DAMNED IF YOU DON’T

Byline: Vicki M. Young

Damn the profitability. For retailers on the Internet, it’s full speed ahead. Regardless of costs, of sales, of return, or lack thereof, retailers have no choice. Steven A. Richter, retail analyst at Tucker Anthony, concluded, “For retailers, being on the Internet is not viewed as a tradeoff. It’s a question of how one does it, not whether one should do it. The reality is that it’s critical to have the site to be able to touch the consumer at multiple points. The consumers are demanding it. They want to do things their way.”
Especially for companies heavily involved in the buying and selling of apparel, there may not be an immediate benefit to a dedicated Web site, but there is a definite penalty to the absence of one. “An Internet presence,” said Joseph Teklits, analyst at Ferris, Baker Watts, “is a requirement more than a benefit. A lot of investors are less interested in a company if there is no Internet strategy. But that doesn’t mean that there’s a premium for those that do have a Web presence.”
Veronique Bardach, chief executive officer of Inshop.com, an “infomediary” firm that helps retailers drive traffic to their local stores, noted that in her experience, traditional retailers who have made the jump online have done so as a response to competitive pressures: “It is rare that a company can generate value in the short term from such a defensive action. Even if a retailer is successful online, the only value they can anticipate is goodwill from Wall Street, which is not quantifiable. Only once they’re online do these retailers begin to contemplate a definitive plan that could in the long run provide shareholder value.”
Jeffrey Klinefelter, retail analyst at U.S. Bancorp Piper Jaffray, pointed out, “Today’s valuation in the market doesn’t give companies credit for being on the Internet. It’s a defense mechanism for them. If they don’t do it, the valuation of their companies could come down.”
Klinefelter observed that it takes longer for retailers to get credit for their migration online. “The revenue base is so large that it takes more time to grow the operation. Catalog companies, because of their fulfillment and call center infrastructure that’s already in place, are given credit for their ability to migrate.”
Todd Slater, retail and apparel analyst at Lazard Freres, noted, “It’s critical for retailers to have an Internet presence. They will lose 10 percent of the market by avoiding it.”
He added, “For manufacturers, it hasn’t yet been as critical. But if vendors could do it all over again, they would go direct to the consumer and not through the retail channel. Direct to consumers has the highest return [relative] to retail, and gives firms greater ability to control their destiny.”
Henry Nasella, chairman and co-founder of Online Retail Partners, which provides technological and business guidance in the e-commerce arena, observed, “More vendors are moving online as a way to maintain loyalty to the brand.” He’s predicting that manufacturers will use the Web as a way to meet customers’ replenishment needs for core basics, or perhaps items not available from what’s sold at retail.
Erwin Isman, managing director at Marketing Management Group, noted, “The Internet may be self-defeating for the manufacturer. It’s going to drive down the prices he can charge because all the information will be available to the retailer.”
Analysts and consultants agreed that it’s tough to get a fix on who the market share and profit winners on the Web will be.
“We can’t figure out if you can ever make money selling to the consumer on the Web even though some companies say they are profitable,” said Emanuel Weintraub, president of Emanuel Weintraub Associates Inc., a management consulting firm.
Walter Loeb, a retail analyst at Loeb Associates Inc., observed, “The Internet is a very difficult area to assess right now. I think that the click-and-mortar companies are likely to succeed, and the plain Internet companies — where the customer doesn’t have any place to return or exchange merchandise — are not likely to be as successful.
Click-and-mortars that analysts say have top-notch sites are J.C. Penney, Lands’ End and Gap.
“J.C. Penney, despite its present problems on the selling floor, has one of the most outstanding sites,” said Loeb, noting that it’s also an easily recognizable site because of the existing customer base generated from the J.C. Penney catalog division. More importantly, Loeb said, “J.C. Penney knows how to present the merchandise on the Internet.”
Jeffrey Edelman agreed. The PaineWebber retail analyst said in a research report that the company’s online environment is working because “Penney is able to leverage its name, brands, a 52 million customer base, a 1,100 store base, and the merchandising and infrastructure of its $4 billion catalog business.”
Lands’ End was cited by Weintraub as having “clear, identifiable merchandise and an excellent presentation” online. “Gap,” he observed, “is focused on just a few items, but its ability to cross-promote the brand is a major factor in its success.”
Edelman also said in a research report that Federated Department Stores could be a winner in e-commerce. “We believe it has been clearly documented that the combination of bricks and mortar and an online presence has the potential to be profitable. Size can make the difference, and Federated not only has that on its side, but also powerful brands, significant customer base, a high average online transaction and more than adequate fulfillment capacity to make this a profitable venture.”
Ed Larson, chief financial officer at Talbots, said at a company presentation hosted by Prudential Securities that the company’s Web presence is a “cost-effective way to build new customers” in the specialty chain’s kids’ and women’s businesses.
“In many cases, customers go to the site to preview the item and then visit our stores. The demand has surpassed our expectations. Over 25 percent of the customers to our site are new, and over 50 of our loyal customers use all three channels,” he said.
In the meantime, the players with the most likely chance of success are still the click-and-mortar retailers, Loeb said. He added, “You have to put things in perspective. J.C. Penney did a $102 million Internet business last year, and $15 million the year before. They’re going to do maybe $170 million this year. But if you take into context what they do, their catalog business is $4 billion and their total retail sales are $19 billion. The Internet business is infinitesimal. Most figures on the Internet are infinitesimal right now. They may be the size of another store, but they’re not the size of another company.”