Blue Streak

“I expect free or low-cost Internet access to become a stock offering by retailers,” says Dylan Brooks, an analyst with Jupiter Communications. “It’s relatively easy and cheap for them to roll out, and it removes one more reason for people

to abandon their stores.” Adds Charlene Li of Forrester Research, “Watch for deals between portals and retailers like JC Penney, Sears and Target—likely with mid-tier portals like Excite, Lycos and GO Network.” Similar deals, if they occur, will confirm what the Wal-Mart and BlueLight deals have already established: that the nation’s biggest brick-and-mortar retailers possess advantages most virtual players don’t—stores with established customers and traffic, warehouses and deep supplier relationships—and they’re finally figuring out how to leverage them online.

In fact, Jackson’s blend of online and offline experience already is winning Wal-Mart high marks for bringing her on board. Along with running Gap’s expansion online, the Harvard business school graduate has experience developing brands and merchandise programs for Saks Fifth Avenue, Victoria’s Secret, the Walt Disney Co. and Federated Department Stores. “ To find someone with both retail and Internet experience is still very difficult,” says Barrett Ladd, senior retail analyst at Gomez Advisors, Lincoln, Mass. “And then to have someone from Gap, which has done a great job of integrating its stores with the Internet—that’s something Wal-Mart really needed to work on.”

While Jackson knows how to leverage store-brand strength on the Web, Goldstein knows the Internet. He founded profiling firm NetAngels, which later merged with Firefly Networks before being acquired by Microsoft in 1998. Another Goldstein launch—the merchandising system Impulse! Buy Network—was swallowed last year by Inktomi. Impressed with that record, Softbank hired Goldstein to assess Web startups for venture funding. He’s regarded by the firm as a star graduate of its entrepreneur-in-residence program, which identifies, funds and places executives at promising Net companies. Before joining BlueLight as CEO, Goldstein sized up the opportunity for Softbank and negotiated the deal with Kmart.

Kozloff is especially critical of Amazon’s zShops, an online bazaar composed of small merchants who sell goods on the site in exchange for a cut of sales. “There’s a quality and brand dilution issue with the Amazon model,” she explains. “If you’re allowing any Tom, Dick and Harry to sell on your site, it’s hard to control what shoppers perceive as the brand. Amazon’s going to have a very difficult time controlling those elements of the business.”

On other affiliation fronts, Amazon faces fewer liabilities. Highly lucrative agreements with other e-retailers could give Amazon a financial boost to the tune of $100 million per. Along with its expansion into toys, tools, electronics and software, Amazon has invested in major revenue-sharing partnerships with Pets.com, Living.com, HomeGrocer and Drugstore.com.

Fran Maier, BlueLight’s vice president of marketing, foresees similar deals allowing her company to expand into financial services and other areas, but probably not to the extent that Amazon has taken them. “I’m sure there will be components of revenue sharing we bring to this,” she says. “But the direct sale of merchandise over the short term will be the major revenue stream.”

Of course the spinoffs pose no threat unless they fly, and it’s still too early to get a read on their success. BlueLight currently offers only a limited set of SKUs and expects to expand next month. Wal-Mart’s redesigned site opened on New Year’s Day, but the company won’t release sales figures. Its cobranded Internet service isn’t yet available.

Internet insiders generally view the big box retailers as foot-draggers, not trendsetters. Bound by cumbersome corporate structures and the demands of their core in-store business, their Internet moves have been evolutionary rather than revolutionary. Kmart had no Web offering until 1998, and its initial plan for a neighborhood of sites didn’t last long. “There were going to be things like a family and fitness site and a gift site,” says Ladd. “They were supposed to have different URLs that shoppers could link to from the Kmart page.” In-store kiosks called Solutions offered additional goods online. By last fall, Kmart had dumped the neighborhood concept. Says Ladd: “They were a little over their heads in terms of Internet technology and strategies.”

Kmart wasn’t the only big box store at sea. Until its Jan.1 relaunch, Wal-Mart’s first-generation Web site had gone without a major facelift since 1996. While the company says it was pleased with its initial home-grown effort, analysts contend an update was long overdue. “Wal-Mart’s first launch just wasn’t up to snuff,” says Brooks. “One of Wal-Mart’s offline benefits is a wide range of goods, and that wasn’t mimicked on the previous site. It was generally flat and static. ”

But now retailers have gained not only a better understanding of the online market but what’s at stake. “Many brick-and-mortar retailers woke up last year and decided they were not going to let another Amazon happen,” says Maier. “They were going to move aggressively. Knowing they needed help to take their Internet efforts to the next level, the marts went to Silicon Valley to get it. In October, Wal-Mart told analysts it would relaunch its Web site with 35,000 items in 19 categories, offering travel photo and pharmacy services, personalized “My Wal-Mart” features and expanded offerings in toys and electronics.

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Meanwhile, Kmart was busy preparing for the December announcement that would launch BlueLight.com. The new site, teased since December, isn’t yet fully operational. When it is, it will feature full lines of electronics, housewares, toys, clothing and Kmart’s Martha Stewart Everyday home products.

The portals bring Internet savvy to both ventures, but the benefits are mutual. The portals need a continuous stream of new traffic to keep growing. Kmart and Wal-Mart have it: about 30 million and 100 million customers, respectively, each one a potential Web shopper. To work, the partnerships must penetrate deep into territory where the Web isn’t yet well-established: mainstream America. If Wal-Mart and Kmart didn’t lead the charge onto the Web, one reason is that their customers weren’t there. Initially, the Internet audience was a higher-end demographic offering little overlap with the traditional Wal-Mart or Kmart shopper. Wal-Mart says 4 in 10 communities with its stores lack local Internet access. Kmart says about 40% of its customers aren’t online. Though both retailers say this is a major reason for offering Internet service, they’re taking different approaches to removing the barriers.

Figuring the bottleneck for many of its customers is the monthly subscription fee, BlueLight is offering its Internet service free. Its software disk warns customers that they’re still responsible for telephone charges—though it says local access numbers are available in most locations. That could be true for most Kmart shoppers, since it claims to have stores within a 15-minute drive of 87% of the U.S. population. But Wal-Mart’s roots are rural. Many of its stores are located away from urban centers in areas where Internet access requires a long-distance call. So its approach is to work with AOL to add local access numbers.

The Wal-Mart deal bets success on brand strength, but Kmart sees the Internet channel from a different vantage point. It holds only an 8% share of the discount retail market to Wal-Mart’s 22%. So Kmart chose to position BlueLight as a new brand, in much the same way Gap launched Old Navy. “BlueLight is a brand that’s going to mean different things to people than what Kmart does,” says Goldstein. “At the same time, BlueLight can take advantage of Kmart’s size and its ability to buy in bulk.”

Yet the big-box stores are known for another kind of bulk. Life moves fast around Yahoo! and AOL, but that’s not always the case for the marts. Wal-Mart’s redesign debuted two months late, and its Internet service won’t emerge until May 1 or later. BlueLight, on the other hand, hustled the Internet service to market, but shoppers won’t see the fully revamped Web site until summer.

Though Kmart and Wal-Mart are racing the Internet Express in similar directions, their recently souped-up strategies have important differences. First the similarities: For better access to the Silicon Valley talent pool, both have relocated their Internet headquarters from parent corporation hinterlands to the San Francisco Bay Area. And taking a route followed by Nordstrom, Toys “R” Us and other brick-and-mortar heavyweights, both partnerships were jump-started with heavy infusions of venture capital. Analysts estimate the BlueLight package at $62.5 million from Softbank and Yahoo!, with Wal-Mart.com getting $50 million to $100 million from Accel and the corporate kitty.