E-Tailing Finally Hits Its Stride

Bill Bass and Jon K. Stein are two very different kinds of Internet merchant.
Bass runs Sears.com, the online arm of the retail giant, where sales are up more
than 40% this year. Stein owns Jake's Dog House in Cherry Hill, N.J., a chain
of five pet-supply stores that gets about $250,000 of yearly sales over the Web-and
expects them to double in 2005. As different as they are, the Internet is at the
heart of both their expansion plans.

As e-tailing heads into its 10th holiday season, it is coming of age. With
more households shifting to faster broadband connections and online shopping
increasingly friendly, Americans are purchasing ever more stuff on the Web.
Analysts at Forrester Research say US online sales will reach $145 billion this
year - or 7% of U.S. retail sales. While growth has slowed from last year's
hefty 38% gain, that's still a 26% leap from the $114 billion racked up in
2003.

But the numbers tell only part of the story. Big changes are percolating
through e-tailing - and spilling over into the broader world of retailing. For
one, giants such as Sears, Roebuck & Co. and Wal-Mart Stores have finally
gotten serious about the Net. They are chasing new markets online and using
their size to force down prices, just as they have done in the brick-and-mortar
world.

Niches Unlimited

At the same time, thousands of niche players like Stein are reaching a
national audience through the Web. "I've got customers in all 50
states," he says. And while some outfits aren't much bigger than
mom-and-pops, being a niche player doesn't have to mean staying small. A
growing number, including e-jeweler Blue Nile, (NILE ) luggage site eBags, and
shoe retailer Zappos.com, are racking up sales of $100 million a year or more.
"There's an unlimited number of niche markets out there," says John
Seely Brown, a director at Amazon and visiting scholar at the University of
Southern California's Annenberg Center for Communication. "It's the new
economic model."

Indeed, in the past couple of years, the increasing sophistication of search
technology and comparison-shopping sites have allowed online businesses cheaply
and effectively to market their products to millions of potential customers.
Often, these innovations are bringing less-well-known brands and merchants to
consumers' attention. People simply type what they're looking for into a
search site, and they're instantly spoiled for choice. The forces being
unleashed have not been lost on that icon of e-tailing, Amazon's Jeff Bezos.
He recently told a New York audience: "We're going to see more richly
varied products for people."

SPECIAL GIFTS Red Envelope focuses on items not sold in shops

It also means a more richly varied network of suppliers. For several years,
e-tailing was dominated by a handful of online merchants-the likes of Amazon,
eBay (EBAY ), and Lands' End. And while they continue to post strong growth
rates, they are facing increasing competition. Much of it comes from a host of
Establishment retailers that were late to the party and becoming increasingly
Web savvy. Says Sears.com's Bass: "A number of really large companies are
just getting started."

The big chains are harnessing the Web not just to sell more stuff but also to
test new products. Gap's Old Navy unit is testing plus-size women's
underwear online, for example. Wal-Mart, meanwhile, is using its site to try out
fancy merchandise its stores don't stock - including such upscale products
as baseball memorabilia, cashmere sweaters, and $6,000 plasma TVs.

Finger Puppets

Even as the big guys muscle in, small fry are also proliferating. For
several years, many smaller players have launched online stores under the aegis
of eBay. According to the online giant, 430,000 people in the US make all or
part of their living as eBay merchants-up from 150,000 in 2002. eBay's
merchants now hawk everything from SpongeBob SquarePants finger puppets to
classic Ford Mustangs.

The advent of search-related advertising-the ads that appear next to search
results-has made it more cost-effective for online entrepreneurs to set up
shop on their own. In the early days of the late 1990s, pioneer online merchants
fruitlessly spent millions of dollars on TV and radio ads aimed at the mass
market. Search-linked advertising has changed all of that. Nowadays, online
companies pay Google or Yahoo! only when a customer clicks on their search ad.
Blue Nile, for example, can get a prospect for a $5,000 diamond ring by paying
Yahoo $1.12 per click. Search-based, targeted advertising helped make e-tailing
a much less capital-intensive, risky business. Perfect for the small guy.

The Web's favorable economics don't stop there. Online merchants can
offer a far broader array of merchandise than specialty brick-and-mortar
retailers, since they don't have to keep the products on store shelves.

It's too early to say how all of this will play out, but it may well
produce a bifurcation of American retailing. At one end will be huge commodity
sellers able to compete in an online world dominated by price comparison sites
and consumers who do careful research and shop on price. Look for search engines
and sites such as Shopping.com and Shopzilla to do to markets such as cameras
and plasma TVs what Dell did to computers: Make it impossible for any but the
most efficient retailers, online or off, to survive. At the other end, smaller
players from gift site RedEnvelope to Stein's pet stores will fight to
differentiate themselves. When Alison L. May became RedEnvelope's CEO in 2002,
she refocused the strategy on selling goods designed in-house. "The way you
protect brands is the same as at the mall," she says. "You sell things
people can't get everywhere else."

The Internet promised an era of more choice, better prices, and greater
customer satisfaction. And as the Web reaches adolescence, that's what's
arrived.

By Timothy J. Mullaney in New York and Robert D. Hof in San Mateo,
Calif., with bureau reports in Business Week. Copyright 2005 by the
McGraw-Hill Companies, inc

The E-tail Effect

How e-commerce is shaking up the retail landscape:

The Big Guns Arrive After early struggles, online sales at brick—and—mortar
giants such as WalMart, Sears, and Gap are soaring. These chains are also using
the Web to test new products and move into new markets.

Niches Go National More and more niche players are succeeding by offering
variety rivals can't match. Luggage seller eBags, for example, is able to
stock 12,000 styles, compared with 250 in a typical store.

Search Lends A Hand Using Google and similar Web sites, consumers can search
far and wide for specialized products-say, stainless-steel farm sinks. That's
creating markets for lesser known brands and new merchants.

More Pricing Pressures Shoppers are increasingly using price-comparison sites
such as Shopping.com and Shopzilla. The result: Ever more cutthroat competition
for brick-and-mortar and online stores alike.