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.
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."
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