Retailing: The Big Guys Go Online

And the likes of Nordstrom may make it tough for the E-tail veterans

Most people may still be running their air conditioners. But the executives at Nordstrom Inc. have only one thing on their minds: an online Christmas. On Aug. 24, Nordstrom said it is creating a partnership with venture capital firms Madrona Investment Group and Benchmark Capital, backer of eBay and other Net stars, to create a new online business. The first goal is to get up and running in time to grab a slice of what looks to be an enormous cyber-holiday shopping season.

Sure, Nordstrom is another brick-and-mortar retailer trying to play catch up. And the track record isn't so great: When old-economy companies have tried to beat their Net rivals at the new game, it has usually been the upstarts that prevailed. But this year's E-commerce Christmas could establish a different pattern as everybody from J.C. Penney Co. to Wal-mart Stores Inc. gets deadly serious about Web selling.

Just ask L. Daniel Nordstrom, CEO of "You can never assume you own your marketplace on the Net," he says. "The competition is startups totally focused on the Net." To make sure the new Nordie's venture is equally focused, the $5 billion retailer realized it needed to act like a startup, too. With the venture partners, the retailer seeded the new venture with $26 million in capital. Nordstrom will also tap the Web expertise of the VCs and their portfolio companies. To plug the site, Nordstrom will spend $17 million on a five-week ad campaign, its biggest single promotion ever. The goal: presenting a choice of 20 million pairs of shoes for Christmas.

MANY CHANNELS. Gap Inc. and Macy's have already shown that established retail brands can thrive in cyberspace. "The companies that are going to be winners on the Internet are those that already have established brand names and vendor and distribution networks and can reach consumers through multiple channels, not just one," says Gerald L. Storch, president of credit and new businesses for Dayton Hudson.

If the traditional retailers Do get their act together, life may be a bit tougher for the Net-only retailers that grabbed the lion's share of E-business a year ago. "This will not be a profitable year for most of the Internet companies," says Gary M. Stibel, a principal of the New England Consulting Group. "They assume less competition than exists, and they assume greater loyalty and higher purchases per consumer than they have yet been able to prove."

But even if the pioneers of online retailing have to share the market, they look forward to an exponentially expanding pie. Market researchers and industry analysts figure that online sales will double or even triple this fall. A new Harris Interactive survey of more than 5,800 online users finds that nearly 33% are planning to buy at least one product over the Internet this holiday, up from only 8% last year. That could mean some $9.5 billion in sales, estimates Harris. Forrester Research Inc. pegs fourth-quarter online sales at $8 billion, up from $3.5 billion in the same period last year, thanks in part to an explosion of new online shoppers. By yearend, Forrester estimates, 17 million U.S. households, or 17%, will be shopping online, up from 10 million a year ago.

For E-consumers, the growing competition for their cyberdollars could produce a greater variety of products, easier-to-use and more personalized sites, and such niceties as free shipping. Dayton Hudson, for instance, on Sept. 7 is relaunching its two-year-old site for upscale discounter Target with, it says, "100 times more merchandise," including toys, CDs and aromatherapy machines. And by November, Dayton Hudson will unveil nine more E-commerce sites, including Marshall Field's and Hudson's. "We're going to go in with our guns blazing," vows Storch.

CHOICES. Wal-Mart is also preparing a redesigned site with an expanded array of merchandise--including Santa suits and Christmas lights--this fall. And J.C. Penney, which disappointed customers last Christmas with its skimpy selection, says it will offer 200,000 items online by Oct. 1, including its entire catalog line. And it will heavily promote the site in its catalogs and stores. "The companies that don't have a pretty strong Internet presence for this holiday are going to have a tough time catching up next year," warns Executive Vice-President Richard E. Last.

Perhaps nowhere will the contest between traditional and cybermerchants be more intense than in toys--even though online toy sales are expected to hit just $250 million--less than 1% of the total toy market. Toys `R' Us Inc., which split from partner Benchmark Capital over management issues, is still struggling to get its cyberfooting. But plenty of others are aggressively chasing leaders eToys Inc. and, which recently added toys to its store. Consolidated Stores Corp.'s K B Toys division bought tiny this spring, and it's investing $50 million in advertising over the next four months. Mattel Inc. has invested $90 million to launch its own retail site in November. And Walt Disney Co. is spending $45 million for a controlling stake in educational toy retailer Wal-Mart, the leader in toy sales, says it will have a vast toy selection online this Christmas, too.

But the entrenched E-tailer, eToys, will be hard to beat. It could grab as much as $100 million in sales this year, analysts figure. "etoys is setting a high standard for excellence and customer experience that will become increasingly difficult for others to compete against," says analyst Lauren Cooks Levitan of BancBoston Robertson Stephens Inc. But, if Toys `R' Us can get its cyber house in order, it could do well, according to the Harris Interactive poll: Among individuals planning to buy toys online this holiday, 64% plan to buy from Toys `R' Us vs. 46% from eToys.

Another E-tailer with a seeming lock on its market is Inc. Of the shoppers who planned to buy books online, for instance, 80% said they intended to buy from Amazon, according to Harris. In the music and video category, Amazon led again with 37%. Laurie J. Goldberg, a vice-president at the Cartoon Network in Atlanta, is a loyal Amazon shopper who won't even look at other book seller's sites. As Amazon moves into new categories, like toys and electronics, she says, "I would do my business with them. They make it so easy."

And Amazon this year is aiming to take away one of the biggest impediments to Web shopping: fears about sharing credit-card and personal information over the Internet. In the Harris survey, 65% cited such concerns as the key factors inhibiting online purchases. A revamped Amazon welcome page includes an "our guarantee" button that leads visitors to security assurances and an option to phone in the last five digits of their credit cards.

CYBER REPS. One place Web veterans insist they won't be caught short this holiday is on such back-end systems as order fulfillment, warehousing, and customer service. Such problems plagued many E-tailers last Christmas. New York-based Bluefly Inc., an online retailer of designer clothes, is expanding its warehouse and creating an in-house customer service operation that will include more than 20 employees. Sears, Roebuck & Co. has added 45 online customer service reps. Last year, a single webmaster forwarded online requests to regular customer service agents.

So, can brick-and-mortar merchants really prevail on the Net? Short-term, Wall Street still sees the Net as more of a threat than an opportunity. On Aug. 25, Merrill Lynch & Co. analyst Daniel D. Barry lowered his ratings on a number of retailers, in part because of the "growing short-term psychological negative" of Internet competition--even though online sales will account for far less than 1% of the nearly $3 trillion in U.S. retail sales in 1999. Longer-term, Barry and others see the Net as a positive for traditional merchants. But for now, let the games begin. Click.

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