March 31, 2011, 12:00 AM

Something Special

By expertly tending their narrow online niches, specialty retailers fend off the mass merchants.

Lead Photo

At Afloral.com, president Sue Bonfiglio knows that there are many other places shoppers can buy silk flowers online, including some very large retailers and online marketplaces. Still, the web-only specialty retailer has grown sales by 30% annually for the past three years with a strategy that sets it apart from its larger competition. It focuses on a specific subset of flower-buyers: budget-minded brides looking to save by using silk flowers instead of live ones.

Afloral offers a wider variety of silk flowers—about 3,000—than is available at mass merchants, Bonfiglio says. And because web shoppers can't actually touch the products before purchasing them, the e-retailer devotes lots of space on its site to product description details. It also leverages the very viral online bridal community with content such as "inspiration boards" that suggest color schemes customers can share through online social networks.

With annual sales still under $5 million, Afloral.com, operating on the e-commerce platform of NetSuite Inc., is not a large retailer. But its growth shows that even niche merchants selling items broadly available online can attract customers and sales—if they wrap products in a site experience that shoppers don't get when buying the same items at mass market counterparts.

"People can't get the proper selection and pricing from mass merchants," Bonfiglio says. "We compete against the big box retailers and are able to do so quite well."

Brains against brawn

Though specialty retailers face competition online from the deep pockets and broad reach of both mass merchants and sellers on large marketplaces such as Amazon and eBay, Bonfiglio isn't the only specialty retailer successfully employing brains against brawn. In fact, the growth rate of Top 500 web-only specialty retailers, a group that includes all web-only retailers in the Internet Retailer Top 500 Guide with the exception of mass merchants Amazon.com Inc., Overstock.com Inc, Buy.com and Market America, actually tops that of the Top 500 overall.

In 2009, sales at web-only specialty retailers rose 10.7% to $16.54 billion from $14.94 billion the previous year. By contrast, sales for the Top 500 overall rose 8.7% to $126.4 billion from $116.3 billion during the same period.

Achieving those gains has not been easy for the specialty e-retailers, and there's no one single formula for competing against larger and more-visited online merchants and marketplaces. While strategies differ, the winners among specialty retailers share one thing in common: They all seek to elevate the experience shoppers have on their sites from what those shoppers will find at marketplaces or on the sites of mass market competitors.

Online-only pet food retailer PetFlow.com is a newcomer among specialty e-retailers, but putting the same strategy to work. The e-retailer posted sales of $650,000 in February after launching only in September 2010, and is on track to reach $1 million in sales in May, according to co-founder Alex Zhardanovsky. It's got competition from plenty of other online sellers of premium pet food—even on the automated replenishment it offers.

To differentiate itself, PetFlow offers a highly focused assortment and simplified site navigation and checkout in contrast to what Zhardanovsky sees as the jam-packed pages of competing sites. The e-retailer also seeks to stand out with flat-rate shipping of $4.95 regardless of order size, a key consideration for shoppers ordering 50-pound bags of dog chow. Plus, it offers customer service 24/7 via phone, e-mail or live chat from Bold Software.

"Try finding a number at Amazon to call to ask what grain-free food there is for your dog," Zhardanovsky says.

HallelujahAcres.com provides another example. Though many online retailers sell health food products and supplements, few support them with faith-based health and lifestyle advice geared to an audience of Christian consumers.

For example, Hallelujah Acres recently offered two web-based health challenges giving participating customers 60 days of e-mails about maintaining good health as an aspect of faith-based living. The e-mails linked to online videos and promoted products on the e-commerce site, which uses e-commerce software from NetSuite. Together, the two programs enrolled more than 23,000 customers.

Chris Young, the retailer's director of information technology, says such programs translate into customer retention and a stronger bottom line. In fact, this approach allowed Hallelujah Acres to grow sales through the recent economic downturn, with the average number of new customers per month in 2010 exceeding 2009 averages by 15%, the number of new customers retained after six months up by 5% over 2009, and the average order size from all customers up 6% over 2009.

Marketplace dilemma

Though neither Hallelujah Acres nor Afloral sells on web marketplaces such as Amazon or eBay, other specialty retailers do go that route, managing to turn what might otherwise be a competitive threat into part of an overall sales strategy. The Amazon marketplace, eBay and Buy.com have hosted other retailers for years. And now such large retail chains as Wal-Mart Stores Inc. and Sears Holdings Corp. are launching their own online marketplaces, seeking to attract more online shoppers with a broader selection of merchandise than they offer on their own.

That leaves specialty retailers with a choice. Participating in the marketplaces may connect them with customers they may not otherwise find. But in making the sale on an external marketplace, the retailer forfeits the revenue share it must pay its marketplace host. Those marketplaces typically take commissions of 7-15%.

And, depending on the marketplace, the retailer may not be able to deepen the relationship with the shopper as it could on its own site, where it could offer promotions, capture e-mail addresses, provide customer service and highlight loyalty programs.

Specialty e-retailers must weigh that decision carefully. EBags.com, for example, has its own robust e-commerce site but also sells on the Amazon marketplace, Buy.com and eBay. It's also the chosen handbag and luggage vendor on the third-party marketplace of Walmart.com, which, unlike most other marketplaces, chooses only one vendor in a particular merchandise category. EBags' online sales totaled $132 million in 2009, according to an Internet Retailer estimate.

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