Using One Retail Channel to Fund Another

She’s a professional woman, somewhere between the ages of 35 and 60. She is well-educated, has money to spend, and does her shopping in stores, online or through catalogs. Who is she? She is quite likely one of an ever-growing number of customers of Coldwater Creek Inc., a triple-channel retailer of women’s apparel, jewelry and accessories.

She and her fellow customers spent $590 million last year buying some of the company’s more than 3,000 products.

Coldwater mailed out 108 million Northcountry, Elements and Spirit catalogs last year to its customer list of more than 15 million names—2.7 million of whom have purchased something from the company in the past 12 months.

Coldwater Creek’s Web site accounts for about a quarter of overall revenues, and the Sandpoint, Idaho-based company says it responds to online “Instant Help” chat inquiries within 10 to 15 seconds. Its diligent focus on the customer has allowed the company to boost revenues from $328 million in 2000 to $590 million last year—a 12.5 percent annual increase. Its net margin of 5.4 percent over the last 12 months is superior to all of its direct competitors, save Chico’s FAS Inc.

Though it has been successful using the catalog and online channels, Coldwater’s current growth strategy is all about real estate. In 2000, Coldwater had eight stores that accounted for 10 percent of revenues. By 2004, the company had 114 stores that accounted for 50 percent of revenues, and it’s on target to open 60 more stores during 2005. The company is attempting to take the brand equity that it’s built by mailing hundreds of millions of catalogs over the past 20 years, and use that to grab a larger share of the physical retail market.

Coldwater Creek’s sweet spot—the 35-plus market—is a $46 billion opportunity, according to market research firm NPD Group, but 90 percent of that money is still spent in bricks-and-mortar locations. And while the company has a healthy 5 percent of overall sales to women in that demographic, it only has .04 percent of the retail store market.

Coldwater’s long-term plan is to have 450 to 500 stores that will account for some 80 percent of revenues. And aligning IT with that kind of traditional bricks-and-mortar growth curve is the main focus of the company’s IT department. To help achieve this alignment, Dan Moen, CIO and senior vice president of Coldwater, reports directly to the company’s CEO, Dennis Pence. Coldwater’s executive team—and ultimately, its board of directors—specifically approves each year’s roster of business-related IT projects.

As is usual with retail stores, it’s all about location, location, location. While identifying cities in which to open new stores is relatively straightforward, Coldwater refines its location decisions with database information about where current catalog and Internet customers live.

Once the store is built, the company can inform catalog or Internet customers of a new store in their area. Thus the data collected over years of catalog and online customer interaction has proved invaluable.

But there are other physical challenges IT needs to address when a company expands a store network as quickly as has Coldwater. Operational and merchandising execution has always been a critical success factor, but it has increased in both importance and complexity as the company expanded in a crowded field that includes big-name players such as Ann Taylor Stores Inc., The Talbots Inc. and Chico’s.

One of the classic retail problems that Coldwater has faced during its growth spurt is what to do with merchandise between the time it is received from suppliers and the time it is needed in stores. In recent years, the layover at the company’s West Virginia distribution center could be as long as a month. Getting behind the fashion curve is death in the apparel industry, and, more tangibly, cause for price markdowns. And that risk increases with each and every new store the company opens. If Coldwater could reduce stock transit time, it could not only reduce the need for storage space, it might also keep more clothes moving at full price.

In February, Coldwater embarked on a strategy to speed up the allocation of inventory at the distribution center. Step one: integrate advance shipment notices that the company receives from suppliers via electronic data interchange into the warehouse management system. Step two: change the company’s merchandising software so that planning teams can allocate that inventory to stores before it’s received.

The system went live in June. Dan Moen says the move effectively changes the distribution center from a “storage-and-distribution” model to one that also includes “cross-docking” capacity, whereby product can go directly from receiving to shipping without spending any time in storage. It’s already working: In its latest quarter, improved inventory management resulted in reduced markdown activity for the company, though the company would not quantify how much.


Dennis Pence
Dan Moen

million (trailing 12 months)
revenue growth
net income growth
IT spending
Company Employees

Opening new retail stores and continuing to acquire new
Web and catalog customers.

Bottom Line

Coldwater’s IT has had to play catch-up to the
company’s bricks-and-mortar build-out. But they
are beginning to find a balance

The toughest part of such a changeover has been getting vendors to deliver the shipping notices. Not only does the new system require vendors to make technical changes in order to comply with Coldwater’s very specific data and labeling needs, but Coldwater also had to convince some vendors that doing so was worth the investment on their part. Moen says that while he and his team were happy to work with vendors on any technical issues that arose, they were also quite explicit about the fact that it wasn’t an optional change. “Frankly, it was a new requirement of doing business with Coldwater, period,” Moen says. To prod vendors into action, the company also began to enforce “chargebacks”—a preset fee that gets deducted from an invoice—when shipments arrived without labels or advance data. “We noticed a marked up–tick in vendor cooperation when we began to do that,” Moen adds.

Once vendors were onboard, Moen says, the internal part was actually fairly straightforward. After developing the software, Coldwater was able to start shifting its highest volume suppliers over to the new system and had completed a full shift in just four months. “With the help of IT, we’ve taken a huge step toward being a flow-through operation,” says Gerard El Chaar, senior vice president of distribution at the company. As an added bonus, Coldwater was able to reduce its space requirements and defer a major capital investment—the expansion of the distribution center from 600,000 to 900,000 square feet. The time when that much space is needed will come, but not just yet.

Along with retail locations, the key to success in the cutthroat fashion-retail business is, of course, fashion. Coldwater understands its demographic perfectly, and designs its clothes accordingly. It is known for its “forgiving” fits and comfort features, fully aware that its customers can be sensitive about their bodies. But all the design success in the world means nothing if the business can’t support it. Coldwater’s IT has struggled to keep up with the pace of growth in the past. But they seem to have caught up, and are starting to think more strategically about the business.

They are already on top of the most important parts of their business. “These kinds of investments in IT make sense when you’ve hit a certain critical mass,” says Christina de Marval, an analyst at Sidoti & Co. LLC. “And that’s where Coldwater is right now. Add that to their excellent customer service, their superior merchandising, and seamless coordination between their Web, catalog and retail operations, and you’re talking about very positive implications for their bottom line.” That’s the kind of alignment that’s always in fashion.

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