Don't Cut Back Now
When I asked Target Corp. (TGT ) Vice-Chairman Gerald L. Storch a few months ago whether the retail chain's online site would turn a profit at some point, he assured me it would--that is, if you include the benefits from branding, driving buyers to stores, and cementing closer relationships with customers. Uh-huh, I thought. Sounds even fuzzier than the dot-coms' much-maligned "pro forma" profits. So I wasn't too surprised when Target announced in mid-September that it's farming out some of its Web operations to Amazon.com Inc. (AMZN )--a move that suggested Target was throwing in the towel online.
Quite the contrary. Target not only will retain its own site, run partly by Amazon, but it will get massive exposure on Amazon's site, which up to 50 million people a month visit. Storch expects the heightened online visibility to boost all those seemingly intangible benefits. I think he's right. According to market researcher Jupiter Media Metrix Inc., only about a third of retailers venturing online look beyond sales and profits on the site itself to determine whether their online efforts are truly profitable. That's a big mistake: They need to understand that their customers use their sites for far more than online purchases.
Of course, pure-play Web retailers such as Amazon must ultimately earn a profit, since they sell only online. But it's an entirely different story for the traditional retailers that are starting to assert their dominance on the Net. Demanding fast profits from their Web sites is precisely the wrong thing for them to do. Indeed, Jupiter analyst Ken Cassar estimates that some two-thirds of the return on investment on an online site comes from branding and physical-store purchases. If all they measure is online sales and profits, he says, "there's a real risk that brick-and-mortar retailers may substantially scale back their online investments, which could put them at a big competitive disadvantage."
What might they miss? A recent Jupiter report found that half of consumers use a retailer's Web site for research before buying a product in its physical store. Savvy retailers don't fret about site visitors failing to click on the "buy" button. Instead, they go with the flow by encouraging shoppers to research online and pick up or buy the item in the store. Surveys by Sears, Roebuck & Co. (S ), for instance, reveal that some $500 million worth of in-store appliance sales were influenced by customers researching online first. So what if they don't buy a washer online? Although Dennis Honan, vice-president and general manager for Sears Customer Direct, says the site will be profitable next year, that's not Sears' only criterion for investing in it.
The results of promoting the brand and strengthening ties with customers are quite difficult to measure. But that's precisely what some retailers, such as Target, see as the main value of their Web sites. Storch says the biggest benefit of Target's online efforts is deepening relationships with its customers--which he thinks will bring them back, both online and to the stores. "Can we prove sales in the store? No," he says. "But is the Web site valuable? Sure."
Justifying continued or even increased spending online is a challenge these days because it's tough to track people accurately across multiple channels. Besides, says Bill Bass, senior vice-president for e-commerce at Lands' End Inc. (LE ), "at the end of the day, profits are what's most important for everybody." True enough. But the companies that don't consider the less obvious benefits of their online efforts will lose customers to rivals that do.