The E-Business Software Weekly is a series profiling trends and developments in software and applications that support e-business, the Internet, and other electronic communication channels. Look for a new story each week in this space.
The New Internet Content Model
What's In Store for Stores
With the holidays approaching, the nation's retailers seem as anxious as children for the arrival of Santa this year. Many of them are still reeling from the lackluster holiday shopping season of 2000, and their expectations for the 2001 season-never wildly optimistic-have been frayed to the breaking point by the slumping economy.
With the holidays approaching, the nation's retailers seem as anxious as children for the arrival of Santa this year. Many of them are still reeling from the lackluster holiday shopping season of 2000, and their expectations for the 2001 season-never wildly optimistic-have been frayed to the breaking point by the slumping economy.
Still, there are glimmers of hope, particularly among online retailers. A November 12 report in the San Jose Mercury-News notes that, for more than a year, "e-commerce has served as the poster child of dashed dreams of the Internet," with investors having been "burned by high-profile failures such as Pets.com, eToys, and WebVan." Now, however, record numbers of Americans appear to be buying online.
Consumers "are getting more comfortable and starting to spend more time and money," the paper quotes Rob Solomon, manager of Yahoo! Shopping, as saying. Solomon estimates that between 50% and 60% of shoppers have made purchases over the Web. He and many other denizens of the digital economy are convinced that the upcoming holiday shopping season will test the resilience of e-tailers.
It's a test that most observers now expect online retailers to pass. The paper notes that market researchers are predicting an increase in online consumer spending of 20% to 40% this holiday season as compared to last year. Though still just 2% of overall U.S. retail spending, the projected online spending levels at least do not validate the calamitous decline that many commentators were forecasting last Spring. "It may not be as big or interesting or cool as once promised," Jeetil Patel, a senior analyst with Deutsche Bank Alex Brown, tells the Mercury-News. "But e-commerce is hardly dead."
Perhaps not. Nevertheless, the report notes, the online commerce enterprise remains fragile, in large part because even sizable e-commerce revenues have not been matched by equivalent profits (as departed companies like eToys can amply attest). To address that problem, many of the surviving e-commerce companies "have retooled their strategies by finding partners, buying up competitors, and waiting to launch with a proven concept."
Following are some of the approaches that recent reports have uncovered that appear, at this point, to be most successful.
A Blending of Old and New
As e-commerce blossomed throughout 1999, Americans witnessed the arrival of a new and unfamiliar breed of retailers rising up alongside the traditional merchants whose names-through time and television advertising-had long since become household words. It was almost as if two worlds had collided, and one fully formed contingent of mysterious new retail companies had suddenly merged with another, more familiar retail population.
But then something strange happened: in small parts, the two worlds began to become one. Among the first signs of assimilation was the transformation of a company called ShopSports.com. At the time one of the most popular online sports stores, the e-tailer's aim was to compete with (and perhaps send to their demise) land-based sports retailers like Big Five, Sport Chalet, and Copeland's. But by summer 2000, ShopSports was announcing on its site that it had partnered with one-time competitor Copeland's in order to deliver "an improved shopping experience to its customers." Now, the assimilation has become complete: a visit to www.shopsports.com opens a Web page that reads "The New CopelandSports" and that features a pop-up window proclaiming "Welcome to the new ShopSports - CopelandSports.com!"
ShopSports is not alone in allying itself with a more established retailer, and in fact the assimilation has not always taken place in one direction. Probably the most noteworthy instance of such reverse assimilation came a little over a year ago when Toys 'R' Us, the nation's leading toy retailer, abandoned its independent e-commerce site and joined forces with Amazon, which simultaneously shuttered its emerging online toy business. Now, Amazon Toys and www.toysrus.com are one and the same. Even more stunning, perhaps, was the recent decision by Borders, the nation's number two land-based book retailer, to close its online bookstore and merge its online operations with Amazon, its one-time competitor. Amazon is forming other alliances as well, including deals with major offline retailers Circuit City and Target.
In other cases, offline retailers are absorbing the assets and goodwill of defunct online merchants and fully integrating them into their own operations. Two years ago, Barnes & Noble took over the domain Books.com from NetMarket.com, an online mall that had built one of the earlier online book superstores, and turned the cachet domain into a pointer to its www.bn.com. Similarly, KB Toys earlier this year purchased the remains of eToys, including its Internet domain and customer lists. Originally, KB followed the Barnes & Noble approach of using the former domain name only to point to its main site. But when eToys' customers begged for the return of eToys, KB resurrected the brand by creating a parallel eToys Web site that, while bearing a somewhat different look and architecture than the main KB Toys site, nevertheless contains the same product inventory and uses the same purchasing and fulfillment system as KBToys.com.
Such mergers of old and new, however they are carried out, make perfect economic sense. As the Mercury-News explains, "each partner handles what it does best: the e-commerce specialists run the Internet operations, usually for a cut of the transaction, while the established retailers deal with the inventory and distribution." More to the point, such arrangements can save both partners huge amounts of money. Online retailers are freed from the enormous costs of building supply chains, warehouses, and distribution systems, while offline retailers are spared the expense and risks of developing an online presence. In any event, the goal is the same: in the newspaper's words, "to give consumers an integrated offline and online shopping experience that will drive more business for both partners."
Putting Multiple Stores Under One Roof
One of the earliest uniquely Internet commercial concepts was that of the "Internet Mall"-aggregators that provided links to multiple Internet shopping sites. Viewing themselves as the successors to land-based shopping malls, these ventures thrived for a while, at least until sophisticated Internet shoppers realized they offered almost no value to customers. For one thing, most i-malls' store selections were maddeningly idiosyncratic, with a few major stores mixed in with a panoply of unknown online retailers whose sites were so poorly designed that few people would wish to shop there. Navigation-supposedly the i-malls' key value proposition-also tended to be weak. It was no surprise, therefore, that most Internet malls soon met their demise.
The few that remained did so in large part because they offered some form of value beyond a compilation of seemingly random links. For instance, Spree.com, an aggregator of affiliate programs (referral services through which the referring site receives a sales commission from the retailers to which it sends customers), survived by offering online shoppers a centralized location where they could receive discounts of 5% to 15% off the regular prices from brand-name and emerging retailers. The offering has proven so attractive that the online shopping portal currently boasts more than three million members. And Mall.com, one of the few pure iMall aggregators still in existence, offers no site-wide discounts, but nevertheless presents its stores via a site design that mimics the familiar offline shopping mall experience better than any of its competitors.
However, the most successful Internet shopping aggregators have been those that, in the words of the Mercury-News' Mary Anne Ostrom, "exploit the efficiencies of bringing people with similar interests together who otherwise would never find each other." Case-in-point: eBay, the auction giant that was the first major player to transplant the "swap meet" concept to the Internet-a concept so powerful that the value of transactions flowing through eBay's Web site for the first nine months of 2001, at $6.6 billion, were more than triple the $2 billion in merchandise sold by Amazon, the top direct online retailer
But even auction leader eBay has moved aggressively beyond its successful auction platform into the fixed price arena with the absorption of the once independent discounter Half.com-now dominating an area once occupied only by the step-child outlets of major retailers, by innovative but small-scale aggregators like Switchouse, and by a small number of outlet portals like Overstock.com. Like auctions themselves, these fixed-price clearance sites offer consumers the ability to purchase deeply discounted used, discontinued, or overstock merchandise, but without the inconvenience and uncertainty of having to win an auction bid. (In fact, one of the eBay auction site's most popular new features is its "Buy It Now" capability that enables shoppers to buy many auction offerings at a fixed price without having to participate in the bidding process.)
Other e-commerce aggregators are helping smaller traditional retailers take advantage of the Web's highly efficient marketing channels without having to incur the costs of building and marketing a full-scale Web site. One of the first aggregators to take this step was CatalogCity.com, the Monterey, Calif., based aggregator of merchandise from hundreds of popular paper catalogs (many of which maintain their own Web sites as well), that enables customers to search at once among the eclectic offerings of Catalog City's growing compendium of catalog merchants. Amazon, which with its zShops was one of the first major online retailers to launch a similar venture, hosts and enables searches among the offerings of thousands of small, locally based retailers throughout the country-an undertaking that now accounts for a significant minority of Amazon's sales.
And Yahoo!, which has long offered a similar service with its Yahoo! Stores, last month joined the fixed-price discount wars by launching Yahoo! Warehouse, a site for both used and clearance goods to be sold for a fixed price. With a single search request, a Yahoo! shopper can now search for and compare prices for items offered in multiple places on the Yahoo! site, including Yahoo! Stores, Yahoo! Auction, and Yahoo! Warehouse. Yahoo! executives are convinced that this new effort will help to transform Yahoo!-until now primarily an advertising-based portal-into a true e-commerce powerhouse.
Making the Most of Convenience
Ultimately, the key to online shopping's success remains the intrinsic convenience that the ubiquitous, interactive Internet affords. As the Mercury-News report observes, "If an Internet site adds convenience and value, customers will come. No industry has proven that better than online travel, by far the biggest sector of consumer e-commerce."
Proof point: online travel expenditures accounted for an astounding two-thirds of all online retail spending for the six months ending September 30, according to ComScore Networks, an Internet measurement firm. As Mary Anne Ostrom notes, an online travel purchase is a "paperless transaction that depends on a rapid exchange of information-perfect for the Web. And it saves both consumers and reservation-takers time and money," so much so that airlines and hotels now often pass those savings on to consumers in the form of online-only discounts.
Hungrily eyeing the huge revenues and efficiencies being racked up by online travel agents like Travelocity and Expedia, five major airlines last June launched their own ticket sales site, called Orbitz. Heavily promoted both online and offline, Orbitz booked more than $100 million in business in the site's first month, instantly transforming the new site into the market leader. Assuming that travel rebounds, it's a position that Orbitz should be able to strengthen-and its competitors mine-in the coming months. A survey by travel consultant PhoCusWright, reported in the Mercury-News, found that 41% of travelers now purchase their tickets online, compared with 26% who use a traditional travel agency.
Other information-oriented vendors, from insurance brokers and lenders to online bankers and brokerages, are perfecting their operational models as well, and are likely to witness similar success in the coming years. "I think a general truth is if the product doesn't need to be touched, tried on, [or] is highly price-sensitive and needs to be moved fast, it's the perfect fit" for the Internet, Dan Hess, vice president of marketing for ComScore, tells the Mercury-News.
Increasing Customer Conversion Rates
As if the difficulties they face in a slumping economy weren't enough, e-tailers are burdened with another challenge that is far more serious than that encountered by their land-based cousins: getting browsers to buy. A September 24, 2001, report by The Wall Street Journal, entitled "Making the Sale," notes that "Internet merchants still have trouble with one of the most basic retail fundamentals: turning visitors on the site into shoppers. Last year, only about 5% of people who looked at e-tailing sites actually bought a product."
That figure may be somewhat less worrisome than it sounds. In several surveys conducted in the late 1990s, Jupiter Media Metrix (then Jupiter Communications) found that upwards of 90% of Internet users employed the Internet to do pre-purchase product research, and so an appreciable proportion of those non-browsing buyers probably did eventually purchase one or more of the products they researched at the site owner's land-based counterpart. Still, Jupiter's Ken Cassar tells The Wall Street Journal, as growth in the number of shoppers online slows, "increasingly, the biggest opportunity for growth for [online] retailers [lies in] improving conversion rates"-a task at which online merchants clearly can do better
According to the Journal, "online retailers are attacking the problem with a full playbook of marketing strategies and technical innovations. They're streamlining their pages so they load faster, and shortening the checkout process to prevent shoppers from abandoning their shopping carts out of frustration. And they're using technology to track shoppers so they can focus their sales pitches even more tightly. Some are replacing mass-appeal television and newspaper ads with email promotions and online advertising campaigns that target existing customers, offering them deals based on their past purchases. Others are even tailoring their sites for each customer, showing [them] different products and pitches depending upon [their] profile."
Among the most notable successes that the Journal uncovered are the following:
Ashford.com, a leading online jewelry retailer, spent $14 million in traditional media advertising in the last quarter of 1999-and lost $19 million on the quarter. Now, it has abandoned its pricey mass-market advertising and relies on such tools as affiliate programs (it boasts 12,000 affiliates) that require almost no upfront investment and that now generate some 15% of the company's sales at a cost of a mere 7% of gross.
Landsend.com, the Internet companion to the popular apparel retailer's paper catalog, features a three-dimensional model that enables shoppers to "try on clothes" virtually and an electronic personal shopper that guides customers more quickly to products they might like-innovations that have boosted browser-to-buyer conversion rates by 26% and 80%, respectively.
Bluefly.com, an online fashion retailer, simplifies the returns process-addressing a key complaint of online shoppers-by including a pre-addressed return-shipping label in every package and offering to pay the shipping-return cost if the customer agrees to accept a store credit instead of a cash payment. Since the policy has been in place, says the Journal, "the company's sales and gross profits have increased-even as return rates have climbed slightly."
BrooksBrothers.com, the Web site of the classic men's and women's clothing retailer, is testing a personalization service that it plans to roll out within the next few months that will present different storefront content and offers to site users according to guesses about their interests based on the Web sites they have previously visited. As Mark Friedman, the company's chief marketing officer, tells the Journal, "If someone has taken the time to come to our site, I want to do whatever I possibly can to get them to buy."
Ensuring Their Survival
The innovations described above are vivid proof that a great many savvy e-tailers, far from being part of a dinosaur-like dying breed, are taking the steps necessary to adapt to a rapidly changing and, in some key respects, an increasingly hostile economic environment-steps that are likely to do a great deal to ensure their survival. One can reasonably expect therefore that not just Amazon and eBay, but a substantial number of small and midsize online retailers are apt to become a permanent part of the digital and commercial landscape.
Indeed, as this article was going to press, retailers-both online and offline-received another note of good cheer. The U.S. Commerce Department reported on November 14 that retail sales jumped 7.1% in October to a seasonally adjusted total of $306.8 billion, the biggest increase for any month on record, after falling 2.2% in September. The increase was nearly three times what economists had been forecasting.
And so, maybe the news for retailers really isn't all bad, after all. While neither offline nor online retailers should expect bars of gold in their stockings this holiday season, perhaps they are even less likely now to receive the long-feared lumps of coal.
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