Looking Beyond Paper

Ask many Wall Street analysts whom they’re handicapping to be standing in the winner’s circle years from now when the Web selling derby is over and their hands-down answer is direct catalogers.

On paper, catalogers already possess many of the tools necessary not just to win their fair share of shoppers, but to dominate the market altogether.

Catalogers are experts at one-on-one marketing—a critical component of any successful Web selling business. And unlike many chain retailers and virtual merchants, catalogers also already have order fulfillment systems tailor-made for shipping individual Web orders quickly—a huge advantage given the steady stream of complaints shoppers are registering with Internet merchants over slow delivery and poor customer service.

Catalogers were among the earliest merchants to buy into the potential of the World Wide Web, and major catalogers such as Fingerhut Companies Inc., Lands’ End Inc., SkyMall Inc. and Sharper Image Corp. are already operating successful e-commerce sites (Lands’ End’s Web sales increased from $18 million in fiscal 1998 to $61 million in fiscal 1999). More than 8,000 cataloging companies are selling on the Internet today, and that number will mushroom to around 10,000 over the next four years. But just because catalogers have some advantages when it comes to Internet merchandising that doesn’t mean they have all the answers.

The fact of the matter is this: Catalogers are as new as anybody when it comes to figuring out what works—and what doesn’t—when selling over the Internet. And if catalogers are going to make a successful transition from direct mail marketing to Internet retailing, they must be willing to take risks that are as radical to them as any measures that other retailers are taking to sell over the Web.

Turn the page

The old ways of doing business simply won’t work in the new medium of online selling. Catalogers must change the way they operate by cutting back on the number of paper catalogs they publish. They must also divert resources from traditional marketing programs such as new prospecting lists and plow the money back into Web merchandising.

“Over time the paper catalog will be replaced by the Internet as a sales and product information channel,” says Richard Thalheimer, chief executive officer of San Francisco-based Sharper Image. “We’re seeing the end of a cycle not unlike the end of the horse-and-buggy days.”

While most catalogers see Internet retailing as a big part of their future, they must also develop strategies that grow e-commerce in ways that don’t hurt their long-time investment in paper cataloging. That’s why to build up their Internet retailing business—and find the money to pay for it—catalogers are implementing a mix of strategies that range from starting off small to aggressively seeking outside investors.

Specific initiatives include:

— Looking for outside investors to build state-of-the art e-commerce sites.

— Buying into successful or promising Internet retailing niches.

— Reducing the size of catalogs and using the savings to grow the Web store.

— Starting small and plowing all Internet revenue back into new business development.

— Leveraging brand names to attract new Web shoppers.

It took direct marketers 20 years to build the business-to-consumer paper catalog market into a
$57 billion business. But some analysts and executives are already predicting that online catalog sales could equal—or surpass—that total by 2005.

Compared to the dollars they spend each year printing and mailing more than 13 billion paper catalogs, direct marketers see the Internet as a faster and cheaper way to generate new business. But building an e-commerce site robust enough to attract first-time customers isn’t cheap. To pay for a top-of-the-line Web store, some catalogers are trying to attract outside investors.

Phoenix-based SkyMall, for example, began selling its high-end specialty gifts over the Web three years ago and today Internet sales account for about 5% of annual revenues. But SkyMall has ambitious plans to more than double its e-commerce business within two years, and most of the $25 million it will spend to upgrade and subsequently market its Web store will come from outside investors.

SkyMall could have taken several years and shifted resources away from paper catalog printing to overhaul its Web store. But convinced that online shopping is moving swiftly into the public mainstream, Chief Executive Officer Robert M. Worsley is pushing for the Web site upgrade by December (see sidebar, page tk).

“The tsunami of Internet shopping has blown through the books and music segments into the general gift-giving category,” Worsley says. “We’re seeking outside investors because this is a fast-track project. We’ve seen enough of this to know we must be a leader, not a follower, in this market.”

Speed is key

Building a Web store robust enough to reduce the time—and clicks—it takes for shoppers to select and pay for merchandise is certainly one method a cataloger can use to generate Internet business. But that’s just one approach. Some big catalog companies are so anxious to sell online that they don’t want to take all the time and trouble to build an entire e-commerce foundation from scratch.

A case in point is Fingerhut. The Minneapolis-based direct-marketer began selling over the Web three years ago. But Fingerhut soon realized that its traditional paper catalog customers (moderate income married women in their 40s) weren’t the kind of shoppers most likely to buy online. To build a successful—and diverse—Web selling business, the company had to attract younger and more affluent shoppers.

But Fingerhut—one of the most aggressive direct-marketers in the business—didn’t want to spend a long time building those markets. Its business plan calls for the company to be in at least 20 new online selling niches by 2000, and Fingerhut’s e-commerce managers estimate that it would have taken two years to build Web stores and customer databases for each new marketing segment it was after. But Fingerhut wanted to be selling in new online categories in half that time.

That’s why Fingerhut is investing in promising niche retailing sites that already exist. To build a base of younger shoppers, Fingerhut bought nearly 20% stakes in mountainzone.com, a sports information and merchandising site, and Freeshop.com, an online discount buyers network. And to accumulate an online clientele of upscale customers, Fingerhut also invested in PC Flowers and Gifts, which sells flowers, gifts and gourmet foods over the Web, and Roxy Systems Inc., an Internet digital communications and entertainment services company.

Before Fingerhut began buying into other Web retailing companies, it had a very limited database of Internet customers. But today that base has grown to about 1.7 million customers and young and affluent buyers now account for about 50% of all Internet sales.

“Speed is the key in this market,” says Andy V. Johnson, president of electronic commerce for Fingerhut. “Investing in existing sites gets us into the customer segments we are after sooner rather than later.”

With annual revenues of $1.2 billion, Fingerhut has some flexibility in shifting funds around to pay for a Web shopping program. So far, the company has used several million dollars from its general operating funds to pay for acquisitions.

But most catalogers aren’t as big as Fingerhut. In fact, about 85% of all catalogers are small- and medium-sized companies with annual sales of less than $50 million. And for smaller catalogers finding the money to invest in a Web store means rethinking priorities and making hard budgeting decisions. Some companies may choose to cut back on the resources they spend in areas such as marketing. But another option direct marketers are considering is reducing the size of their paper catalog.

A medium-sized direct mailer with annual revenues of $50 million spends at least $8 million each year printing and mailing catalogs. “Paper catalogs are the heart and soul of many companies,” says William A. Dean, president of W.A. Dean & Associates, a San Francisco-based consulting firm. “It isn’t easy cutting back on an established sales channel like a catalog to pay for one that’s still unproven such as the Internet.”

Image overhaul

Yet if catalogers are truly serious about staking all, or at least a portion, of their future on the promise of big Internet sales, executives must be willing to shift resources away from their business units, including cataloging operations. A prime example is Sharper Image.

Each year Sharper Image, which sells high-end gift and entertainment products, mails 40 million catalogs, mostly to male shoppers 55 and older with annual incomes approaching $100,000. A year ago a typical Sharper Image catalog contained 84 pages. But today, with the exception of its June and December editions, the catalog is 52 pages and shrinking. Instead of investing more resources in catalog printing, Sharper Image is using the money to expand its Web store.

In February, Sharper Image updated its Web store with technology from Intel Corp., San Mateo, Calif., that enables shoppers to view merchandise with accompanying sounds and three-dimensional images (see sidebar, page tk). And the following month Sharper Image acquired software from Broadbase Information Systems Inc., Menlo Park, Calif., to begin profiling and tracking the purchasing patterns of its online shoppers.

While online sales accounted for about 4% of Sharper Image’s $243.1 million in revenues last year, the company is downsizing its catalog and plowing the savings back into Internet retailing because the company wants to grow e-commerce to at least 15% of sales within a year.

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“The Internet can reach millions of people at a fraction of the cost of mailing out catalogs,” Thalheimer says. “We want to shift customers away from paper shopping and onto the Web.”

Cutting back on cataloging is an option because Thalheimer believes Sharper Image’s upscale merchandise will sell well in the online specialty gift category, a Web niche that is projected to ring up sales of about $1.4 billion by 2002.

But many catalog companies simply can’t afford to be as aggressive as Sharper Image in eliminating paper to pay for e-commerce. Instead another option direct marketers are trying is starting out with a very small Web selling initiative and growing it by investing all sales back into the business.

For example, Michael Gotfredson, president and founder of San Diego-based Road Runner Sports, wanted to sell his company’s line of running shoes and apparel over the Internet. But Gotfredson needed to build up Web sales in a way that didn’t undercut Road Runner’s paper cataloging business.

Road Runner’s catalog customers are serious runners who buy their shoes from Road Runner because of the deep discounts they receive on new, discontinued or limited-edition brands from major athletic footwear manufacturers such as Adidas, Asics, Brooks and Etonic.

It took several years for Road Runner to build up a $75 million business with a clientele of about 4 million customers, and Gotfredson wasn’t willing to risk losing that base by diverting resources from catalog publishing into Internet retailing.

Instead, Gotfredson set up e-commerce as a separate unit and gave his Internet manager a single directive: Make the Web store pay for itself.

“When we got into this, I wasn’t sure the Internet was viable,” Gotfredson says. “I also knew that with all the hoopla surrounding Web shopping that if we didn’t give this a try our competitors certainly would.” At first online sales were small (only about $15,000 a month). But as the Web store grew, the company used the proceeds from the site to pay for more technical upgrades.

Paying off quickly

To generate repeat business, Road Runner added an e-mail program that alerts 70,000 shoppers that their favorite running shoe is about to be discontinued and may be purchased online at a substantial discount off the manufacturer’s suggested price. Road Runner also installed Shoe Dog, a personalization program that asks runners a series of questions about their shoe size, running patterns, jogging schedule or training habits and then recommends the best pair of shoes to buy.

Road Runner has a long-standing policy of closing down any new venture if it isn’t profitable within four months. But so far, investing recurring revenue back into e-commerce is paying off. Internet sales, which totaled around $308,000 in 1997, mushroomed to more than $1.5 million in 1998 and could account for as much as 10%, or $7.5 million, of Road Runner’s total sales by December. “The e-commerce business had to stand on its own and the site is doing just that,” Gotfredson says. “We’re finding new categories of runners and joggers who like to buy their gear online.”

The right mix of merchandising and sophisticated personalization applications can certainly help catalogers convert browsers to buyers once they’re on the Web site. Yet a bigger indicator of how successful direct marketers will ultimately be on the Internet is how adept they are in attracting visitors to their Web stores. And many catalogers are finding that their strong brand name and marketing approach work as well on the Web as in the paper world.

Lands’ End, a well-known cataloger in the casual clothing and outerwear market, is counting on its famous name, a TV ad campaign and other initiatives to grow its already successful Web business.

More than 15 million shoppers logged onto the company’s site last year, which contains—much like its catalogs—a blend of high-quality displays of merchandise and interesting offbeat stories about some aspect of clothing or the rustic lifestyle. And 200,000 shoppers signed up for the company’s online newsletters, which provide biweekly updates on soon-to-be liquidated merchandise, product and style updates and other news.

The approach has been so successful that Internet sales were the bright spot in an otherwise down year for Dodgeville, Wis.-based Lands’ End, which saw its net income plunge 51% in 1998 (due to a slowdown in the sale of liquidated merchandise and other factors). “Our customers know the Lands’ End name,” says Ronald A. Frey, the cataloger’s Internet business manager.

Lands’ End is now counting on its TV campaign to grow Internet sales by reaching even more of its best online shoppers: college-educated customers between 35 and 44 living in dual income households. The first ad, which began airing in April, highlights Your Personal Model, a program that enables women to create a three-dimensional image of themselves and try on clothes based on their measurements.

Subsequent ads will feature So Many Shirts, an application that helps men shop for oxford shirts based on the specific preferences they’re looking for, and a similar personalization application that allows customers to mix and match swimwear styles. “With the right mix of merchandise, technical features and advertising, our objective is to keep them coming back,” Frey says.

Slow and steady

Lands’ End was among the early catalogers to give Internet retailing a try almost five years ago. But other catalogers still aren’t sure where the Internet falls into their business plan. And until they do they’re taking a conservative approach.

Last December, for instance, Lillian Vernon Corp. launched a limited Web store that features about 400 items from the company’s 6,000-product paper catalog. The Rye, N.Y.-based company elected not to put its entire catalog online because its best customers are older women who don’t own computers and aren’t likely to be cruising the Internet looking for shopping bargains. And until it figures out a new marketing and merchandising plan to draw younger customers to its Web store, Lillian Vernon will continue to concentrate on its paper catalog operations while growing its Internet business in increments.

“Our online catalog is not a replacement for our paper catalogs,” says Delphine Hibon, manager, new business development. “It’s an alternative for customers who want to take advantage of technology and shop from their home or office.”

Lillian Vernon has a five-year plan to increase the size of its Internet store, beginning with the best-selling items found in its traditional catalogs.

But given the speed with which Internet retailing is catching on, other executives believe the time for caution is over.

“If a cataloger isn’t on the Internet soon, they’re going to lose business to someone else who already is,” Worsley says. “Catalogers can’t walk a fine line anymore about whether or not they are going to be on the Internet.” •

SkyMall feels the need for speed

SyMall Inc. CEO Robert M. Worsley doesn’t need any more convincing that e-commerce is a big part of his cataloging company’s future. He has given the go-ahead to a major overhaul of SkyMall’s e-commerce infrastructure. Major technical improvements include installing new computer hardware and software that will reduce the time it takes to download SkyMall’s online store page and the number of clicks it takes for shoppers to locate merchandise.

By Worsley’s calculations, it now takes customers up to 16 seconds to access SkyMall’s online store and six clicks to get to the goods. When the changes are in place, he expects the process to take half as long and half as many clicks. “We intend to focus on speed,” he says.

To build a faster Web site, SkyMall is installing new hardware and software from the likes of Oracle Corp., Redwood Shores, Calif., SunMicrosystems Inc., Mountain View, Calif., and Apple Computer Inc., Cupertino, Calif. The changes should be online in time for the holiday shopping season.

Three dimensions, no waiting

When you think of Sharper Image, you probably think of gadgets—say, a personal relaxation system with 10 different soundscapes, from Tropical Cruise to Summer Night. Or an ionic pet grooming tool that guarantees a gentler way to comb the tangles out of Fido’s coat. Selling high-end gadgets is the foundation that Sharper Image was built on.

It’s no surprise, then, that Sharper Image is using one of the newest technical gimmicks to hit Internet retailing—three-dimensional product images and accompanying sound—to generate interest in the company’s Web site. “Visiting a Web store shouldn’t be a static experience,” says Sharper Image CEO Richard Thalheimer. “This 3-D program makes shopping online at Sharper Image interactive for our customers.”