of BrainPlay’s Internet experience
Why?


Zero Internet experience at KB Toys.
Toy shoppers are highly price sensitive.
E-Business Management
490X1 Case Study:
“Bricks and Clicks”
KB Toys
How?




$80M invested in joint venture, 80% stake in
BrainPlay.
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
490X1 Case Study:
“Bricks and Clicks”
KBkids
Results:


Little cannibalization at mall stores which rely on
impulse purchases
Physical stores increased buying power.
Today:


Back to KB Toys, management buyout of division
from parent company, now privately held.
Purchased eToys in bankruptcy.
E-Business Management
490X1 Case Study:
“Bricks and Clicks”
RiteAid
Goal:

Internet presence fast through strategic partnership
with Drugstore.com
Why?



Convinced it was the future way of doing business
Drugstore.com had strong investors available,
limiting RiteAids risk.
Drugstore.com had the internet experience.
E-Business Management
490X1 Case Study:
“Bricks and Clicks”
RiteAid
How?





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
490X1 Case Study:
“Bricks and Clicks”
Rite Aid
Results:


Drugstore.com now has access to PCS
Healthsystems customers, which approves their
reimbursement.
Flexibility for customers that often need prescriptions
immediately.
E-Business Management
490X1 Case Study:
“Bricks and Clicks”
Rite Aid-Drugstore.com Today


Prescription Refills
Stock
–

around $60 in 1999 to
$3.00 today


GNC Relationship

Drugstore.com is a
glorified porn site
Stock
– Around $80 in 1999 to
around $3 today
GNC relationship
E-Business Management
490X1 Case Study:
“Bricks and Clicks”
Four Business Dimensions (5 actually)
Brand
 Management
 Operations
 Equity
 Competition

E-Business Management
490X1 Case Study:
“Bricks and Clicks”
Brand

Strong existing brand adds credibility to the Internet
site.

Less fear of credit card fraud, important to customers

Extending brand identity to the Internet can inhibit
product offerings to maintain commonality.
E-Business Management
490X1 Case Study:
“Bricks and Clicks”
Management

Draw on current expertise with integration.

Encourage innovation with separate
management.
E-Business Management
490X1 Case Study:
“Bricks and Clicks”
Operations

Leverage existing distribution and/or IS
capabilities.

Build new state of the art systems at large
cost.
E-Business Management
490X1 Case Study:
“Bricks and Clicks”
Equity

Retain and gain entire value of internet
operation.

Spin off and limit risk.

Spin off and ensure access to capital (less of
a factor today?)
E-Business Management
490X1 Case Study:
“Bricks and Clicks”
Competition

Are you entering a no-win situation?

Is it possible that your rival is not accountable
for a profit for years to come?

What would you have done if you had been a
manager at Barnes & Noble?