I have been saying this for a year but no one believes me:
"Everything Must Go ... Online:
Faceoff -- Bricks-and-Mortar
Companies Live in the Real World
By Steven Schuster
Special to TheStreet.com
5/25/99 3:39 PM ET
Editor's note: This faceoff is part of TSC's
three-day series on the e-tailing Internet
wars. To read the other side of the debate,
see Jim Seymour's piece, then vote
on whose argument is more compelling.
I'm no Internet naysayer. I'll buy certain items
online as well as the next time-strapped guy.
But there's a big difference between
occasionally buying a book from Amazon.com (AMZN:Nasdaq) and
allowing that the dot-coms will inherit the earth as the pundits would
have you believe.
After taking abuse for the past year for supposedly missing the Net
boom, the old bricks-and-mortar retailers are readying a counterattack
that could render their e-tailing competitors bust.
Reality-based retailers that have sat on the sidelines during
e-commerce's infancy may ultimately benefit from their born-on-the-Web
brethren's early mistakes. For example, a new car company would not
copy the mistake Ford (F:NYSE) made with the Pinto by placing the
gas tank over the rear bumper. Being late to the Internet market so far
has simply meant missing out on a lot of losses. Many leading retailers
can only be faulted for trying to deliver an economic return to
shareholders in the form of profit dollars. With Amazon.com, probably
the most successful of online retailers, losing $125 million last year on
$610 million in sales, one can see that operating profitably is a long way
off for this group.
The spin doctors on Wall Street and in Silicon Valley have done a great
PR job convincing people that six-month-old start-ups with little in the
way of revenue -- just "losses and a dream" -- are actually enterprises
worth hundreds of millions (if not billions) of dollars. Why should it be
otherwise now that the public is willing to take the risk that was once
the province of venture capitalists? But shareholders eventually tire of
an enterprise bleeding red ink. Remember Boston Chicken
(BOSTQ:Nasdaq)?
As in the physical world, getting there first doesn't always protect you
from being overtaken by a savvy competitor. For most of this century,
Woolworth (now Venator (Z:NYSE)), the granddaddy of today's
discount chain, was one of America's largest retailers, only to be
steamrolled by an upstart called Wal-Mart (WMT:NYSE).
And established retailers such as Gap (GPS:NYSE) and Intimate
Brands' (IBI:NYSE) Victoria's Secret already have what young
dot-coms desperately want: a brand name. (Hence all those crazy
marketing costs.)
A known brand wields trust not just with shoppers, but perhaps even
more importantly, with vendors. Think about it. If you were the CEO of
XYZ Jeans and some dot-com start-up wanted to buy your product to
sell on some Web site you never heard of, you'd probably proceed with
caution. You might first want to determine whether or not the start-up
would sell your merchandise at half price and enrage the other 99.9%
of the retailers you supply.
Many companies leading the charge into e-commerce may be familiar
with technology but know less about retailing. It doesn't mean they can't
catch up, but they are behind the eight ball. It's far easier for a retailer to
adopt new technology and embrace a new distribution channel, than for
a technology start-up to learn about retailing.
And there's the rub.
For the traditional brick-and-mortar retailers, the Internet is just one more
way to connect with customers they already own. Traditional retailers
can leverage stores, systems, vendors and advertising. Their network
can provide data about their target markets, which in turn can drive
traffic in both the physical and virtual worlds. Traditional retailers have
built longstanding franchises and have demonstrated their ability to
maintain repeat business. They have greater buying clout than their
start-up competitors and are more experienced in managing inventory,
taking markdowns, staying in stock and catching new trends. And these
hard-won advantages can be extended to the Net.
Take the case of Sears Roebuck (S:NYSE) and CVS (CVS:NYSE).
Sears has an extraordinary 35% market share for appliances in the
U.S., and it will be able to leverage this commanding lead and build
incremental sales through Sears.com. Through the national
infrastructure, convenient return privileges, installation, service and its
own delivery vehicles and credit, all backed by a satisfaction guarantee
("or your money back"), Sears will dominate the channel in these
products. Here, physical inventory is actually an advantage, not the
disadvantage that the dot-coms would have us believe, since owning
the inventory means faster delivery time.
Likewise, CVS filled 280 million prescriptions last year, which is more
than anyone else filled. It has 9,000 third-party relationships and 55
million patients in its database. CVS is one of the largest customers of
Merck (MRK:NYSE) and Pfizer (PFE:NYSE) and, as such, has
leverage to get price discounts. And with its recent decision to acquire
online drug retailer Soma.com -- a sign that this combination of real and
virtual players is the way of the future -- CVS has bought for the paltry
sum of $30 million what it would've spent six months building.
The dot-coms, meanwhile, don't have a lower cost structure, and they
are relegated to the cash market, which makes up less than 15% of the
prescription business. Half that number, or 7% to 8%, represents the
acute market, which is useless to the dot-coms because those
prescriptions need to be filled immediately. That leaves them with the
relatively small chronic market. Besides, who wants two sets of
records, one for acute prescriptions and one for chronic? Wouldn't you
shop the company that provides both?
Furthermore, chains that operate in both the real and virtual world offer
their customers flexibility, such as the option of ordering online but
picking up or returning merchandise at the store.
As traditional retailers dedicate a greater amount of their resources to
the Internet, the problems the dot-coms are facing will become more
acute. You have all the pitfalls of a regular start-up, plus you have to
spend heavily to develop awareness. New dot-coms don't have an
existing business or a brand name to leverage. At the end of the day,
they're trying to build a business without a profitable business model.
Actually, the biggest challenge to many traditional retailers will not come
from the young dot-coms, but rather from the suppliers, who will
bypass retailers entirely and sell directly to consumers. Either way, it
will be the companies that have cracked the retailing code in the real
world that will ultimately triumph online.
For the flip side of this argument, check out Jim Seymour's Why E-tail
Trumps Retail. Then tell us whose argument is more compelling.
Steven J. Schuster, a former managing director of First Manhattan
Co., runs Gemina Capital Management, a hedge fund in New York. At
the time of publication, his fund was long CVS, although holdings can
change at any time. Under no circumstances does the information in
this column represent a recommendation to buy or sell stocks. He
welcomes your feedback. " |
