December 26, 2000, 9:55 AM

The Not-Coms

By Michael Menduno

Editor in Chief

Superficially, all that separates Bloomingdale’s, Nordstrom and Macy’s from Filene’s, Kohl’s and Proffitt’s is a dot and a com-an electronic storefront. But the latter group, all of them stores without sites, take a beating for lacking another kind of sight (read: strategic foresight) at a time when investors love all things “e.”

Compared to catalogers and stores with national reach and brands, regional department stores have been slow to embrace e-commerce. Never mind that most of the retail world is rushing to reach out to online shoppers in a bid to increase wallet share. These not-coms aren’t convinced the dot-com revolution is the way to go. And even though they may have sound business reasons, department store executives hesitate to discuss their e-reticence for fear of being vilified as old economy hold-outs. “We have to be careful,” one executive explains. “Being a department store is bad enough, but then saying we’ve decided to hold off on selling on the Web? We don’t want to be perceived as Luddites.”

It’s an easy impression to make with the glare of spotlights on the Internet. “Investors are looking for an e-commerce strategy, notes Will Ander, a partner at retail consultancy McMillian-Doolittle, Chicago. “If stores say they’re not interested, their stock takes a dive.”

Department stores already face tremendous pressure from Wall Street. Their sales performance has been sluggish-a mere 5% in the last two years-and hasn’t kept pace with other retailing segments. Over the last two decades, superstores and discounters have taken over the low end of the business, while specialty retailers have elbowed into the high-margin business, leaving department stores to eke out an existence in the lackluster middle market. Ander offers a startling for instance: Fifteen years ago, department stores were responsible for 75% of retail sales, while discounters took the remaining 25%. Today the numbers are reversed.

Department store customers used to be brand-conscious middle- and upper-income families, says Ander. But higher-end specialty stores have siphoned off fashion buyers, while discounters and specialty stores such as Gap have peeled off merchandise-and customers-at the lower end of the scale. Result: Department stores are left with an older customer base, losing the most lucrative 20-40 year-olds who now have plenty of options for buying both high-fashion goods as well as everyday duds such as jeans and sweatshirts.

Post-merger malaise

A wave of mergers and corporate consolidation during the early to mid-1990s further weakened the market distinctiveness of department stores. Today, most offer a broad range of general merchandise that is nearly identical from chain to chain, making it even harder to create buzz. Given these pressures, it’s not surprising that department stores have been slow to embrace the Web. “It’s a matter of priorities,” says Ander. “Many stores have had other issues to deal with or lack the infrastructure to support it. Selling to customers remotely is a very different animal than running a retail store. They don’t want to race off the cliff.”

Department stores face various damned-if-they-do/damned-if-they-don’t challenges over setting up shop on the Web. In the first place, an e-commerce site is expensive, a likely strain on already-weakened margins. Pam Stubing, a retail analyst in Ernst & Young’s New York office, puts the price tag in the tens of millions and notes there’s no guarantee that a retailer’s stock price will be rewarded. Federated Department Stores is the poster child for this affliction. “Federated announced it was going to spend $50 million this year, and the stock got whacked,” Stubing points out. “Investors want to see retailers go on the Web, but they want profitability. That’s why the May Co. and Dillard’s are reluctant to move online. They’re being compelled by the market, but they don’t want to do it.”

Brand builder

Branding also is a major issue for some stores. Unlike national names such as Bloomingdale’s or Nordstrom, regional stores like Dillard’s and Strawbridge’s lack a national base of customers they can access through the Web, making it difficult to build online sales. As pure-plays such as Amazon have shown, Web traffic is all about building brand.

Nor are regional department stores in a position to benefit from increased in-store purchases as a result of online sales in the way that specialty players such as Eddie Bauer and Gap can with their national reach. According to Forrester Research, making an online purchase can increase a customer’s in-store purchases by as much as 20%. In that regard, regional stores have no more offline advantage than Internet pure plays, which Forrester and others foresee facing rough times.

An online store also needs a sturdy infrastructure to support customer service and fulfillment. But regional department stores have all but closed once-common mail-order sales. Macy’s and Nordstrom, on the other hand, have continued to operate direct-marketing businesses and have scaled up their call centers and fulfillment operations to accommodate growing Internet sales. Building these operations from scratch is one of the most costly propositions behind running a Web store. Many stores have backed off because their traditional categories like apparel and accessories are difficult to sell on the Web. Stores worry that sizing and quality problems will lead to high returns.

On top of these challenges, many executives are looking at the numbers and asking why they should bother at all. Last year, online purchases accounted for a scant 1% of U.S. retail sales. Forrester estimates this number will grow to $184 billion, or 7%, of retail sales over the next four years. Still, Forrester analyst Seema Williams warns that the Web’s influence is greater than its numbers indicate. “Online shopping has an enormous impact on how customers behave and how they choose their offline brands.” Her prediction? Retailers that don’t go online will start losing offline market share. Of course the erosion won’t happen overnight. “Strong branded retailers have been able to get away with it,” says Williams. “They haven’t lost traction with their customers yet.”

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