Eek-tailing

The fulfillment problems that many dotcoms are experiencing have opened the door for the brick-and-mortars, and they're taking full advantage

When MVP.com, the online merchant of gear for the sports enthusiast, burst upon the scene just after the dawn of the bright new millennium, it immediately became the darling of the e-commerce community and the media that covered it.

Why not? After all, how could it possibly miss when it had three of the athletic kingdom's most revered icons steering the ship? At the helm was John Elway, future hall-of-fame quarterback and company chairman. And Elway couldn't ask for better right and left hands than company directors Wayne Gretzky, hockey's greatest player, and Michael Jordan, arguably the greatest athlete of all time and the possessor of a golden touch that would make King Midas green with envy.

But miss the company did, folding its tent a year after it opened for business and joining the growing pile of companies that thought they would be playing on the e-commerce equivalent of a field of dreams but found themselves in a minefield instead.

The list of failed — or failing — companies in the business-to-consumer online marketplace continues to grow and is showing no signs of slowing down.

Figure 1 Demographics of online buyers

	U.S.	Brazil	Canada	France	Germany	Spain	U.K.
Age (average)	42	34	42	36	32	34	35
Average annual household income	$52,300	$40,000	$43,600	$42,700	$46,800	$61,000	$49,200
Gender: male female	40% 60%	75% 25%	51% 49%	81% 19%	84% 16%	85% 15%	62% 38%
Marital status (% married)	59%	40%	56%	36%	28%	36%	45%
4 year college +	35%	67%	39%	54%	27%	47%	45%
Source: Ernst & Young

Back in November, online grocer Streamline.com announced that it was ceasing operations. Earlier this year, Amazon.com, considered by many to be the world's quintessential e-tailer, announced that it was laying off 15% of its work force and would drop unprofitable items from its product offering. And in the first quarter of this year, etoys declared bankruptcy, after first slashing 1000 jobs in the first few weeks of 2001.

Not only that, but there has been a spate of obituaries for free Internet service providers — such as Spinway, 1stUp.com, and Freewwweb — that couldn't generate enough advertising from fellow dotcomers to keep themselves afloat.

So, is all this doom and gloom a prophecy foretelling the eventual demise of e-tailing? Hardly. In fact, e-tailing in general is healthier than ever. But it may suggest an eventual extinction of the dotcoms — at least in terms of how we know them today.

According to Ernst & Young's “Global Online Retailing” market study, 74% of U.S. consumers made online purchases in the past year, spending an average of $896 and making an average of 13 purchases.

Moreover, shop.org and the Boston Consulting Group recently reported that online sales increased 66% in 2000 over 1999, to $44.5 billion from $26.7 billion.

Consequently, any company that is in the business of selling to the consumer needs to incorporate the Internet as a part of its strategy, says Carolyn Topp, an analyst with Ernst & Young.

“We are at an early stage in the development of this channel. We call it the second inning,” Topp explains. “We believe [e-tailing] is here to stay. We're forecasting that by 2005, in categories such as books, CD, and consumer electronics, that 20%-25% of business will be done online. And in categories such as apparel and health and beauty, we believe that 10% to 12% will be done online by then, compared with less than 1% today.”

Topp adds that consumers have long gotten over any concerns or phobias they had about doing business over the Web. And as the comfort level grows, so will sales. She compares the evolution with that of bank cards, now a life staple for most but a phenomenon that was looked upon warily when it first emerged.

“When ATM machines first came around, there were so many people who said they wouldn't use a debit card. Well, no one says that anymore,” Topp says.

So if e-tailing is so healthy, then why are the dotcoms having so much trouble? Two reasons: They weren't prepared for the grind-it-out rigors of retail fulfillment, and they started to get a lot of competition from the companies that were.

“Over the next year, you'll see a number of pure-plays either expand or leave the market altogether. The future of e-tailing lies with the brick-and-mortar players, or lies with those players who can offer multiple channels to the customer,” says Sean O'Neill, an associate for Mainspring.

According to O'Neill, traditional retailers have an advantage in that it is a relatively simple matter for them to take their established practices and infrastructures and apply them to selling on the Web. In contrast, many dotcoms have yet to figure out how to go about it, much less execute. As Jerry Seinfeld might say, they're good at taking the order, but not as good at acting upon it.

“That's why you've seen companies like Toys “R” Us… partner with Amazon to ensure that their distribution is better,” O'Neill explains. “And companies like Ralph Lauren are coming online now because they've been able to see the successes and failures of e-tailers in the past and they've been able to learn from those mistakes. These are the fast followers.”

The reason that Toys “R” Us and Amazon is such a great marriage is that the partnership plays to each company's strengths and weaknesses, claims Lauren Friedman, analyst with the e-tailing group. “One really understands the toy business, and one knows how to deliver the goods and personalize the online experience.”

The fulfillment problems that many dotcoms are experiencing have opened the door for the brick-and-mortars, and they're taking full advantage.

“There were so many problems with fulfilling orders on time or correctly, that people who have purchased online in the past are moving toward retailers they have had good experiences with and sticking with those,” O'Neill adds. “It can be that they had a good experience online, or they may have had a good experience offline in a store and they trust that brand name.”

Figure 2 Consumer trends in online shopping

Trends in number of purchases*
	U.S.	Brazil	Canada	France	Germany	Spain	U.K.
Number of purchases in past 12 months
1-2	13%	17%	21%	17%	10%	20%	9%
3-4	21%	29%	30%	20%	23%	35%	19%
5-9	23%	27%	23%	28%	30%	23%	24%
10+	38%	22%	21%	29%	35%	16%	44%
Average number	13	9	8	10	12	7	14
Change in number of purchases made somewhat or greatly increased	77%	79%	72%	86%	82%	81%	86%
Stayed about the same	19%	14%	23%	13%	17%	18%	13%
Somewhat or greatly decreased	4%	7%	5%	1%	1%	1%	1%
Trends in spending
Average amount spent past 12 months	$896	$493	$590	$709	$656	$523	$778
Change in amount spent somewhat or greatly increased	74%	80%	74%	88%	79%	82%	79%
Stayed the same	21%	13%	20%	11%	19%	17%	19%
Somewhat or greatly decreased	5%	7%	6%	1%	2%	1%	2%
* Excluding financial services, travel tickets, reservations or magazine subscriptions						Source: Ernst & Young

Of the traditional retailers, catalog companies have had the easiest time converting to the Internet because they already have the operational infrastructure to pick, pack, sell and service the consumer, adds Ernst & Young's Topp. “They already understand what it takes to sell customers direct, where shipping is involved. That's really what the Internet at a high level is about.”

Not only can the brick and mortars fulfill better, they can also provide better service, which is another hammer they can use to nail the dotcom coffin shut.

“If you live in New York City and order online from Barnes and Noble, they will deliver your purchase to you the same day,” Topp claims. “Or maybe I've bought something from them online and I need to return it; I can simply walk over to Broadway and 84th. That's an advantage [for them].”

As if that wasn't enough, the venture-capital well has more or less dried up at a time when the dotcoms are finding that customer-acquisition costs are more daunting than they ever dreamed, a problem that the more established brick and mortars don't seem to have.

“The cost of acquiring a customer is very, very expensive. A year and a half ago the average cost per customer was $120. You can't run a profitable business if you're spending $120 to acquire a customer who is going to spend 45 bucks,” Friedman explains.

Add it all up and the past 12 months represent a year of utter defeat for the pure-play e-tailers, Topp says. “They found out you can't just put a Web site on and spend all of this money on marketing and then have unrealistic business plans that don't fundamentally address what it's going to take to profitably be a retailer to the consumer.”

The e-tailing group's Friedman agrees with Topp. “The landscape has changed, and the upper hand certainly plays to the catalogs and the [traditional] retailers,” she explains. “While they continue to understand this business and learn how to do it, they don't see it as the end all, be all; it's just another channel for them.”

In the end, the dotcoms will need to adopt something like the Toys R Us model or find some other way to get into the multichannel game, if they want to survive — an unlikely prospect at best. But if the dotcoms do expire in their current form at some point in the future, Friedman says the survivors — and Internet consumers around the world — will owe them respect, if not a debt of gratitude.

“If hadn't been for the dotcoms, the traditional companies wouldn't be there at all,” she reasons. “It's easy for people to trash the dotcoms now, but hindsight is 20-20. The reality of it is there would not be BarnesandNoble.com if there hadn't first been Amazon.”