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Retailers rush to the Web
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June 20, 1999: 5:12 p.m. ET
To be online, or not to be -- for most retailers, that's no longer the question
By Staff Writer Martha Slud
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NEW YORK (CNNfn) - For America's retailers, the growth of shop-around-the-clock electronic commerce is the latest revolution in an industry still reeling from previous change.
As the fight shapes up over which stores will dominate the Internet, the field already is strewn with victims of earlier retail battles. First came the mass merchandisers that sprouted in the post World War II era as people moved from city to suburbs, displacing mom-and-pop shops. Then came the "category killer" superstores -- Circuit City, Toys "R" Us, Barnes & Noble -- followed by the spread of sprawling, low-cost warehouse clubs, developments that squeezed out smaller and weaker competitors.
And now, with the advent of shop-by-computer retailing, all of the above are struggling to adapt. While no one is predicting that the Internet will trigger the demise of your local shopping mall, analysts say that if retailers want to retain an edge, they are going to have to wrangle with the new world of online commerce.
Traditional retailers "are scared to death, and rightly so," says Geoff Ramsey, a statistician at the electronic commerce research firm eMarketer. "What they are facing is a whole new business structure, where their competitor could very well tomorrow be their ally. Companies that they've never even heard of before can step in and take them by storm."
Still small potatoes
Web transactions account for just a fraction of overall retail sales today, totaling about $8 billion, or less than 1 percent, of the estimated $2.5 trillion spent last year. But Internet sales are projected to rise sharply, to as much as $80.5 billion four years from now, according to estimates by eMarketer.
While the industry is still in its earliest stages, the situation thus far is shaking out as a struggle between the upstart, money-losing Web companies, whose growth is being fueled by high-flying stock prices, and some of the nation's biggest and best-known retailers, which for the most part have been slow to formulate Web strategies.
Perhaps the most high-profile fight is between online book and music powerhouse Amazon.com (AMZN) and Barnes and Noble (BKS), which recently spun off its online service, Barnes and Noble.com (BNBN), into a separately traded company in hopes of competing better.
Barnesandnoble.com shares have slipped since the online company went public in late May
Another battle is being waged between EToys Inc. (ETYS) and Toys 'R' Us (TOY). To compete with EToys, one of the new dot-com darlings of Wall Street, the embattled Toys "R" Us recently announced it will spend $80 million on revamping its Web site and is considering separating its Internet operations from the rest of the company. Toys "R" Us has pledged to be the No. 1 toy seller on the Net by the end of the year.
These and other fights portend a lot about the future of retail: Are Web startups with technological savvy and the all-important head start the ones best poised to exploit the Internet? Or can traditional businesses use their brand identity, buying power, customer loyalty and existing infrastructure to set themselves up as the long-term winners?
"The Web-only companies are setting the standard," says Evie Black Dykema, an analyst at Forrester Research. But, she adds, although "the 'bricks-and-mortar' players have been laggard, they bring many assets to the table."
The big guys strike back
While Amazon.com, most notably, has expanded deeper into online shopping with links to merchants offering clothes, electronics and other items, some major retail players are trying to boost their Internet presence.
The major department stores right now have a pretty spotty showing on the Net, Dykema says. She points to Macy's, which is operated by Federated Department Stores (FD), and J.C. Penney (JCP) as two companies that have done a good job at working to build their sites.
Also, flagship retailer Sears Robuck & Co. (S) is making a step-by-step foray into Internet sales. It has introduced a tools and parts venture online, and recently followed that up with sales of appliances over the Internet.
Meanwhile, some companies aren't conducting business over the Net at all, or only barely. Dykema cites as notable absences Dayton Hudson Corp. (DH), whose big department stores don't sell over the Web -- although its Target Stores unit has launched a small-scale shop@target venture -- and May Department Stores (MAY).
So far, Wal-Mart (WMT), the world's No. 1 retailer, has been largely on the sidelines while Amazon.com has been touted throughout the industry as the "Wal-Mart of the Web." Wal-Mart offers some items for sale over the Internet, but has been criticized by analysts for being a Net laggard,. The company now is promising to unveil a beefed-up Internet site soon, as well as an as-yet unknown new Web strategy.
Wal-Mart plans to unveil a new Web strategy,
but is it too late?
The high-end stores are getting into the act too. Tiffany & Co. (TIF), whose jewelry business is centered around its flagship store on Fifth Avenue in Manhattan, plans to launch an online sales business this fall.
But does every retailer need to jump on the Internet bandwagon to position itself for the future? One expert says he's not so sure.
"People are rushing forward because they see their competition doing it, and it's not clear to me that they see all the implications of it," says Prof. Robert E. Spekman, who teaches business administration at the University of Virginia's Darden School of Business and follows developments in retail.
But Dykema says a Web presence is vital for all types of retailers, especially for department stores. These companies made their name through the ease of one-stop shopping and "that's the glory which the online channel has stolen from them," she says.
A big investment
But the problem for traditional retailers is that it isn't so easy just to jump onto the Web, industry experts say. How are they going to deal with existing stores and distributors? Are they targeting the same customers, or different ones? And are they willing to invest in the technology to make the sites successful?
"While the Internet provides a long-term payout, the short term is pure hell," says Ramsey. Companies must absorb big costs in new infrastructure, human resources and advertising to get their sites going.
So for an enormous company, such as Wal-Mart, there are big issues at stake, says Elaine Rubin, chairwoman of shop.org, a trade organization for the online shopping industry.
"They can't just pop online," she says "They have hundreds of thousands of products, vendor relationships, thousands of stores that they need to protect ... Amazon doesn't have that conflict."
Retailers also have to weigh whether the online units will threaten their existing businesses. Is the Internet venture "a competitor or a buddy?" asks Spekman. "Are you stealing revenue or adding to it?"
But as the retail industry struggles with this new medium, some stores are blazing the path to the Internet.
One example analysts point to again and again is The Gap (GPS). The popular clothing chain has cleverly designed its Web site as a supplement to its stores, says Richard Jaffe, a retail analyst at PaineWebber. The Gap's Web site is one of the few that allows customers to return products to an actual store rather than packing up the items and shipping than back, he says.
"When you do that, The Gap declares victory," Jaffe says. "The Web site has just succeeded in getting you into the store."
The Gap has wisely tied its Web site to its chain store operations, says analyst Richard Jaffe
Other chains, such as Victoria's Secret, a unit of Intimate Brands Inc. (IBI) have developed attractive Web sites, but they haven't been nearly as successful in linking the online unit to the rest of the business, he says.
The Gap, which has separate sites for its Gap, BabyGap, and GapKids units, won't discuss its Web profits or traffic, saying only that it's pleased with the performance of the venture. Company spokeswoman Rebecca Weill says the site was a natural extension of the apparel chain's mission: "The whole founding philosophy of our brand is really ease of shopping."
For now, few Web peddlers seem to be making much money. But analysts say they aren't particularly concerned. For the Web companies, they say, this is the hyper-growth stage of investing in their future development. And for traditional retailers expanding into the Internet, the question of e-commerce profits should be looked at within the long-term picture, Jaffe says.
Investors should look at how the Internet is built into a whole sales strategy, Jaffe says. "I see it as an advertising tool, a benefit to the core franchise," he says.
But for some companies, going full barrel into the Internet is more than an extension of existing business -- it's a matter of survival, analysts say. Many catalog companies, such as Lands' End Inc. (LE), have remade themselves as online leaders to contend with the new retail landscape, Dykema says.
And as for which sectors of retail are best poised to profit, Ramsey, of eMarketer, says that travel-related purchases will soon surpass computers as the No. 1 item sold on the Internet. "The Internet shines when information is involved, because it's a complex decision involving a lot of money," he says.
And Rubin says that while she once thought certain types of items probably would have little success on the Internet, such as groceries or cosmetics, she says she's changed her mind.
A screen shot of Eddie Bauer's "Virtual Dressing Room," which allows shoppers to try on items online
Some online retailers are working hard to make purchases of touch-and-feel merchandise more accommodating. Casual clothing company Eddie Bauer, for example, has introduced a Virtual Dressing Room, in which customers can simulate the clothes shopping experience -- of sorts -- by mixing and matching items together on their computer screens.
"I don't think there's really any product category that I would say will absolutely never work," says Rubin. But "there are some that are more challenging than others." 
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