And the winner is...

Sneered at by the new-economy entrepreneurs only a year ago, chain retailers are the new gods of Internet retailing.

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With the holiday season the peak sales time for most e-retailers, the last three months of 2000 were effectively Judgement Day for some of those teetering between survival and shut-down. But for the web operations of many multi-channel sellers, it was a time to shine, as fourth-quarter results show.

Five department and discount store dot-coms—J.C. Penney Co. Inc., Wal-Mart Stores Inc., Sears Roebuck and Co., Kmart Corp. (Bluelight.com) and Target Stores Inc. ranked among the 26-most visited retail sites of Q4, as tracked by San Francisco-based Alexa Research. Traffic at the sites more than doubled between October and December, which gave them the highest growth curve of the quarter.

Well-publicized fourth-quarter dot-com crashes start to look like little more than growing pains for e-retail when looking at the holiday performance of the sector as a whole. Precisely how much online shoppers spent from October to December varies depending on who’s doing the measuring. Gomez Advisors, for instance, reports that online shoppers spent $11.4 billion in those three months, up 95% from last year’s $5.8 billion. Others report slightly different numbers, but most agree that the figure was double the previous year. At 1% to 2% of all retail sales, that’s still teeny in comparison to sales in other channels, but the number is expected to keep rising fast. An Ernst & Young study estimates that from 10% to 15% of all retailing will move online by 2005. And if Q4 2000 is any indication, much of the increase will be driven by the web traffic at department and discount stores and other multi-channel sellers.

Fast-rising web sales, for instance, were the star in an otherwise ho-hum holiday performance by multi-channel retailer Eddie Bauer. For the five weeks ended Dec. 30, Eddie Bauer’s overall sales declined 3% from a year earlier—but web sales grew 94% at Eddie Bauer, Newport News and parent Spiegel combined. Web sales growth was likewise some of the best news from a J.C. Penney so sluggish it’s closing stores to boost its bottom line. J.C. Penney saw December sales down almost 2% from the previous year—but e-commerce sales nearly doubled to $65 million.

Trusting the brand

What’s driving more of the consumer dollar to traditional retailers’ web sites? “The rise of department stores on the web is the story of the fourth quarter,” says Marc Engel, e-commerce analyst at Alexa. “They didn’t have as much presence last year. Problems were reported about these sites being slow and not as savvy about what the customer needed. But after major problems at some of the pure-plays, consumers wanted to go to names they trust off-line. They seem pretty willing to give these web sties a chance because they trust the brand.”

For department stores and other multi-channel sellers, “the growth of their web operations is really the bright spot,” confirms retail analyst Paul Ritter of The Yankee Group, Boston. “It’s considered to be where things are going.”

And the numbers are piling up to support that contention. Consumers who shop the web sites of traditional retailers and shop the retailer’s other channels as well are more valuable to the company than those who shop a single channel. While traffic at leading pure-play sellers outstrips that of traditional retailers, the multi-channel shopper buys more.

Just look at J.C. Penney, for example. In 1999, the most recent figures available, customers who shopped the store alone spent an average $194 per year, customers who shopped the catalog alone bought an average $242 in goods, and those who shopped both the catalog and web averaged $502 per year. The most valuable customers? Those who shopped the store, catalog and web combined; they had average purchases of more than $1,000 per year. By comparison, the average order size this last Q4 at web-only seller Buy.com was $158, and at Amazon, about $58.

For some multi-channel sellers, Q4 showed that web sites don’t necessarily have to rack up sales to deliver value; they can be an effective marketing tool for the company, too. With increasing recognition of the web’s power to also influence sales in other channels, “a web site is a must-have for retailers,” declares Jill Frankle, director of retail e-commerce at Waltham, Mass.-based Gomez Advisors.

Sears, for example, ranked as the 11th most-visited retail web site in Q4 as tracked by Alexa Research. Revenues from merchandise and services (excluding Sears’ credit business) were $11.3 billion, up 3.1% for the quarter over 1999. Sears doesn’t break out numbers for online sales, but the company notes that appliances and electronics were leading performers for Sears in the quarter and the year. Could that be because the heavily trafficked Sears.com provides online product specs and price comparisons for these research-intensive purchases to an extent that beats competitors?

“Sears’ web site has become an important tool for consumers to use to look at a product and examine its features prior to coming into the store and making a purchase,” says Joe Grillo, retail analyst with Duetsche Bank Alex Brown. “The impact of Sears’ web site is going to be more robust with respect to web-influenced sales as opposed to actual transactions online.” Its transactions though, are nothing to sneeze at: PC Data says Sears.com ranked No. 6 in buyers.

It’s much the same story at stores such as Target and Wal-Mart, says Ladenberg Thalmann analyst Eric Beder. “Many of the discounters are so big in terms of revenue now that the web site sales aren’t going to have a huge impact,” he says. “The point is that they’re going to drive people into the stores.”

The wrong way

Internet-only sellers don’t have the option of stores. Their web sites are their only path to profits, and when Q4 numbers failed to reverse wrong-way trends, it underscored anew the problems of a sales strategy that depends exclusively on the web. Drugstore.com, for example, posted a net loss for the quarter of $43.2 million on net sales of $36.2 million, and rocked some investors with the announcement that it didn’t expect to break even until at least 2004, even with the January layoff of 20% of its work force. EToys posted a fourth quarter operating loss of $74.5 million on net sales of $131.2 million, well below its own projections of only three months earlier, said it would run out of cash by March 31, and in February told its remaining employees to prepare for pink slips.

Buy.com reported a Q4 pro forma loss of $27.4 million, bigger than analysts’ expectations, on revenues of $196.7 million. In January, the self-styled “low-price leader” in online sales of categories ranging from books to electronics cut 10% of its staff, said it would focus on only higher-margin products going forward, and announced plans to raise prices.

“It’s very unlikely that there will be many long-term winners that are entirely pure-plays,” says Yankee’s Ritter. “Companies that have the ability to maintain margins because they offer a unique product will have a chance, but it’s unlikely they’ll achieve the mass of visitors or sales that so many companies were expecting. Very few pure-plays are going to survive at $100 million-plus.”

Category leaders such as Amazon got the message. To prepare for Q4, they strengthened their presence in the physical world with warehouses and developed partnerships with retail chains and manufacturers. Amazon’s strategic alliance with toy retailer ToysRUs, for example, brought in supplier relationships and in-depth toy industry expertise that helped make this Christmas a bleak one for competitor eToys. Toysrus.com saw holiday sales triple to $124 million from 1999, helping the company grab market share from both eToys and Wal-Mart. Amazon.com, meanwhile, posted a net loss of $545 million or $1.53 per share on net sales of $972 million (proforma operating loss was $60 million) but inched toward the black, slightly beating expectations and nearly doubling its sales from the year-ago quarter.

Traditional retailers got the message too. They began to see web sites as a complement more than competition to their traditional way of doing business, and set about making their web sites better. They spent millions to buff up the customer interface on their web sites and the infrastructure to support it in time for the holidays, and e-retailing made big strides as a result.

A study by Accenture (formerly Andersen Consulting) found that 92% of attempted online purchases during the holidays were successful—a big gain from the 75% of 1999, when many shoppers thought they’d completed online purchases only to find out they hadn’t registered. Download times speeded up for the holidays dropping to an average maximum of 4 seconds or less, according to Keystone Systems. More e-retailers posted cut-off dates after which delivery could no longer be guaranteed by Christmas, and in fact Accenture found that 88% of orders placed online did arrive on time.

For some, the improvements had an immediate effect. Walmart.com took down its web site for a major overhaul during October—and was rewarded with a 500% increase in traffic by the end of November, according to Alexa Research. Barnes & Noble offered shoppers the chance to return or exchange merchandise purchased online at its stores, added Internet kiosks to help customers research online while in-store, offered same day delivery in Manhattan for purchases made online by 11:00 a.m., and saw sales rise 33% from October to December. Similarly, 1-800-Flowers.com shelled out big bucks on technology to expand its order management systems, and saw online sales for the quarter rise 69% to $47.7 million, or 36% of sales, from Q4 1999.

Top 500 Guide

The Sharper Image spent Q4 cashing in on its strategy of making its web site look as much as possible like its familiar catalog and stores. At a time when other retailers were blaming a softening economy for a disappointing season, The Sharper Image reported that sales across all channels rose 20% from the previous year to $98 million in December alone. Total sales for The Sharper Image’s fiscal year (which ended Jan. 31) rose 39% to $405.9 million. While each channel grew, Internet sales grew fastest, rising 50% to $14.5 million to kick in 15% of December sales and growing 111% to $60.2 million or 15% of the year’s sales. “Sharper Image places great emphasis on presenting a cohesive experience to the customer across all channels,” Ritter says. “They take it to a high level, using the same graphic designers to develop the catalog and the web, so whether you go to the web site, look in the catalog or walk into the stores you see the same products and product images presented in the same way.”

The lessons of Q4 2001 are a year away—but they’ll be packing a punch. “For two years to come, we’re still going to see some significant weeding out,” Ritter says. “There are a whole range of factors that drive success. There’s no one magic formula.” Maybe so, but holiday season 2000 suggests it’s a safe bet that when the time comes, the web sites of traditional retailers with long-standing brand equity won’t be among the dot-coms gone. “These are the companies that will be competing with the online superstores as the destination for one-stop shopping,” Engel says.

mary@verticalwebmedia.com

Stagnant construction and more shopping online:
Malls must fight to hold their piece of the retailing pie

By Andrea McKenna Findlay

There’s no doubt that shoppers are taking to the Internet. Online holiday sales last year were double what they were the previous year. And all evidence points to continued growth of Internet shopping.

So what’s that mean for the real-world shopping malls? Probably that the low growth of malls that the market experienced throughout the 1990s will continue. And that mall operators will have to continually find new ways to attract tenants and consumers to malls. “Just because there are more shopping options out there doesn’t mean that consumers will spend more money,” says Christopher Merritt, principal at Kurt Salmon Associates in Atlanta. “Malls need to keep their share of the pie.”

In the 1970s and through most of the 1980s, mall construction boomed, with malls of 400,000 square feet or more growing at double digit rates in many years. Then the recession of the early 1990s hit, and mall construction scaled back to only about 2% per year. Forecasts now are for that rate to be about the same for the foreseeable future. “There’s just too much capacity out there now,” says PricewaterhouseCoopers’ Chief Economist Carl Steidtmann. “Productivity in existing space needs to generate profitability in order to promote investment.”

So, just as mall operators added megaplex movie theaters and a broad mix of dining options-from pizzerias to fine restaurants-to their mixes as a way to keep consumers coming to the malls, today they are trying to find ways to integrate the Internet into malls. The newest way to do this is to add e-commerce options to the mall shopping experience.

By no means is mall construction dead. The International Council of Shopping Centers, a trade group, reports developers are planning 35 regional and super-regional malls with over 41 million square from 2000 to 2002. Between 1997 and 1999, developers opened 29 new malls with a total of 33 million square feet. And the council’s research shows that shopping center developers are stretching the perception of what malls can be, mixing indoor and outdoor layouts, combining different types of retail tenants as well as focusing on outlet-oriented complexes and dining and entertainment.

Clearly the proliferation of online shopping has forced mall owners and operators to expand their retail coverage to the Internet in order to service retail clients who rent mall space and to keep the interested eye of today’s consumers. Mall operators as well as retail tenants today are adding kiosks to mall locations and are making sure they provide an online presence, whether it is for mall information or to allow shoppers to make online purchases. John Konarski, senior staff vice president of research of the shopping center trade group, says that with the increased interest in multichannel retail strategies, it’s now becoming more important than ever for retailers and their shopping center complexes to become involved with the Internet. “If you want to be a well-known retail firm you’ve got to have a presence online,” he says.

And the mall market is responding to this demand: Such major mall operators as Cinncinati-based Simon Properties and Chicago-based General Growth Properties, two of the biggest in the United States, have developed electronic commerce strategies that tie into the current retail theme of multichannel shopping.

Simon Properties Group, which operates or owns interest in 252 shopping centers, malls and mixed use properties, promotes its web strategy to consumers and retailers. It targets shoppers through its Simon.com web site. The ShopSimon.com home page promises “one click” access to “America’s best malls and American’s favorite stores,” gives visitors the option of being notified via e-mail of sales and other events at malls and provides a mall locator.

Simon also developed its Clixnmortar subsidiary to create e-commerce products and services. Created in late 1999, the firm spent 2000 testing two web-related retail products. MySherpa.com was developed for time-constrained shoppers who could scan items at the store, pay for them at a kiosk then have them shipped. For the teen market, Clixnmortar developed FastFrog.com, in which teens use a barcode scanner at the mall to record gifts they want. Parents can view the goods and make purchases via a web site. Both tests are over now and Clixnmortar is developing a hybrid product, although no plans are set for a rollout. The product under development is called Clixlist, which shoppers can use to make an electronic shopping list of items that they can review, revise or purchase.

General Growth Properties launched its Mallibu.com e-commerce initiative in mid-2000 to help its retailers gain an online presence as well as provide information on its mall retailers and locations. A similar effort called MallibuDirect is a joint effort between General Growth and IBM to create interactive media stations enabling mall shoppers to access web retailers at General Growth mall kiosks. The deal offers web retailers access to mall shoppers as well as giving web retailers a physical presence without having to build stores. Mallibu launched the program at malls in Dallas and Michigan with such online retailers as ehobbies.com and art.com.

Clearly, the Internet’s impact on real-world shopping is only starting. Even with online shopping growing strongly from quarter to quarter while retail sales are flattening, the Internet accounts for only 1% of retail sales. But it’s a trend that mall owners ignore at their peril. “Adding e-commerce to mall operations is an important industry trend,” Merritt says. “The ongoing challenge for all retailers is to have the right product, in the right place at the right time. If malls can add kiosks to get transactions from consumers who are shopping online or may find items they didn’t’ see in the stores then the more likely malls will be to keep their piece of the pie.”