Why Dick's Sporting Goods decided to play its own game in e­commerce

Dick's Sporting Goods has long partnered with eBay Enterprise on its e­-commerce platform. Now, it's bringing the technology in­-house. Learn the benefits and risks of this multi­-million dollar IT bet.

Dick's Sporting Goods will take its e-commerce destiny into its own hands as it moves from a partially outsourced model for its omni-channel retail operation to one where it has all the control.

The leading sporting goods retailer isn't alone. Dick's is following a playbook established by Target, which used Amazon's platform to launch its e-commerce operations and then brought it in-house for more control. Target's move went well, but the company did struggle with outages during peak times when it initially launched its platform. Today, retailers are cutting their real estate footprints and using stores as distribution centers to some degree. Whether it's Walmart or Macy's retailers are doubling down on e-commerce, curbing physical store growth and looking to blend the virtual and physical shopping experiences.

In other words, these retailers have seen the future. That future means less real estate, more experiences for the customer that blend physical and virtual commerce and more playing catch-up to Amazon.

Dick's plan is to move its e-commerce operations in-house so it has more control over its omni-channel features. Dick's has been using eBay Enterprise—formerly known as GSI Commerce—for its e-commerce operations. eBay Enterprise offers back-end fulfillment and e-commerce services that rhyme with Amazon Fulfillment Services. When eBay spun off PayPal, eBay Enterprise, which competes with Amazon, was sold to private equity and now operates as an independent company, although it's in the process of merging with Innotrac to become Radial. Dick's executives in various presentations use GSI and eBay Enterprise interchangeably.

For eBay Enterprise, the Dick's defection will be a hit—especially since Sports Authority, another big customer, has filed to reorganize under Chapter 11. eBay Enterprise managed Dick's e-commerce technology, fulfillment for Dicks.com, customer service, payment processing and web store maintenance. Technologies touching stores and inventory were managed by Dick's.

Speaking at a Bank of America Merrill Lynch investor conference on March 15, Dick's CEO Ed Stack said in-sourcing the remainder of its e-commerce operations will give it "the levers to more effectively differentiate our online experiences."

"We'll have easier access to data as opposed to trying to get it through GSI's platform that will allow us to build a more engaging cross-channel and consumer experience and marketing than we're able to do today," he said.

For Dick's, the move toward omni-channel in-house and away from eBay Enterprise has been gradual to avoid big bang disruptions. Stack noted that Dick's Golfgalaxy.com and Field & Stream stores have launched on the company's internal platform. The plan is to move all of its stores on its own platform in 2017.

Now that Golf Galaxy and Field & Stream sites are live, Dick's operating chief Andre Hawaux said features will be added including ship-to-store, pickup in-store and buying process improvements. Those feature packs will provide insight to the Dick's site relaunch in January 2017.

Dick's plan is to move its e-commerce operations in-house so it has more control over its omni-channel features.

"There are a lot of things we're doing in advance of that to make sure that it's not big bang, that we're installing new feature packs, and things like that," said Hawaux.

Another key milestone for Dick's e-commerce relaunch will be revamping fulfillment center contracts ahead of January.

Dick's e-commerce business was up 19 percent in for the fiscal year ending January 30, 2016 to $748 million, up from $638 million in fiscal 2015. For fiscal 2016, e-commerce was 10 percent of sales, up from 9 percent of sales in 2015.

Aside from control, Dick's is aiming to improve profit margins. Under its deal with eBay Enterprise, executives at Dick's have said the company pays a percentage of sales. By bringing e-commerce in-house, Dick's said its costs will be fixed instead of variable. Stack said on Dick's third quarter earnings conference call that the company will garner those returns because as profitability goes up it won't have to pay fees to eBay/GSI.

Here's a look at Dick's annual e-commerce sales:

dicks-ecommerce-sales-resized.jpg

Dick's won't detail specifics about the eBay deal, but Stack did provide a rough sketch on the retailer's third quarter conference call in November 2015. He said:

"I won't give you the exact percentage, but we provide the same percentage whether we sell a pair of $50 shoes or a pair of $100 shoes. And it doesn't cost GSI any more to pick a $50 pair of shoes than we do a $100 pair of shoes. So what we will be able to do as we go forward is to leverage those costs, which we can't do today because they are all variable. So there is a very meaningful increase in profitability when we roll off this GSI contract."

"This involves substantial risk, including risk of implementation delays, cost overruns, technology interruptions, supply and distribution delays, and other issues."
Dick's Sporting Goods 2015 Annual Report

CFO Teri List-Stoll said "we expect our e-commerce business to generate at least 30 basis points in consolidated operating margin benefits in 2017 as compared to 2016." That improvement, or an additional $20 million to $25 million in pre-tax earnings, boils down in part to not having to pay eBay Enterprise fees.

Naturally, there are risks to any big technology transition. Dick's duly noted in its 2015 annual report:

"Our omni-channel strategy also includes the development of an internal e-commerce platform. Installing a new e-commerce platform involves integrating a number of information and management systems from different vendors, increasing supply chain and distribution capabilities, attracting, developing and retaining qualified personnel, and managing the customer experience. This involves substantial risk, including risk of implementation delays, cost overruns, technology interruptions, supply and distribution delays, and other issues that can affect the successful implementation and operation of our internal e-commerce platform. If we are not able to successfully implement and operate our internal e-commerce platform, our financial performance and future growth could be materially adversely affected."

The stack

Dick's didn't return calls seeking additional comment about its plans or how the implementation has gone so far. But, regulatory filings and job listings provide a picture of the e-commerce stack.

Based on job openings—there were 20 listings as of March 25—Dick's internal e-commerce operations will be based on IBM's Websphere Commerce Suite. WebSphere Commerce is designed for omni-channel shopping and fulfillment to link stores, e-commerce and customer experiences across multiple screens.

Most of the open positions, ranging from designers, engineers, Web developers, analysts and omni-channel coordinators, are based in Dick's Pittsburgh, Pennsylvania headquarters. For instance, a developer for Dick's omni-channel platform needs to know Java development, Websphere, Apache ServiceMix, Eclipse and be schooled in agile development.

An analyst position open at Dick's is focused on omni-channel and will work on Buy Online Pickup In Store (BOPIS), Associate Ordering System (AOS), Ship from Store (SFS) and Ship to Store (STS) initiatives.

dicks-strategic-rationale-resized.jpg

This same omni-channel analyst is also expected to know the business and e-commerce systems. Dick's is looking to meld its DSG (Dick's Sporting Goods) Omni-channel Engine with its shipping systems and Manhattan Associates Order Management System.

Manhattan Associates is the supply chain management vendor for Dick's. The Manhattan supply chain suite runs four distribution centers out of the retailer's Pittsburgh central computing hub. This central computing center is called the SSC, or Store Support Center, Dick's reported in its 2015 annual report filed with the Securities and Exchange Commission.

JDA Software Group is also critical for merchandising, allocation and replenishment at Dick's stores. In a SEC filing, Dick's noted that data from JDA Software systems "are consolidated into a comprehensive data warehouse application that was purpose-built to provide near real-time performance information across a broad spectrum of critical metrics for our business."

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For financial and human resource management software, Dick's uses Oracle's PeopleSoft. Despite a bevy of third party applications and suites, Dick's uses internally developed software to meld the systems and create additional value. On the hardware front, IBM mainframes, servers and storage systems are coupled with Cisco voice and networking gear.

Those systems mentioned in the 2015 annual report were dropped from the 2016 versions, but it's likely that the status quo remained amid the company's e-commerce build-out. In Dick's 2016 annual report, the company only stated that it relies on third party vendors for much of its technology infrastructure.

The economics

What's unclear is whether Dick's can garner the returns it is seeking. For starters, Dick's will have more ongoing costs as it hires expertise and talent and has to maintain systems. Many of the e-commerce functions sat with eBay Enterprise.

Should Dick's projections work out, the retailer should post returns in three to four years. Here's the math: Dick's said it will invest $65 million on its e-commerce build out. But Stack noted March 15 that the company decided to buy its data center capacity instead of leasing it. That move brings the total cost to about $80 million to $81 million.

"We know that a multi-channel customer spends three times as much as a single-channel customer."
Ed Stack, CEO of Dick's Sporting Goods

Once the project is complete in January 2017, Dick's expects more than $20 million to flow to pre-tax earnings. The rough math indicates a 4-year break-even point with more control and better cross-channel marketing in theory.

But even if costs were higher, Dick's executives maintain that the in-sourcing strategy makes sense. Why? An integrated platform will allow the company to better link data between its store and web data as well as its loyalty card program. Better use of data may enable Dick's to save money on more traditional advertising such as newspaper circulars. Best Buy also has invested in its digital marketing efforts with much of the return on investment being tied to lower traditional ad spending.

To Stack, the ability to move faster and differentiate from other retailers is critical. Speaking on Dick's fourth quarter earnings conference call, he said:

"This will position us to capitalize on the significantly improved economics and other strategic benefits, including the control to create a differentiated online experience, easier access to data, and the ability to leverage cross-channel data, control over development cycles including faster testing and implementation, and the ability to quickly stand up new sites."

As for the bottom line, there are a mix of benefits including:

  • Leveraging customer data better with one integrated system;
  • The ability to test approaches regionally;
  • Improved search;
  • Enhanced mobile app;
  • More effective digital marketing;
  • Better consumer insights and analytics;
  • And more integration between physical and virtual sales.

Of those bullet points, localizing the e-commerce experience could have the most benefits, according to Stack. "The synergies of the stores that drive our e-commerce market share are pretty significant. We have improved our capability from a regionalization standpoint, allowing us to customize our homepages to local markets. This allows us to test different pages and different promotions in different parts of the country and see what delivers the best results," said Stack.

Overall, Dick's is expecting about $25 million to $30 million of net savings a year from going in-house for e-commerce. That savings is largely based on a pro forma look at what Dick's costs would look like if it had stayed with eBay Enterprise.

What Dick's is really betting on is accelerated e-commerce growth without paying fees to eBay Enterprise. At it's 2015 annual analyst meeting, Dick's projected an estimated $1 billion to $1.2 billon in annual e-commerce sales.

Another strategic benefit for Dick's is that it can offer more selection online as well as flash sales to manage inventory. The warm winter of 2016 led to lower same store sales for Dick's.

Dick's has argued in various investor presentations that physical stores drive e-commerce sales. In fact, Dick's found that e-commerce sales double in a region where it opens a new store. However, it's not clear how long that impact lasts and how small the base was originally.

Today, Dick's has 644 stores in 47 states and noted in March that it could expand with more physical locations in the future. By Dick's estimates, it has "significant white space" across the U.S. to expand. The company also said that it has fewer stores than other similar retailers.

dicks-store-comparisons-resized.jpg

Dick's estimated that it has the potential to build 1,100 stores. It's possible that a growing e-commerce business could curtail that investment. After all, other retailers are trimming stores due to e-commerce. Whether Dick's follows through on its physical store build out will largely depend on how they drive internet sales.

Stack said stores are likely to be mini-distribution centers as Dick's hones its ship-from-store strategy once it's free from the eBay Enterprise partnership. "Our organization is set up and organized to be able to handle any of these options that the consumer wants through whatever fulfillment channel they want, and we have a fulfillment algorithm that will result in the fastest and most cost-efficient delivery to the consumer" said Stack. "We focus on this because we know that a multi-channel customer spends three times as much as a single-channel customer."

Should that trend hold for Dick's as it increases its percentage of e-commerce as a portion of total sales, the company shouldn't have much trouble generating returns. Now it's up to Stack and his executive team to execute, innovate and deliver features it couldn't under the eBay Enterprise deal.

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