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 Amazon.com 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.

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 Gloss.com for an estimated $5 million or less in April, 2000.

It relaunched the Gloss.com 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

online."

Even at bargain-basement prices, these resurrected sites are no slam-dunk

moneymakers. Because Lauder plans no dedicated marketing for Gloss.com 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 Amazon.com to take over operation of the Toysrus.com 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

stores."

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