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Before, there reasons for creating carveouts. For one thing, during the 1998-99 e-tail funding frenzy, companies needed to be agile and independent to grow quickly. Corporate management was a drag on that nimbleness and growth, and the shock troops of the New Economy had to freed from it. But now more companies understand the Net, and the fear of getting Amazoned is subsiding, so that there's less need to barrel ahead at all costs. That doesn't mean traditional retailers can now forget selling on the Net. Consumers continue to shop online because they like the convenience, choice, and variety. So to grab new customers and keep existing ones, traditional retailers still have to master e-tailing. But retailers need to go about it in a new way. That's mainly because the cast of players in this online drama has changed. The struggle for e-tail customers and market share will now take place, for the most part, among bricks-and-clicks companies. When traditional companies set up separate cyber units in the past, the intellectual capital those units might have brought to the whole corporation was sacrificed to win the battle against fast-evolving, heavily funded pure plays. The important thing now is to make a company Web-smart across the entire corporation. So, wouldn't it make sense for these companies to pull their Net teams in-house? That way they can share the wealth of knowledge. As bricks-and-clicks battle, close integration between online and traditional stores is key. Some companies are already moving in that direction. In October, Barnes & Noble announced plans to align more tightly with its online spin-off. The company will install Internet Service Counters in its superstores to let customers order from the Web site and pay using cash, check, or credit card. Barnes & Noble will also let online customers return books in the stores and receive store credit. Returns are the most basic of the advantages a store-based retailer has when selling online. But up till now, the fierce price competition fueled by venture-capital money meant that many online arms of traditional companies couldn't afford to take returns. Why? Because legally, in order to take returns, they had to charge sales tax. SCOOTER SPOTTERS. The Net's benefit for traditional e-tailers isn't solely revenues from online purchases. It also helps them learn a great deal about their customers. The benefits of tracking consumer behavior online, including immediate reaction to sales by demographics, geography, and income, are real. Since consumers online buy at one central virtual storefront, its much easier to spot purchasing patterns and trends. Toysrus.com, for instance, spotted the scooter craze online last spring before the stores took notice. One of the main concerns about pursuing a Net strategy internally has been that no one within a corporation will really advocate selling online. The argument goes that without a smart group of geeks acting as the vanguard, a stodgy corporation won't ever push the envelope. That was probably true four, three, or even two years ago in times of rapid, uncertain change. Now, the benefits may look clearer inside corporations: throwing money around heedlessly is no longer in vogue, the Net makes it easier to get an early read on competitors, and there's now little doubt that the Web is something people like and want to use. Of course, another big reason for creating a spin-off was bringing in venture capitalists. That way, corporations didn't have to pay for investments by themselves and could get a part of the losses off their books. By partnering with a VC, traditional companies shared the risk. And when e-tailing valuations went through the roof, traditional retailers were eager to cash in. Nowadays, unless an entirely new business model is being developed, it's hard to imagine that many VCs will be willing to pony up funds for a carveout that will have a hard time going public. Without tons of money funding huge, expansionist e-tailing bids, the amount of market share a new company is able to grab quickly -- and the payoff to investors -- is much reduced. And the demand for a path to profitability is hitting the spin-offs just as it did the pure plays. So until feeling about the e-tailing sector improves, it's hard to make a case for most of these carve-out IPOs. Given this, and the change in the players battling it out, there seem to be plenty of strategic reasons why traditional companies should bring their Net ventures home. Green covers the Internet for Business Week in New York. Have a question or a comment? Let her know at heather_green@ebiz.businessweek.com. |
