December 26, 2000, 9:55 AM

Looking Beyond Paper

Ask many Wall Street analysts whom they’re handicapping to be standing in the winner’s circle years from now when the Web selling derby is over and their hands-down answer is direct catalogers.

On paper, catalogers already possess many of the tools necessary not just to win their fair share of shoppers, but to dominate the market altogether.

Catalogers are experts at one-on-one marketing-a critical component of any successful Web selling business. And unlike many chain retailers and virtual merchants, catalogers also already have order fulfillment systems tailor-made for shipping individual Web orders quickly-a huge advantage given the steady stream of complaints shoppers are registering with Internet merchants over slow delivery and poor customer service.

Catalogers were among the earliest merchants to buy into the potential of the World Wide Web, and major catalogers such as Fingerhut Companies Inc., Lands’ End Inc., SkyMall Inc. and Sharper Image Corp. are already operating successful e-commerce sites (Lands’ End’s Web sales increased from $18 million in fiscal 1998 to $61 million in fiscal 1999). More than 8,000 cataloging companies are selling on the Internet today, and that number will mushroom to around 10,000 over the next four years. But just because catalogers have some advantages when it comes to Internet merchandising that doesn’t mean they have all the answers.

The fact of the matter is this: Catalogers are as new as anybody when it comes to figuring out what works-and what doesn’t-when selling over the Internet. And if catalogers are going to make a successful transition from direct mail marketing to Internet retailing, they must be willing to take risks that are as radical to them as any measures that other retailers are taking to sell over the Web.

Turn the page

The old ways of doing business simply won’t work in the new medium of online selling. Catalogers must change the way they operate by cutting back on the number of paper catalogs they publish. They must also divert resources from traditional marketing programs such as new prospecting lists and plow the money back into Web merchandising.

“Over time the paper catalog will be replaced by the Internet as a sales and product information channel,” says Richard Thalheimer, chief executive officer of San Francisco-based Sharper Image. “We’re seeing the end of a cycle not unlike the end of the horse-and-buggy days.”

While most catalogers see Internet retailing as a big part of their future, they must also develop strategies that grow e-commerce in ways that don’t hurt their long-time investment in paper cataloging. That’s why to build up their Internet retailing business-and find the money to pay for it-catalogers are implementing a mix of strategies that range from starting off small to aggressively seeking outside investors.

Specific initiatives include:

- Looking for outside investors to build state-of-the art e-commerce sites.

- Buying into successful or promising Internet retailing niches.

- Reducing the size of catalogs and using the savings to grow the Web store.

- Starting small and plowing all Internet revenue back into new business development.

- Leveraging brand names to attract new Web shoppers.

It took direct marketers 20 years to build the business-to-consumer paper catalog market into a
$57 billion business. But some analysts and executives are already predicting that online catalog sales could equal-or surpass-that total by 2005.

Compared to the dollars they spend each year printing and mailing more than 13 billion paper catalogs, direct marketers see the Internet as a faster and cheaper way to generate new business. But building an e-commerce site robust enough to attract first-time customers isn’t cheap. To pay for a top-of-the-line Web store, some catalogers are trying to attract outside investors.

Phoenix-based SkyMall, for example, began selling its high-end specialty gifts over the Web three years ago and today Internet sales account for about 5% of annual revenues. But SkyMall has ambitious plans to more than double its e-commerce business within two years, and most of the $25 million it will spend to upgrade and subsequently market its Web store will come from outside investors.

SkyMall could have taken several years and shifted resources away from paper catalog printing to overhaul its Web store. But convinced that online shopping is moving swiftly into the public mainstream, Chief Executive Officer Robert M. Worsley is pushing for the Web site upgrade by December (see sidebar, page tk).

“The tsunami of Internet shopping has blown through the books and music segments into the general gift-giving category,” Worsley says. “We’re seeking outside investors because this is a fast-track project. We’ve seen enough of this to know we must be a leader, not a follower, in this market.”

Speed is key

Building a Web store robust enough to reduce the time-and clicks-it takes for shoppers to select and pay for merchandise is certainly one method a cataloger can use to generate Internet business. But that’s just one approach. Some big catalog companies are so anxious to sell online that they don’t want to take all the time and trouble to build an entire e-commerce foundation from scratch.

A case in point is Fingerhut. The Minneapolis-based direct-marketer began selling over the Web three years ago. But Fingerhut soon realized that its traditional paper catalog customers (moderate income married women in their 40s) weren’t the kind of shoppers most likely to buy online. To build a successful-and diverse-Web selling business, the company had to attract younger and more affluent shoppers.

But Fingerhut-one of the most aggressive direct-marketers in the business-didn’t want to spend a long time building those markets. Its business plan calls for the company to be in at least 20 new online selling niches by 2000, and Fingerhut’s e-commerce managers estimate that it would have taken two years to build Web stores and customer databases for each new marketing segment it was after. But Fingerhut wanted to be selling in new online categories in half that time.

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