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Don’t Cut Back Now

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DQI Bureau
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When I asked Target Corp vice-chairman Gerald Storch a few months ago whether

the retail chain’s on-line site would turn a profit at some point, he assured

me it would–that is, if you include the benefits from branding, driving buyers

to stores, and cementing closer relationships with customers. Uh-huh, I thought.

Sounds even fuzzier than the dot-coms’ much-maligned "pro forma"

profits. So I wasn’t too surprised when Target announced in mid-September that

it’s farming out some of its Web operations to Amazon.com–a move that

suggested Target was throwing in the towel on-line.

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Quite the contrary. Target not only will retain its own site, run partly by

Amazon, but it will get massive exposure on Amazon’s site, which up to 50

million people a month visit. Storch expects the heightened on-line visibility

to boost all those seemingly intangible benefits. I think he’s right.

According to market researcher Jupiter Media Metrix, only about a third of

retailers venturing on-line look beyond sales and profits on the site itself to

determine whether their on-line efforts are truly profitable.

That’s a big

mistake: They need to understand that their customers use their sites for far

more than on-line purchases.

Of course, pure-play Web retailers such as Amazon must ultimately earn a

profit, since they sell only on-line. But it’s an entirely different story for

the traditional retailers that are starting to assert their dominance on the

Net. Demanding fast profits from their websites is precisely the wrong thing for

them to do. Indeed, Jupiter analyst Ken Cassar estimates that some two-thirds of

the return on investment on an on-line site comes from branding and

physical-store purchases. If all they measure is on-line sales and profits, he

says, "there’s a real risk that brick-and-mortar retailers may

substantially scale back their on-line investments, which could put them at a

big competitive disadvantage."

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Research

What might they miss? A recent Jupiter report found that half of consumers

use a retailer’s website for research before buying a product in its physical

store. Savvy retailers don’t fret about site visitors failing to click on the

"buy" button. Instead, they go with the flow by encouraging shoppers

to research on-line and pick up or buy the item in the store. Surveys by Sears,

Roebuck & Co, for instance, reveal that some $500 million worth of in-store

appliance sales were influenced by customers researching on-line first. So what

if they don’t buy a washer on-line? Although Dennis Honan, vice-president and

general manager for Sears Customer Direct, says the site will be profitable next

year, that’s not Sears’ only criterion for investing in it.

The results of promoting the brand and strengthening ties with customers are

quite difficult to measure. But that’s precisely what some retailers, such as

Target, see as the main value of their websites. Storch says the biggest benefit

of Target’s on-line efforts is deepening relationships with its customers–which

he thinks will bring them back, both on-line and to the stores. "Can we

prove sales in the store? No," he says. "But is the website valuable?

Sure."

Justifying continued or even increased spending on-line is a challenge these

days because it’s tough to track people accurately across multiple channels.

Besides, says Bill Bass, senior vice-president for e-commerce at Lands’ End,

"at the end of the day, profits are what’s most important for

everybody." True enough. But the companies that don’t consider the less

obvious benefits of their on-line efforts will lose customers to rivals that do.

By Robert D Hof 

in BusinessWeek. Copyright 2001 by The McGraw-Hill Companies, Inc

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