E-Tailers, Get Out Your Cash
Selling over the Internet is often touted as a simple, low- overhead way to build a business. It
isn't, say electronic retailers who are doing it.
In fact, one executive advises would-be e-tailers to stock up on Pepto-Bismol, get ready to pay
for some serious customer service -- and pray if they can.
Chapters Online Inc., Canada's leading Internet book retailer, spent C$6 million (US$4.07
million) this year setting up its Web site in a high-pressure, three-month period, while
simultaneously planning an initial share offering. Rick Segal, president of Chapters Online, says
his message to retailers is that e-tailing costs big money and traditional store-front retailers
still have advantages over their Internet competitors.
``This is the myth you have to get away from: that it is cheaper to set up a Web site and the
virtual world will save you money. That is hogwash,' Segal said in a recent speech to members
of the Retail Council of Canada.
The cost of Internet selling is more than that involved in creating a compelling site. It includes
delivery and fulfillment of orders, as well as customer service that can involve manning phones
24 hours a day, seven days a week.
Customers want Internet stores to be lightning fast, with the same level of service as a
conventional store, 24 hours a day, seven days a week, Segal said.
``Expectations are higher in terms of service because you have so many alternatives,' said
Jamie Spreng, analyst at Canaccord Capital Corp. ``If a site is down, you won't go back.'
Land's End Spends
According to an August study by Forrester Research Inc., 47 percent of American companies
spend up to US$5 million developing a Web site. A remarkable 17 percent spend more than
US$20 million, Segal said.
Retailers with an existing catalog business say they are a step ahead, because customer
databases, delivery systems, and customer service centers are already in place.
``We use our catalog infrastructure to service this channel with exactly the same standard as
any other channel of the company,' said Paul Walters, chief executive of Sears Canada Inc.
``Most Internet companies are having to invest so heavily in customer-direct logistics and
distribution, it is a long way away before they see their first dollar of profit,' Walters said.
``For us, it is a leveraged activity.'
Dodgeville, Wisconsin-based Lands' End, America's No. 5 catalog retailer, is spending more to
make customer service on the Net better than its competitors'. A shopper at Lands' End's online
store can be connected to a live sales person to chat about clothes, ask questions or give
comments. Shoppers can also link up with a friend at a different computer and shop together.
Lands' End will spend up to US$20 million in advertising alone for its Web site in fiscal 2000,
said spokeswoman Anna Schryver.
Fastening Seat Belts
So far, Lands' End's investments seem to be paying off. Online sales for its second-quarter ended
July 31 were 2 1/2 times those of a year earlier. In fiscal 1999, Internet sales were US$61
million, about 4.5 percent of total net sales.
The reward for a having a fast, reliable site may be worth a significant cash outlay. On average,
three to five percent of customers buy something at a site they enter, Segal said. The average for
Chapters Online is 11 to 15 percent, depending on whether it is offering a free-shipping
promotion.
Chapters Online's parent told investors last quarter, though, not to expect the new Internet
business to make any money for the ``foreseeable future.' Chapters Inc. chalks it up to the cost
of creating a business.
Hudson's Bay Co., Canada's oldest and largest department store retailer, is planning to think
carefully before its Bay department store chain expands Internet sales beyond a specialty bridal
goods Web site.
Zeller's, Hudson's Bay's discount chain, is moving more quickly. As with catalog operations, it's
leveraging -- promoting its Web site on store bags, cash register tapes, and in-store signs, and
through its ``Club Z' loyalty program.
``The tip of the iceberg is building what the customer sees,' said Michael LeBlanc, senior
manager of interactive retailing at Hudson's Bay. ``To make sure the customer has a seamless
cross-channel experience is what costs time and money.'
Bloomberg's U.S. Internet Index, which measures the performance of Internet stocks with a
market value greater than US$250 million, has fallen 35 percent since its April 13 high. It's
up 49 percent for the year.
``Fasten your seat-belt and take a gallon-sized drum of Pepto-Bismol, pray a lot and you will be
successful,' says Segal of Chapters. |
