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e-Retail Case Study 2: RedEnvelope

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In this excerpt from the book e-Merchant: Retail Strategies for e-Commerce, (Addison-Wesley, 2001, 0-2017-2169-4), authors Joanne Neidorf and Robin Neidorf examine how e-retailer RedEnvelope created its retail presence on the Web.

It began as an emergency service for those who were thoughtful and yet pressed for time—911gifts.com, where gifts ordered by midnight Eastern Standard Time would be delivered the following morning. Although RedEnvelope still has a 911gifts section in its Web-based retail store, the new incarnation of the company aims for total recognition as a unique gift source known for quality, style, and personality.

Figure 1 RedEnvelope storefront.

911gifts.com began in 1997 as the brainchild of Scott Galloway and R. Ian Chaplin. Galloway and Chaplin were co-founders of Prophet Brand Strategy, a consulting firm assisting companies with their electronic commerce and brand strategy efforts.

In the fall of 1999, the company evolved into RedEnvelope Gifts Online. The name refers to an Asian custom of presenting special gifts in a simple red envelope. The "urgency" feature of the assortment had been supplanted by an emphasis on meaningful gift-giving, simplified.

Since the re-launch, several successful rounds of venture capital financing have enabled the company's dramatic growth.

RedEnvelope's management team has years of experience working for traditional and catalog retailers like Williams-Sonoma and its brands (Pottery Barn, Hold Everything, and others). With RedEnvelope, they have adapted traditional retail concepts to the Web environment. At the same time, they have embraced advanced technologies that enhance the consumer's shopping experience and added electronic touches such as e-mail gift reminders, which function elegantly in the Web environment.

Strategy

As 911gifts.com, the company targeted upscale customers with more money than time to do careful shopping. Chief Executive Officer Martin McClanan notes that the company's understanding of its market has not shifted in the evolution to RedEnvelope. "We've found that the 'last-minute' aspects of our positioning were not necessarily the most important value proposition to the customer," he comments. "We found that our customers are more interested in a one-stop shopping experience where they can choose from a variety of high-quality gifts at approachable price-points."

What is an "approachable price-point"? Most gifts in RedEnvelope's assortment range in price from $30 to $300, indicating quality but not exorbitance.

McClanan describes the RedEnvelope brand as characterized by four key features:

  • Stylish products—Products that are often unique and exclusive, since RedEnvelope works with suppliers and artisans to create gift items; customers know they are getting something special.

  • Approachable price points—The range invites shoppers seeking gifts for all occasions, from "just because" or thank-you gifts to special occasion like weddings and anniversaries.

  • Limited assortment—Saves the customer time by making it easier and more convenient to shop because there are fewer items to sort through.

  • Superlative customer service—Live online customer service, personalized gift cards, on-time delivery, and the ability to send multiple items to multiple addresses with a single order form assure customers that they will be personally assisted throughout the transaction.

Assortment Planning

Merchant teams are responsible for developing and selecting the assortment for RedEnvelope. The assortment is organized around the primary shopping categories on the site: Home Decor; Office and Travel; Backyard; Flowers and Plants; Pet Gifts; Gift Baskets; Sweets; Personal Care; Jewelry and Accessories; Bar, Wine, and Cigars; Gadgets and Tools; Sports and Games; and Toys and Baby Gear.

Assortments are seasonal, and many items are exclusive to RedEnvelope. Assortment planning requires attention to gift-giving cycles (Christmas, Valentine's Day, June weddings, and so on), as well as changing fashion and customer tastes. Exclusives are designed specifically for RedEnvelope in most categories by artisans, working in concert with RedEnvelope's merchants.

Merchandising

On RedEnvelope's staff are store managers. Like their counterparts in the brick-and-mortar world, store managers are responsible for merchandising the assortment, developing cross-selling strategies, planning promotions, and other point-of-purchase tasks. In carrying out these responsibilities, they work closely with the merchant and buying staff.

In addition to the primary shopping categories, visitors to the site can sift through items using other criteria such as for him, for her, and by occasion, among others. The overall goal in merchandising, McClanan says, is to build the brand as an overall, upscale, lifestyle brand.

That is accomplished through the details as much as through the overall merchandising strategy. "Photography is what sells the product," McClanan notes. "Years of experience have taught us that." Considering that RedEnvelope's management team includes some of the creative merchandising minds that pushed print catalogs toward lifestyle magazines, this emphasis on the visual presentation of the products is hardly surprising.

The years of experience have also yielded some other lessons that McClanan and his team consider carefully in developing the online store displays. "The more challenging items to merchandise effectively are those that are more complicated," he explains. "For example, [look at] some of our items in the Tools and Gadgets category: the more complicated the functions, the more the consumer wants to interact with the product prior to purchase.

"Also challenging are the 'commodity' products, such as toys and books, which are available from many well-known sites," he continues. When RedEnvelope does not develop exclusives for these commodity items, it can be difficult to sell the benefits of purchasing these items from their site rather than from alternative sources.

Overall, RedEnvelope has found that it does best with the categories in which a customer is truly browsing for ideas and does not yet have a definite plan to purchase a specific type of gift. Think of it as the classy, eclectic neighborhood boutique that always has something new and different—the place you always go when you are looking for ideas.

To help you get those ideas, RedEnvelope deployed a live customer representative system in November 1999. By clicking on a button conveniently located on all shopping pages, customers can get connected to a customer representative through a live chat feature. Customers can then get instant answers to any questions they may have on a product and obtain advice for locating the perfect gift.

McClanan recognizes a huge advantage to merchandising online, one that he and his colleagues could not duplicate in other environments. "You can truly test new product ideas in this medium," he explains. "We can purchase 10items, do the photography, add the item to the assortment, and then judge its true popularity before investing in a huge number. This is a great advantage over traditional retailers."

Inventory Management

RedEnvelope owns its inventory, with the exception of a few items that are drop-shipped directly from the vendor. Its warehouse is located in Ohio, conveniently next door to the Airborne Express hub. Depending on the season, RedEnvelope may have anywhere from 600 to 1,500 SKUs in the assortment and available for sale.

To manage inventory effectively, RedEnvelope selected an off-the-shelf software product originally developed for catalog and direct mail retailers. "Although it's not as flexible as some of the other products recently created for online retailers," McClanan says, "it has the advantage of being a well-developed, well-tested, and robust system."

To address a common frustration with online shopping, RedEnvelope's inventory management system updates the site quickly so that items merchandised and offered for sale are actually available when the customer places an order. However, when an order is placed, the first thing the system does is check inventory to confirm that the stock is available. When the credit card information has been validated, the system sends the customer an e-mail indicating that the order has been received and is being processed. The pick-and-pack instructions are generated at the warehouse. This can sometimes be a complex step, as individual orders may involve shipping to several addresses. The goods are shipped and the credit card is billed usually within 18 hours of order placement. With shipping, the customer receives another e-mail to confirm that the gifts are on their way.

Pricing and Promotion

The pricing structure for RedEnvelope reinforces the brand as a quality source of unique gifts. Initial Mark Ups (IMUs) and Maintained Margins (MMs) are in line with what consumers find at other upscale lifestyle retailers, online and off.

Vendor Relations

In the beginning, 911gifts.com found vendors reluctant to work with the company. Over time, as RedEnvelope has proven the solidity of its planning and execution, the reluctance has disappeared. "Now we have far more suppliers who want to work with us than we have room for in our assortment plans," McClanan says. Suppliers initially showed concern with financial stability and staying power—not channel conflict.

Structure

The organizational structure for RedEnvelope is solidly based on traditional retail structures. In addition to McClanan, the management team includes Hilary Billings, Chief Marketing Officer; Tom Bazzone, President and Chief Operating Officer; and Christopher Cunningham, Chief Information Officer. Each key individual has more than a dozen years' experience in his or her field.

The merchant teams are comprised of creative merchants and control buyers. Creative merchants own the financial responsibility for their assortment's margin performance, and they do the strategic planning, hunting for new gift ideas and working with suppliers to develop unique products that establish RedEnvelope's brand. Control buyers handle the logistics of the supply chain, including everything from writing orders to working with suppliers to ensuring prompt delivery. Control buyers also have primary control over the inventory management aspects of managing the assortment.

Store managers take over at the level of site execution, planning how items will be merchandised and promoted to shoppers.

The Wisdom of Experience

"We've seen at least a dozen of our competitors go out of business in the last year, and it seems another five or six will be leaving the field shortly," McClanan observes. To weather the volatile e-retail environment for three years is its own accomplishment, one McClanan attributes to fundamental attention to the business of retail.

"We have always built our decision-making and plans around traditional retail metrics. We have refused to fall into the trap of sacrificing gross margins to achieve sales.

"Frankly, I've been surprised by the number of e-retailers who refute the sense of solid business decision-making," he continues. "The e-retail environment plays by the same rules as the so-called 'real world.' Yet quite a number of dot-coms seemed to think they played by different rules, creating unsustainable growth plans or not thinking through how they would be able to earn a profit."

In the first 10 months of its existence as RedEnvelope, the company achieved more than 400 percent sales growth and more than 40 percent increase in gross margins. "It's been a challenge to grow that quickly," McClanan admits. "Often we've wished we could slow down and test ideas more thoroughly before execution."

The only way such growth has been possible, let alone successful, is through balanced attention to each of the metrics at stake in a healthy business: sales, gross margin, maintained margin, turnover, marketing expenditures, and so on.

RedEnvelope is something of a test case in how much is possible in the e-retail environment in relatively little time. However, McClanan has cautionary words for would-be e-retailers: "Never grow beyond your business's ability to support the growth," he says. In other words, do not promise the universe if you can deliver only a galaxy or two!

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