April 1, 2009, 12:00 AM

Survivor: E-retail

(Page 2 of 4)

Leiberts offered them an affiliate relationship in which Leiberts sets up a sub-site for each dealer with the dealer’s brand, offers a commission to the dealer, and presents a custom package of appliances suited to the affiliate’s clientele. Consumers who shop through the affiliate’s site get a 2% discount off Leiberts standard prices and each affiliate has a dedicated customer service representative to ensure the consumer or dealer calling will be served by a familiar voice.

Leiberts, whose showroom in a suburb of New York City takes up nearly a city block, is targeting the kind of smaller markets where the nearest Sears or Home Depot may be many miles away. “We want to bring the online independent appliance dealer to those locations,” Satran says. “For those areas, it’s a very good option that’s not been out there before.” After two months, Leiberts had signed up 11 affiliates.

Even some online retailers that had a lousy holiday season are bullish on their prospects-in large part because their store competitors are doing worse. That’s the case at online jeweler Blue Nile Inc., whose fourth quarter sales were down 23% compared to a year earlier. That’s not so bad, given that MasterCard reported total luxury spending was down 34% during the period, with jewelry among the poorest-performing product types in the category, Blue Nile president and CEO Diane Irvine told analysts in February.

She noted the number of bricks-and-mortar jewelry stores decreased by 5% in 2008 and that more jewelry chains filed for bankruptcy early in 2009. “The consolidation in the industry creates further opportunities for Blue Nile,” she said. “With relatively low fixed costs, low inventory and low capital requirements, we are able to operate with strength in the economy.”

Improving the experience

She said Blue Nile intended to improve the customer experience on its web site, including product-visualization features, and enhance its international offering by adding local currency payment in the 35 foreign countries to which Blue Nile began shipping last year. She noted that Blue Nile expanded abroad without building offices or warehouses outside of the U.S. “It’s all about the technology,” she said, underscoring the ability of web retailers to expand their reach at relatively low cost.

Blue Nile did lay off some workers in January, as did a few other online retailers. They include handbag and luggage retailer eBags, which cut its workforce by 30% in the fall, and shoe retailer Zappos, which laid off 8% of its employees. TV and web retailer HSN cut its headcount across the company by 3%.

But more have not cut their e-commerce teams. These include merchants that sell mainly or exclusively on the web like Newegg.com, Improvement Direct, Richlund Ventures (operator of CompactAppliance.com), Buy.com, eHobbies, Drugstore.com and Replacements Ltd., as well as manufacturers that sell online like Junonia and Case-Mate, and retail chains Staples and Title Nine.

The recession also contributed to eBags’ decision to close down a U.K. operation it had set up four years ago with the hopes that it would be the launching pad for the web-only retailer’s expansion into continental Europe. While the U.K. operation was not yet profitable, it was growing and the company might have kept it going if the economic climate had been more favorable, says Peter Cobb, senior vice president and co-founder of eBags.

Drop-shipping strategy

While a few e-retailers have been forced to retreat, the recession has turned into a rout for many retail chains, leading them to not only close stores but also buy more cautiously. That’s led retailers to seek low-risk ways to offer more merchandise on their sites, expanding online selection as physical stores cut theirs.

One way to do that is to develop relationships with suppliers that drop-ship merchandise to the retailer’s customers. That way, e-retailers don’t take on the risk and carrying costs of buying inventory, says Sean Cook, CEO of e-commerce technology provider ShopVisible.

Richlund Ventures, operator of CompactAppliance.com, is among the online retailers pursuing that strategy, and has found the recession has made suppliers increasingly willing to fulfill orders on a drop-ship basis.

“The economy has brought some vendor partners around who weren’t so interested in working with us in the past,” says Jason Roussos, president of Richlund Ventures. “As distributors and local businesses dry up, they’re more open to distributing online.”

Roussos says the company has expanded use of drop-shippers in recent months, allowing it to offer a wider product selection with little risk. “We’re able to sell inventory and not have to pay for it until we take orders from our customers,” Roussos says.

The company, whose original business model was built around drop-shipping, is using that strategy more as it expands into new non-appliance categories, including coffee and cutlery, under a new brand, LivingDirect.com. Given the economic climate, it’s also looking for low-cost ways to promote the new microsites under the LivingDirect.com brand, such as the Kegerator site aimed at beer enthusiasts. Roussos says the company has hired an employee to focus on building buzz for such sites on blogs and online forums, and was planning to engage a public relations firm that specializes in such marketing to back up that effort.

The drop-ship approach to expanding merchandise selection appears to be increasingly attractive to a wide variety of retailers.

While Drugstore.com was already expanding its selection through a deal with direct-from-supplier fulfillment specialist CommerceHub before the recession took hold, the economic slowdown has not slowed down that program, says Julie Johnston, vice president of over-the-counter product merchandising.

The web-only retailer added 10,000 SKUs last year, bringing its selection to more than 45,000, at least three times the number of items at a typical bricks-and-mortar drugstore, she says. The drop-ship option has allowed Drugstore.com to expand into such bulky items as walkers and bathroom safety aids that would have been hard for the company to warehouse and ship.

Some products have sold well enough that Drugstore.com has begun stocking them itself. “But for the most part, it’s a way to offer a much broader assortment to our customers risk-free.” As evidence that others are picking up on the drop-ship opportunity, CommerceHub, a fulfillment service of Commerce Technologies Inc., says it handled 19% more drop-ship orders in 2008 than the year before.

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