Costco Web Division Triples Sales

Costco.com operates the Web site of Costco Wholesale Corporation, a pioneer in the world of wholesale buying clubs. Only three years after enabling online purchasing on the site, Costco.com generated nearly U.S.$100 million in online revenue - and had outgrown its e-commerce management system. Unable to handle increasing Web traffic volume, the existing system was difficult to support and required that the IT staff handle every update to the Web site, which often took days rather than hours.

As a result, Costco lost sales opportunities. To solve these problems, Costco.com migrated to Microsoft Commerce Server 2002. The solution easily handled the growing volume of online sales, which more than doubled the first year. It also gave business managers the tools they needed to manage most Web site updates, relieving the IT staff of these tasks and freeing more than 50 percent of their time.

Situation
Founded in 1976, Costco Wholesale Corporation is one of the largest U.S.-based wholesale buying clubs. It offers individual and business members everything from tires to dairy products to digital camerasall at discount prices. With revenues of more than U.S.$47 billion in fiscal year 2004, Costco serves member buyers in 457 retail warehouses throughout North America, Mexico, the United Kingdom, Taiwan, Korea, and Japan.

In 1998, Costco.com, the Web division of Costco, added online purchasing to the companys existing Web site. Within three years, online revenues were just under $100 million. Today, Costco online business accounts for $630 million of the companys multibillion dollar annual revenues. When it launched its first e-commerce venture, Costco.com implemented Microsoft Site Server, Commerce Edition to manage the business. Designed for small to midsize businesses, Site Server was the first product Microsoft developed for managing e-commerce operations.

With rapidly building Web traffic and online sales volume, Costco.com inevitably outgrew the solution in terms of performance and functionality. By 2001, the average number of daily online transactions had grown to more than 1,000; the peak number of daily transactions was more than 2,000. Anticipating double the volume over the next one to three years, Costco.com knew that the existing system would not be able to load pages fast enough or process the volume of orders.

Equally important, the existing solution lacked management tools accessible by Costco.com business and Web site managers. For example, if the marketing department wanted to launch a new marketing campaign or offer coupons or discounts, the IT staff had to make those changes by manually updating the database. Making database changes was not trivial; sometimes the changes took days or weeks, not hours, says Luke Friang, Senior Director of E-Commerce Technologies. We were spending over half of our time just running the day-to-day business. We wanted to give the business side of the house the tools they needed to set up marketing campaigns and publish new discounts. We wanted to get out of their way and let them focus on what they do best, adds Friang. The situation was equally frustrating for Costco.com business managers, who realized that lost time meant lost sales. In addition, the continual database updates were complicating the existing system, making it difficult for IT to manage and maintain.

Faced with these challenges, Costco.com knew it was time to upgrade its e-commerce solution, and it was not alone. In just two or three years, e-commerce Web sites had become unbelievably successful Internet-wide, and the technology for managing Web sites had evolved dramatically. Even Microsoft would soon be retiring Site Server and migrating customers to Microsoft Commerce Server 2002. Friangs vision for the future was a solution that would scale to accommodate growth while offering optimum performance and uptime. Friang also wanted to simplify and modernize the entire Web site development environment. He also wanted business managers to have flexible tools for performing advanced analytics and managing catalogs, customer accounts, discounts, and merchandising campaigns.

Solution
For Friang, choosing the correct platform was a more crucial decision than simply choosing a product, and Microsoft .NET connection software made sense. We wanted to get away from the traditional coding practices of the day and move to a more object-oriented, service-oriented approach that centered on Web services, says Friang. And ultimately, we wanted to reduce our IT support costs.

In September 2002, working with Microsoft Services consultants, Costco.com began its migration from Site Server to Commerce Server 2002, which is part of Microsoft Windows Server System integrated server software. Underlying technologies and products included the Microsoft Windows 2000 Server operating system and the Active Directory service. Costco.com also uses Microsoft SQL Server 2000 to store merchandise and transaction data and Microsoft Operations Manager 2000 to monitor all mission-critical systems.

Through a joint development program, Microsoft and Costco.com worked together to develop and improve the business management tools and other features that eventually became part of Commerce Server 2002 Feature Pack 1, which Costco.com runs today. Tight integration with the Microsoft Visual Studio .NET 2003 development system let the developers take advantage of the Commerce Server 2002 prebuilt business components and tools that support Microsoft ASP.NET development.

On the business side, Commerce Server 2002 with Feature Pack 1 provides the powerful and customizable management tools that Costco.com business managers need for maintaining product catalogs (see Figure 1), managing discounts (including coupon discounts), and creating special marketing and merchandising campaigns. The tools all have familiar Microsoft Windows interfaces, so they are easy to learn and use.

Costco.com business managers use the profiling tools to manage and support customer profiles for the more than 6 million registered Costco.com users. Catalog tools help managers maintain catalogs in multiple languages and prices in multiple currencies, and easily aggregate catalogs from multiple suppliers. Managers also use the business-processing pipeline tools to customize business processes, such as the steps that are used to handle online purchases.

With the proper tools in the hands of business managers, the IT staff now has time to focus on developing new features. For developers, Commerce Server 2002 with Feature Pack 1 offers staging support, which makes it easy to test and debug new features before deploying them live on the Web site.

To support the joint development effort, the entire Costco.com IT staff (approximately 40 people) received about 120 hours of classroom training in Commerce Server 2002 and other new technologies and tools, including the Microsoft .NET Framework version 1.1, Microsoft ASP.NET, the Microsoft Visual C# .NET 2003 development tool, Unified Modeling Language (UML), and object-oriented programming.

Benefits
For Costco.com, Commerce Server 2002 resulted in a wide range of benefits for the business and operations people as well as the IT staff. Today, Commerce Server 2002 provides the stable and secure platform Costco.com needs to meet its performance and availability requirements. Operating with uptime of 99.8 percent, the solution handles the unparalleled growth in Web site traffic and sales that Costco.com had projected. Business and IT staff are more productive, the company has increased its time-to-market, and the solution has saved the company time and money.

Increased Sales
The day that Costco.com went live with Commerce Server 2002 Feature Pack 1 was history-making: the site had the highest number of hits ever and record-breaking revenues. The immediate growth rate was phenomenalmore than double the first yearand still remains strong today. Costco.com consumer revenue grew 66 percent in fiscal year 2004, from $226 million to $376 million and another 68% in fiscal year 2005 to $630 million. And for fiscal year 2006, Costco.com anticipates continued growth in online revenue from business, consumer, and International sales. Over a three-year period, this amounts to growth of more than 300 percent. Two aspects of the Commerce Server 2002 solution have contributed to the growth: its ability to handle the increased order capacity, and the business management tools that help managers to proactively drive their business rather than just respond to it.

Increased Productivity and Flexibility
The business management tools that Commerce Server 2002 provides have enabled IT and business people to completely change the way they work. Before, the IT staff was spending more than half of its time handling non-technology-related issues, which left little time to develop new tools or launch new business initiatives. Now, the IT staff has time to focus on technology issues, keep the platform stable, and build new features and functionality that help the business people do their jobs. Fiscal year 2002 is when everything changed for us. Commerce Server allowed the business to get refocused, IT to get refocusedit was very successful, says Friang.

Faster Time-to-Market and Targeted Marketing
Providing catalog and marketing tools for business people also means faster time-to-market. Rather than waiting days or weeks, business and site managers can now create customer service pages, launch new-member services, design targeted marketing campaigns, create and publish promotional pages and virtual catalogs, and publish new discounts. Web site managers value the new system because faster time-to-market translates to increased sales. IT receives positive comments from business managers who say, Im more in control of my business today than I was before.

Time and Money Savings The new business management tools that Commerce Server offers and the Web servicescentered .NET platform are the two primary reasons that IT has saved time and money. Shifting Web administration duties to the business managers has freed more than 50 percent of IT staff time. Moreover, the new platform has dramatically simplified IT system support. In the last three years, headcount has stayed flat, IT spends less time managing daily operations, and the business has increased 300 percent. The solution has definitely saved us time and money, says Friang. Friang sums up the Commerce Server project with high praise for Microsoft: My philosophy is to have strategic technology partners, not just vendors. Microsoft has proven itself over the last few years and is now one of our top strategic partners.

Costco.com is looking forward to implementing Commerce Server 2006 as well as Microsoft BizTalk Server 2006 to replace its existing order management system. IT has already completed a 16-week assessment, built the framework of the core solution, and tested it in the Microsoft EEC lab. Drawing on the knowledge and experience gained on the Commerce Server project, Friang expects the order management replacement project to take about 14 months.

For more information about Windows Server System, go to: www.microsoft.com/windowsserversystem

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