Fighting for Dollars on the Net

Web-only retailers that survived the dot-com meltdown aren’t out of the woods yet. They’re facing their first holiday season with consumer confidence noticeably shaken by an economic slowdown.

Meanwhile, seasoned catalog operators and bricks-and-mortar retailers now dominate online retailing, and they are stepping up the competition.

As a result, Web-only retailers are no longer just fighting among themselves for survival. Some may not make it through a painful industry restructuring.

“Dot-coms had their own little shakeout, but now they’ve got to face up to the mother of all shakeouts,” said Sean Kaldor, vice president of analytic services with New York-based Nielsen/NetRatings. “Suddenly, it’s not-so-good times and the Internet is no longer immune to the overall economy.”

The stalled economy is making it harder for retailers of all stripes to turn a profit. Recession-wary consumers this holiday season are flocking to stores, Web sites and catalogs that emphasize value. That’s forcing Amazon.com and other Web-only operators--which quietly raised prices earlier this year to fatten profit margins--to cut prices.

It’s not all doom-and-gloom in the evolving online retailing sector. The Yankee Group predicts that domestic online sales will grow by 7% to $9.5 billion in the fourth quarter. Worldwide, online sales will soar by 39% to $25 billion, according to the Boston-based market research group.

But sales increasingly are flowing to traditional retailers that benefit from well-known brand names. Bricks-and-mortar chains, catalog operators and other real-world players generated 75% of online sales during the first three quarters of this year, said Caldor, who expects the percentage to remain stable during the holiday rush.

Consumers Go With Retailers They Know

Shoppers and dollars are flowing to online units of brick-and-mortar brands because so many online prodigies--think EToys, Webvan, Pets.com and Eve--have closed their doors. Amazon.com was No. 1 on Nielsen/NetRatings’ Top 10 list of most popular retail Web sites in the week ended Nov. 11. But seven of the remaining slots were occupied by online units of traditional retailers.

“You have to differentiate E-tailers from E-commerce,” said David Schehr, research director at market research firm GartnerG2. “E-tailers aren’t doing well. Consumers want to buy from companies they’re familiar with.”

Land’s End is one of those comfortable names.

The Dodgeville, Wis.-based catalog operator’s online sales grew at a steady clip during the online boom and did equally well during the dot-com meltdown. Online sales will account for about 20% of overall revenue in 2001, said Bill Bass, the company’s vice president of e-commerce. Analysts say it’s hard to find an online-only apparel retailer that comes close to Land’s End, which reported $218 million in Internet sales in 2000.

Land’s End doesn’t care if its customers use browsers or catalogs to buy cotton shirts, down jackets and turtlenecks. “We’re one company with one group of customers,” said Bass, whose company this year will distribute 270 million catalogs. “Internally, we say we’re truly channel-agnostic. We do the best catalog we can, and the best Internet site we can. And we let customers choose which one they want to use.”

It’s the same story at Wal-Mart Stores Inc., which has spent the last year fine-tuning its Walmart.com Web site that went online in the fall of 2000. “This is about being where customers are,” said Cynthia Lin, a spokeswoman for the Brisbane, Calif.-based online subsidiary. “It’s about being able to meet their online needs.”

Prices on Wal-Mart’s Web site mirror those found in traditional stores. But Walmart.com is offering services not found in its stores. Customers can, for example, upload digital camera images to Hallmark Cards Inc. and create personal greeting cards. Online shoppers also can pre-order hot holiday gifts, have them wrapped and include a personal note inside the package.

Another measure of the growing synergy between Wal-Mart’s online and real-world retailing became evident in August, when Jim Breyer, managing partner of Palo Alto-based Accel Partners, a high-tech venture capital firm, was elected to Wal-Mart’s board of directors. Accel had helped the nation’s largest retailer remodel its Web site.

Traditional Toy Stores Doing Well on Web

The online toy sector once dominated by EToys.com also has fallen into the hands of real-world toy merchants.

KB Toys purchased the remnants of Santa Monica-based EToys.com this year through Bankruptcy Court. KB Toys’ main online competitor is bricks-and-mortar sparring partner Toys R Us, which has hired Amazon.com to run its online affairs.

Scott K. Wilder, vice president of product development and marketing for Denver-based KBToys.com and EToys.com, said KB jumped at the chance to buy EToys’ software system and an order fulfillment warehouse in Virginia: “You love to say you can develop everything and make it world-class, but we really appreciated what EToys had.”

Amazon.com also continues to win praise from traditional retailers for its ability to get things done online. “I try to give them a run for the money, but they’re still the gold standard,” Bass said. “Their system makes the [online] experience real easy for consumers.”

What Amazon.com hasn’t been able to do is generate a profit. The company in October reported its 18th consecutive unprofitable quarter, but continues to talk about a profit from operations, possibly in the current fourth quarter.

To bolster its chances of getting into the black, Amazon.com has moved beyond simply selling new merchandise. The company took aim at EBay this last year by adding used merchandise. Analysts say the new business will take time to grow, but should generate fatter profit margins than deeply discounted compact discs and books.

Blending Online With Bricks-and-Mortar

Amazon.com also is trying to leverage its costly infrastructure through deals with companies that once were viewed as competitors. Its intricate business dealings with Target Corp. underscore the shift.

Target and Amazon.com didn’t get far when top executives met in January 2000. “Back then, there was too much of a gulf between where we were heading and where they were heading,” said Target Vice Chairman Gerald L. Storch. “It was like meeting someone from a foreign country, and not being able to speak the same language.”

They were speaking the same language in March, when top executives met again. Click on Amazon.com and you’ll find links to Target.com; click on Target.com and you’ll find merchandise sold through Amazon.com. Target also turned over operation of its online companies, including Target.com, MarshallFields.com and Mervyns.com, to Amazon.com.

Target’s Web sites had been running “three to four times last year’s levels” even before Amazon.com’s arrival, Storch said. So why do the deal? “Their technology is simply better than anything out there,” Storch said. “Everything they do could be replicated [by Target], but it would take years. So why not do it faster?”

Amazon.com’s fee-for-services deal with Target isn’t the only joint venture. Amazon.com customers can buy merchandise from Circuit City Stores Inc. and pick up purchases at Circuit City stores. Amazon.com also has links to book-seller Borders Inc. in addition to operating the Toys R Us Web site.

Amazon.com isn’t the only pure online player scrambling to find new revenue streams and turn a profit. Egghead.com, the computer products store operator turned Internet retailer, in August laid off 185 employees and sold its assets to Fry’s Electronics Inc.

Buy.com shareholders are scheduled to vote Nov. 27 on a proposal to sell the company back to founder Scott Blum for 17 cents a share--a dramatic tumble from the intra-day high of $35.43 the company hit Feb. 8, 2000, the day Buy.com went public.

Company officials and Blum declined to be interviewed for this report, but Securities and Exchange Commission filings paint a grim picture. Aliso Viejo-based Buy.com used the lure of low prices to build annual revenue to $787.7 million in 2000, but the company lost $130.2 million in 1999 and $133 million in 2000.

Buy.com’s board of directors enlisted Merrill Lynch and USBancorp Piper Jaffray to shop the troubled company, but, other than Blum, no serious suitors emerged. Over the last year, Buy.com laid off more than half of its 200 employees and its stock was delisted by Nasdaq after falling below the minimum price bid of $1.

Dot-com hubris that called for online retailers to totally reshape the business of selling goods and services has been replaced by a more down-to-earth recognition of online retailing’s role as another choice for consumers who want to buy goods and services.

“We’re not trying to make our $33-billion market cap come true because of the Internet alone,” said Target’s Storch, who expects online sales to account for about 5% of the company’s overall sales in five years.

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Times staff writer James S. Granelli contributed to this report.

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High-Traffic Sites

Top online retailers, excluding travel and finance sites, during the week ended Nov. 11 were split between pure-play and multi-channel retailers.

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Time spent Visitors per person Web site (in thousands) (in min., sec.) Amazon.com 6,590 7:57 ColumbiaHouse.com 1,541 3:02 Apple.com 1,042 4:20 BarnesNoble.com 957 6:10 CDNow.com 909 6:11 Dell.com 810 12:55 BestBuy.com 805 6:11 JCPenney.com 789 8:54 Walmart.com 757 4:34 BMGMusicService.com 684 8:18

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Source: Nielsen/NetRatings