Magazine

The Year of the E-Piggyback


Just before halloween, KB Toys kicked off the fourth quarter in an appropriately spooky way: It raised eToys Inc. (ETYS) from the dead. After KB bought most of the bankrupt dot-com's assets for $15 million last spring, the 1,300-store chain relaunched the site in October. By offering such popular eToys features as a gift registry and sophisticated search engine, KB hopes to attract previous eToys customers who liked the Web site but didn't know it went bust. What's more, it got a state-of-the-art warehouse in Blairs, Va., and the right to send promotional e-mail to 3 million former eToys customers. At the same time, KB is keeping its own Web site so it can hang on to its original stable of customers. Now, KB expects to double its online sales this year, to $80 million. "EToys was a first-class operation," says KB Chief Executive Michael L. Glazer. "We expect a lot of its customers to show up again."

This Christmas, traditional retailers are taking the lead online, but not all by themselves. They're riding on the backs of dot-coms--dead and alive. Blending in assets they bought for peanuts from failed e-tailers is only part of it. Many others are forming alliances with surviving dot-coms that would have been unthinkable a year ago. After losing $29 million a year online, Borders Group Inc. (BGP) linked up with rival Amazon.com Inc. (AMZN) to handle Borders' online sales through a co-branded site--which turned profitable almost instantly after it was launched in August. Other retailers such as QVC, Modell's Sporting Goods, and Kmart (KM) have outsourced much of their online inventory and customer service operations to Web fulfillment companies such as Global Sports Inc. (GSPT).

It all adds up to a massive rethinking by traditional retailers of their role online. Following the dot-com crash, many have chucked the idea of spending hundreds of millions to catch up with heavily funded but often doomed e-tailers. Instead, smart bricks-and-mortar retailers are focusing on what they do best--merchandising, marketing, and operating stores--while handing off much of the technical and logistical tasks of the online world to those with the know-how. And they're treating their Web sites not as a fast route to initial public offering riches, but as another sales channel--one that, for the average retailer, generates only 2% or less of overall sales. "Online is important, but it's not core to our growth," says Bob Edington, director of online operations at Borders.

Indeed, retailers are using dot-coms past and present only partly to win new customers. They also hope to use Web sites to serve existing customers better and save money. After all, there won't be much growth online anyway this holiday season, thanks to the sagging economy. Jupiter Media Metrix Inc. (JMXI) expects online holiday sales to rise only 11%, to $11.9 billion. That's why many retailers won't be doing much marketing of their online sites beyond including Web addresses in ads. "We used to hear retailers yelling about when they were going to take their Web sites public," says Jupiter analyst Ken Cassar. "Now it's all about minimizing risk and keeping a low profile online."

Too low a profile could backfire, though, especially when consumer behavior is so volatile. In a recent poll of 3,000 consumers, market researcher Odyssey found that 54% of Web shoppers plan to buy online this season, down from 71% last year. "The Web is just as vulnerable to changes in the macro economy as the rest of retailing is," says Sean Baenen, Odyssey's managing director. "Online retailers have to make sure they're getting the message out that people can still find good deals on the Web."

One way they're doing that is using the Web sites of once-independent upstarts to provide a better shopping environment. That's what Estee Lauder Co. (EL.I ) did after it bought cosmetics e-tailer Gloss.com for an estimated $5 million or less in April, 2000. It relaunched the Gloss.com site in October to market its own brands--plus those of Chanel and Clarins. The unusual collaboration among rivals, says Group President William P. Lauder, more closely mimics the choice a woman would find in a department store. Lauder's research found that 70% of women prefer to shop where there's a wide selection because, on average, they use seven brands of cosmetics. Says Lauder: "We danced beside our competitors for a long time anyway, so it was mutually beneficial to give our customers similar options online."

Even at bargain-basement prices, these resurrected sites are no slam-dunk moneymakers. Because Lauder plans no dedicated marketing for Gloss.com this season, Banc of America Securities analyst William Steele says there's no evidence that it will attract enough buyers to pay for its upkeep. And the shoestring marketing means Lauder may make it tough to communicate the advantages of shopping for cosmetics online. Says Steele: "The jury's still out as to when they'll make money on this." It's the same with KB Toys: Despite the sales boost it expects from eToys.com, KB could still lose money on the Web this year because, so far, traffic to the resurrected site is limited.

Such uncertainties are the reason many retailers are taking yet another tack. They're leaving Web work to the experts by outsourcing various operations to surviving dot-coms and fulfillment outfits. Toys `R' Us Inc., for instance, signed a deal with Amazon.com to take over operation of the Toysrus.com site, as well as shipping of everything from Razor scooters to Furbies. One benefit: The highly publicized late shipments that plagued Toys `R' Us (TOY ) online in 1999 have vanished. Its Web sales are now expected to shoot from $180 million in 2000 to $300 million this year, says investment bank Gerard Klauer Mattison & Co.

Retailers get other benefits from the dot-coms as well. For all their faults, e-tailers have spent years and millions of dollars perfecting features that retailers now admit are valuable to consumers. "We can now offer product recommendations and reviews, and we can ease the experience of buying online, which ultimately will make people more likely to buy there," says John Barbour, CEO of Toysrus.com. Its success prompted Circuit City Stores Inc. (CC ) and Target Corp. (TGT ), among others, to strike similar deals with Amazon.

Most of all, retailers get the attention of Amazon's 38 million customers. "The reality is, they have a lot more traffic," says Target Vice-Chairman Gerald Storch. (Amazon is the 12th-most-visited site on the Web, while Target doesn't make the top 50.) Although retailers pay Amazon about 10% to 20% of sales through Amazon's site, they get far more business--and avoid having to spend millions of dollars on their own Web site and warehouses.

Some retailers find the advantages of outsourcing so compelling they're giving up a bigger cut in return for washing their hands of the whole online rigmarole. In April, Dick's Sporting Goods Inc. signed on with Global Sports, which not only handles site design, fulfillment, and customer service, but also owns and manages all the inventory. On average, Global Sports (GSPT ) takes 90% or more of its clients' online revenues, but what Dick's nets is almost pure profit. "We make no capital investment, and we went from having 60 full-time Internet people to one," says Dick's Chief Operating Officer Bill Colombo. "We can take that capital and invest it in opening new stores."

Striking the right balance of frugality and visibility online won't be easy. The problem is figuring out how much to spend when there's no way to predict what's really going to happen. The Web, after all, has never lived through a war, bioterrorism, or a recession, and now they're all happening at once. One thing's for sure: Retailers will need as much help as they can get--even from the dot-coms that once sought to put them out of business. By Arlene Weintraub

Contributing: Heather Green in New York, Robert D. Hof in San Mateo, Calif., and Faith Keenan in Pittsfield, Mass.


The Good Business Issue
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus