Online Extra: Pushing the RedEnvelope

This specialty e-tailer's CEO talks about what it takes to thrive as a merchant without bricks and mortar

As online retailing hits its stride, niche players are striving more than ever to stand out in a marketplace largely dominated by the Web sites of bricks-and-mortar retailers. Catalog and online-only gift retailer RedEnvelope (REDE ), for one, launched an outdoor and print advertising campaign in the fall designed to increase revenue and brand recognition. Around the holiday season, the outfit also boosted ads touting specific products.

The San Francisco company, which sells items such as a $90 cashmere baby sweater and a $129 set of kids' golf clubs, has also been investing heavily in its warehouse and inventory operations. For the six months ended Sept. 26, RedEnvelope reported revenue of $31.7 million, an increase of 21.4% from the prior-year period, and posted a net loss of $4.8 million, a bit wider than the year-earlier net loss of $4 million.

BusinessWeek Correspondent Louise Lee spoke with RedEnvelope CEO Alison May in early November about the business and trends in online retailing. Edited excerpts from their conversation follow:

Q: How is RedEnvelope's merchandise selection evolving?


Personalization will continue to be a big part of our business. Going into 2005, we'll have a product that lets you send us a digitized photo, and we'll print and insert it into the picture frame you purchase. You'll be able to write a three-line poem or verse and have it engraved on a box. You can upload songs, and we'll put them on a CD and put it in a monogrammed CD holder.

Most of our customers are women. We like to do something personal. We used to bake special-occasion cakes, but who has time to bake anymore?

Q: What kind of growth does RedEnvelope project in the near future?


We expect to grow in line with e-commerce generally, which is expected to grow in the low-20% range annually. For the year ending March, 2005, we're projecting a loss of $2 million to $3 million. But our goal is to get to an operating profit margin of 8% to 12% over the next three years. Our gross margins are increasing because we have been using more overseas sourcing, mainly from Asia, and we're becoming more efficient in order fulfillment.

Q: What about overseas expansion?


We're looking at opportunities outside the U.S. We're looking at Canada and China, which is exploding. In China, branded retailing is growing by leaps and bounds. So far it's mainly Chinese brands, but they're looking at U.S. brands, too.

We're looking at Europe, where it's a real challenge for U.S. bricks-and-mortar companies to expand because of the cost of real estate for stores and the distribution center, and the cost of hiring store workers. With an online retailer like us, you have fewer of those issues. You need just a warehouse and a call center.

Q: What are some of the overall trends you see in online retailing today?


A lot of early growth in online retailing came from comparison shopping for electronics. That'll always be big. But more traditional specialty retailing has been growing rapidly. Apparel has moved into first place in categories of merchandise sold online. There's a mental shift.

Q: Do you think bricks-and-mortar stores take full advantage of the opportunity to sell online?


I don't believe that all bricks-and-mortar stores have truly grasped the massive opportunity of online selling and marketing. In many cases at bricks-and-mortar chains, the online business is the black sheep, and the company has it because they think they have to and not because they want to.

Some companies have an online channel but still say, "We want our customers to come to the stores." Just because the real estate is there, doesn't mean that's how people want to shop. Mall traffic is declining every year. It'll get increasingly expensive to reach a customer through bricks-and-mortar.

Q: How do you see bricks-and-mortar stores changing?


What may end up happening is that the bricks-and-mortar store will be different. It'll be entertainment-focused and may have less inventory. Customers may see the product and have it delivered to their house from a warehouse. The store would be more efficient because it wouldn't have to stock a lot of merchandise.

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