Closed, Gone To The Net
The poster-boy companies of the Web--Dell, Cisco, and Charles Schwab--are combining the best of cyberspace and the physical world in their rush to take full advantage of dot.com. But in an Internet economy that's racing forward at light speed, moving partway onto the Web isn't fast enough for some companies.
In the past year, a growing number of venerable companies--from 110-year-old Provident American Life & Health Insurance Co. in the U.S. to 103-year-old Yoneda Silk Parasol in Japan--have been shedding their brick-and-mortar operations and remaking themselves as cyber-only businesses. About 5% of the companies now scrambling onto the Web are taking this radical leap, and more are expected to follow as E-commerce explodes, says William Seibel, CEO of Boston-based Zefer Consulting.
Why ditch the bricks for bits? Survival, for starters. Struggling companies may see the Net as a way to start anew or a chance to one-up rivals. Reinventing oneself as a Web startup also can help raise fast capital and defer doom long enough to test out a new business plan. And companies that opt for total Net makeovers can focus limited resources: Out go costly overhead and branch offices, in come a tech-savvy workforce and an entrepreneurial culture. "We call it the Silicon Valley implant," says Chris Lockhed, a strategist for Web consulting firm Scient Corp.
MIDDLEMAN'S HEAVEN. The strategy, however, can be ultra-risky. Cybershoppers are just a fraction of total consumers, and only 10% of online households have made a Net purchase. "If you're going totally online, you're cutting off 90%-plus of the potential market out there," says analyst James Nail of Forrester Research Inc. Instead, the most successful E-commerce companies are keeping one foot rooted in the real world, using their Net operations to boost customer traffic in their physical stores or give tired brands a shot of cybercachet. Sears, Roebuck & Co., for example, has found that folks who buy tools through its Web site end up spending 27% more in its retail stores.
What kinds of companies are making the leap with both feet? Those most vulnerable to being squeezed out by the Net--traditional middlemen such as travel and insurance agencies, which can broker information more widely, quickly, and cheaply over the Net. Other candidates sell discount surplus or seasonal goods and can use the Web to do away with costly and inefficient earthly stores. And specialty shops with rare or hard-to-find goods discover that they can suddenly reach millions on the cheap. Says Michael Ashker, CEO of HealthAxis.com, an online insurance agency once known as Provident American: "If you have competitive pressures and limited resources, there's no choice between offline and online. For us, it came down to choosing between the past and the future." Here's a sampling of those betting on a digital future:
For most of his 20-year career, Larry Latham would rent out hotel ballrooms across the country for days at a time to help the U.S. government auction off everything from repossessed single-family homes to radio frequencies for the Federal Communications Commission. But last summer, Latham, chief executive of Scottsdale (Ariz.)-based Larry Latham Auctioneers Inc., saw the writing on the wall with the emergence of online auctioneer eBay Inc. and house-listing sites such as realtor.com.
So in December, Latham shuttered his company's 14 branch offices, hired a staff of 22 techies, hammered out a new business plan, and renamed the company homebid.com. His goal: to transform his company into the Net's first full-service home auction, purchase, and relocation-services site. On June 14, homebid.com will begin auctioning off homes over the Web. Its first auction will put several hundred Arizona homes on the block. By fall, Latham plans to add properties in 13 other states and eventually hold multiple auctions across the country each week.
ICE STORM. Latham, 46, is no stranger to risk. In the early 1980s, he was the first auctioneer to bring regional-property buyers and mortgage lenders together in a single place. In the early 1990s, he was the first to use satellite linkups to expand the reach of those auctions. And last January, despite his booming offline business, with 1998 sales of more than $600 million, Latham decided to chuck the ballrooms and go totally into cyberspace. His reasoning: Web auctions were taking hold--Forrester Research figures that online auctioneers will sell $19 billion worth of goods by 2003, up from $3.3 billion this year. For Latham, "it wasn't a question of whether to go digital, but how fast. For us, the Net was a natural extension of the business."
Latham has reason to be optimistic about his decision. In a test of the site in Connecticut last January, he sold 136 of 147 homes over the Web at prices that averaged 97% of list. Some 400 brokers participated--four times the number Latham had expected. And it all happened during a freak weekend ice storm that would have chilled any offline auction. The best part: That auction cost about 30% less to conduct--no hotel rental bills or pay for extra staffers. Says Tobey Corey, CEO of US-Web/CKS, a San Jose (Calif.) Web consulting firm: "In some cases, the opportunity is so extraordinary online that keeping one foot off the Web makes no sense any longer, even if your physical business was making a profit." It's a bricks-and-mortar business that, thanks to the Net, is going, going, gone.
In 1991, when former management consultant Kenneth Seiff opened his golf apparel business in an old warehouse in the heart of midtown Manhattan, he was sure he could make a thriving business out of selling specialty golf wear to department stores such as Macy's. He was right--for a while. But by 1997, Seiff found he was being elbowed out of the way by better-capitalized brands such as Tommy Hilfiger and Polo Ralph Lauren. "We couldn't compete with their massive marketing budgets and just kept getting shoved to the back of the big stores," Seiff says.
Last summer, Seiff, 34, set out to end-run the sales and distribution hierarchy. He sold off the inventory and assets of his old company, Pivot Rules, and reopened as Bluefly.com in September--the Net's first off-price designer outlet. Now, Seiff hawks first-run, end-of-season, and excess designer clothing from such elite design houses as Donna Karan and BCBG at discounts up to 75%.
How? With Bluefly, Seiff can use the Net to reach a broader audience without costly retail outlets. And he can luRe shoppers in fresh ways: He now dispenses fashion tips andoffers personalized "shopping carts" that dish up suggestions based on a buyer's size, color, and designer preferences. Seiff plans to add gifts and home accessories to Bluefly's array of overstocks. The real plus, he says, is that the Web lets him measure supply and demand right up to the minute. That allows him to move merchandise faster, price items more flexibly, and target promotions.
For a while, Seiff planned to keep the golf-apparel business while dabbling online. But he soon discovered that going digital took more time, capital, and brainpower than he could give to both efforts simultaneously. "So we chose digital," Seiff says. "In cyberspace, we saw a once-in-a-lifetime chance to become a dominant player."
So far, so good. The market value of his business has zoomed from around $5 million the day before the company announced it was moving to the Web to $52 million today. First-quarter profits were $457,000, up 43% over the last quarter of 1998. In April alone, profits amounted to $325,000. And traffic to the site is up 90% over the fourth quarter. Now, designers are starting to knock--no, click--on Bluefly's door.
Back in the 1970s, Provident American Chief Executive Al Clemens put his medical insurer on the map. By using popular television celebrities such as Michael Landon and Burl Ives to pitch policies directly to consumers, he bypassed insurance agents--a revolutionary idea at the time. Some two decades later, Clemens, 61, is at it again. Intrigued by the promise of E-commerce, he helped force the Hartford company last spring to set up a small, experimental online subsidiary called HealthAxis.com.
The move paid off. Just months later, HealthAxis.com Chief Executive Ashker reported back to Clemens with a new business plan that would transform the company from a one-product underwriter into the Web's first full-service online insurance agency. Ashker nailed an exclusive, three-year online distribution deal with America Online Inc.--enough to convince Clemens and the Provident board that it was time to move the rest of the company into cyberspace. On Dec. 31, 1998, after nabbing additional marketing deals with Lycos Inc. and other Internet portals, Provident American sold off its traditional underwriting business and severed its relationships with some 20,000 agents. Reborn as HealthAxis.com in Norristown, Pa., the new company--with Clemens as its chairman--will sell policies issued by a variety of major carriers, plus information about insurance and rate comparisons across the industry.
"MUDDLING ALONG." Like many other companies who give up conventional retail operations to venture into cyberspace, HealthAxis.com was a case of either jumping online or getting shoved aside. "Provident had been muddling along as a marginal player, overshadowed by such major players as Aetna and Prudential," Ashker says. "Keeping one foot on the ground was never an option. We had the right product--information. And unlike books and records, we didn't have packaging and shipping costs. Instead, we had costly middlemen in an industry where distribution is inefficient."
Cutting out the middleman, Ashker says, will allow the company to market insurance at prices 15% lower than it had been selling offline. And being the first online insurance agency gives HealthAxis.com a shot at dominating its industry, at least in cyberspace. "There was no first-mover advantage in 1999 in writing insurance, but there is one in distributing it over the Net," Ashker says.
Wall Street is optimistic. As Provident American, the company's stock had an all-time high of $14 per share. As HealthAxis.com, it now trades at around $27. Not bad for a small-fry insurer that has found its own best policy is a future strictly on the Web.