<Show: NRF.com/Supply Chain Program>
<Date: September 29, 1999>
<Time: 00:00:00>
<Tran: 092901cb.l23>
<Type: SHOW>
<Head: Closing Shots>
<Sect: Business>
<Byline: Patrick Barry>
<Guest: N/A>
<Spec: Business; >
<Time: 00:00:00>
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT
BE IN ITS FINAL FORM AND MAY BE UPDATED.
OPERATOR: Ladies and gentlemen, welcome to the closing super session of
NRF.com. Please welcome the moderator of our panel, Patrick Barry, Chief
Financial Officer and Executive Vice President, Operations, Bluefly.com
(Company: Bluefly Inc.; Ticker: BFLY; URL: (A
HREF="http://www.bluefly.com/")http://www.bluefly.com/)(/A).
PATRICK BARRY, CEO/EXECUTIVE VICE PRESIDENT, OPERATIONS, BLUEFLY.COM: Good
morning. Thank you for staying around for the closing conference today. I
think we have a great group of panelists to top of the NRF.com, and let me
introduce them.
First we have Ken Cassar from Jupiter Communications. Ken is the Research
Analyst for online retailing and has been with Jupiter for a few years. And
prior to that, he spent time at both BMG Direct and Ames Department Stores
(Company: Ames Department Stores Incorporated; Ticker: AMES; URL: (A
HREF="http://www.AmesStores.com")http://www.AmesStores.com)(/A). So he
brings some real world experience to the table.
Elaine Rubin. Elaine is President and CEO of ekrubin inc. It`s a consulting
company doing retailing - doing consulting and strategic planning both for
retailers and manufacturers alike. She also chairs shop.org. And prior to
that, she was a Chief Strategist for iBaby.
David Shiffman. David is the Vice President of - Vice President of the
Retail Group of Goldman Sachs (Company: The Goldman Sachs Group Inc.;
Ticker: GS; URL: (A HREF="http://www.gs.com/")http://www.gs.com/)(/A).
David covers both online and offline retail companies.
And the final panelist is Dylan Tweney. Dylan is the Content Development
Manager and Columnist for "InfoWorld," writing about Internet commerce. And
he has a weekly e-mail entitled "The Tweney Report."
I thought what we would do today is talk a little bit about the business
models, both the online business models, and comparing them to the
traditional multi-channel business models that a lot of retailers sitting
in the audience have. And I`d like David to talk a little bit about kind of
the Wall Street perspective and different metrics and business models.
Just bringing a personal experience to light, we had looked at joining
forces with an offline brick and mortar off-price apparel company, and they
were doing about 450 million in sales a year versus our 500,000 sales in
our latest quarter. And they had a market valuation of about 12 million,
and my market valuation is 60 million. So there`s obviously different
metrics that we`re being measured by, and they`re going to start to
converge, and hopefully David can add some light to that topic.
DAVID SHIFFMAN, VICE PRESIDENT OF RETAIL GROUP, GOLDMAN SACHS: I think the
big question for a lot of people out here is, when you`re responsible for
the dot-com PC (INAUDIBLE) business as part of a traditional retailer and
you want to go and ask your boss for $50 million for a year to get
something going and help build a brand, and the CFO or CEO looks at you and
says, "Well, wait a second. The last time I checked, I had a high-flying PE
multiple. I have an EPS number that I have to protect. And if I give you
that $50 million, you may cost me $2 billion of market cap."
And that is the challenge that most of you face in that the pure e-tailers
traded a multiple or multiples of revenues, generally anywhere from one to
two years forward, and that`s all Wall Street expects from them right now.
Over time, as valuation multiples converge with traditional retailers,
you`ll see first an expectation of when companies will produce positive
cash flow, and then ultimately they`ll be measured in EPS.
The traditional retailers, on the other hand, have to protect their PE
multiple. They have earnings, whereas the virtual companies don`t, and as
such, there is much more focus on the investment spend. No one knows
exactly when the convergence will occur. People look at the Amazons
(Company: Amazon.com Inc.; Ticker: AMZN; URL: (A
HREF="http://www.amazon.com/")http://www.amazon.com/)(/A) of this world and
are tracking closely both sequential quarterly growth as well as year over
year growth on an annualized basis and saying, when there`s a significant
deceleration, that may signal a time in which people are going to start
focusing on profitability.
BARRY: Do you think the metrics are starting to, you know, lose focus on
the top line and starting to move down the P&L to the gross profit and then
the income line, or have you not seen that shift yet?
SHIFFMAN: We haven`t seen as much of that, although I will tell you the
(INAUDIBLE) at Goldman Sachs has started to be more focused on, rather than
start at the revenues line, they`re looking at gross profit and saying
that, you know, the key is capturing your gross profit margin. That`s the
amount of money you have to spend. And someplace between that and net
income is -- ringing out the costs is in fact, where you become
competitive. And I know we`ve started measuring customer acquisition costs
and retention rate investment spending against gross profit.
BARRY: Elaine, you`re doing a lot of work in the area of both -- on a
consulting side for individual companies and for VCs, et cetera. What are
some of the metrics that you`re looking at, and how do you value the pure
startup, and how do you advise companies who are, you know, on the brick or
mortar trying to get into this, and what do you look for?
ELAINE RUBIN, PRESIDENT/CEO, EKRUBIN INC.: Well, when you - when you look
at an offline retailer or manufacturer, one tremendous advantage is your
brand and the loyalty that you have built with your customer. The name of
the game is building that loyalty, that trust, translating that online to
go forward and create a longer-term relationship with this customer. So
from a metrics standpoint, we are always looking at retention rates and how
are we going to build that trust, how are we going to bring this customer
from the offline world into the online world.
KEN CASSAR, ANALYST, DIGITAL COMMERCE GROUP, JUPITER COMMUNICATIONS: Yeah.
And one thing that I would add is that we at Jupiter are rather bullish on
the long-term -- although we don`t cover stocks, so I don`t know if we`re
allowed to be bullish -- we`re positive about the - about the long-term
prospects for the multi-channel retailer. We think that the retailers that
are really going to win at the end of the day are those that have both
brick and mortar channels as well as Internet channels, and that the guys
that are going to do the best jobs are going to be the ones that have done
a good job of integrating the two channels together.
And that`s really at odds with what the financials markets are demanding
today. And it`s - it really remains to be seen how that`s going to happen.
We believe that folks like Amazon are - should start to build brick and
mortar outside of their warehouse and distribution facilities. We think
that they should strike partnerships with grocery store chains so that
people can pick and drop off groceries. We think that Amazon should build a
few flagship stores in San Francisco, London, and Paris, just to add
something tangible to their brand, so that people feel like their not
buying from nothing.
And then, at the same time, we will see brick and mortar retailers make
more and more investments online. It`s going to be difficult for them to
do, because Wall Street has slammed people that - Starbucks (Company:
Starbucks Corporation; Ticker: SBUX; URL: (A
HREF="http://www.starbucks.com/")http://www.starbucks.com/)(/A) is a great
example. Whole Foods (Company: Whole Foods Market Inc.; Ticker: WFMI; URL:
(A HREF="http://www.wholefoods.com/")http://www.wholefoods.com/)(/A) is
another recent example of a company that has just been absolutely slammed
by Wall Street for spending aggressively on the Web. So I`m not exactly
sure how the brick and mortar guys are going to get there, but I do believe
in the long run that is going to be the sweet spot of retail -- not just
online retail but of retail.
BARRY: I think we saw some of that this week with the Nike (Company: Nike
Incorporated; Ticker: NKE; URL: (A
HREF="http://www.nike.com/")http://www.nike.com/)(/A) Fog Dog (ph) venture,
and maybe, Dylan, you can talk to this on - some of the other things you`re
seeing, I think, you know, people like Intel (Company: Intel Corporation;
Ticker: INTC; URL: (A
HREF="http://www.intel.com/")http://www.intel.com/)(/A) and Microsoft
(Company: Microsoft Corporation; Ticker: MSFT; URL: (A
HREF="http://www.microsoft.com/")http://www.microsoft.com/)(/A) all want to
get into commerce space, and they`re going to do it through various ways.
And there`s going to be a lot of acquisitions and consolidations and
ventures in the industry. So maybe you could talk a little bit about, you
know, kind of what you see in the year ahead, and are these combinations,
you know, as a - an Intel/Sears (Company: Sears Roebuck & Company; Ticker:
S; URL: (A HREF="http://www.sears.com/")http://www.sears.com/)(/A)
combination going to work, not only from an economic business model, but
from a cultural fit, taking kind of the high tech with the traditional
retailer and trying to blend them together?
DYLAN TWENEY, CONTENT DEVELOPMENT MANAGER, COLUMNIST, "INFOWORLD": I don`t
know if I can speculate about specific acquisitions or mergers or alliances
to happen, but I`d like to talk about sort of the general areas where I see
activity happening. And I think what Ken was saying earlier about the
multi-channel approach being very effective I think is going to be proved
true in the coming year, and we`re going to see a lot of alliances between
pure plays and offline or traditional retailers to address the respective
needs of this constituency. So, for example, the online retailers, I think
the holiday season that`s coming up is going to show that a lot of them
need a lot of help in specific areas, such as fulfillment, logistics,
customer service. And I think that, in the wake of the holiday season,
we`re going to see a lot of alliances aimed at addressing specific
deficiencies that will come up.
BARRY: Is it mostly the infrastructure that you see in terms of, you know,
a Macy`s with their acquisitions, with Fingerhut (Company: Fingerhut
Companies Incorporated; Ticker: FHT; URL: (A
HREF="http://www.fingerhut.com")http://www.fingerhut.com)(/A), or is it
also the branding issues?
TWENEY: Well, I think it`s both. I mean, you know, a Macy`s or a
Nordstrom`s does have an extremely strong brand offline and, you know, that
hasn`t translated to an online brand yet very much, but there`s a lot that
they can build on there if they - if they execute correctly.
Now, the problem is, when you`re just dipping your toes in, or just getting
started in the Internet space, a lot of things can go wrong, and a lot of
things will go wrong. And I think in many ways that the holiday season
that`s coming up is going to be really disappointing to a lot of the people
who are just starting out, both consumers and retailers, because of the
problems.
RUBIN: I think it`s important from a partnership standpoint to understand
also that it`s not within your circle that you traditionally think of who
you might want to partner with. Look at Time Warner (Company: Time Warner
Inc.; Ticker: TWX; URL: (A
HREF="http://www.timewarner.com/")http://www.timewarner.com/)(/A) taking a
stake, Columbia House and CDNow (Company: CDNow Inc.; Ticker: CDNW; URL: (A
HREF="http://www.cdnow.com/")http://www.cdnow.com/)(/A) bringing a direct
marketer an online commerce business and a media company that are creating
these efficiencies that you are acquiring knowledge and knowledge transfer,
not just a grand or a place to go buy a good or return a good. So retailers
need to be thinking outside the box. You need to be thinking about who
might be the best partners for you, and it might not just be in the
logistic space or in the retail space.
TWENEY (?): The only think I question is whether an alliance is the ideal
way to go about it. The - for me, the sweet spot in the multiple channel
space is the drugstore business. The - about half of our prescriptions in
the real world are chronic. About half are acute. So half are birth control
pills and Viagra and things like that, and then about half are antibiotics
and things that we need to get right away.
The CVS (Company: CVS Corporation; Ticker: CVS; URL: (A
HREF="http://www.cvs.com/")http://www.cvs.com/)(/A) brick and mortar store
is unquestionably - oh, and then, they actually make the money in Listerine
in forcing you to walk through the store to end - to get your prescriptions
and actually pick up some soap and Listerine and some Captain Crunch on
your way.
So the - there`s certainly an awful lot of value that can be added by
putting people`s chronic prescriptions online by -- just on a monthly
basis, having my sleeping pill prescription come for me. And then there`s
an awful lot of value in having a relationship with the brick and mortar
drugstore around the corner. The thing that I really wonder about is
whether it`s possible to pull this strategy off with two different units
doing it with a partnership. I mean, the first and most obvious issue
they`re going to have is brand. Rite Aid (Company: Rite Aid Corporation;
Ticker: RAD; URL: (A
HREF="http://www.riteaid.com/")http://www.riteaid.com/)(/A) and
drugstore.com (Company: drugstore.com Inc.; Ticker: DSCM; URL: (A
HREF="http://www.drugstore.com/")http://www.drugstore.com/)(/A). Rite- Aid
bought 25 percent of drugstore.com. How are they going to pull that up? How
are they really going to take advantage of the synergies if they`ve got two
different companies?
Another example is Real.com and Hollywood Entertainment (Company: Hollywood
Entertainment Corporation; Ticker: HLYW; URL: (A
HREF="http://www.hollywoodvideo.com/default.htm")http://www.hollywoodvideo.
com/default.htm)(/A). They talked about bringing together this unit and
finding all sorts of synergies between the sell-through and rental. But
they are two different brands, and they are unwilling to kill Real, they
are unwilling to kill Hollywood, most likely. So unless they sort of scrap
the sort of two parallel venture concept, I think that they`re really not
going to be able to capture the true opportunity that`s out there.
SHIFFMAN (?): You know, we are big believers that the ultimate winners
should be the traditional retailers who have the dot-com extension to their
businesses. I mean, and we feel very strongly about that. But you can`t
generalize about that. Our discussions here, you`d have to look category by
category, understand why certain traditional retailers have done the deal
that they have done. And to stick with the CVS example, they purchased
Sylma (ph), you know, when there was tremendous hype about first mover
advantage in the drugstore sector, and that place, by its own set of rules,
be it through the regulatory environment that surrounds that, you had a
situation where you had some very high profile venture capital backers
behind drugstore.com, behind PlanetRX (Company: PlanetRX.com Inc.; Ticker:
PLRX; URL: (A
HREF="http://www.planetrx.com/")http://www.planetrx.com/)(/A), and then you
had Sylma.com (ph) sort of standing out there waving the flag and saying,
"We launched first. We were first," but yet, they didn`t have the right,
you know, "money behind them."
And in fact, CVS was very smart, spending $30 million using stock as the
currency, therefore, not paying anyone out and making Internet millionaires
and management walks away, but locking them into the company. That seems to
be a much more powerful strategy than just the basic alliance.
TWENEY (?): Yeah. I totally agree. And what really - what really compelled
them to do that was the PBM relationships.
SHIFFMAN: (?) That`s right.
TWENEY: (?) The - they started up these drugstores and just assumed that
people would send in the $80 for their prescription and realize that no one
will ever do that. People are only going to strike up a relationship with a
pharmacy that has a relationship with my PBM so that I only have to send in
the co-pay. So that`s really what compelled that. But I think that the long
term potential - I completely agree - is in bringing together those two
units, and the CVS as a brand, and just kill Sylma (ph).
BARRY: Let`s switch gears for a little bit, because I`m sure a lot of you
out there are kind of at your beginning stages in trying to formulate your
Internet strategy, and talk a little bit about doing that in the
relationship - some portals. Are they as important as they were, and is it
a different strategy for a Home Depot (Company: The Home Depot
Incorporated; Ticker: HD; URL: (A
HREF="http://www.homedepot.com/")http://www.homedepot.com/)(/A) that has a
well established brand, versus a Bluefly to use the portals, or can they
stand alone and not have the portals play as big of a role?
You want to take that one?
RUBIN: Yeah, sure. I`d love to take that one. Having been an online
retailer since 1992, and when we first really started marketing plans, we
always thought you fish where the fish are, and why go offline? You have
to, you know, be online and market to people online. And so the portals
were really -- and at the time they were online services before they were
portals -- were really the answer for many of us to reach the largest
masses of people out there on the Internet. That has changed considerably,
and I think it has a lot to do with maturity and where you are in your life
cycle of being an online retailer.
If you are very much in your customer acquisition mode, the portals will
always be important for that. That is where are all newbies and where a lot
of Internet users go for information and for research. So that is a
starting point, and one that is important as part of your overall strategy.
But in terms of the overall importance, we had seen the drop in how
important that might be. I`ve spoken to retailers and worked with retailers
where the portals used to deliver 90 percent of the traffic and of the
revenues, and it`s now as low as 15 percent or 20 percent.
BARRY: And maybe it`s just our specific example, because it seems like the
portals are getting more aggressive of trying to own the customer and
control the commerce...
RUBIN: Right.
BARRY: ... where it used to be they would, you know, flash up to your site.
Now they want that experience on their site. They want to process the
transaction, then pass it on to you to fulfill. Do you see them having that
same leverage as some of the bigger players, the more established brick and
mortar retailers come online?
RUBIN: Absolutely not. You know, I mean, there is this brand fight that is
going on. If Yahoo! (Company: Yahoo! Inc.; Ticker: YHOO; URL: (A
HREF="http://www.yahoo.com/")http://www.yahoo.com/)(/A) wants to own this
customer and wants to retain this customer, and a well-known brand is not
going to want to just hand over their customer base to these folks. So, no,
I think there are a lot of big struggles, and it really worked well when
you were a little, you know, short play retailer and you didn`t have a lot
of, you know, money or brands behind you. Now, when these bigger players
come online, and well-known brands, they`re calling the shots in some ways.
And so the dynamics have changed a great deal.
BARRY: Is that going to make it harder for the true - you know, for the
Blueflys of the world to even gain entre to the space? I mean, it seems
like there`s kind of the haves and the have-nots and it`s - you know,
you`re bringing (ph) them six figures or seven figures not even playing the
portal space. And it`s really going to be tough for the true startups.
SHIFFMAN (?): I think the whole portal thing points to a larger question,
which is that, if your customers are already online, the difficulty with
the portal is that you have to convince them to go from Yahoo! to your
site. You have to pull them off of wherever they are. And maybe it`s not a
Yahoo!, maybe it`s your competitor site or maybe it`s somebody else all
together, you know, Amazon.com. And I think what`s going to develop is that
rather than - rather than making the customer come to you and come to your
site, you`re going to have to reach out and go to wherever your customer
is. And maybe that`s a portal, maybe that`s Amazon, maybe that`s somebody
else altogether. But I think that we`re going to see a lot more distributed
merchandising, so to speak, and points of sales throughout the Web. And as
for startups, I think, I think -- I don`t think it necessarily makes it
more difficult. It`s - I mean, they can make the same kind of deals.
TWENEY (?): Yeah. We - the phenomenon that you tend to see sort of in
nature and in life is that, oftentimes, when you have small, medium, and
large, medium gets squeezed out. And I believe that we are going to find
that this is going to happen on the Web, and that there aren`t going to be
an awful lot of guys that are doing $50 million a year in sales. When we
look five years out, we`re going to have a lot of guys that are doing many
billion dollars a year in sales. And then we`re going to have a lot of guys
carving wooden ducks in their garages. And I don`t know how much of a vital
middle there will be. And the cost of doing business with the portals will
be one of those things that will shove things in that direction.
RUBIN: There`s also - there`s been an evolution of the portal strategy. I
mean, if you look at America Online (Company: America Online Inc.; Ticker:
AOL; URL: (A HREF="http://www.aol.com/")http://www.aol.com/)(/A), you
wouldn`t even consider them a portal. They`re truly an aggregator. They`ve
created a loyal customer base, and therefore, there`s more ownership there.
They truly deliver. You know, 60 percent of AOL users are online shoppers
versus, you know, the Internet online shopping, which I think is about 30
percent at this point, you know, of Internet users or online shoppers. So
you really have to take it on a case per case basis. It`s not like, "Oh,
portals are bad," or, "Oh, I should only be putting this much into it."
They`re revolving into different beings and into different entities. Some
of them are turning into shopping search engines, if you will, or a way for
you find the exact product and price that you`re looking for, so.
TWENEY (?): Yeah. I mean, just the absolute worst place in the world for
anyone to be, other than a wooden duck carver, would be on Yahoo! Yahoo!, a
year ago, used to be essentially a mall. You would go into Yahoo! shopping
area, you would click on "books," and then they would have banners for the
two or three or one -- if they sold exclusivity -- book merchants that they
worked with. They have since flipped their model, and essentially, they`re
trying to make it look as though you`re shopping from the Yahoo! Store, and
you are relegated to someone who just happens to be selling a product in
the Yahoo! Store rather than being a storefront in the Yahoo! mall. And
that is absolutely terrible in terms of branding. The - that`s a pure
transactional deal, and if you ever do a deal with Yahoo! or anyone who`s
really going with that model, only evaluate it based on the transactional
value. Do not assume any brand impact at all.
BARRY: What would be your general advice to people starting out? Would it
be to, you know, wait and jump in full force and have the full content
commerce model, or would it be, you know, get started now, and start with
the simple stuff with information, driving traffic to your brick and mortar
stores, and then incrementally building the rest of the site, the commerce
and rapiding (ph) content, et cetera, or, you know, do you just wait until
you have it all?
RUBIN: Well, it certainly depends on the category and on the situation. It
really comes down to what your customers expect. And if you`re a well-
known brand and they have a certain relationship with you, and they expect
certain services and certain products from you, it`s a big disappointment
to come into your online effort and see some corporate information --
perhaps maybe, you know, 10 percent or one percent of your offline product
offering. You feel gypped. This is not the experience I expect from this
retailer or from this cataloger. That was really good for 1994 and 1995,
but at this point, you really need to have a pretty well thought-out
strategy before you go into it. Not to say that you have to put every
single skeel (ph) online and you have to deliver exactly the same service.
Remember, you go online for a number of reasons, and one of them is you
need to have a point of difference. What is different about your online
offering than is about your offline offering, and is there any advantage to
the customer for transacting or visiting you online? And perhaps you can
find a service or a subset of your overall product offering that might
serve the needs of those customers. But I always advise all of my clients,
and when I`ve started businesses, you know, look to the customers. Let them
give you the feedback. If you`re already in business, you have a great way
to do some research and poll your customers. Find out what their
expectations might be.
SHIFFMAN (?): I was just going to say, to tackle the back half of that
question of, should you be commerce, content, community. I have seen this,
probably 50 examples in the last year, of traditional retailers throwing
out the three Cs and saying, "That`s where we`ve got to be," and they
charge in, once again, to senior executives, and they have this whole
vision of what they should be. If you were a retailer, your focus should be
on capturing that gross profit margin, right? You are there to sell goods,
sell services. That`s where the money`s going to come from. You`re not a
publishing house on the content side, you`re not a subscription-based
revenue generator, you`re a - you capture the gross profit.
That doesn`t mean that, over time, you can`t evolve and build each of those
pieces to your overall business or revenue mix, but the execution is so
complex just to deliver on the goods, that that`s where your energy should
all be focused, day one, and then it can grow from there. And it`s the
alliances that were referred to before where you`re not going to be a
better publisher than some of the big publishing houses. And that`s where
you say to yourself, "Well, can I benefit from this convergence of the
media with the traditional retail in the dot-com entity?" And that`s how
you sort of put together that element of it.
TWENEY (?): I think you have to be careful, though, that the expectations
online are very different than offline in terms of what customers expect
from the experience. And if you - it`s unquestionably true that you have to
deliver revenue and profit margins and I think that`s very important. But
if you take the attitude that, "All we have to do is sell products on our
Web site and, you know, just move inventory," I think that`s going to
backfire, because people, when they go to a Web site, they expect a little
more: they expect information, they expect interactivity, they want instant
responses, they want feedback, they want answers to their questions, and
you have to be prepared to deliver that.
So it`s not that - I think retailers would be well advised to not try and
create content or create community if that`s not their expertise, but I
don`t think it`s advisable to avoid content or community because, you know,
that`s not our bag. I don`t think you can avoid it on the Internet.
BARRY: I want to kind of lead into what we all see in store for the `99
holiday and kind of touch on something that you brought out up about
instant response in customer service. And maybe, Ken, you can talk a little
bit about, you know, the whole issue of last year was kind of a banner year
for commerce and really came of age and what you think this year is going
to be, and are we going to face the same issues and the same complaints
that we heard about kind of the customer service and the deliverability
issues, or do you think that the major players have that solved?
And then at the end, I want to kind of poll the panelists and get their
views without - I know some of them are in kind of funny situations where
they can`t talk about specific companies - but talk about who are going to
be the big winners for `99, or what areas, whether it`s going to be the
drug companies or, you know, who at the end of the year is going to be out
above -- ahead of the rest?
CASSAR: OK. The last year was certainly a pivotal year in the grand scheme
of things. We believe that about $3.1 billion were generated in online
commerce -- that`s including travel -- representing about 40 percent of the
year`s sales. We believe that that number will be $ |
