September 28, 2005, 12:00 AM

Chains ignore the web at their peril

The chains that dominate retailing in stores do not boast a similar hegemony on the web.

As I examine the ranks of the largest e-retailing businesses, I am always struck by an inescapable reality: The chains that dominate retailing in stores do not boast a similar hegemony on the web. Only 20 of the top 50 e-retailing businesses in the U.S. based on annual sales, as ranked by Internet Retailer’s Top 400 Guide, are owned by store-based chains.

It’s quite shocking when you think about the enormous resources the big chains have at their disposal-resources they could easily exploit to replicate online the type of market share they enjoy in conventional merchandising. They have extremely competitive purchasing arrangements with suppliers of merchandise, loyal customer bases, state-of-the-art computer technology, and a logistical infrastructure that made America a world marvel in moving retail goods efficiently from manufacturer to consumer. And they have brand names that now often surpass the recognition factor of the legendary brands of consumer goods manufacturers.

So why then is it that Wal-Mart, the behemoth that regularly eats the lunch of so many competing store-based mass merchants, holds a relatively weak 12th place on the web, with online sales that amount to less than one-eighth of those of Amazon.com, the nation’s largest e-retailer? Why does drugstore powerhouse Walgreen have only about one-third the online sales of Drugstore.com, the pure-play that leads the drugstore field on the web? Why did Netflix.com last year rent nearly as many movies online in one week as Blockbuster did on the web in all of 2004? And why is Blue Nile the dominant jeweler online while jewelry chains like Tiffany and Zales are also-rans on the web?

The reason is not that Internet retailing requires such different merchandising skills than stores possess. If that were true, Office Depot and Staples would not dominate office supply retailing at both the store level and on the web. Home Depot and Lowe’s would not rank first and second in online hardware. And the Gap wouldn’t be tops in online apparel.

So, what accounts for this disparity between the dominant market position of the big chains in retailing and their much weaker position on the web, which is the subject of this month’s cover story? The answer, I believe, is found in the executive suites of the leading retail chains, which, as in the case of government policy, is where the buck stops.

Too often CEOs of big retail chains are myopically focused on the stores that account for the great bulk of their sales and profits and the lion’s share of their invested assets. They are comfortable with preserving the status quo and have a blind eye for the societal and technological trends that are reshaping retailing for the future. They are content hearing management reports about the improved efficiency they are achieving in traditional retailing and are unwilling to challenge their organizations to attack new forms of retailing with the same vigor. During the late 1990s, when the Internet was the buzz, the chains defensively reacted by setting up their own e-retailing businesses, but when the Internet investment bubble burst in 2000, those initiatives got back-burner treatment.

Since then, of course, Internet retailing has grown at a steady 25% annual clip. It’s like a hurricane that’s ready to rearrange the coastline of the retailing market. If the big chains’ CEOs aren’t refocusing their organizations to respond to the challenges posed by the web, they, like our President in the wake of Katrina, may have some explaining to do.

jack@verticalwebmedia.com

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