The Year of the e-Piggyback

Just before Halloween, KB Toys kicked off the fourth quarter in an
appropriately spooky way: It raised eToys from the dead. After KB bought most of
the bankrupt dot-com’s assets for $15 million last spring, the 1,300-store
chain relaunched the site in October.

By offering such popular eToys features as a gift registry and sophisticated
search engine, KB hopes to attract previous eToys customers who liked the Web
site but didn’t know it went bust. What’s more, it got a state-of-the-art
warehouse and the right to send promotional e-mail to 3 million former eToys
customers. At the same time, KB is keeping its own Web site so it can hang on to
its original customers. Now, KB expects to double its online sales this year, to
$80 million. “EToys was a first-class operation,” says KB’s CEO
Michael Glazer. “We expect a lot of its customers to show up again.”

This Christmas, traditional retailers are taking the lead online, but not all
by themselves. They’re riding on the backs of dot-coms–dead and alive.
Blending in assets they bought for peanuts from failed e-tailers is only part of
it. Many others are forming alliances with surviving dot-coms that would have
been unthinkable a year ago. After losing $29 million a year online, Borders
Group linked up with rival to handle Borders’ online sales through
a co-branded site–which turned profitable almost instantly after it was
launched in August. Other retailers such as Kmart have outsourced much of their
online inventory and customer service operations to Web fulfillment companies.

Tap Clicks for a Holiday Fix
season, traditional retailers are beefing up their e-commerce efforts by
allying with surviving e-tailers, hiring online fulfillment specialists,
and even bringing dead dot-coms back to life
Borders hired Amazon to operate a
revamped, co-branded Web site, as well as handle shipping and
customer service.
Selling out to the competition? Maybe, but Borders was losing $29 million
a year online before. Now its site, opened in August, is profitable.
Sporting Goods
In April, the 125-store Eastern
retail chain outsourced its site to Web company
Global Sports, which manages the site, inventory, and customer service.
Even though Global Sports now gets most of the site’s revenues, Dick’s’
remaining share is pure profit because it was able to cut its Net staff
from 60 to one. Now, it has shifted the money toward opening 20 new stores
while maintaining an online presence.
In October, the owner of the
1,300-store KB Toys chain resurrected eToys’ Web site after buying most
of the bankrupt dot-com’s assets for $15 million.
Having lost $100 million on its own site while netting only 1 million
customers, KB spent far less to grab a first-class warehouse, a snazzy Web
site, and the right to e-mail eToys’ 3 million previous customers. Now
it hopes to double its online sales this year, to $80 million.
Company reports, BusinessWeek

It all adds up to a massive rethinking by traditional retailers of their role
online. Following the dot-com crash, many have chucked the idea of spending
hundreds of millions to catch up with heavily funded but often doomed e-tailers.
Instead, smart bricks-and-mortar retailers are focusing on what they do best–merchandising,
marketing, and operating stores–while handing off much of the technical and
logistical tasks of the online world to those with the know-how. And they’re
treating their Web sites not as a fast route to initial public offering riches,
but as another sales channel–one that, for the average retailer, generates
only 2% or less of overall sales. “Online is important, but it’s not core
to our growth,” says Bob Edington, director of online operations at
Borders. Indeed, retailers are using dot-coms past and present only partly to
win new customers. They also hope to use Web sites to serve existing customers
better and save money. After all, there won’t be much growth online anyway
this holiday season, thanks to the sagging economy.

Jupiter Media Metrix expects online holiday sales to rise only 11%, to $11.9
billion. That’s why many retailers won’t be doing much marketing of their
online sites beyond including Web addresses in ads. “We used to hear
retailers yelling about when they were going to take their Web sites
public,” says Jupiter analyst Ken Cassar. “Now it’s all about
minimizing risk and keeping a low profile online.”

Too low a profile could backfire, though, especially when consumer behavior
is so volatile. In a recent poll of 3,000 consumers, market researcher Odyssey
found that 54% of Web shoppers plan to buy online this season, down from 71%
last year. “The Web is just as vulnerable to changes in the macro economy
as the rest of retailing is,” says Sean Baenen, Odyssey’s managing
director. “Online retailers have to make sure they’re getting the message
out that people can still find good deals on the Web.”

One way they’re doing that is by using the Web sites of upstarts to provide
a better shopping environment. That’s what Estee Lauder did after it bought
cosmetics e-tailer for an estimated $5 million or less in April, 2000.
It relaunched the site in October to market its own brands–plus
those of Chanel and Clarins. The unusual collaboration among rivals, says Group
President William Lauder, more closely mimics the choice a woman would find in a
department store. Lauder’s research found that 70% of women prefer to shop
where there’s a wide selection because, on average, they use seven brands of
cosmetics. Says Lauder: “We danced beside our competitors for a long time
anyway, so it was mutually beneficial to give our customers similar options

Even at bargain-basement prices, these resurrected sites are no slam-dunk
moneymakers. Because Lauder plans no dedicated marketing for this
season, a Banc of America Securities analyst says there’s no evidence that it
will attract enough buyers to pay for its upkeep. And the shoestring marketing
means Lauder may make it tough to communicate the advantages of shopping for
cosmetics online.

Such uncertainties are the reason many retailers are taking yet another tack.
They’re leaving Web work to the experts by outsourcing various operations to
surviving dot-coms and fulfillment outfits. Toys ‘R’ Us, for instance,
signed a deal with to take over operation of the site, as
well as shipping of everything from Razor scooters to Furbies. One benefit: The
highly publicized late shipments that plagued Toys ‘R’ Us online in 1999
have vanished. Its Web sales are now expected to shoot from $180 million in 2000
to $300 million this year, says investment bank Gerard Klauer Mattison.

Retailers get other benefits from the dot-coms as well. For all their faults,
e-tailers have spent years and millions of dollars perfecting features that
retailers now admit are valuable to consumers.

Some retailers find the advantages of outsourcing so compelling they’re
giving up a bigger cut in return for washing their hands of the whole online
rigmarole. In April, Dick’s Sporting Goods Inc. signed on with Global Sports,
which not only handles site design, fulfillment, and customer service, but also
owns and manages all the inventory. On average, Global Sports takes 90% or more
of its clients’ online revenues, but what Dick’s nets is almost pure profit.
“We make no capital investment, and we went from having 60 full-time
Internet people to one,” says Dick’s Chief Operating Officer Bill
Colombo. “We can take that capital and invest it in opening new

Striking the right balance of frugality and visibility online won’t be
easy. The problem is figuring out how much to spend when there’s no way to
predict what’s really going to happen. The Web, after all, has never lived
through a war, bioterrorism, or a recession, and now they’re all happening at
once. One thing’s for sure: Retailers will need as much help as they can get–even
from the dot-coms that once sought to put them out of business.

By Arlene Weintraub; Contributing: Heather Green in New York,
Robert D Hof in
San Mateo, and Faith Keenan in Pittsfield in BusinessWeek. Copyright 2001 by The McGraw-Hill Companies, Inc

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