Chapter Eight - e-Commerce - Do We Have To?

Kohl’s reaction to the birth and development of the Internet as an additional revenue stream is a great illustration of their corporate culture’s approach regarding all things new: never ever be a first adopter, be methodical in your due diligence, and don’t lose focus on your core business.

As one of the original members of the Kohl’s E-Commerce Executive Steering Committee, launched in 1999 to explore Web based opportunities for our business, I was able to see first-hand how corporate culture can dramatically impact the process of such an initiative. A company’s well entrenched ways of thinking and of doing things are not going to change overnight simply because the world itself is changing. Companies tend to believe they can make the world conform to their standards rather than the other way around.

By early 1999, it was pretty apparent that many companies were developing business models on the Internet that were generating significant levels of revenue. Pure plays, such as, were putting up some impressive top-line numbers (even though the costs to get that revenue were staggeringly high), as were “bricks and clicks,” stores such as The Gap that were using their website as an important new revenue stream and service to their customers. We learned at the time that The Gap was generating online volume around $15 million, or the equivalent of a couple of large stores. Not earth shattering, to be sure, yet things were accelerating dramatically.

The Internet frenzy was in full swing, and forecasting companies like Jupiter and Forrester Research were reporting impressive statistics about dramatically growing numbers of women surfing the Web and purchasing goods online. And I mean a lot of merchandise! It was an exciting time, and it was easy to get caught up in the hype of it all. I didn’t want Kohl’s to be left behind! The Internet offered retailers like Kohl’s an extraordinary opportunity to create an additional revenue stream.

At that time, however, we had barely any web presence. The move to begin to develop an Internet strategy came from several middle senior executives, such as myself, who pressed senior management. The idea percolated its way up the chain of command. Certainly the dot-com mania that swept through the country during this time helped fuel the fire. It’s funny how just a few years later after the burst of the Internet bubble in 2000-2001 we could look back and see that much of the enthusiasm for “E commerce” was overexhuberant. But back in 1999, there seemed to be a belief that anything with dot-com after its name would be a runaway success. We now know better, of course, but at the time the feeling was that the train had already left the station and nobody wanted to miss it. And many of our third-party service providers who supplied the ‘picks and axes’ to the Web goldrush –companies like IBM, for example—were lobbying pretty hard for us to get into the game.

But the top guys initially weren’t having any of it. Their approach was, to say the least, cautious. It’s not really all that surprising. Consider that during the time Bill Kellogg, Jay Baker, John Herma and Larry Montgomery were, like many guys in their 50s and 60s at the time, were basically computer-illiterate. The only time most of them ever used the computers on their desks was to check sales from the previous day or during the day when the company was running a major promotion, opening up a new market, or were in the heart of the Christmas selling season. But initially they had no interest in personally accessing the Internet. This was 1999, not 2007. Jay Baker could now have a Facebook profile for all I know! But back then, the Internet was something Kohl’s leadership really didn’t want to touch.  Launching a major Web initiative was counter-intuitive to the business they had all worked so hard to develop.

Eventually, however, the Chief Information Officer, John Lesko, pulled together an initial game plan and presented it to the guys for consideration. The plan called for a slow, judicious and methodical review of the opportunity, run much the same way as Lesko managed Y2K.

Like so many other companies that devoted incredible amounts of time and money to ward off the supposed dangers of Y2K, Kohl’s expended thousands of man-hours to insure that there were no surprises at one minute past midnight on December 31, 1999. Committees were formed, time and action calendars (specifying who does what) were established, and implementation plans were drafted and eventually executed. It was not unusual to have Y2K meetings last for hours; they were interminable.

However, all told, John Lesko had done an excellent job managing the process, and he suggested to senior management that the company apply the same regimen in evaluating the Internet opportunity. Eventually they gave John the green light and the E-Commerce Executive Steering Committee was formed in the Spring of 1999.

Initially, John invited some of our business partners who were far more familiar with the Internet to come to the corporate office and give us an overview of this new frontier for commerce. Our advertising firm at the time, J. Walter Thompson, provided an eye-opening account of how certain retailers, such as L.L. Bean, Gap and Penney’s, had stormed out of the gate quickly and had already developed some successes. We were presented with what is called “best practices,” a review of examples of companies that excelled at certain aspects of their operations. We looked at key components of the shopping experience for customers, notably, ease of navigation on the website, download speed, customer personalization, return policies, shipping prices, fulfillment, in-stock positions, and packaging.

Our partners at IBM came in and shared with us ‘best practices’ of companies that had developed truly robust and scaleable websites, and provided some general roadmaps for building a great E-commerce location. There were issues involving security, measurement, stress testing, data mining, personalization, marketing and customer acquisition.

Along with ‘best practices’ came ‘worst practices,’ and we quickly learned as a committee that many of our competitors had hastily launched sites and were dearly paying the price for their lack of planning and attention to detail. Many sites did not download quickly, others were very difficult to navigate, and a startling number of customers on some sites were abandoning their virtual shopping carts out of frustration with the overall purchasing experience. For every website we visited that left us all feeling pretty darn good, we found ten that were unmitigated shopping nightmares.

In addition, some highly-publicized glitches on some well-known websites created additional fodder for those who advocated a ‘steady as she goes’ approach to launching an E-commerce site. For example, Victoria Secret had advertised an upcoming fashion show on their site, but then, disastrously, did not have enough server capacity to handle the deluge of male visitors wanting to check out the eye candy. Not exactly the kind of PR you want to promote for your company.

The committee members who represented the merchants and the stores had lots of questions. Key among them:

–will all of Kohl’s merchandise be offered on the site?

–will other merchandise not in the stores be offered?

–will prices be different on the site than our ads?

–can merchandise purchased at be returned at a Kohl’s store?

The ‘to-do’ lists and questions from our initial fact-finding missions soon started to add up. John Lesko adroitly added structure and form to the process. An E-Commerce master plan was eventually conceived, involving representatives from virtually every division in the company. Time and action ‘dashboards’ were drafted and meetings were held ad infinitum to ensure that no stone was left unturned in the eventual launching of

When the original plans were drafted, Kohl’s expected that the e-commerce initiative would generate about $50 million in revenue in the first year following the launch. This included an estimated $39 million generated on-line and an additional $11 million of incremental volume driven through the physical store channel, as a result of customers ‘shopping’ on the web site and then going to their local store and making a purchase in person.

To be sure, if you’re involved in a business and have an entrepreneurial passion to push the envelope by encouraging the people around you to throw ideas up on the wall and see if they ‘stick,’ the Kohl’s snail pace—best described as review, review, test, review, review, test, launch – might drive you nuts. It certainly did with me. We simply were not going to launch the site until we had worked out all of the kinks. And I mean ALL of the kinks. And I remember very clearly never seeing any pressure from above to get things going with the E-Commerce initiative. It was as if they considered it some little pet project that was certainly not any kind of priority. In fact, I always felt at the time that Larry Montgomery, Bill Kellogg and Jay Baker didn’t see much of a future in selling merchandise on the Internet.

There were several delays to the development of the Kohl’s web site. A key person who worked on the project refers to the whole initiative as “a whole lot of baby steps…we never took any big jumps to getting the site launched.” For example, during the 1999 Christmas season and long before the site was launched as a true e-commerce venture, Kohl’s sold Holiday Gift Cards on the site. Much later, following a very long test period, was finally launched in November, 2001, about ten months later than the original plan. Initially, only certain categories of merchandise were featured. For the most part, these were khaki and denim bottoms, fleece separates, knit and woven tops, small electric and cookwares. These represented less than 20% of our total inventory. Never an early adopter of a new idea, Kohl’s chose to not even be a close second or third. Among major retailers, they came up from the rear. But at least the company now had a horse in the race.

Yet to be fair, in the short-term, as it has played out, this excruciatingly slow approach to launching a commercial website arguably had one upside. The company was not one of the dozens of other retailers (for example, Macy’s) that got way ahead of themselves, spent millions of dollars launching a site, then millions more re-launching it to correct all the original glitches. In other words, do it right the first time and you don’t have to worry about a second time.

Yet on the other hand, if you guessed right that e-commerce was going to be absolutely huge in this new century, you could make the point that Kohl’s got into the game way late, dabbled for far too long, and only in 2004-2005 really gained any genuine traction. While the first year revenues fell significantly short of the original goal (around $12 million, increasing to about $30 the second year), the sales trend has greatly improved over the years, even though e-commerce revenue is still an extremely small slice of the total revenue pie. And compared to the early adopters, the revenue generated on the Internet as a percent to total sales since 2000 has been paltry. There was a lot of much needed revenue that Kohl’s left on the table.

In the early years of dabbling with e-commerce, Kohl’s senior management didn’t talk much about the subject. During the years 2000-2003 they were virtually mute on the subject; in fact, the topic never came up in conference calls with analysts. Think of it as a corporate version of ‘don’t ask, don’t tell.’ Larry and his COO, Arlene Meier, never volunteered updates, and the analysts never asked the question: “Can you comment on how your E-commerce initiatives are performing?” I always thought that was strange, coming at a time, as we now can view in hindsight, of a slowdown in Kohl’s momentum and overall company performance.

Certainly, fast forward to 2007, and e-commerce is top-of-mind and is a regular subject during analyst conference calls, annual reports and shareholder meetings. While certainly not yet a home run, has developed into a growing, viable business. And while a very, very late addition to the Internet party, they are well-positioned to capitalize on the opportunity in the years ahead.

Yet looking at the excruciatingly slow evolution of Kohl’s getting into e-commerce is a fascinating study of how being a super-slow adopter in new technology can end up arguably stunting your growth.