INTERNET OUTLOOK: PARTLY SUNNY
Byline: Valerie Seckler
NEW YORK — Major discounters, which have mounted Web sites in the past year, can capitalize on electronic commerce to spark sales of the basic items that drive their apparel businesses, but they better keep fashion goods off the Net.
That was the outlook of executives who surveyed retailing’s future on the Internet, during a recent conference held here by Goldman, Sachs & Co.
“Basic apparel, particularly replenishable merchandise, is better suited to selling over the Internet than fashion goods, where touch and fit are so important,” said Richard Baum, senior retailing analyst at Goldman.
Jeans, T-shirts, bras, legwear, underwear and men’s dress shirts are the classifications most easily adapted to electronic commerce, he noted.
Items listed in bridal registries also have performed well after going on line, according to Goldman, Sachs research.
Experts estimate retail sales on the Internet will peak at around 6 percent of the industry’s volume, said George Strachan, another retail analyst at Goldman, during the conference, which was held two weeks ago. That would put the sector’s market share on a par with the direct mail business. The Net has so far captured just 0.5 percent of the market, according to data from Goldman, Sachs.
“Goods that sell the best electronically are those that compel shoppers to seek out information about them, like video cassettes, compact discs and computers,” Baum said, because of the Internet’s capacity for targeting consumers.
“Without many major brands to rely on, the greatest opportunity for discounters on the Internet may be to sell private label basics and children’s apparel,” advised Strachan.
With their assortments of general merchandise, Strachan added, discounters are also positioned to compete with category killers such as Sports Authority, Staples and Barnes & Noble by electronically merchandising books, sporting goods and office supplies.
In contrast, observed Baum, “Fashion apparel and jewelry are the least well-suited products for Internet retailing. This merchandise is mostly about image, in the consumer’s mind.”
Roughly 70 percent of the Net’s surfers are male, further limiting the near-term electronic sales potential of women’s fashion, according to Strachan.
Not surprisingly, Wal-Mart has by far the most extensive Web site of the big three discounters and, unlike Kmart and Target, is selling merchandise on line. “The company’s approach to the Internet has been to create a virtual store,” said Strachan. “Wal-Mart displays about 500,000 items for on-line purchase, including 300,000 books.”
Merchandise is available for electronic purchasing from Wal-Mart in 31 categories, including apparel, automotive, computers, groceries, hardware, records and sporting goods.
Goldman Sachs’ research recently found that on-line prices for 30 items from Wal-Mart cost just 1 percent more than the same goods when they were purchased in a Wal-Mart store in Tampa. There is also a separate shipping cost.
Nonetheless, the average dollar-transaction on Wal-Mart’s Web page is triple the amount of its typical in-store transaction, related Phil Martz, director of on-line business at Wal-Mart Stores Inc. “Wal-Mart’s Internet customers have an average household income of $57,000 annually,” Martz said, making them more affluent than the company’s typical discount customer.
The size of the average on-line transaction has also been inflated by the shipping costs associated with electronic commerce.
As electronic shoppers fill their virtual baskets, Wal-Mart provides a running total of the cost of the purchases they’re planning to make.
While breadth of assortment is a competitive advantage for actual discount stores, Strachan pointed out that this edge is neutralized on line. “The physical convenience of one-stop shopping is all but eliminated in cyberspace, where shoppers can sample the goods of Macy’s, OfficeMax and Barnes & Noble with just a few keystrokes,” he said.
“To offset the loss of this advantage,” Strachan added, “discounters will have to create sites and assortments compelling enough in and of themselves to hold on-line shoppers’ interest and attract their dollars.”
Among the features Wal-Mart has added since launching its Web site a year ago is an item highlighted in the upper-left corner of each electronic page under the heading of “Click Here.” These items reflect Wal-Mart’s effort to stimulate impulse purchases, similar to point-of-sale display or special signage. The image of the merchandise — like Fleetwood Mac’s “The Dance” CD, priced at $13.95 — flashes on and off, to draw attention.
On the far-right side of each Wal-Mart Web page, there are five products called “Hot Items” from the category featured on that page.
“Although management remains somewhat skeptical about the near-term potential of Internet shopping, Wal-Mart’s intention is clearly to remain at the forefront of Web development,” Strachan said.
The Web site developed by Target Stores, said Strachan, is “attractive and visually sophisticated,” but unlike Wal-Mart, Target does not sell on line.
“Target has perhaps the most well-developed Internet-based public relations effort among discounters,” Strachan offered. The company’s home page tells browsers about its community projects, like a company-backed program to restore the Washington Monument.
Target’s site also serves up information about bridal and baby registries and provides kids with a novelty adventure game called “Wishbone,” which features a puppy icon.
“In Target management’s view,” said Strachan, “demand for Internet shopping remains insufficient to justify interactive merchandising.”
Like Target, Kmart has a well-developed Web site without offering on-line shopping. However, Strachan said, “We expect Kmart to take the plunge into cyber-commerce in the near future.”
According to Goldman’s research, Kmart is likely to focus on Internet-friendly items like consumer electronics, rather than establishing a full-blown “virtual store” a la Wal-Mart. Goldman looks for Kmart to use the Net to leverage proprietary brands such as Martha Stewart home merchandise.
Despite its lack of on-line merchandising, the Kmart Web site won high marks from Strachan for ease of use and interesting features. Limited motion graphics enhance the site’s environment.
Besides standard fare, like store locations, the Kmart site features the firm’s weekly sales circular; a celebrity corner, which recently spotlighted Kathy Ireland, namesake of its proprietary junior apparel, and a “window-shop” function, enabling viewers to take a cursory look at goods in each department of a Kmart store.
One of the greatest constraints on Internet commerce is that less than 15 percent of the U.S. population is on line, said Matthew J. Fassler, another Goldman, Sachs analyst. “We expect this to change quickly,” he added. “The personal computer’s penetration of households is accelerating for the first time in a few years. Over 40 percent of U.S. households have PCs.”
By the end of the year, Goldman is projecting 43 million Americans and 69 million people worldwide will be using the Net. By 2000, there should 81 million surfers in the U.S. and 163 million globally.
Store Categories Ranked By Internet Adaptability
Rank Category Score
1. computer hardware 41
2. PC software 39
3. books 35
4. music 34
5. office products 33
6. home improvement 31
8. dry groceries 30
9. discount stores 29
sporting goods 29
prescription drugs 29
10. home furnishings 28
11. department stores 27
12. off-price apparel 26
auto parts 26
13. perishable food 21
Source: Goldman, Sachs & Co.
Key to Scores
33-49: High potential for success
29-32: Moderate potential for success
Under 29: Low potential for success