Can REI Climb Higher with Networking and the Internet?

With an old-fashioned sensibility and a forward-looking embrace of networking and Internet technology, Recreational Equipment, Inc. (REI), occupies a distinctive position in the retail market. Selling gear and clothing for outdoor recreational activities, REI operates 70 stores throughout the United States, as well as 2 stores on the Web and an adventure-themed travel service. Together, these entities recorded over $800 million in sales during 2003.

           The company was started in 1938 as a cooperative by mountain climbers Lloyd and Mary Anderson and a group of associates to acquire quality climbing gear and other outdoor recreational equipment at affordable prices. Despite the significant expansion and modernization, REI remains a cooperative, with more than 2 million members. REI pays out approximately 85 percent of its total income to cover rebates to cooperative members equaling 10 percent of their purchases. Because REI is not a publicly traded company, it does not have to base its performance on meeting short-term earnings targets and can take a longer-term view of its technology investments.

           REI was one of the first retailers to investigate the potential of e-commerce, and by 1996, REI was already doing business on the Web. Two years later, the company’s Web store had become a profitable venture. Now, REI.com and REI-OUTLET.com combine with REI’s catalog phone sales to account for 17 percent of the company’s total annual sales revenue. More important, REI has successfully integrated an e-commerce channel into its business without hurting the traditional channels, retail stores and catalog sales.

           REI does not attempt to compete on price. Its business strategy emphasizes product selection, staff expertise, extensive product information, and multiple channels working together to provide consumers with the best shopping experience possible. According to Brian Unmacht, REI’s senior vice president of retail, “The key for REI is to be the place to come for information. We’re always working on ways to tie information to the shopping path in a relevant way.”

           For example, REI was one of the first retailers to employ kiosks in its stores. From these kiosks customers can view products, accessories, styles, and information that may not be available in the physical store in which they are shopping. REI has over 40,000 pages of product information on its Web site, which traditional shoppers can also view from the kiosks when they are in an REI store. The content goes beyond simple choices such as sizes and colors to include detailed advice from experts on everything from how to choose a sleeping bag to how to measure yourself properly to fit a piece of equipment. Stores get credit for online sales made through the kiosks.

           As the company grew, REI graduated from low-speed dial-up connections to a wide area network (WAN) and then to a state-of-the-art high-availability network based on Cisco Systems networking technology. In 2002, REI installed a Cisco Aironet wireless local area network (LAN) in every store to provide a platform for applications such as barcode scanning, shipping, receiving, pricing, and inventory. The wireless implementation resulted from the company’s decision to use technology to eliminate inefficiencies that were cutting into profits. Specifically, the company wanted to reduce the amount of time employees needed to spend receiving shipments, integrate shelf stocking with supply chain management operations to reduce errors, and introduce a system by which vendors would ship products directly to stores rather than to distribution centers.

           Before implementing the wireless LAN, employees in each store spent an average of 48 hours per week in shipping and receiving. After implementing the wireless system, the same work can be performed in 25 to 28 hours. Multiply that by 70 stores and you have major cost savings.

           REI is now experimenting with new ways to deliver information to the store floor. It is testing wireless handheld devices that give employees instant access to product information on the Web, wireless cash registers and point-of-sale devices to facilitate quick changes to store layouts, and live two-way videoconferencing based on IP/TV technology that would enable shoppers or sales associates at kiosks to talk to call center agents or product specialists at REI headquarters or other stores. REI has rolled out wireless IP telephony phones in its flagship Seattle store, and it is considering using its network to deliver ondemand videos to kiosks to supplement employee training.

           REI has remained determined to use its multiple channels to support each other. The company’s philosophy is that it doesn’t matter which segment of the company is responsible for a sale occurring; the sale benefits the company as a whole. Jeff Schueler, a usability consultant and founder and CEO of Usability Sciences, views a sale as the final step in the multistep process of shopping. According to Schueler, the vast majority of people who visit e-commerce Web sites do so for purposes such as fact finding, price comparisons, obtaining special discount coupons, and account maintenance and bill paying. Most do not actually visit Web sites to make their purchases. Therefore, any business that is open to encouraging its customers to flow from one channel to another has a competitive advantage. So, although the end product of consumerism still takes place mostly by traditional means at REI, it is heavily influenced by Internet technology.

           In mid-2003, the company introduced a new service that enables customers to order products from home over the Web and then pick up their orders at their local REI store. According to Joan Broughton, REI’s vice president of multichannel programs, approximately one-third of all customers who make purchases online will spend about $100 more simply as a result of being in the physical store to retrieve their online orders. The benefit to in-store pickup for the customer is that it eliminates shipping costs. The company does not incur additional costs either. It saves money by shipping a number of items in bulk to one store rather than to the individual addresses of multiple customers. Furthermore, items that are shipped to an REI store for in-store pickup travel on the same trucks that are already en route to the store with inventory replenishments.

           Combining these two distinct forms of order fulfillment required a technology solution. REI was able to integrate orders from its Web site with restocking orders from its stores by using IBM’s WebSphere business platform running on an RS/6000 server linked to an Oracle database. The database feeds an order-processing system running on a midrange IBM AS/400 computer. Brad Brown, REI’s vice president of information services, explains that integrating the two types of data wasn’t as challenging as synchronizing the fulfillment of the two types of orders. When a customer purchases a product online, the item leaves the warehouse, cued by the order, and waits for the appropriate truck to be loaded. Inventory replenishment orders, on the other hand, are generated by an automated system that prompts items to leave the warehouse at regularly scheduled intervals.

           To ensure that integration runs smoothly from the customer’s point of view, the information services team developed an algorithm to inform customers when the products they have ordered online will be available for pickup. The algorithm takes into account the possibility that an order is placed too close to the departure day of the delivery truck to be met and promises a more conservative delivery estimate. REI still attempts to complete the order before the promised date.

           REI took a major step in unifying its technology infrastructure by adopting IBM’s WebSphere Web-development environment in 2002. Using this environment and an integrated database, REI is able to develop technology syssystems for each of its business channels simultaneously, rather than having to devote resources individually to Web or store-based applications. REI has implemented a content management system from Documentum to help centralize information for its various business channels. REI is also working toward establishing matching keywords and item numbers for products on its Web site, in its mail-order catalog, and in its retail stores so that shoppers can roam seamlessly from one channel to another, viewing products in person and retrieving their specifications from the Web. REI publicizes discount incentives for online purchases in its mail-order catalog because the company can process orders from the Web more cheaply than orders placed by phone or mail.

           The main purpose behind all of this effort at integration is to create perception that REI doesn’t have distinct channels at all, that customers don’t see channels at REI, they see only REI. The company hopes that customers simply view REI as providing every convenience that it can while still offering high-quality merchandise and service.

           REI continues to be progressive both in adopting technology and in shaping its product line for maximum appeal. Around the same time that REI implemented WebSphere, it also installed a data warehouse to improve the company’s ability to perform customer transaction analysis. Output from data mining enables REI to refine its buying, marketing, and sales initiatives according to trends and customers’ buying habits.

           In 2004, REI announced that its use of SeaTab Software’s PivotLink surpassed the expectations that REI’s director of inventory and logistics, John Strother, had for a business intelligence solution. PivotLink integrates enterprise-wide data so that key decision makers can access the bottom-line results of company processes more easily. REI uses PivotLink to expand the availability of internal data economically, lending greater support to the decision-making process, as well as to communicate critical data to vendors, who require them to maintain their own business processes properly. According to Strother, PivotLink enables REI to increase profits and performance; increases employees’ and partners’ ability to do their jobs effectively; and offers an information access solution that is easy to implement, affordable, and scalable.

           Can REI continue to thrive on all fronts of its multichannel business? Brian Unmacht actually downplays his company’s role as an innovator of Internet and telecommunications business strategies. He states, "From a technology perspective, we’re not very adventurous. We like to find the most effective and reliable way to meet all of our goals.” For REI, that way is to build a powerful and flexible network that can house all of its applications and use the Internet as the medium through which all of its business processes flow together.

Sources: Eric J. Adams, “Retail Trailblazing,” Cisco IQ Magazine, Second Quarter 2004; Megan Santosus, “How REI Scaled E-Commerce Mountain,” CIO Magazine, www.cio.com, May 15, 2004; “Recreational Equipment Inc. Presents Success Story with SeaTab’s PivotLink Business Intelligence Solution at Retail Systems 2004,” PRNewswire press release, May 13, 2004; Bill Becher, “Feminine Side Is Coming Out,” Los Angeles Daily News, www.dailynews.com, June 2, 2004; Ian Mylchreest, “Competition Gets Tough in the Sporting Goods Stores,” Las Vegas Business Press, www.lvbusinesspress.com, May 21, 2004; and www.rei.com, accessed June 10, 2004.

CASE STUDY QUESTIONS

1. Evaluate REI using the competitive forces and value chain models.
   
   
2. What is REI’s business strategy? What role do networking and Internet technology play in this strategy?
   
   
3. What management, organization, and technology issues does REI face in running its business? What role do telecommunications and the Internet play in solving these challenges?
   
   
4. How effectively has REI used information systems and the Internet to meet its business strategy goals and maintain a competitive edge?