A Hard Sell Online? Guess Again

Clothes, furniture, even food are starting to move

It used to be that when Katy Bremer wanted new furniture, her first thought was to jump in the car. And she would have gotten little argument from even the most ardent E-commerce fans on Wall Street. Some industries were made for the Internet and some weren't--or so the early wisdom went. Furniture? You can't try out a chair online. So why did the full-time mother from Villa Park, Calif., just buy a dining room set from FurnitureFind.com? "I was comfortable with the brand name and the price, and you get a lot of confidence in them from a customer service standpoint," Bremer says. Besides, she adds with a laugh, "you could just see the [store] salesmen grimace when I told them the price I got online."

Customers such as Bremer are helping chip away at one of the last blockades to E-commerce: the idea that some types of goods just can't be sold online. As recently as two years ago, even bullish analysts had a list of industries they thought would move to the Net slowly--or not at all. Now those industries are making a rush for dot.com gold.

ONETIME LAGGARDS. Today, new Web stores are far more likely to enter onetime laggard categories such as clothing and art--and less likely to sell Web staples such as CDs and books. More than 11% of online stores open less than a year sell mostly apparel. And new E-tailers are four times more likely to sell toys and almost twice as likely to offer art as stores that opened 12 months to 24 months ago, says Harry Wolhandler, vice-president for market research at ActivMedia Inc. in Peterborough, N.H.

Even perishable groceries, furniture, and car parts, named in August, 1997, as three of the top "Internet Challenges" in an influential 148-page report by Goldman, Sachs & Co., are heating up. Internet investors at CMGI Inc. are backing CarParts.com and Furniture.com, while Jupiter Communications Inc. thinks online grocers will claim $3.5 billion in sales by 2002--only $200 million less than projected online book sales.

What's changed? Not the products. Keeping food fresh while it's being delivered to doorsteps around the world is still tricky, tailored fashions can't be slipped on in cyberspace, and art, well, does anything look truly beautiful on a computer monitor? What has changed is the Net's buying audience and new technologies and services that are helping entrepreneurs to overcome customer worries about not being able to squeeze the fruit, feel the fabric, or sit on the couch.

Venture capitalists are driving the trend, too. They're funding the so-called laggards and putting more money into each deal. One reason: With lots of competition already in once easy-to-attack markets--such as books and stock trading--venture capitalists are looking for novel ideas. And larger financings give entrepreneurs the war chests they need to attack touch-and-feel issues. Andrew Busey, CEO of the new furniture site Living.com Inc., spent some of his $6.5 million in venture money on imaging systems so that customers could see high-resolution pictures of fabrics they can't touch. Now he's about to close on $30 million more in venture capital.

One big boost to the E-tailing latecomers is the broadening Web audience. There are far more women online today, helping categories such as furniture and groceries where women make most of the buying decisions. Women now account for 46% of North American Internet users and 38% of online purchasers, up from 29% last year, says Jerome Samson, director of technology and business strategies at Nielsen Media Research. "If you look back a couple of years, what was available was hardware and software and the only consumers were white, male, and affluent," Samson says.

The wider audience probably still wouldn't bite, though, unless the new sites erased the earlier fears. Consider Guild.com Inc., a high-end crafts store based in Madison, Wis., that made its debut on the Web in March. Guild.com knew it had to convince consumers that the ceramics, jewelry, and other crafts that it offered were a good value. So the store appointed the former head of the Smithsonian Institution's Renwick Gallery to chair the panel that screens pieces for the Web site. "Everything on our site has been juried by someone in the know," says Marketing Vice-President John Anderson.

PERSONAL MODEL. Clothiers are taking a similar problem-solving approach. Catalog merchant Lands' End Inc. has developed a "swimsuit finder" feature to mollify women who don't want to buy beach gear they can't try on. It allows consumers to pick their body type from an array of choices and recommends suits likely to fit. A similar feature called the "personal model" helps customers size up other clothes based on their general measurements, say, how broad your shoulders are. The result: Lands' End raked in $61 million in online sales in its 1999 fiscal year ended in January, up from $18 million the year before. And the growth is continuing: Its online sales jumped 150% in the first quarter.

Web grocers have had to make especially big accommodations. Everyone's goal is to find a way to distribute food cheaply enough to hold down or eliminate delivery charges and still make a profit. None of the Web grocers has quite figured it out yet. For example, Hannaford's HomeRuns Inc., the Somerville (Mass.)-based grocer, needs 8,000 orders a week to break even. In a good week recently, it got 2,600, says HomeRuns.com President Tom Furber. Some grocers already have been forced to change their game plans. Skokie (Ill.)-based Peapod Inc. has stopped delivering groceries it used to purchase at regular supermarkets in favor of building their own warehouses and buying wholesale.

Streamline.com Inc. is losing money, too, but it's confident it now has a winning formula. Suburban Boston-based Streamline's strategy is to convince customers that they can get fresh food delivered on a convenient schedule by letting Streamline install a refrigerator in the consumer's garage. Streamline drivers use a keypad lock to make deliveries when the consumer isn't home. Still, Streamline's stock has dropped after its $10 a share IPO on June 17, to about $8 today.

The problem is controlling Streamline's warehouse and delivery costs, which chewed up more than 100% of the company's 1997 sales. Skeptics thought online grocers would never get order-picking and delivery cheap enough to allow them to make money. Still, Streamline.com's case suggests that fast sales growth could one day outstrip expenses. Sales have jumped from $1.8 million in 1997 to $2.5 million in just the first quarter of this year. That helped Streamline lower its warehousing and delivery costs to 47% of sales. Similarly, Peapod claims that it will be profitable in its key Chicago market by yearend because it has enough customers there to cover warehouse costs. "We've had business skepticism, but against a backdrop of consumer acceptance," says Streamline CEO Timothy A. DeMello.

Hoping they have addressed their weak spots, the new online stores are selling the idea that their non-Web rivals are more vulnerable than analysts once thought. CEO Andrew L. Brooks of Worcester (Mass.)-based Furniture.com says analysts underestimated online furniture selling partly because they didn't understand how inconvenient regular stores are. And Furber says the meat HomeRuns.com delivers is actually fresher than a supermarket's because it has never sat out in a display rack. Now he just has to convince consumers.

WHIPSAWED. And that's the rub: None of the new, high-profile online merchants has proven it has a profitable business. Like other E-commerce players, they're putting up big sales growth on a small base and occasionally getting whipsawed by the stock market's changing moods. Even promising players such as Alloy Online Inc., a Generation Y clothing retailer, feel the pinch: Alloy went public at $15 in May and is trading around $11. On the other hand, despite Goldman's 1997 report calling toys a below-par online opportunity, eToys Inc.'s $20-a-share price at its IPO in May spiked to $85. One spur: eToys' annual sales jumped to $30 million in the year ending in March, from $687,000 the year before, even though the company lost $29 million. The lead underwriter of that deal? None other than Goldman Sachs.

Despite early losses and fickle stock markets, it's all but certain that venture capitalists will let more E-stores that once seemed like dogs try to seize their day.

"What's happening is complete euphoria," says Marc Singer, a vice-president at Brand Equity Ventures in Greenwich, Conn. "They're throwing money around fairly [crazily]." There seems to be no retail niche where E-commerce companies can't claim turf. The hard part will be executing well enough to deliver for customers--and for investors.

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