Niche dot-coms find common ways to grow in the valley of e-giants

Small companies selling online in categories dominated by giants such as Amazon.com focus on unique products, niche items they believe are better than those provided by the big players. These smaller companies pay close attention to cost, largely by keeping a check on advertising and marketing. And, these companies look for business-to-business customers, often selling to those they may compete against for retail sales.

Survival for a niche player, says Jill Frankle, director of retail e-commerce for Gomez Advisors, Lincoln, Mass., “is about smart marketing and being smart about leveraging core competencies.”

At the heart of those core competencies is the product. U.S. Wings, Stow, Ohio, sells authentic military aviation apparel—leather bomber jackets being its mainstay—from its one storefront shop and its web site. And sales are booming says owner Ret. Army Sgt. David Hack. Although he doesn’t divulge sales figures, the site gets more than 500,000 unique visitors per week and Hack’s client list runs deep. He is an aviation gear supplier to all branches of the U.S. military. Companies such as Microsoft, Disney and Amazon buy his jackets by the hundreds to give away as incentives or gifts. And movie companies have bought his jackets for props in films such as in the latest Arnold Schwarzenegger movie, “The 6th Day” and HBO’s film “The Tuskegee Airmen” about the Flying Tigers.

What separates U.S. Wings from the hoard of online leather jacket sellers? Quality, says Hack. Everything Wings sells is U.S. made; no cheap imports, he says. His customers don’t mind paying extra for the jackets (anywhere from $100-$200 more than one would pay for a similar-style jacket at an online apparel site) because the jackets will last more than 30 years, he says. Wings boasts a return rate of only 0.25%.

Quality and availability are what separates Rockingtoy.com’s offering of hand-carved, hand-painted rocking toys and figurines. Terra Stratton, owner of the Albany, N.Y.-based pure-play, says her items are unique-looking and there are only a few other retailers buying from her supplier—and there is an informal agreement that they won’t go on the Interet. Stratton started the company in the summer of 1999 with a $50,000 investment. She has a 2,000-square-foot warehouse and an office. She answers phones and packs most orders herself. Although there is no shortage of online rocking horses and rocking chairs for children, Stratton says her product falls in the middle of the other offerings. “I’m very specialized, I don’t think I’m competing against toy or rocking toy retailers,” she says. That, she adds, is because her items are more expensive than those from toy makers yet less expensive than those from English rocking horse companies.

Similarly, Alibris, an online rare and used bookseller, has found its unique product niche, but does not limit its product offering. Whereas Rockingtoy has only 18 items and is considering adding about five more and Wings has about 100 jacket styles and about 100 other items, Alibris says it carries more than 1 million titles. The strength of its offering is the large inventory and those items’ obscurity in the marketplace.

Hilo Hattie, a click-and-mortar Hawaiian apparel and gift retailer, believes authenticity and market focus set it apart. Other apparel companies may sell Hawaiian shirts, but it is usually seasonal, says Bret Hause, vice president of e-commerce. But the site’s breadth of offering, such as Hawaiian music, videos and art, and its products’ authenticity provides its edge. Hilo Hattie, based in Honolulu, began in 1965 as a storefront retailer. It now has 11 stores, 650 employees and is a $700 million business. Like Alibris, Hilo Hattie does not limit its offering; the site carries about 1,000 items.

U.S. Wings’ web site generates about 90% of its sales; word-of-mouth to drive the lion’s share of those sales. “These customers just tell one another about us,” Hack says. The company does not run banner, print or broadcast media ads. It maintains no affiliate agreements. It relies exclusively on word-of-mouth, search engine results and press coverage to bring customers to its site. “Even the military came to us,” he says. The product’s reputation is strong enough to drive sales without using conventional advertising, Hack says.

Wings did get a shot in the arm when it first went online six years ago. “We were the first online retailer to partner with MasterCard,” Hack says. “They did a major promotion featuring us.” That, of course, was free, he adds.

Stratton, on the other hand, has made affiliate agreements the center of her marketing strategy. She tried paid advertising in the beginning, but quickly abandoned it because of the cost. She now has about 2,000 affiliate agreements and hopes to expand to more than 10,000 within three years. “I negotiate coupons or give-aways to get free advertising,” Stratton says. “Everything I do is commission based. You never know what you’re going to get from Internet advertising, so if they won’t work on commission, I go elsewhere.”

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She recently cut a deal to be a featured merchant through December on Coolsavings.com; in exchange she pays $20 for every sale. Stratton pays affiliates 15% of all sales that come through their web sites. She uses California-based Commission Junction, an affiliate network, to attract and monitor affiliate sales. Commission Junction receives 5% of whatever commission the affiliates receive. Rockingtoy also has an affiliate recruiter who works for a commission. Affiliate-generated sales account for 15% or less of her overall sales; most of her activity comes from search engines. “It’s all about tapping into something that has a critical mass,” Frankle says. “Affiliate programs can tap into the viral nature of the Internet.”

For Hilo Hattie reaching the critical mass began as an experiment in 1996 when the brick-and-mortar retailer joined two other companies—a bank and a technology company—in an online mall. “It was more of a background, wait-and-see project, not a strategic move,” Hause says. The retailer limited its web site marketing to being listed on search engines and running some print ads in local publications, “but we noticed a lot of activity.” That activity made a web presence part of Hilo Hattie’s long-term strategy in 1999. The goal is to have 10% of the sales coming from the Internet within a couple years.

The problem with selling to a small market is that it is small. To augment sales, many niche retailers find refuge in business-to-business customers. Supplying the big guys or making other b2b sales makes sense for niche players because it increases their distribution base, says Frankle. “That’s a way that they are recognizing value from what they’ve created,” she says.

For Alibris, b2b is its main focus. Alibris President and CEO Martin Manley says retail sales account for only 0.5% of its overall sales. “Retail customers that use our web site are insiders, the tip of the market,” he says. It would not make good business sense to try to raise the $100 million it would take to create brand awareness, he adds.

However, Alibris did have a brand-awareness campaign in 2000 (with ads appearing in The New Yorker, the most recent being a full-page ad in the December issue). But Manley says those ads are directed at both retail and b2b customers. Alibris had advertised in as many as 15 consumer publications; now it runs only in The New Yorker. Alibris sees itself first as a supplier, Manley says, adding that Amazon and Barnes & Noble are its biggest customers—not competitors. “We cheer Amazon and Barnes & Noble on and hope they do well,” he says. To get at that market, Alibris uses a b2b development group to attract and manage b2b accounts.

Stratton joined Wholesalecountrycrafts.com, a lead generator for wholesale merchants. She pays $125 a year to join the wholesale mall and gets as many as 10 inquiries a day from interested buyers. Like Alibris, Stratton says her items are so specialized she does not see herself as competing with large toy manufacturers.

U.S.Wings and Hilo Hattie both serve b2b—25% of Wings business and only a marginal amount for Hilo Hattie. Both say they don’t worry about competing against large apparel companies. Both say they are tops in their niche. But b2b has been away for Wings to diversify, Hack says. These companies are buying hundreds at a time to give away as incentives or gifts, he adds. Wings sells its jackets in bulk (12 or more) at a 25% discount.

Hilo Hattie does some discount by volume business or group sales, often to people hosting Hawaiian theme parties, Hause says. But that is a small part of the company’s business. “There’s a ton of people out there who sell Hawaiian shirts,” Hause says. “We don’t stack ourselves up against (large apparel retailers). We do this year-round while others are seasonal. We want to be the dominant player in our category.”