Web Synergies Pay Off

It looks like a hot holiday season for e-tailers -- and those meshing the Web with traditional stores stand to be some of the biggest winners

By Amy Tsao

Web Synergies Pay Off
For retailers of all kinds, it's already beginning to look a lot like Christmas. Industry association National Retail Federation (NRF) is predicting that holiday sales will rise a jolly 5.7% this year, to $217.4 billion, making for the best season since 1999. As much as malls should be bustling, Internet stores will be bursting their virtual seams. Forrester Research estimates that holiday sales made online will rise 42%, to $12.2 billion. With better-than-projected revenues for online stores in the first three quarters of the year, the market-research outfit figures that online sales for the year will top its original forecast of $96 billion, coming in above $100 billion.

The growing success of e-tailing speaks to the increased convenience, ease, and security of buying online. Traffic to retailing sites has increased every year, while shopping malls have been losing customers. "It has happened really fast," says Donna Hoffman, co-director of Vanderbilt University's Sloan Center for Internet Retailing. She points out that it took 100 years for catalog retailers to account for 5% of retail sales, while the Web has reached almost that figure -- 4.5% -- in about five years. And momentum for growth is expected to be strong for the next several years. Forrester figures that through 2008, online sales will rise a steady 20% annually.

Both online-only sellers and multichannel operations have been increasingly focused on efficiency. Better-performing technology and greater traffic mean profits -- or in some cases, at least smaller losses. As a group, retailers' online operations broke even in 2002, up from negative 6% margins in 2001, according to Shop.org, the online-research division of the NRF. Seventy percent of online operations -- including multichannel and online-only -- were profitable in 2002, up from 56% in 2001.


  What has tickled multichannel operators isn't just that online is becoming a source of profits, but that it can help boost offline performance. In the early days of e-tailing, the concern was that an online store would cannibalize the same outfit's brick-and-mortar outlets. These days, however, just the opposite is proving to be the case. Indeed, many traditional retailers are looking to their Internet operations as a creative and highly effective means of boosting both sales and profitability. "The ones with the most leverage are in all channels," says Hoffman, who adds: "They can cover their costs much better."

Consider REI, seller of outdoor wear and gear. Its online venture has been profitable since 1998, and it says that its online profit margins keep rising, with growth this year expected to be at a "double-digit" rate. A new program, which started in June, allows shoppers to come to REI stores to pick up online purchases.

Joan Broughton, REI's vice-president for multichannel programs, calls it an unprecedented success. About one out of three who choose in-store pickup keep shopping while on the premises, and these customers typically an average $90 to their initial online purchase. Says Broughton: "In the last few months, with this program, our comparable store sales are higher by 1%."


  Privately held REI wants "to use [the Web site] as an investment to grow top-line sales overall for REI," says Broughton. Her holistic view doesn't mean eliminating stores but using the Web to spur more sales everywhere -- and also to think of a sale as a sale, no matter where it was generated. Retail stores now account for 85% of REI's sales, while cybersales makes up 12%, and catalog, 3%.

Such synergy between online and offline is becoming the norm. For instance, with online profits in hand one year earlier than planned, Sears (S ) will be pushing its Internet division to improve the company's overall performance. Sears figures that one in five shoppers who buy an appliance in its stores have researched the purchase online first. "We're more profitable this year than last," says Bill Bass, vice-president and general manager of Sears Direct, which comprises online, catalog, and direct mail. "Once you have [infrastructure] in place, it doesn't cost a lot more to grow sales with it. You just keep climbing up."

For the holidays, Bass hopes to draw in yet more online traffic by offering post-Thanksgiving Day sale prices to Internet shoppers on the holiday itself -- when actual stores are closed. "People can get a head start on spending money," he says. Sears will do the same on Christmas to push its after-Christmas sales.


  Similarly, e-tailer Amazon.com (AMZN ) has realized the leverage it can get from traditional retailing assets. Thanks to its myriad partnerships with store-based retailers like Target (TGT ) and Toys 'R' Us (TOY ), Amazon in effect is providing access to physical stores. "Even they've recognized they can't just be an online store," Vanderbilt's Hoffman says. Amazon, much criticized for its lack of earnings, will report its first full year in the black. According to analysts' consensus estimates, its profits will rise by 48% in fiscal 2004, and by 39% in 2005.

These successes belie the challenges ahead, especially for online-only retailers. Just as the Web can boost offline operations, the opposite is true. So companies without physical operations don't have the benefit of synergy. Fashion e-tailer Bluefly and close-out merchant SmartBargains have yet to report a full year without losses.

Carl Rosendorf, president and chief executive at SmartBargains, says with positive results in the third and fourth quarters, his company, will be profitable. He cites the lower cost of customer acquisition and reduced operating expenses as the main reasons for being able to sell at good margins. "All the metrics are moving in the right direction," says Rosendorf, who adds that full-year profitability shouldn't be too far off.


 Quarterly profits remain elusive at Bluefly. The site hit some rough patches last year during the critical holiday season as a new technology platform proved difficult to implement, according to CEO Ken Seiff. Lately, it's operating without a hitch. "We're getting more page views than during the peak week of the holidays last year." But Seiff isn't promising profits yet, though with the falling cost of winning shoppers, he may be able to soon.

Even some multichannel operators face "a lot of internal struggles," says Scott Silverman, executive director of Shop.org. Some still "feel online is a threat, that it's taking sales away from them." And those that came late to e-tailing are forced to play catch-up with those who have had several years to work out the kinks.

And don't expect online emporia to render malls obsolete. Despite the hassles, consumers will still take to the streets to shop, especially for the types of items that don't lend themselves well to being sold on the Net. By 2007, 39% of computers and software accessories will be sold online, figures Jupiter Research, which also predicts that housewares sold via the Web should account for 9% of total home goods sold in 2007 and 8% of consumer electronics. But online apparel sales are relatively low and will rise only to about 4% of the total by 2007.

As cybersales continue to grow, handsome profit margins should follow, especially for the multichannel operators that have figured out how to make the Web work for, rather than against, them. This holiday season should provide ample evidence of that.

Tsao covers retailing for BusinessWeek Online from New York

Edited by Patricia O'Connell

Before it's here, it's on the Bloomberg Terminal.