September 1, 2006, 12:00 AM

Growing Pains

Growing retailers may be living the e-retailing dream—but many are still looking for the right size e-commerce platform.

By Paul Demery

Managing Editor, B2B E-commerce

An entrepreneur at heart, Diana Nelson left a career as a big-chain retail executive in the late ‘90s, having racked up experience running merchandising operations for venerable names like Gap Inc. and Marshall Field’s in Chicago. She headed west looking for something new, and when she came across Kazoo & Co., a promising and innovative toy retailer in Denver, decided to buy it and plant some new roots. The promises of e-commerce were buzzing all about and Nelson figured she had found her future.

Kazoo offered from its single location unusual and educational toys that sold at higher prices than found in most toy and department stores. It had been founded by a group of educators from Kalamazoo, Mich., who had condensed their hometown’s name and set out to offer an atypical toy shopping experience, where customers would find toys like Beka wood building blocks that cost more but were educational and longer-lasting. Nelson, a mother as well as veteran merchandiser, immediately saw the store’s potential for growth-but more on the web than in the store itself.

200% annual growth

Within a year, Nelson had launched her KazooToys.com on a Yahoo Store e-commerce platform, expanding her retailing market reach as well as reputation. “We’ve been growing about 200% a year,” she says.

But like most retailers that start out small and reach a certain level of volume, Kazoo & Co. took a hard look at its e-commerce platform to see if it was up to the job of providing the functionality and scale necessary to support its intended growth. Yahoo Store, now known more formally as Yahoo Merchant Solutions, has worked well up to now, Nelson says, but approaching about $1 million in sales, she and a consulting firm earlier this year began scouring the market for other platform options. “We looked at about 14 vendors,” she recounts.

Kazoo’s Yahoo platform has been reliable and effective as a starting point in e-commerce, but Nelson wanted to be sure her site operated on a platform capable of keeping her in the game and growing. “Kazoo wants to increase site functionality and sales as soon as possible,” says Janine Ward, vice president of client services for Nelson’s consulting firm, Los Angeles-based Infuse Creative.

Kazoo isn’t alone among small but growing retailers facing a turning point that requires them to reconsider their existing e-commerce platform. There may be hundreds of thousands of merchants operating on Yahoo, eBay and in-house platforms nearing the level of e-commerce volume that will make them re-think their platform strategy, experts say. “There are lots of companies that, when they get from $1 million to $5 million in sales, they feel they’ve outgrown their Yahoo platform, and they’re looking for a low-cost, high-function solution,” says Tamara Mendelsohn, retail industry analyst at Forrester Research Inc.

Be prepared

The motivation is usually to be more prepared for whatever comes along, experts say. “They want to be able to change things faster, and have flexibility in being more dynamic in merchandising based on what shoppers are looking for,” says Patti Freeman Evans, retail analyst with Jupiter Research.

The same can be said for retailers operating on eBay or in-house technology, experts say. The ProStores division of eBay estimates that 400,000 small online retailers-many operating on in-house platforms-are candidates for platforms such as ProStores. “We expect that number to increase to 900,000 by 2008,” says Julian Green, director of ProStores.

But the decision on which platform to choose isn’t easy. Not only are plenty of vendors ready and willing to take on these growing merchants, but Yahoo and eBay themselves are trying to stay in the game with upgraded platforms of their own.

The key to finding the right match, experts say, can depend on several things ranging from the vendor’s fee structure and infrastructure to the particular features a retailer wants to deploy. Retailers in the Yahoo environment might work with Solid Cactus Inc., for instance, a vendor founded by pet supplies retailers that specializes in adding marketing, merchandising and navigation features to the Yahoo Merchant Solutions platform. And Yahoo itself has been expanding its own set of optional site features. “Retailers can start out with us as a mom-and-pop shop, then grow their business up through various customization capabilities,” says Jimmy Duvall, director of e-commerce for Yahoo Small Business.

Among the capabilities he cites in the Yahoo Merchant Solutions platform: a new tool that lets retailers customize the checkout process, such as by consolidating multiple steps on one page; product image downloads expedited by Akamai Technologies Inc.; and the ability to conduct real-time look-up of inventory-an option Kazoo has used in a shipping system integrated with UPS.

Considering channels

EBay’s ProStores platform, based on the technology of Kurant, which eBay acquired last year, offers page design features that let retailers customize merchandising and promotional efforts, integration with shipping systems and upgraded search optimization techniques to assure that search spiders capture information about new products, Green says.

Yahoo Merchant Professional requires a $50 set-up fee, $299.95 per month, plus 0.75% fee on sales. eBay’s Pro Stores runs $29.95 a month for its most popular version, plus 0.5% fee per sales transaction. ProStores also offers ProStores Enterprise at $249.95 a month plus 0.5% which integrates into inventory management systems. Both Yahoo Merchant Solutions and eBay ProStores can accommodate retailers as large as about $5 million in annual sales, according to Yahoo and eBay.

The actual quality of experience a retailer may have on a new or revised platform can depend on several factors, including a retailer’s need to integrate with an existing legacy infrastructure, its expected near-term volume, the range of shopping and merchandising features it wants to manage and the number and type of channels it wants to sell through, experts say.

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