Wal-Mart, Fingerhut Alliance Shakes Up Internet Retailers

Wal-Mart Stores Inc., the nation’s biggest retailer, took its first step toward trying to dominate the world of e-commerce Monday, announcing that catalog firm Fingerhut Cos. would handle Wal-Mart’s online orders.

What was considered to be good news for Fingerhut, a unit of Federated Department Stores Inc., and Wal-Mart sent shudders through much of the online world--from online pharmacies to online clothes sellers--as the store known for crushing competitors turned its might to the online world.

With unparalleled buying power, Wal-Mart has made its “everyday low prices” a shopping mantra that few retailers can beat. What’s more, as specialty stores such as Toys R Us learned the hard way, Wal-Mart has been able to dominate any sector it decides to take on.

“If you look at the announcement, Wal-Mart is saying we want to be serious on the Internet and we want to be serious immediately,” said Jeff Stinson of Midwest Research in Cleveland.

Fingerhut simultaneously announced that it would handle distribution for Internet toy seller EToys. Financial details of the two arrangements were not released.

Wal-Mart’s deal also suggests stepped-up e-commerce competition for holiday sales--especially in toys. The giant retailer, also the nation’s largest toy seller, plans to revamp its Web site later this year.

Toys R Us and Mattel have recently taken steps to beef up their online services, and EToys’ decision to use Fingerhut is another sign of the coming battle for toy sales.

“It may not be a story for this year or next, but as time goes on, Wal-Mart will be something to be reckoned with,” said Michael Niemira, retail analyst for Bank of Tokyo-Mitsubishi in New York. “You still have your niche markets out there in books and computers and whatnot, but over the long haul, the others probably should be worried.”

Considered one of the world’s most technologically advanced and efficient retailers, analysts said Wal-Mart has resisted expanding its Internet offerings until the company is certain it could do so and maintain the level of service that its customers expect.

The new partnership is Wal-Mart’s way of testing the waters without committing resources to build the order-taking, distribution and shipping facilities that it would need to support the Internet venture, said Sally Schaadt, retail analyst with Fourteen Research in New York.

It is a formula Wal-Mart has used before, Schaadt said. The company once used middlemen for its food distribution until it decided to move wholesale into that business.

The two deals mark a giant step forward for Federated’s newest unit, an expensive acquisition that married a traditional department store company with a catalog firm specializing in low-end merchandise.

Fingerhut’s Business Services Inc. handles fulfillment for 22 companies, including Levi Strauss, Intuit, Wet Seal and PC Flowers & Gifts, from three distribution services in Utah, Minnesota and Tennessee. The Minneapolis-based direct-marketing company also handles Federated’s, Macy’s and Bloomingdale’s by-mail operations, as well as Macy’s online distribution.

Even so, the company has had excess capacity. Wal-Mart and EToys are thought to be good clients for Fingerhut because they do not compete with Federated’s department stores or Fingerhut’s own offerings.

Some retailers say they aren’t worried about the new online competition because it mirrors the brick-and-mortar struggle they have already hashed out with Wal-Mart.

Discounter Target, which has posted strong sales and profit for parent Dayton Hudson Corp. in spite of Wal-Mart, said it is working to relaunch its own Web site by fall in order to handle more e-commerce.

“Our retail strategies are very different and we appeal to a very different customer than Wal-Mart,” said Dayton Hudson spokeswoman Susan Eich.

EToys, which said Fingerhut will supplement its own new fulfillment center in Virginia, said the new distribution avenues are needed to handle this year’s expected increase in customer demand. For the fiscal year ended March 31, EToys recorded about $30 million in sales; in documents filed with the Securities and Exchange Commission, the company said it has lost $30.8 million since its 1997 launch.

The Santa Monica-based toy company said it chose Fingerhut because its warehouses are fully automated, meaning that visitors to the Web site will be able to see what EToys has in stock.

An EToys spokeswoman had no comment about competition with Wal-Mart’s own toy division. Fingerhut said it sees no conflict of interest in handling both clients, since each relationship is separate and private.

Wal-Mart also said Fingerhut’s services will supplement other distribution and warehousing arrangements, adding that more deals such as this one are possible.

Stinson said the move makes true one of the quips making the rounds in investment circles.

“The line is, who is going to be the Wal-Mart of the Internet?” Stinson said. “The answer is that Wal-Mart will eventually be the Wal-Mart of the Internet.”