A SAFETY NET FOR TRADITIONAL STORES?

Byline: Ira P. Schneiderman

NEW YORK — Say goodbye to most of the pure-play Internet retailers — they may soon be as obsolete as 5-and-10-cent stores.
Sound radical? It’s one of several projections made by John Konarski, senior vice president of the International Council of Shopping Centers, during a roundtable called “Online Retail: An Internet Hype,” held recently by the New York University Real Estate Institute.
The reason: A proliferation of strategic alliances that is expected to spark a rapid convergence of Internet service providers with brick-and-mortar retailers, even as those traditional stores increasingly strike deals themselves to acquire dot-com companies.
“Despite all the changes on the Internet scene, one thing we can say for certain,” Konarski said, “is that we will see a continuing convergence this year between retail channels such as America Online and Wal-Mart, Yahoo and Kmart, and Microsoft and Radio Shack.”
Konarski predicted, “Internet pure plays and their land-based cousins will gradually merge together and become one.”
What the pure plays most need — brand recognition, merchandising and logistical know-how — can be provided by traditional players, while those merchants need the technological expertise of the dot-coms to execute effectively online.
Mall-based retailers, particularly apparel merchants, are well positioned to survive the growing competition posed by cyberstores, Konarski contended. “Even if the Internet sales estimate of $144 billion for 2003 is reached,” he said, “the net loss to land-based retail channels would not constitute a lethal blow to most real estate developers.”
However, Konarski admitted, “This conclusion only holds if the growth rate of online sales begins to level out within the next few years, and synchronizes more closely with that of all sales.”
Among the ways in which Konarski sees the Internet affecting business: l Impact on malls: Internet performance will begin to influence the structure of leases, as certain types of stores continue to see a significant slice of their sales exit the malls. “This is likely to be reflected in the space allocation at some shopping centers,” he said.
REIT stock performance, which he contended has been depressed because so much of investors’ excitement has focused on the Net. However, Konarski advised, “The hard numbers on Internet retailing do not justify the gloom hanging over retail real estate stocks.”
Sources of financing for e-commerce companies will keep diminishing as investors grow more skittish over the volatile performance of Internet stocks.
In making his point that the Net need not provoke excessive gloom among traditional retailers, Konarski cited estimates that put U.S. cybernauts at just under 70 million people, a population projected to increase to about 100 million by 2004.
Less important than the absolute number of users, Konarski said, is the projected growth rate in people coming online, which he said is on a downward path. “This is because most of the users of the Internet are relatively well educated and high-income individuals,” he said. “That market is now virtually saturated, and penetrating the remainder of the U.S. population is [going to be] much tougher.”
In part for that reason, Konarski told the group, “The Internet should not be seen as the grand terminator.”
Even e-tailers in the best-selling e-commerce categories — books, music and other media-based merchandise — are being hit harder by brick-and-mortar competitors with stores off the mall, in power shopping centers and downtown districts than by online merchants, Konarski contended.
Not surprisingly, the first monthly e-commerce report by National Retail Federation and Forrester Research , released last Wednesday, found that the growth rate of sales of books and recorded music online slowed from year-ago levels, while gains in categories with smaller online volumes, such as footwear, and toys and video games, accelerated.
“Rather than driving a final stake through the heart of these retailers, the Internet is offering them a lifeline to compete,” Konarski said.
“While some [traditional] retailers will indeed fail to develop viable strategies,” he concluded, “many others will emerge stronger and more viable after their Internet-driven catharsis.”

Virtual Snapshot: Online Retail Sales

’99 Consumer Sales Estimates
Jupiter Communications: $14.9 billion
eMarketer: $18.6 billion
Forrester Research: $20.3 billion
International Data Corp.: $24.2 billion
Yankee Group: $24.2 billion
Ernst & Young: $27.5 billion
Average estimate: $21.6 billion

’03 Consumer Sales Projections
International Data Corp.: $75 billion
Jupiter Communications: $78 billion eMarketer: $80.5 billion
Yankee Group: $125.6 billion
Ernst & Young: $132 billion
Forrester Research: $143.8 billion
Average estimate: $105.8 billion

’99 Sales as % of Total Retail (Est.)
eMarketer: 0.7%
Forrester Research: 0.7%
Jupiter Communications: 0.8%

’03 Sales as % of Total Retail (Est.)
eMarketer: 2.2%
Jupiter Communications: 2.7%
Forrester Research: 4.7%

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