In Recreational Equipment Inc.’s huge stores, customers can test-ride mountain bikes on an indoor track or try out harsh-weather gear in the rain-forest room. They can practice their rock-climbing technique on two-story-high walls. They can see how the portable camping stove does with Mom’s recipe for chili. Or they can snuggle up to a computer kiosk and check out REI’s Web site.

Which raises the question: In a 100,000-square-foot store that has everything—and then some—that an outdoor enthusiast could want, why would anyone want to go stare at a computer screen?

In the answer lies a potent new e-business strategy, “real-world integration.” The term refers to the tying together of digital and physical commerce, a huge emerging trend in which the Seattle-based retailer is a trailblazer. Conventional wisdom today holds that nimble “dot-com” enterprises possess an imposing advantage over more traditional rivals that are held back by their bricks-and-mortar baggage. But proponents of real-world integration argue that, over time, the reverse is more likely to be true. It’s not that traditional retailers will prevail over on-line ones. It’s that the winners in the future will be those that successfully tie together the digital and the physical worlds.

That ability may be the trump card for merchants like REI. “I call [the trend] clicks and mortar,” says Dave Pottruck, co-chief executive officer of brokerage firm Charles Schwab. “If you integrate digital technology with physical distribution, it’s not easily replicable by on-line-only firms.”

Even Jeff Bezos, billionaire founder of the poster child of on-line commerce, bookseller Amazon.com, acknowledges that “physical retailers can set up effective feedback loops between stores and Web sites.” For all its success, integrating the Web with the real world is just about the only strategy that Amazon can’t implement—at least not yet.

REI executives say there are at least three reasons for the decision to install rows of computer kiosks in all of the company’s 50 stores:

First, much of REI’s merchandise isn’t always in stock everywhere. With the self-service kiosks, customers can choose from the company’s whole range of goods—more than 10,000 items in all—and sizes. The customers buy what they want with their credit cards and have items delivered to their homes or to the store, for pickup. (REI isn’t, however, handing out favors to its competitors or to comparison shoppers: The kiosks block access to any site but rei.com.)

“People don’t go into the store to play on the computers,” says Matt Hyde, a 36-year-old mountain climber who is REI’s vice president of on-line sales. “But if you’re in the Wisconsin store and you’re getting ready to go climbing in Yosemite and you need our haul bag and that store doesn’t carry it, we’ll ship it to you for an extra $2.50.”

Second, the terminals offer more information than store signs and brochures ever could. The REI Web site is stockpiled with the kind of detailed specifications that hard-core campers and hikers can’t get enough of and that store employees can’t possibly memorize. So, if a patron wants to see a chart comparing the thermal characteristics of 30 sleeping bags, he can refer to the Web site, generate a chart, and print it.

The extra information is helping in-store personnel to sell better. This summer, REI began turning all its in-store cash registers into full-blown Web terminals, just in case customers have questions for the cashiers about the merchandise. “Cashiers get a lot of questions,” Hyde says. “A customer will say he loves his new tent but wasn’t able to find a ground cloth for it. So, rather than have him drive around town to get it from a competitor, the cashier could place the order on-line for the customer at the point of sale” and have him pay for it right there.

Third, having computers in the stores lets REI provide new types of services. For instance, customers can generate customized, full-color, high-resolution, topographic HorizonMaps of almost any wilderness destination in the U.S.—maps that they can print out at their convenience using their home computers. Or, they can visit REI Adventures, an on-line travel agency that provides information and bookings for hundreds of adventure trips. With all these options, it’s no wonder that the average store visit lasts nearly two hours—a staggering figure for any retailer.

Using the store to help people become familiar with REI’s Web site carries a bonus benefit. When they get home, they know their way around the REI site and are much more likely to remember to visit the site again. Looked at this way, REI’s old-fashioned, bricks-and-mortar buildings could become the best advertisements it could buy.

REI encourages people to use the Web site at home by adding another link between the physical and the virtual: It makes customer-service people available to respond instantly to on-line queries. Just as a shopper in the store, say, might ask what aisle has waterproof sleeping bags, on-line customers can type a question into a chat box and have a human answer right away. The service person can even take control of the customer’s browser remotely and push the relevant Web page to his computer screen, thanks to software from Acuity.

REI also uses its catalog to push customers to the Web site. The 10 million copies of the catalog that REI mails each year encourage customers to visit the Web site for more detailed product information and a wider selection. The Web address is promoted on the front cover and on almost every page-fold.

Then, at the Web site, the home page includes a blurb that says: “Order our new catalog!” Similarly, the Web site pushes people back to the stores. REI’s Web site not only lists the locations of each store, it always promotes a current roster of events. If there is a bicycle-maintenance clinic happening in the store in Cary, N.C., or a talk by a park ranger in Fort Collins, Colo., about “living with predators,” the Web site will tell you that you simply must go. This not only drives people back to the store again but perhaps even gets them socializing with other people who also like shopping there. REI says that the in-store event and clinic pages are among the most popular features on the Web site, as measured by page views.

With the stores driving people to the Web site and the catalog, which return the favor by sending people back to the stores, REI constantly has its customers looping back and forth and back among its three main retail channels.

The company’s total investment in its Web presence has been considerable. With assistance from IBM’s e-business team, REI initially spent at least $1 million developing the site and integrating it with all of its legacy information systems at its headquarters. Since then, REI has spent an additional $15 million on enhancements, upgrades, and new applications. “And we think we’ve been frugal,” Hyde says.

It’s been worth the expense. From its initial planning stages in 1995, REI’s Web venture was treated as “a profit center rather than a marketing expense, which was highly unusual at the time,” Hyde says. The site brought in about $10 million in sales in 1997, its first year on-line. That figure was triple what the company expected, and is equivalent to one of REI’s larger physical stores. On-line sales shot up to about $35 million last year and are expected to surpass $50 million in 1999, accounting for about 10% of REI’s total business. Thanks in large part to the leaps in on-line sales, REI’s revenue is growing at 10% a year, not a bad pace for a 60-year-old retailer. REI has about 12% of the $5 billion-a-year U.S. outdoors-goods market.

“REI has discovered that the Web is not about cannibalization of existing sales channels, but about boosting revenue and improving customer service,” says Jessica DiLullo, vice president and co-founder of Della & James, an on-line gift-registry service that has a partnership with REI.

Naturally, the Web has broadened REI’s presence globally, too. With translated versions in French, German, and Spanish, plus an entirely original Japanese-language site, REI is now selling into more than 40 countries.

Yet for all REI’s early success, very few merchants—on-line or off—have tried to mimic the strategy. For instance, you cannot log onto the Internet from a CompUSA store. With 211 locations (some of which are now being closed because of poor performance), CompUSA is the country’s largest chain of high-tech megastores. Each store is stocked with rows upon rows of personal computers and thousands upon thousands of pieces of merchandise with Web addresses printed on them. If a certain hot-selling PC is out of stock at a specific location but available for purchase at compusa.com, why not allow the customer to log onto the Net, purchase the machine on-line, and have it shipped to his home or office?

“Sorry,” replied a young salesman at CompUSA’s Boston location, “but we can only get onto our internal company network from the store.” But there are millions of computers here, and all of them come with Web browsers preloaded on the hard drive! The salesman shrugs and throws his hands up in the air.

What’s merely a missed opportunity for CompUSA could even be the key to survival for some retailers. A case in point is Brookline Booksmith, a tiny bookshop outside Boston. Booksmith is just the kind of shop that Amazon was expected to put out of business. Instead, Brookline has used real-world integration to bring more customers into the store and measurably increase its business. Some 1,000 customers signed up for its monthly e-mail newsletter about events in the store such as author signings, readings, and special discounts. Customers don’t just read the newsletter and toss it, either. When author Barbara Kingsolver was first scheduled to appear at the store, those who visited the Web site and received the e-mail newsletter heard about it before employees had a chance to put up the traditional paper flyers at the store entrance. Before anyone realized it, 600 people bought tickets to the reading, which had to be held across the street in a movie theater. Nearly half of those attendees bought Kingsolver’s new novel from the bookshop.

The store drives customers to the Web site, which then drives customers back to the store. That’s what Amazon’s Bezos means by an “effective feedback loop.” By integrating their Web presence with their physical presence, retailers use the strengths of one form of retailing to reinforce the other.

Doesn’t REI’s trailblazing make the 60-employee rei.com ripe for an IPO? Wouldn’t a rich infusion of funding from public shareholders help REI fend off venture-capital-backed, Internet-only competitors that are now entering its market—companies such as FogDog.com, The Mountain Zone, Gear.com, and Planet Outdoors?

“Certainly, we’ve thought of that,” REI’s Hyde says. “However, we think that remaining one company and not providing any barriers between the retail and on-line entity is going to serve the customer better.”

To some business people, it might sound a bit anticapitalist to shun the public markets at a time when there is so much money to be had. Even odder, REI gives a portion of its profits back to its customers. REI is run as a customer cooperative—one of the largest in the U.S., with 1.5 million members who have paid a $15 lifetime membership fee. Membership confers actual ownership of the company. The owners elect the board and are entitled to a patronage dividend at the end of every year, a rebate based on a percentage of how much they’ve spent. The percentage ranges from 5% to 10% or more, depending on how profitable the company is. Based on REI’s 1998 sales of $587 million, for instance, the company declared a total patronage refund of $31.3 million to its active members.

The decision not to take the Internet business public may or may not turn out to be the right one. But REI’s employees still get paid, the executives are still compensated, and management still has control over how much it wants to invest on expansion and future business development.

In any case, REI’s unusual cooperative structure not only fostered a strong focus on the customer, it also made it easier to get the whole company working toward real-world integration. Hyde says that, back in 1996, when the Web effort began, REI formed an on-line team with members from nearly every department—including marketing, merchandising, I/S, adventure travel, retail, real estate, accounting, and public affairs. Everyone was on board from the beginning. Unlike at many companies, there was no resistance at REI from factions who thought the Web would cannibalize their existing business.

“Many businesses have been like deer frozen in the headlights because of their channel conflicts,” Hyde says. “They see the Web as competing with their other lines of business. But we take Web orders from the core Seattle customers who drive by our stores every day. Many customers are multichannel customers. We can’t choose how our customers want to shop. So we offer any product, any time, any place.”

Schwartz is the author of Digital Darwinism. He can be reached at evan@webonomics.com.