Online Sales: Still A Threat

Forget the falling stock prices. Web sales are reaching a critical mass

You can't blame retailers for heaving a sigh of relief. Those pesky dot-coms are tanking left and right. Even mighty Inc. is in the doghouse. But retailers' relief could be short-lived. Here's why: The Web's bite into store sales is about to hurt. A widely accepted rule of thumb says a 10% to 15% loss in sales vaporizes a store's profits. This year, online sales of books will top 11% of overall sales, up from 8.5% in 1999, while CDs and videos will more than double their penetration, to 10%, according to Boston Consulting Group Inc. Online personal computer and software sales already have taken 18% of the total industry--and look what happened to CompUSA: The PC chain is about to be acquired by Mexican retailer Grupo Sanborns. "If you take 18% out of a store's revenues, it will turn the economics very quickly negative," says consultant James Vogtle of Boston Consulting.

Of course, some retailers are figuring out how to steer buyers to their online sites. And those with good Web sites will drive some customers to stores, where they might make additional purchases. But the fact is, 94% of online buying is just a shift from stores, reckons market watcher Jupiter Communications. Like it or not, says San Francisco commercial leasing broker Mark Borsuk, "you're starting to see the impact on physical stores."

The rub is that the physical retailers that move most successfully online may face the greatest pressure on their original business models. Despite current dot-com losses, there's no doubt that it costs much less to sell from central warehouses than through hundreds or thousands of stores. Do you focus investments on the Web store that's doubling sales every year, at a fifth of the cost of stores, or on opening stores whose sales are growing 5% a year?

Already, some investors are shifting their bets. The San Francisco-based real estate investment trust AMB Property Corp. sold off $560 million worth of local shopping centers a year ago to invest in warehouses close to urban centers. Chief Executive Hamid R. Moghadam thinks they will be in high demand by online sellers such as Webvan Group Inc., in which AMB has invested.

Does this mean the conventional retail model of expanding largely by opening new stores is busted? Are store closings imminent for more kinds of retail beyond computers? Will retailers downsize stores to reduce costs or focus on fewer but bigger and more entertaining stores?

At the least, physical stores will have to evolve to provide more services that online stores can't. Maybe grocery stores don't need to stock quite as much cereal or shampoo in the store as more people order these regularly online for delivery directly to their homes. Instead, they could add new services such as dry cleaning or one-hour photo finishing. Or, like PC maker Gateway Inc., they might open stores that are strictly showrooms, saving inventory and staffing expense. Or they could provide more of an entertaining experience, such as sporting-goods retailer Vans Inc.'s skateboard rink in Southern California. "You'll see stores shifting to more of a higher-service operation," says Bill Bass, e-commerce senior vice-president at apparel cataloger Lands' End Inc.

Problem is, denial runs deep among most retailers and mall owners. Says Borsuk, who recently attended a conference of the International Council of Shopping Centers trade group: "The sense I got is that they feel the threat is over." Only in their dreams.

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