Private equity firm Apollo Global Management will take Rackspace private in the all-cash deal.
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Most manufacturers cite customer requests for online shopping and a chance to better promote their brands as the generic reasons they’re opening Web stores. But they’re also looking for ways to increase profits and move more product. Analysts predict Web shopping will soon be at least a $13 billion business and manufacturers are not willing to just hand the market over to retailers. “These are profit-driven companies and they see the Internet as the biggest merchandising opportunity to come their way in a long time,” Whalin says. “It’s just too important a sales outlet for them to ignore.”
Brand name manufacturers are drawing up elaborate plans to expand their inventories and merchandising efforts, as they sell online to the public. L’eggs, for instance, is building a separate distribution system complete with its own warehouse to fill individual Web orders. And Estee Lauder and Avon are enhancing their Internet stores with interactive applications that help shoppers pinpoint the fragrance or skin care product they’re looking for by asking them for more personal details such as their hair and eye colors.
Reaching out to customers
But selling online isn’t limited to big manufacturers. Even small companies are willing to bypass their retailers in the race to get on the Internet. A.I. Root Co., a small Medina, Ohio, candle manufacturer recently opened a Web store to sell holiday and church candles over the Internet. The company’s products are carried in just under 9,000 stores nationwide, but A.I. Root, which has been in business since 1869, is willing to risk alienating its retailers because it sees the Internet as the only cost-effective way to reach the newest market it is after: younger buyers. “We know our retailers aren’t going to like this and we’re worried about what their response might be,” says Brad Root, A.I. Root vice president. “But we’ve looked at electronic commerce pretty hard and that’s the only way we can reach out to the younger customers we haven’t had before.”
Attracting younger customers is the prime reason Levi is selling directly on the Web. Tired of losing market share to designer jeans makers and impressed with the success Internet retailers such as The Gap Inc. are having with their Web stores, Levi decided it had to have more online than just an information-only site. Today on the Levi site, shoppers can click, select and buy more than 100 different styles of pants, ranging from traditional jeans to khakis. The Web stores feature stylish graphics and various interactive features.
For instance, shoppers can click on a size calculator and receive instant recommendations on the best size of Dockers tops and bottoms for them. And another function-Style Finder-uses personalization software applications to ask shoppers a series of lifestyle questions, which in turn helps them narrow down their clothing selections. Levi wants to use electronic commerce and the Internet to draw in its best customers. But its policy of bypassing other Web merchants and limiting the merchandising of its clothing to its own Internet stores isn’t winning the jeans maker new friends among retailers.
When Levi’s Web stores went live, macys.com, the electronic commerce arm of Federated Department Stores Inc., and JC Penney Co. were among the online merchants that had to put aside their plans for selling Levi jeans and khakis online. Levi insists that its Web selling policy isn’t trying to take business away from retailers. “The Internet is so new a medium that we think that we know best how to build the brand up,” says Jay A. Thomas, director, digital marketing, Levi’s brand, San Francisco. “This is a huge opportunity to stay customer focused and build sales volume for everyone, including bricks-and-mortar stores.”
Publicly, Penney and other national merchants are playing down Levi’s exclusive merchandising rules and use words such as “disappointed” to describe their reactions. But there’s tension in the industry over big manufacturers bypassing retailers on the Internet. And many believe the issue will soon become a full-fledged controversy.
“There’s a lot that’s not being said, but that doesn’t mean retailers all across the board aren’t mad about this whole bypassing issue,” Whalin says. But no matter their level of ire, many retailers believe there’s not much they can do to fight back against the very companies that supply their lifeblood-the products they sell. “The big retailers aren’t going to confront their manufacturers anytime soon,” he says. “They’re too dependent upon them for business. It’s a delicate balance.”
Seiff believes manufacturers may have already won the Internet retailing battle because they’re willing to take risks where traditional retailers aren’t. For instance, Timex and Levi put their entire product inventories on the Internet and enhanced their stores with sophisticated graphics and interactive shopping functions to get customers to buy. In contrast, many big national chains still have no immediate plans to sell online or are limiting their Internet sites to selling only a few select items.
“The Internet is rewriting the rules of merchandising and conventional thinking and I don’t think department stores understand the business model yet,” Seiff says. “On the Web, I think wholesalers and manufacturers are going to be better retailers than department stores.”
But not all retailers agree with that assessment, especially merchants that see electronic commerce as an integral part of their sales and distribution channel.
Unlike manufacturers, retailers also aren’t limited to selling just one line of merchandise. Wal-Mart, for instance, carries nearly 250,000 different products on its Web site. And even if it’s restricted from selling Levis online, macys.com does stock Calvin Klein jeans and dozens of other designer clothing categories. Thus, even if more manufacturers are looking to bypass merchants on the Internet, retailers can still compete based on their product diversity and expertise in selling to the public.