Lessons of the Cyber Survivors

E-tailers have learned from their past blunders

Last fall, when eBay Inc. (EBAY ) set up auctions to raise money for victims of terrorism, watch retailer Fossil Inc. (FOSL ) spied a chance to do good and boost its Net business at the same time. Fossil offered Harry Potter and I Love Lucy collectible watches, promising to send all proceeds to September 11 victims. The good deed brought in $10,000 for the victims, while introducing thousands to Fossil's online sales.

Fossil had plenty of company. Similar charity efforts by other e-tailers drew millions to their sites, including consumers who had never traded in the virtual world. All told, 2.2 million people made their first online transaction with their digital donations, according to a January survey by Forrester Research Inc. Of those, 1.9 million said they felt comfortable enough to type in their credit-card numbers again and make their first e-purchases. The charity sites, says Forrester's Christopher Kelley, "got people over the first hurdle."

That's just one way e-tailers have become savvier at making consumers more comfy with online shopping--with good results. Outreach programs such as the eBay auction, together with easier-to-use Web sites and the demise of thousands of early competitors, have online sales heating up for survivors of the dot.com shakeout. Total e-tailing sales are expected to top $39 billion for 2002, up from $30 billion in 2001, according to market researcher Jupiter Media Metrix Inc.

Improved service helps, too: Online shops got a 77% satisfaction rating during the holiday season, beating the 74.8% scored by traditional retailers, according to the American Customer Satisfaction Index released on Mar. 8 and sponsored by the University of Michigan Business School, the American Society for Quality, and CFI Group, a consultancy. "A lot of the things that were difficult are now easy to do," says Fred H. Lerner, CEO of Ritz Interactive Inc. The unit of Ritz Camera Centers Inc., for example, uses live online chat to give potential customers immediate advice about products for sale on the Web site.

Wall Street, burned badly by its own earlier e-tailing hype, is taking cautious note. "We thought we would see an acceleration in e-commerce during the second half of the year, but it looks like that's happening sooner," says Anthony Noto, Internet analyst at Goldman, Sachs & Co. He thinks online consumer sales, just 1.8% of total retail sales in 2001, should rival catalog sales, or about 5% of total sales, within four years.

That would be some reversal of fortune for e-tailers, many of whom were given up for dead in the dot-com bust. Just a year ago, high-profile sites such eToys.com and home-delivery service Webvan Group Inc. went up in smoke. But since then, lesser-known sites such as 1-800-Flowers.com (FLWS ) and teen e-tailer Alloy (ALOY ) have picked up the slack. Thanks to a healthy Christmas, both posted their first online profits in the fourth quarter.

Clearly, shoppers are feeling increasingly at ease on the Net. While the growth rate of households going online for the first time is slowing, the crossover rate from mere Net surfing to buying is soaring. According to a survey of 1,500 Net users released by the Pew Internet & American Life Project in March, it takes one to three years for newbies to try online shopping. While 60% of households are online, about half of those signed on in just the past three years. That means a hefty number of people are just beginning to shop.

E-tailing's survivors are also learning from past blunders. Many now have a better feel for pricing, merchandising, and customer care. With its costly startup phase behind it, for example, Blue Nile Inc. can now cut prices to lure more business. The price of Blue Nile's Tahitian pearl earrings was nicked 10% in the first quarter, to $500. The result? Average monthly volume was up 51% over the previous quarter.

Even some products earlier thought to be a tough sell on the Net are catching on. At BlueLight.com, Kmart Corp.'s (KM ) site, outdoor furniture sets have been the hot items. "The convenience is finally starting to appeal to people," says BlueLight CEO Richard Blunck. At last, a dot.com claim that's turning out to be true.

By Heather Green in New York, with Robert D. Hof in San Mateo, Calif.

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