December 26, 2000, 9:55 AM

Blue Streak

The Internet is a repackaging machine.What was stodgy becomes hip, what was slow is juiced up to fast. Kmart’s store-roving blue light-a fixture cast off by today’s generation of corporate leaders as a cheap relic of a bygone age-becomes the fun, kitschy name of the discounter’s new standalone Internet company, But there’s more than new packaging surrounding Kmart’s revamped e-commerce strategy. There’s a heap of venture capital (analysts put the figure at $62.5 million), a move to digital digs in San Francisco, an Internet chief known for running startups, even a deal with Web portal Yahoo! to offer free Internet access to Kmart’s middle-market shoppers-the very crowd analysts expect to see surfing the Web in droves before long.

In moves closely matched by Wal-Mart, Kmart has suddenly reached Net speed. Awakening to e-commerce, the marts have rebuilt lackluster Web stores and sprinted after nimble dot-coms like Amazon. They haven’t burst into the lead yet, but both are talking about their brick-and-mortar roots as advantages, not baggage.

“Just like offline retail, the winners will be the boutiques and the big box stores,” says Mark Goldstein, who founded three Internet companies, including the Impulse! Buy network, before being named CEO of “A number of pure-play e-commerce companies are going to have problems unless they’re focused on a specific niche, because they’re not going to be able to hit volumes. So you’re going to see a lot of mergers as a result. This is definitely the year for the click-and-mortar play.”

Under a deal announced in December, Kmart has spun off BlueLight in partnership with portal company Yahoo! and Silicon Valley venture capital firm Softbank. At the same time, Wal-Mart announced a strategic alliance with America Online. Within days, Wal-Mart revealed plans to roll up its Internet operations into a separate company with venture capital firm Accel Partners of Palo Alto, Calif. And more recently, it named Gap executive Jeanne Jackson CEO of its Net company. Jackson, a retailing veteran who was president of Gap’s Banana Republic unit, also oversaw Gap’s Internet operations as well as the Banana Republic catalog.

Along with new leaders and new locales, the spinoffs put both companies in the Internet service business, where they’ll offer free or discounted access through their partnerships with Yahoo! and AOL. In becoming shoppers’ gateway to the Web, the discounters are positioning themselves for the next wave of consumers expected to go online. By 2001, according to Forrester Research, half of new online users will come from households earning less than $35,000 a year.

A wave of followers?

That segment reaches deep into the customer base of the discount chains. “As traditional brick and mortar retailers, they see the growth of the Internet, and they don’t want to lose their core consumers,” says one insider. Free or low-cost ISPs can add value to retail brands, helping drive traffic and build loyalty. And if it works, analysts say cobranded access could spark a wave of similar retail-portal partnerships, plus a round of spin-offs to speed them to market.

“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.

Formidable rivals

Though the two leaders are formidable rivals chasing the same target, this year’s real online battle isn’t between the two discounters but between the retailer-portal partnership model and the much-imitated affiliate model that’s made Amazon the king of virtual retail. In fact, Amazon has much to fear in the new deals. “Amazon’s valuation is based on the idea that it’s going to steal share from traditional retailers,” says Emme Kozloff, retail analyst with Sanford C. Berstein, New York. “But that’s going to be much tougher as traditional retailers set the wheels in place for e-commerce sites on par with Amazon’s.”

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.”

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