OCTOBER 5, 2000
SPECIAL REPORT--THE NET'S FUTURE
Comparing the Big Three of Clicks-and-Bricks | Sears, Kmart, and J.C. Penney are taking different tacks to e-tailing. Right now, Penney seems to have the edge
| When online retailer Amazon (AMZN) burst onto the scene in 1997, retailers Sears Roebuck (S), Kmart (KM), and J.C. Penney (JCP) had no presence on the Internet. But three years later, they are the Big Three brick-and-mortar chains with the most retailing impact on the Net, according to Media Metrix' traffic figures over several straight months.
The three retailers sell similar lines of merchandise. All had earthbound revenue of $15 billion to $20 billion over the past six months. None of the Web sites makes money -- and all have very similar Web-traffic figures that put Kmart on top one month and Sears the next. And though their traditional revenue base is in the same range, they have quite different overall financial conditions. Sears, the parent company, is highly profitable and boasts a market value of $11 billion, while Kmart is deep in the red with a market value of $3 billion. J.C. Penney is in the middle, with a $3 billion market cap and restructuring losses in the past six months.
They have distinctly different clicks-and-bricks strategies, too. Each has its own way of blending e-commerce with Old Economy brand marketing and in-store sales. It's too early to say which model will win -- although each has made fulfilling orders its top priority after several years in which many e-tailers sullied their reputations by failing to ship goods on time. On this issue alone, Penney may well have the most appealing strategy because it is harnessing the customer-service and order-fulfillment strength of a $4 billion catalog division. Meanwhile, it is also experimenting with several aggressive pricing models -- and forecasting profitability in two years or less.
Wal-Mart Stores, the nation's largest retailer, is lagging behind the three others and has been revamping its Web site ("Wal-Mart.com's Second Grand Opening," Daily Briefing, Sept. 29, 2000) in an effort to reach Christmas shoppers. But more than likely, Sears, Penney, and Kmart will grab the lion's share of the big-box retailers' Web sales this holiday season. While the period from Thanksgiving to New Year's traditionally accounts for about 70% or more of the year's retail revenues, this year is not expected to be the make-or-break moment that decides which company succeeds in the e-tailing game. All the same, the three rivals' Web strategies offer contrasting case studies in how established brick-and-mortar retailers are growing more serious about e-tailing.
IPO BLUES. Kmart has contracted its Internet business to a partially owned subsidiary, the pure-play Web startup www.BlueLight.com. Kmart made a one-time $55 million investment this year in BlueLight, which was formed in December, 1999, with an initial $50 million from venture-capital firm Softbank Partners and $12.5 million from Martha Stewart Living Omnimedia. Softbank added an additional $25 million this year. Kmart owns 60% of BlueLight.com, which plans to go public in 2001. "That’s our Internet strategy," explains Kmart spokeswoman Mary Lorencz.
BlueLight serves as Kmart's e-commerce arm and also offers free Internet access to anyone who registers. The site has exclusive marketing deals to sell Martha Stewart housewares -- a big draw in Kmart stores ("'Kmartha' to the Rescue?" Daily Briefing, Oct. 4, 2000). The preview site is not without its kinks. One category, for example, "Computers & Accessories," has only a single offering -- a $70 oak rack for holding compact disks. But BlueLight says it will vastly increase its product offerings when it launches full online shopping on Oct. 15. BlueLight certainly has its work cut out for it, considering that other Net companies are already offering a far more extensive range of discounted goods.
Although BlueLight enjoys a certain amount of financial independence from its parent company, Softbank has already signaled that it wants the operation spun off to the public markets. But so far, that strategy isn't working with other e-tailers, which have seen their stocks devastated by this year's widespread downturn in Net stocks.
Penney and Sears, by contrast, have in-house Web sites. Sears boasts about 150 Web-site staffers and says it's ramping up to 250 before Christmas, with plans to spend $75 million to $100 million on www.Sears.com in 2000. But beyond that, the company is reluctant to provide specific figures on how the site is doing. "We consider Sears.com basically an extension of our other businesses. It's not a separate entity," says Sears e-commerce spokeswoman Ann Woolman.
UNDER WRAPS AT SEARS. At the launch of Sears.com in 1998, the Chicago-based retailer wanted its site to serve as an outlet for Craftsman tools, washers, and dryers, as well as the spare parts to repair and maintain them. Not much was added until July of this year, when Sears placed small appliances, electronics, housewares, and other product lines from its stores on the virtual shelves as well. There are still gaping holes in the service: Sears, for example, sells gift-certificate cards on the Web site that can be used in stores -- but not online. "At this point we don't have the technology in place to be able to ensure that it's going be a safe transaction," Woolman says. But Sears is working on it, she adds.
Some analysts don't like the fact that Sears declines to disclose financial information about its Web site. "Breaking the division out [as Penney has done] intuitively makes more sense," says Internet.com analyst Tom Taulli. "That makes it easier for investors to see what your online division is doing. Regardless of what Sears says about its site, buying products online and in the stores are two entirely separate businesses," and the company should treat them as such, Taulli says.
Penney, on the other hand, treats its Web operation as a wholly-owned division of the $4 billion catalog unit, while also separating out the site's financial performance. Penney views www.jcpenney.com as a revenue source that operates independently, the company says, rather than as a marketing expense, which is how Sears lists its site on the balance sheet.
J.C. Penney is saving money by training its catalog division to handle customer service for Web-site sales. And it has much of the cost for the Web site spread across several divisions of the company. Penney's online sales this year will hit $300 million, vs. $100 million last year, predicts Penney's Paul Pappajohn, who formerly managed e-commerce for The Washington Post Co. "We're working to put the entire selection of the J.C. Penney catalog online," he says. Right now, that's more than 200,000 products.
AUTOMATIC MARKDOWNS. Pappajohn says his team is also experimenting with several pricing models. At least two auction models are being used to sell everything from apparel to baby products. And Penney is pushing automatic markdowns on the Web site -- a system that sees a product's price drop several times over a period of days until inventories are depleted. "As the price continues to drop, you may or may not get that set of products if you wait too long," Pappajohn says. But you may also end up paying less than the customer before you.
JCPenney.com's goal is to reach $1 billion in sales by 2002. If sales match its ambitions, then the company estimates the site will reach operating profitability by the end of 2001 or early 2002. "Scaling is the name of the game," Pappajohn says.
The trends may be favoring Penney. According to PC Data, which tracks online customer traffic and purchasing, Penney had the most positive trends in summer Web-site use. It went from the 328th most visited Web site in May to 135th in August. Sears.com went from No. 210 to No. 152, while BlueLight fell from No. 242 to No. 244.
All three retailers are learning from the mistakes of pure-play online retailers that have lost millions of dollars or gone into bankruptcy by trying to develop the kind of brand name on the Web that Sears, Penney, and Kmart already enjoy at the mall. One example is the defunct furniture seller www.Living.com, which was unable to attract the Web customer base it had hoped for. (Several former Living.com staffers now work for Penney.) Much of Living.com's assets were swallowed by the largest pure-play e-tailer, Amazon, whose business model is still a work in progress -- and whose chances for profitability remain slim in the near term.
PROFITS AHEAD? Penney, by contrast, is likely to be profitable within two years, company officials say. Sears hasn't said when it expects its Web site to be in the black, and Kmart's BlueLight says it plans to hit the IPO as a profitable venture. That will mean BlueLight needs a very prosperous Christmas season this year if it's going to achieve profitability next year.
All three still have shortcomings, and each offers only a limited range of in-store products as they move toward making fulfillment their highest priority. But in the months ahead, just how the three traditional department-store chains fare selling kitchenware, DVDs, and bathrobes over the Web could determine the most effective model in clicks-and-bricks retailing.
It appears that Penney has the advantage. And if it hits profitability late next year -- before the others -- we'll all know whose clicks-and-bricks strategy is working best.
By David Shook in New York
Edited by Beth Belton
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Copyright 2000, by The McGraw-Hill Companies Inc. All rights reserved.
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