Online Retailing Finds Its Legs


I'm a model of shopping efficiency this gift-buying season. First, I went to the Internet, where I ordered a dozen or so books and CDs from Amazon. A trip to the local Costco nearly completed my list, though I still had to battle the crowds in New York City for the finishing touches -- wrapping paper and a few gifts I forgot the first two trips.

Like me, more shoppers are spreading their dollars around -- and making the Web one of their regular stops, along with discounters and name-brand chains. In fact, despite setbacks in the wake of the Internet bust of 2000, online shopping continues to grow in popularity. According to an annual holiday-spending survey conducted by Goldman Sachs and Nielsen/NetRatings, shoppers planned to spend an average 17.5% of their gift budget on the Web this year, vs. 15.1% in 2001. And 22% of respondents said their satisfaction with online shopping is higher now than a year ago.

Online shopping may still account for only 2.5% of overall U.S. retail sales, but merchants are clearly getting the hang of the Web. Over the next few years, increased use of high-speed Net access and savvier business models from retailers and manufacturers will only make shopping online more appealing. "The job of any company is to know how to integrate slowly, but surely, the [Internet] into its business model without destroying it," says Christian Dussart, senior professor of marketing at the MIT's Sloan School of Management. "The key is to manage the evolution and avoid a bloody revolution." Online sales "will be complementary," Dussart says, though he adds that within two decades, online sales could account for as much as 30% of retailing dollars.

TWIN WORLDS. Starting from scratch in the late 1990s, retailing giants such as Wal-Mart (WMT), Sears (S), and Best Buy (BBY) are finally figuring out how to use the Web to drive store traffic -- and vice versa. These big retailers don't give a second thought to blurring and crossing traditional boundaries in pursuit of sales wherever they may be -- online or off. Advertising a store sale to individual customers via e-mail is as common today as training store clerks to direct customers to a Web site to find different sizes or colors of a sweater.

"We're a multichannel retailer," says Barry Judge, vice-president for consumer marketing at Best Buy. "That's the future. In order to be world-class, we need to be best in both the physical and virtual space."

Not so long ago analysts predicted that online retailers such as Amazon (AMZN) would challenge bricks-and-mortar behemoths such as Wal-Mart. After all, cybersales doubled from 1998 to 2000, the heyday of the Internet boom. With the hype gone and dozens of Web stores shuttered, that growth is more tempered now, though still impressive. Online retail revenues in 2002 will grow to $40 billion, vs. $30 billion in 2001 and $24 billion in 2000, says Ken Cassar, senior Internet analyst at Jupiter Research. He expects compounded annual sales growth of 20% via the Web for the next five years. By 2007, Jupiter predicts, online sales will account for 5.3% of overall retail spending, up from 1.5% in 2000 and 1.9% in 2001.

WIDE VARIETY. One reason for that growth will be the success retailers are having with cross-channel experiments. After some early missteps, online sales at Walmart.com are "up significantly," says John Fleming, CEO of the Web site. "The e-catalog is just the price of admission," he adds. "The bigger prize is to help the Wal-Mart customer online or in-store."

The site has yet to reach profitability, and it still sells some products, such as new movie releases, below-cost to compete with stores and Web sites such as home-electronics retailer Buy.com. But Fleming says the site will be profitable ahead of plan -- though he won't say by when.

In part, that's because Wal-Mart directs in-store shoppers to its Web site, where they can choose from 100,000 music titles, vs. just 3,000 in a typical store. Fleming says the site also improves customer service. Customers can send digital photos to be developed via Walmart.com and then pick up the prints at a local store. Alternatively, they can drop film off at a store and have photos e-mailed to them. They can even order tires online -- and make a date to have them installed at a Wal-Mart tire center.

EDUCATED CUSTOMERS. At Sears, the strategy is to compensate for flagging overall sales by pumping up its Web site. This will be Sears.com's first profitable year, says spokesperson Ann Woolman. The giant's goal is to let shoppers buy any way they like -- online, by phone, or in a store. In November, 2001, Sears introduced an option to buy products online and pick them up at a store. Now, 30% to 40% of Sears' Web sales occur this way, Woolman says.

Retailers have also discovered that the Web is ideal for publishing reams of information to win over customers. Nearly 50% of Best Buy's shoppers go to the Web site first before making a trip to the store, Judge says. Best Buy also provides an online library of "articles" on how to use various gadgets and accessories. Sears also provides buying guides, and its site also offers some 300 brochures on electronic products, in English and in Spanish.

The big Web-only players -- including Amazon, Yahoo!'s (YHOO) Yahoo Shopping, and AOL Shopping, which is run by AOL Time Warner (AOL) -- also are developing sophisticated online malls. While Amazon is known mainly for selling books, CDs, and DVDs, it also runs the shopping sites of major retailers including Target. Yahoo and AOL both list hundreds of brand names and dozens of shopping categories, making searching for items much easier.

As long as such gateways draw traffic, many retailers will pony up for real estate on them. Meantime, auction site eBay (EBAY) is competing more directly with online retailers as it offers a "buy it now" option -- goods sold at fixed prices -- in addition to auctions.

INTO THE BLACK. As online shopping gains critical mass, even the few dozen retailing sites that survived the dot-com bust are achieving stability. Many are just turning profitable or are on the verge. Amazon likely will be the top destination for purchases of toys, consumer electronics, books, CDs, and DVDs this holiday season, according to early data from Goldman Sachs' survey. And 2002 may be its first profitable year ever.

Similarly, privately held closeout retailer SmartBargains says it will have 2002 sales of $60 million, up from $19 million in 2001, and be in the black in the holiday quarter. CEO Carl Rosendorf says the company will also earn a profit this year. Overstock.com (OSTK), which also sells off-price goods online, recently reported its first-ever profit, for the third quarter. It won't make money for all of 2002, but expects to be profitable in 2003.

Specializing in the right niche is also a way to find success. Jupiter's Cassar notes that jewelry sites Ice.com and Bluenile.com are profitable because margins on jewelry are high and shipping costs are low. All niches aren't created equal, however. Bluefly.com, which sells designer apparel, will have record sales for the holiday quarter but isn't profitable yet because it doesn't have enough buyers. "We're getting close to profitability," says CEO Ken Seiff. "Once we can fully absorb fixed overhead, we'll be well on our way."

SELLING DIRECT. Significantly, the Web is also opening new sales channels for manufacturers, says MIT's Dussart. Dell Computer (DELL), the world's No. 1 PC company, gathers tens of millions in online sales per day. Hewlett-Packard (HPQ) is shifting more to a direct-selling strategy. And though online car sales are rare now, General Motors (GM) is getting ready for cyberselling, Dussart says. And makeup maker L'Oreal is already using the Web to sell its brands, which include Lancome and Maybelline.

Online retailing suffered initially because everyone involved -- retailers, customers, and investors -- expected too much of it too early. But it has survived a turbulent childhood -- and now seems headed for a rambunctious adolescence. By Amy Tsao in New York


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