December 26, 2000, 9:55 AM

Looking Beyond Paper

(Page 2 of 4)

That’s why Fingerhut is investing in promising niche retailing sites that already exist. To build a base of younger shoppers, Fingerhut bought nearly 20% stakes in mountainzone.com, a sports information and merchandising site, and Freeshop.com, an online discount buyers network. And to accumulate an online clientele of upscale customers, Fingerhut also invested in PC Flowers and Gifts, which sells flowers, gifts and gourmet foods over the Web, and Roxy Systems Inc., an Internet digital communications and entertainment services company.

Before Fingerhut began buying into other Web retailing companies, it had a very limited database of Internet customers. But today that base has grown to about 1.7 million customers and young and affluent buyers now account for about 50% of all Internet sales.

“Speed is the key in this market,” says Andy V. Johnson, president of electronic commerce for Fingerhut. “Investing in existing sites gets us into the customer segments we are after sooner rather than later.”

With annual revenues of $1.2 billion, Fingerhut has some flexibility in shifting funds around to pay for a Web shopping program. So far, the company has used several million dollars from its general operating funds to pay for acquisitions.

But most catalogers aren’t as big as Fingerhut. In fact, about 85% of all catalogers are small- and medium-sized companies with annual sales of less than $50 million. And for smaller catalogers finding the money to invest in a Web store means rethinking priorities and making hard budgeting decisions. Some companies may choose to cut back on the resources they spend in areas such as marketing. But another option direct marketers are considering is reducing the size of their paper catalog.

A medium-sized direct mailer with annual revenues of $50 million spends at least $8 million each year printing and mailing catalogs. “Paper catalogs are the heart and soul of many companies,” says William A. Dean, president of W.A. Dean & Associates, a San Francisco-based consulting firm. “It isn’t easy cutting back on an established sales channel like a catalog to pay for one that’s still unproven such as the Internet.”

Image overhaul

Yet if catalogers are truly serious about staking all, or at least a portion, of their future on the promise of big Internet sales, executives must be willing to shift resources away from their business units, including cataloging operations. A prime example is Sharper Image.

Each year Sharper Image, which sells high-end gift and entertainment products, mails 40 million catalogs, mostly to male shoppers 55 and older with annual incomes approaching $100,000. A year ago a typical Sharper Image catalog contained 84 pages. But today, with the exception of its June and December editions, the catalog is 52 pages and shrinking. Instead of investing more resources in catalog printing, Sharper Image is using the money to expand its Web store.

In February, Sharper Image updated its Web store with technology from Intel Corp., San Mateo, Calif., that enables shoppers to view merchandise with accompanying sounds and three-dimensional images (see sidebar, page tk). And the following month Sharper Image acquired software from Broadbase Information Systems Inc., Menlo Park, Calif., to begin profiling and tracking the purchasing patterns of its online shoppers.

While online sales accounted for about 4% of Sharper Image’s $243.1 million in revenues last year, the company is downsizing its catalog and plowing the savings back into Internet retailing because the company wants to grow e-commerce to at least 15% of sales within a year.

“The Internet can reach millions of people at a fraction of the cost of mailing out catalogs,” Thalheimer says. “We want to shift customers away from paper shopping and onto the Web.”

Cutting back on cataloging is an option because Thalheimer believes Sharper Image’s upscale merchandise will sell well in the online specialty gift category, a Web niche that is projected to ring up sales of about $1.4 billion by 2002.

But many catalog companies simply can’t afford to be as aggressive as Sharper Image in eliminating paper to pay for e-commerce. Instead another option direct marketers are trying is starting out with a very small Web selling initiative and growing it by investing all sales back into the business.

For example, Michael Gotfredson, president and founder of San Diego-based Road Runner Sports, wanted to sell his company’s line of running shoes and apparel over the Internet. But Gotfredson needed to build up Web sales in a way that didn’t undercut Road Runner’s paper cataloging business.

Road Runner’s catalog customers are serious runners who buy their shoes from Road Runner because of the deep discounts they receive on new, discontinued or limited-edition brands from major athletic footwear manufacturers such as Adidas, Asics, Brooks and Etonic.

It took several years for Road Runner to build up a $75 million business with a clientele of about 4 million customers, and Gotfredson wasn’t willing to risk losing that base by diverting resources from catalog publishing into Internet retailing.

Instead, Gotfredson set up e-commerce as a separate unit and gave his Internet manager a single directive: Make the Web store pay for itself.

“When we got into this, I wasn’t sure the Internet was viable,” Gotfredson says. “I also knew that with all the hoopla surrounding Web shopping that if we didn’t give this a try our competitors certainly would.” At first online sales were small (only about $15,000 a month). But as the Web store grew, the company used the proceeds from the site to pay for more technical upgrades.

Paying off quickly

To generate repeat business, Road Runner added an e-mail program that alerts 70,000 shoppers that their favorite running shoe is about to be discontinued and may be purchased online at a substantial discount off the manufacturer’s suggested price. Road Runner also installed Shoe Dog, a personalization program that asks runners a series of questions about their shoe size, running patterns, jogging schedule or training habits and then recommends the best pair of shoes to buy.

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