Don't Count Old-Line Retailers Out of E-Commerce Fight

The Amazon.coms and eBays may have won round one, but bricks-and-mortar firms are just starting to fight back.
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For traditional bricks-and-mortar retailers, the first two years of the E-commerce Age can be summarized with one stat: Of the 50 busiest e-commerce sites in June, only six belonged to physical store chains, according to

Media Metrix

.

These guys simply didn't see cyberspace coming.

But they see it now. By year-end, virtually every major retailer will be online, and we'll find out which model works best: the pure cybermerchant like

Amazon.com

(AMZN) - Get Report

or

eBay

(EBAY) - Get Report

, or some form of old-line/online hybrid.

For a sense of how this might play out, let's start with what everyone seems to agree on:

  • E-commerce will keep growing. According to a report just published by Schroder & Co. analysts John Harris and Linda Kristiansen, online spending will rise from $19 billion this year to $108 billion in 2003.
  • The impact will be uneven. Only 2% of apparel sales will be online in 2003, vs. 25% of software and 18% of books. But no product category is completely safe. Start-ups furniture.com, Webvan.com and priceline.com (PCLN) are now selling, respectively, furniture, groceries and cars.
  • Prices will continue to fall. A combination of low overhead, low barriers to entry and other revenue sources like banner ads makes it possible for cybermerchants to live with minuscule margins. A front-page article in July 28's The Wall Street Journal featured a story on how "free" the e-commerce pricing strategy of choice is now.
  • And with the advent of shop-bot software like mySimon, which scans the Web for the lowest price, the pressure is only going to intensify.
  • Some radical experiments will change things in unexpected ways. Vstore, for instance, is enabling just about any site to add its own e-store, with product offerings tailored to the site's clientele. Vstore handles the customer service, transaction processing and fulfillment for a cut of the proceeds.
  • And when bandwidth explodes in a year or two, we'll more than likely just download videos, music and software, a prospect that has to terrify Blockbuster and Barnes & Noble (BKS) - Get Report.

The Empire Strikes Back

But the bricks-and-mortar retailers have some strengths that are only now becoming apparent.

  • They have an existing customer base. It costs cybermerchants around $50 to land a new customer. Gap (GPS) - Get Report, on the other hand, already has millions of people who know and like its clothes. And it has an ongoing marketing campaign, to which a Web address can be added for zero cost.
  • A store network is a big fulfillment advantage. Say you buy a computer from Buy.com. The company will deliver it, of course. But unless you want it left on your front porch, you'll either have to take the day off work or wait for the UPS guy to leave you a note telling you where he put it when you didn't answer the door. But order a computer through Circuit City (CC) - Get Report and it'll be sent to the local store (if it's not there already) for you to pick up at your convenience. As for returns, if you buy a green shirt from L.L. Bean but are sent a yellow one, you've got to pack it up and mail it back. Buy the same shirt from Wal-Mart (WMT) - Get Report online and you can bring it to the local store for a cheerful refund or exchange the next time you're there.
  • Physical stores offer instant gratification. Shopping is more than just the acquisition of necessities. It's also a comfort-seeking activity. When we want something, we want it. And if a short drive gets it now rather than next week, so be it. I found this out the hard way recently when I ordered some Pokemon cards for my 6-year-old child through Shop.com, which promised delivery in "four to eight business days." After hearing, "When are my cards coming?" for the thousandth time, I got the message: Next time we drive to Target.

Which brings us to the trillion-dollar question: Which of the bricks-and-mortar chains will win?

It's too early to say for sure, but retailing analysts do have some clear favorites, including Gap, which credits its nearest store for online purchases, thus encouraging sales staff to plug the Web site; Circuit City, which in July launched the Web's biggest consumer electronics site;

OfficeMax

(OMX)

, which had a traffic increase of 55% in June;

Federated Department Stores

(FD)

and

Toys R Us

(TOY)

, which recently bought fulfillment companies, giving them expertise in this all-important side of e-commerce; and

Home Depot

(HD) - Get Report

, which won't start selling online until later this year, but has convinced Wall Street that when it does, look out.

But it's Wal-Mart that really has the e-commerce world riveted. Right now, it's doing maybe a tenth of the online business of Amazon.com. But by year-end, it's expected to unveil a site with a selection that dwarfs anything else on the Web. Coupled with its ubiquitous physical stores, it will have the whole package: superstore selection, easy returns and, given the parent company's $5 billion or so annual profit, the ability to eat massive start-up losses without getting indigestion. "Clicks-and-mortar," they call it.

John Rubino, a former equity and bond analyst, writes a column on mutual funds for POV and is a frequent contributor to Individual Investor, Your Money and Consumers Digest. His first book, Main Street, Not Wall Street, was published by William Morrow in 1998. At time of publication, he had no position in any stocks mentioned. While Rubino cannot provide investment advice or recommendations, he invites your feedback at

rubinoja@yahoo.com.