BUSINESSWEEK ONLINE : AUGUST 28, 2000 ISSUE
FINANCE E*Trade: Not Just Clicks Anymore Will brick-and-mortar offices pump up profits at the online broker? Silicon Valley's E*Trade Group Inc. (EGRP) is acting more like an old-line broker than an online rebel. Executives finally acknowledge that E*Trade's online brokerage and banking business can only grow with the support of real-world outlets. By the end of August, E*Trade will open its first brick-and-mortar office in a SuperTarget discount store outside Atlanta. The 500-square-foot ''E*Trade Zone'' pilot program is designed to draw in shoppers to talk to E*Trade customer service reps and open a brokerage account, place a stock trade, or make deposits into their E*Trade Bank accounts. Likewise, the first of a few stand-alone E*Trade offices is expected to be a three-story, 30,000-square-foot office in midtown New York by yearend. The Madison Avenue office will offer a staff of customer-service reps, computer terminals, and a cafe. And 9,000 E*Trade automated-teller machines are showing up in gas stations, drugstores, and supermarkets. EXEC DEPARTURES. E*Trade is facing a host of new pressures that make these latest strategies a fight for long-term viability. And it is by no means clear that these initiatives will give the company the boost that it needs. E*Trade is mum on how much it's spending, but the mandate to change is loud and clear: Investors are curbing online trading, customers are complaining about service, and the stock is down more than 50% from its 52-week high, which some think makes it a prime target for acquisition. Adding to E*Trade's woes are the departures of several high-ranking execs, including Kathy Levinson, its longtime president and chief operating officer, who left to pursue ''philanthropic interests'' in May. Jerry A. Dark, who was E*Trade's head of human resources, and Debra Chrapaty, the chief media officer, also have left in recent months. There's more. In recent weeks, an arbitration panel awarded about $61,000 to an E*Trade customer who complained that the company ignored his cancellation of a limit order. And there are more arbitration cases to be heard. E*Trade ''disagrees with the judgment, but intends to comply with the ruling,'' says E*Trade spokesman Patrick Di Chiro. E*Trade is getting squeezed from both ends, facing competition not only from higher-end outfits that offer more services, such as Merrill Lynch & Co., but also cheaper brokers like Ameritrade Inc., where a trade costs just $8, compared with E*Trade's $20 fee. Hoping to better straddle the middle ground, E*Trade set up a joint venture with Ernst & Young in May to offer investment advice. Analysts are mixed about E*Trade's brick-and-mortar expansion. A flashy Manhattan address is ''just a showpiece thing'' that isn't guaranteed to bring in real business, says Tom Goggins, a manager for the $2.4 billion John Hancock Financial Industries Fund. More realistic may be the Target plan, where shoppers are a relatively young and attractive demographic group. The average annual household income is $49,000, higher than that of customers of other major retailers. E*Trade is also betting that Target will help it attract more female customers, who today make up about 40% of E*Trade's customer base and 80% of Target's. E*Trade plans to open its E*Trade Zones in some 23 SuperTarget stores in the next year. Minneapolis' Target Corp., however, is much more cautious and says it all depends on how well the pilot store goes. Until now, E*Trade has connected with young, tech-savvy customers through online marketing, its Web site, electronic mail, and the phone, but that's simply not enough. Brokers and banks must provide customers with ''three channels to reach them: online, over the telephone, and in branch offices,'' according to a McKinsey & Co. report. DLJdirect and Web Street Securities, for instance, have opened branch offices. E*Trade, though, is the only major broker that's acquiring ATMs and branding them. In addition to the purchase of an online bank in January (now called E*Trade Bank), E*Trade paid $82.4 million in stock in May for ATM operator Card Capture Services Inc. Since then, it has plastered its name on the existing machines and wants to expand to 18,000 ATMs through acquisitions. TAKEOVER FEARS. E*Trade's new ATMs--which the company plans to upgrade to give customers access to their brokerage accounts as well as bank accounts--offers tradition-minded customers a physical place to do business. Some say the change isn't coming a moment too soon. E*Trade's stock is trading at about $14 a share, down from a 52-week high of $40. Its depressed stock price makes it vulnerable to a takeover, analysts say. ''If the stock goes down farther, there are lots of big firms who would love to capture E*Trade's franchise,'' says Jerome A. Castellini, president of CastleArk Management in Chicago. Potential suitors, he says, could include European financial companies or American Express Co., with whom E*Trade was rumored to be discussing a merger early this year. Both American Express and E*Trade declined to comment. The poor performance of the Nasdaq Composite Index this year has put a damper on online trading. At E*Trade, daily average transactions during the June quarter fell by 26% from the preceding quarter. And while Wall Street in the past didn't mind the huge losses E*Trade ran up with big spending on advertising, it's now demanding profits. E*Trade has made some progress: After posting an operating loss of $132.4 million in the last fiscal year ended Sept. 30, the company broke even in each of the two most recent quarters, though largely because of ad-spending cuts. Other key metrics are also heading in the wrong direction. E*Trade's average account size, an important measure, is one of the smallest in the industry at $21,000, down from about $26,000 in the previous quarter. By comparison, Schwab's average account size is about $100,000, while DLJdirect's is roughly $55,000. Moreover, it's getting more expensive for E*Trade to acquire new customers: It costs E*Trade an average of $286 for each new customer, up from an average of $246 in the prior four quarters. While E*Trade is adding to its customer base, the rate of increase has slowed. As of June 30, it had 2.72 million active accounts, up 119% from a year ago, and up 10% since March. Schwab's 4.1 million accounts, up 46% since last year, are up 11% since March. But while the cost to lure new customers has risen, analysts say it isn't too high for E*Trade, where each customer generates about $700 in earnings over an eight-year customer life span, before taxes and marketing costs. E*Trade's new customers could be more lucrative, though more difficult to harvest. ''The next group to invest online will be a tougher transition, because it's been wedded to a physical, place-based experience, whether a bank branch or brokerage,'' says Jerry D. Gramaglia, E*Trade's president and COO. In retrospect, it may well be that E*Trade should have shifted faster into bricks and mortar. Still, it's far too soon to count this pioneer out of the game. By Louise Lee in San Mateo, Calif. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS E*Trade: Not Just Clicks Anymore CHART: E*Trade's Stock Gets Battered TABLE: How E*Trade Is Going Traditional INTERACT E-Mail to Business Week Online

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