Monday, September 28, 1998
More Retailers Testing Virtual Waters
Electronic commerce: Toys R Us, Tower Records and other chains of the
physical world are entering cyberspace. But smaller online companies are giving
them a run for their money.
By GREG MILLER, Times Staff Writer
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COMPANY CAPSULES
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ith profits plunging, Toys R Us recently announced plans to
close dozens of stores and lay off thousands of workers. But in
the companyÉs budding online business, itÉs a different story.
"WeÉre hiring," said Joel Anderson, vice president of Toys R Us
Direct. "I sat down with my
boss yesterday and he
basically said, 'What do you
need?' The checkbook is
there."
Profits remain a pipe
dream across much of
online retailing, but the
giant chains of the physical
world are on a cyberspace
building binge. Toys R Us,
Borders Books, Tower
Records and many others
have either rolled out or
revamped their virtual superstores in recent months.
For them, itÉs part of an effort to seize control of the Internet much
the way their superstores have overrun the retail landscape on terra
firma over the last decade. But so far, cyberspace is proving to be a
tougher market for them to crack.
Online pioneers such as Amazon.com, CDnow and EToys -- businesses
which probably would have been crushed had they opened shop on a
street corner -- have built substantial electronic-commerce leads and
are proving remarkably resilient.
The billion-dollar question on the Net is which of these two business
breeds will prevail over time: the virtual companies or their
carbon-based counterparts. Both sides claim the clear advantage.
Virtual companies say they alone can focus on e-commerce,
unencumbered by giant payrolls, vast real estate empires and the fear
that the Internet will erode their in-store sales. The bricks-and-mortar
stores, however, boast universally recognized brands, enormous
marketing muscle, vast inventories and unmatched buying power.
The stakes are hard to comprehend now, with most online retailers
losing money hand over fist. Analysts say that could continue for years
as companies spend heavily to build their brands in a business with
minuscule margins.
But the payday is coming. Jupiter Communications, a New York-based
research firm, estimates that
online-shopping revenue will
surpass $40 billion by 2002, up
from $2.7 billion last year.
"The companies that are able to
establish market share and mind
share right now," said Ken
Cassar, an analyst at Jupiter, "are
the ones that will capitalize when
these businesses represent serious
dollars."
The fast-approaching holiday
shopping season is shaping up as
an early test for the newest retail
category to be tested on the Net:
toys.
In a cavernous building in
Commerce, EToys, a Santa
Monica start-up, is converting an
old bottling warehouse into a
high-tech North Pole. By
November, nearly 500 employees
working staggered shifts will be
picking, packing, wrapping and
shipping thousands of toys each
day.
Meanwhile, across the country,
Anderson and his 30-person team
are scrambling to expand the
3-month-old
toysrus.com site,
fine-tuning computer systems,
revamping a Chicago shipping
center and adding hundreds of
items to the online selection each
week.
The outcome of this battle may
hinge on whether the Internet is truly an opportunity for Toys R Us or
merely a distraction. Toby Lenk is banking on the latter.
"We know Toys R Us is going to be a very strong company online, and
weÉre not going to be able to stop that," said Lenk, co-founder and
chief executive of EToys. "But their No. 1 competitive problem is not
us and the Internet. ItÉs that discount chains like Wal-Mart have
muscled into the toy space. We think we can be No. 1 online because
weÉre focused just on the Internet."
In fact, Toys R UsÉ preoccupation with the mounting threats to its
physical stores gave EToys its most important break: a nine-month
head start. Toys R Us set out to launch its online store last fall, but the
project collapsed as department heads turned their attention to
problems in the physical stores amid the crunch of the holiday season.
The Paramus, N.J.-based company finally launched the site in June, but
only after creating a separate online division and putting Anderson,
one of the companyÉs top regional sales executives, in charge.
"Initially, we were just borrowing resources from various
departments," Anderson said. "But now weÉve got a core group of
people with some skin in the game."
But now that the site is up and running, Toys R Us confronts one of the
most nettlesome problems traditional retailers have faced online:
getting shoppers to go to their virtual stores.
Amazon, for instance, continues to control 90% of the online book
market, according to Jupiter, even though it has been under online
assault by Barnes & Noble since May 1997.
Similarly, CDnow and Music Boulevardtogether account for 45% of
online music sales and seem to be pulling away from Tower Records
and other traditional retailers that sell online, analyst Cassar said.
Tower will face even more pressure now that Amazon has also
entered the online music market.
This is partly because online shoppers are proving to be surprisingly
loyal to the stores they do business with first, analysts said. As easy as
it is to move from one digital store to another, consumers are reluctant
to leave sites where theyÉve developed trust, established an account
and built a user profile that yields product recommendations.
But it is also because attracting online shoppers has proved to be
remarkably expensive. Ironically, itÉs the well-heeled giants of terra
firma that tend to blanch at such costs.
Tower, for instance, was recently hammering out a $1-million to
$2-million promotional deal with one of the InternetÉs most popular
search engine sites. Then one of TowerÉs online rivals swooped in and
offered $6 million.
Tower Continues Its Frugal Ways
Tower, a billion-dollar company, could easily have upped the ante. But
the company has built its empire over 20 years through frugal financial
management, and executives werenÉt prepared to throw that out the
window for an online opportunity that still seems very uncertain.
"We donÉt want to put millions in the hole," said Mike Farrace, a vice
president at Tower. "What is there to be gained? CDnow has already
lost $18 million this year, and [Music Boulevard] has lost as much as
$30 million. In our company, thatÉs just unconscionable."
That may also explain why many giant physical retailers, including
Virgin Megastores, have declined to enter the online race. It also
explains why Barnes & Noble announced last week that it hopes to
raise as much as $100 million by selling stock in its online subsidiary.
Virtual retailers, with no brick-and-mortar stores to fall back on,
canÉt afford to hesitate. EToys paid $3.2 million to America Online
just six weeks after it launched, then it turned around and paid
$500,000 to Yahoo so that when users type in "toys," an EToys banner
ad pops up.
"Have we overpaid? Probably," said Phil Polishook, vice president of
marketing at EToys. "But itÉs a scramble for mind share and
customers."
The marketing advantage may be turning, however, as online retailers
focus their attention on capturing the next wave of Internet shoppers,
most of whom arenÉt even on the Internet yet.
To reach these neophytes, Amazon, CDnow, Music Boulevard and
others are moving their marketing offline, spending millions on
television, radio and print ads.
But the physical chains already have massive marketing budgets and
interact with millions of customers every day, generating advantages
for their online stores. Toys R Us, for instance, plans to place its
online address on shopping bags, in-store banners and all of its
upcoming television commercials. By doing so, superstores can reach
billions of potential online shoppers with almost no increase in their
marketing budgets.
By the superstoresÉ logic, the first wave of online shoppers may be
lost. But subsequent waves will already be familiar with their brands
and perhaps even loyal to their physical stores. Now the task is to
retain those loyalties as they migrate online.
"As this marketplace moves beyond propeller heads into the
mainstream," said Steve Riggio, vice chairman of Barnes & Noble, "we
think we will be the bookseller of choice."
Price Comparisons Almost Effortless
The economics of online retailing also seem to favor traditional stores,
which buy so much product that they can simply cut better deals with
suppliers than smaller companies can. This is important because the
Net, which makes comparing prices almost effortless, is shaping up as
a market of extremely narrow margins.
Barnes & Noble has tried to take advantage of its purchasing power by
dropping online prices even lower than its in-store discounts. Jeff
Bezos, chief executive of Amazon, acknowledges that itÉs not easy to
keep pace.
"Barnes & Noble has a large purchasing-power advantage over
Amazon.com, as does Borders," he said. "What we have done is make
strategic decisions to fund that purchasing power gap out of our own
investment funds so our customers donÉt pay for that lack of
purchasing power. The trick is to get big fast enough so we can level
the playing field."
It helps to have Wall Street on your side. Amazon, like some other
Internet companies, is flush with cash because investors have been
clamoring for its stock. Even though Barnes & NobleÉs revenue this
year will surpass AmazonÉs by about $3 billion, AmazonÉs stock
market value is more than $5 billion, about twice that of Barnes &
NobleÉs.
The founders of EToys, which is still privately held, are hoping for a
similarly spectacular payoff someday. For Toys R Us, which is
watching its terrestrial empire shrink, the potential online payoff is no
less significant.
"Physical stores arenÉt going to go away," Anderson said. "But we see
this as the single biggest growth area in the next decade." |
