Web retailers: Hot stocks, scarce profits
In April, K-Tel International Inc. said it will begin to sell its
tried-and-true music compilations _ with such titles as ''Roller
Disco'' and ''101 Percent Rock 'n' Roll'' _ on the World Wide Web.
It's the same pop music the Minneapolis-based company has been peddling
on television for more than three decades. But the Internet
announcement sent K-Tel's stock through the roof: Its share price
soared sixfold in just two weeks as investors rushed to get in on the
next hot Internet stock.
Is K-Tel an Internet stock? Hardly. But investors don't seem to care
how tenuously a stock is connected to the hottest new retail venue of
the late 1990s. They also are snapping up the stocks of search engine
companies such as Yahoo!, Lycos and Excite _ each wants to be your
homepage _ in hopes that ad revenue from retailers will drive profits.
Whether a company is making any money doesn't matter. Pure Internet
concerns such as Amazon.com Inc. have become Wall Street stars without
ever showing a penny of profit.
A bevy of Amazon wannabes are riding its coattails, including
CyberShop, a small Internet retailing operation that markets itself as
''a department store on-line.'' The New York-based Web boutique went
public this March at $6.50 a share, and its stock more than tripled to
more than $21 a share before settling back in the $12 range. Not bad,
considering that Wall Street doesn't expect CyberShop to show a profit
until sometime in 2000.
Is all this Internet hype just another case of the stock market's
irrational exuberance?
Yes, say a variety of retail consultants and analysts. To a large
extent, the universe of on-line shoppers is still a small group, most
of which is male and comfortable with technology. And with the
incredible proliferation of retail Web sites, it's harder for retailers
to differentiate themselves and for casual Web surfers to stumble
across something they are interested in.
''On-line shopping is not a leisure activity. You can develop calluses
before you find something you want to buy,'' says Kurt Barnard,
president of Barnard's Retail Trend Report, an industry newsletter, in
Scotch Plains, N.J.
Still, the on-line shopping industry's much-ballyhooed potential
actually may be starting to materialize. As of January, about 23
percent of American households were connected to the Web. That trendy
group racked up an estimated $2.6 billion in retail sales on the
Internet last year, up from only $707 million in 1996, according to
Jupiter Communications, a market research company focused on the
Internet.
A lot of those purchases came late in the year, as a whole new group of
shoppers introduced themselves to the ease of ordering holiday gifts
from a computer at their office or home.
In the last six months of 1997, about 7 million U.S. households made a
purchase on-line. That's more than double the 3.2 million that bought
something via the Web during the same period in 1996.
''We're seeing 'trial and repeat' rather than 'trial and reject,'''
said Elizabeth Atcheson, director of business development with Odyssey,
a San Francisco-based market research firm that tracks consumer
behavior.
Most consumers have a pleasant experience when they shop on-line, she
said. The goods arrive on time, the quality is as advertised and their
credit card number hasn't been stolen. That makes it likely they will
shop again and tell a friend about the experience. ''That's very
powerful,'' Atcheson said.
The Internet may well be a boon for time-pressed consumers, but there's
far less evidence that it's an easy place for most retailers to make
money.
Many traditional retailers don't have a clue how to sell on the Web,
nor do they have the systems to fill orders that come in on-line, warns
Sid Doolittle, partner with McMillan/Doolittle, a Chicago-based retail
consulting firm.
''We're approaching equilibrium, where as many retailers are getting
out of Web sites as are coming in. A lot of early innovators are
getting out because there's a lot of maintenance and not much
payback,'' Doolittle said.
Just ask Amazon.com. The on-line bookstore reported that its
first-quarter 1998 sales zoomed 32 percent, to $87.4 million. But the
Seattle-based company still lost $9.3 million, virtually the same
amount it lost a year earlier. From a profit perspective, that's bad
news, analysts concede.
Yet from a market share point of view, Amazon is a big success. And
it's fast growth has prompted the nation's two biggest book retailers _
Borders and Barnes & Noble _ to jump into the Internet fray.
On May 11, Borders Group Inc. unveiled its Web site, which offers more
than 10 million books, compact music discs and videos in stock. Rick
Vanzura, Borders' senior vice president of electronic commerce, said
his company expects to lose money for the foreseeable future as it
invests in the infrastructure and inventory needed to fill Internet
orders.
But expanding to the Internet is about more than making money for the
company, based in Ann Arbor, Mich. It's about brand-building and
extending Borders' franchise to areas in the United States and abroad
where no Borders stores exist, Vanzura said. Still, Borders isn't
interested in building market share if it can't make a profit
eventually, he adds.
If one on-line book retailer can't make any money, how can three?
Vanzura says he believes there's room for all three players to
differentiate themselves through customer service and special features
such as author interviews and virtual book groups. But, he admits,
''Nobody in this arena has proven they have a successful business
model. That's what we're looking forward to doing.''
Some product categories already have established themselves as winners,
industry experts say. Computer hardware sellers such as Dell Computer
and Gateway are at the head of the class. Dell has said it expects to
conduct half of its sales on the Web by 2000.
On-line sales have been a boon for struggling Apple Computer, which
received a record $1.9 million in orders during a 24-hour period after
its new PowerBook G3 became available.
Other categories with flourishing sales include computer software, used
cars, discount brokerage services and event ticket sales. ''These are
not touchy-feely products. They are information-intensive products,''
notes Lauren Freedman, president of the e-tailing group, a
Chicago-based electronic commerce consulting firm. Those commodity-type
products are the ones that are most suited to the new medium, she said.
Selling apparel has turned out to be a more difficult proposition.
There's the fit, the color and the fabric's texture to be considered,
none of which translates well on a computer screen. Despite those
obstacles, some casual apparel retailers say they are doing well,
including Gap, Lands' End and Eddie Bauer.
That makes sense, experts say, because their styles and fit tend to be
relatively standardized. And shoppers aren't worried about how to
return the products if they aren't happy because the retailers offer
money-back guarantees.
For catalogers such as Lands' End, it's no harder to sell a swimming
suit on-line than it is through a catalog. It may even be easier, said
Ron Frey, Internet business manager at Lands' End in Dodgeville, Wis.
A new feature on Lands' End's Web site allows women to define their
figures on-line, receive advice on what suits will flatter their
shapes, and mix and match more than 216 swimsuits. Want the top in a
different color? Just click. Would you like to see the top of one suit
with the bottom of another? Click again.
Lands' End won't reveal sales figures for the Internet, but it's
confident enough about the possibilities that it has created a separate
Internet business unit and put a high-level executive in charge of it.
''More and more of our customers want us to give them service this way.
We believe it could generate significant sales, and we will invest
accordingly,'' Frey said.
But spending a lot upfront on the Web doesn't guarantee success, as
Spiegel Inc. discovered. The Downers Grove, Ill.-based catalog company
was one of the first retailers to put up its own Web site back in 1995.
Early on, customers complained loudly that there wasn't enough of the
catalog's merchandise available. And they wanted to be able to place
their orders on-line, said Randy Heiple, vice president of electronic
and print production with Spiegel.
And there was one thing they didn't want: to be entertained with
editorial content that wasn't related to product descriptions. So the
short stories went by the wayside.
Now, Spiegel is letting the site evolve as technology improves. Soon,
it hopes to add a feature that will allow customers to take a blouse
and zoom in on details such as stitching and texture.
Although the Internet is still a small piece of the Spiegel's overall
business, ''Its growth pattern is huge,'' Heiple said. ''All we've done
is stay out of the way.''
Letting other guys make the mistakes has proven a smart strategy for
Hoffman Estates, Ill.-based Sears, Roebuck and Co. The giant retailer
was a late entrant to the Internet, putting up a site selling Craftsman
tools only in October.
But the site has been a big success, getting 1 million hits a week,
chief executive Arthur Martinez said last week. That is prompting the
company to consider expanding offerings to include lawn and garden
equipment.
When it comes to selling on-line, Sears has wisely chosen to go slow
and let its ''harder side'' lead the way.
PHOTO available from KRT Photo Service, 202-383-6099.
PHOTO (color): Executives of major Internet search engine firms
participate in a panel discussion on Internet advertising. Wall Street
has embraced companies such as Yahoo!
GRAPHIC (from KRT Graphics Network, 202-383-6064):
(c) 1998, Chicago Tribune.
-0-
Visit the Chicago Tribune on America Online (keyword: Tribune) or the
Internet Tribune at chicago.tribune.com
Distributed by Knight Ridder/Tribune Information Services.
AP-NY-06-10-98 0618EDT< -0-
By Susan Chandler
Chicago Tribune
|
