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Everything Must Go ... Online: The Battle for Christmas Shoppers Will Be Hard Fought

While Web retailers have gotten the drop on their real-world counterparts, the battle for online buyers isn't over yet.

Editor's Note: This story is part of


three-day series on the e-tailing Internet wars.

It's hard to believe that just a year ago online shopping was unproven, relegated to a brave few who were willing to send their credit-card numbers into the vast, unknowable cyberspace.

Christmas '98 put to rest the idea that e-commerce would remain a sideshow. Sales for the fourth quarter of 1998 more than tripled to $3.5 billion from $1.1 billion in the year-earlier period, says

Forrester Research

. And that growth is expected to accelerate: By Forrester's estimates, e-sales should hit $108 billion, or 6%, of the $1.8 trillion in total U.S. retail sales by 2003. That's up from $8 billion, or just 0.5% of the $1.7 trillion in overall retail spending last year.

Ring 'Em Up
Online sales per year

Source: Forrester Reseach

As online sales fill a greater portion of the retail shopping bag, the competition between bricks-and-mortar companies and their born-on-the-Web counterparts intensifies. The young dot-coms, in many cases, have done an admirable job of wooing consumers. But as more traditional companies start selling online, will consumer loyalty sway back to the names they've come to trust in the real world?

E-tailers and retailers bring different weapons to this battle. One analyst calls Net companies little raptors, the small creatures of

Jurassic Park

fame, because of their fierce nimbleness. By contrast, traditional retailers -- let's call them Tyrannosaurus Rexes -- draw strength from their size. It's unlikely that the brand equity of, say,


(WMT) - Get Walmart Inc. Report

will be deleted with a few mouse clicks.

Wall Street has already cast its vote for the dot-coms in the form of soaring stock-market valuations. But with real-world heavyweights like

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Home Depot

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eyeing the Net in a hungrier way, the betting is still open.

Shaking a Virtual Leg

"Of the

real-world retailers on the Net so far, many are doing a poor job," says Christopher Vroom, an analyst with

Thomas Weisel Partners

, who tracks online companies. "Many retail executives are asleep at the switch. They believe they have time to wait and see how this distribution unfolds. They will be dead."

Americans are brought up with the notion of instant gratification. And companies that succeed on the Web will need to supply it. Take the case of




Toys R Us


. Vroom emailed both companies on a Sunday afternoon several months ago and asked each to recommend a birthday present for his little brother. eToys shot back an email in two hours. Toys R Us has yet to respond. Toys R Us didn't return a phone call seeking comment.

Gifts to Go
Christmas 1998 validated the Net
as a real place to shop

Source: Forrester Research

There is a bureaucracy bred in real-world companies that makes it hard for them to shake a leg, says Yannis Bakos, a professor of e-commerce at

New York University's Stern School of Business

. He describes his own experiences working with online and real-world companies this way:

"If I try to set up an appointment with a traditional retailer, I leave a message with someone's secretary," he explains. "Three days later you get a call back. And two weeks later you have your meeting.

"If I send an email to the chief executive of a Net company, she responds in two hours from Japan, where she happens to be on a business trip, and we have everything resolved."

These advantages haven't excluded land-based retailers from the party altogether, but they are more than fashionably late. The sudden surge in e-commerce has acted like a metaphorical headlight, momentarily freezing seasoned retail executives in midsale. But there's a growing number of analysts who say the early lead that born-on-the-Web retailers have established will be short-lived. They argue that brick-and-mortar types have been smart to sit back and let the dot-coms spend cash and make mistakes. And now, they say, reality is ready to strike back.

Reality Bytes

"The story this Christmas will be the brick-and-mortar retailers taking back the Net," says David Strasser, an analyst at

Salomon Smith Barney

, who follows land-based retailers. The e-tailing "business models don't work," he argues. "The only reason these guys exist is because the cost of capital is so cheap. They can get equity for nothing. Anyone can take market share by undercutting pricing. But retailers don't survive on little bits of margin."

Brick-and-mortar players do have a few weapons up their sleeves, not least of which are long-established relationships with suppliers, existing bases of repeat customers and established brand names.

"Once brick-and-mortar guys figure this out, they will win a disproportionate share of online sales," says Kate Delhagen, director of e-commerce research for Forrester.

A Fatter Slice
Online sales, while still a tiny fraction
of overall U.S. retail sales,
are expected to grow rapidly

Source: Forrester Research

Take the case of Wal-Mart. To date the company has done little more than post an online catalog. It features few of the amenities that customers have come to expect from online shops like book reviews, chats or celebrity guests. And its prices on certain items are more expensive than's

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. Wal-Mart declined to comment for this story.

But Delhagen says there are signs that the Bentonville, Ark.-based discounter is taking the Web more seriously. "I expect them to overhaul their whole site and move forward with e-commerce in the next few quarters," she says, although she declined to elaborate.

And, sure, Amazon may have arrived on the book scene with little trouble, but some other retail categories, namely office supplies and home improvement, will be harder to crack, says Lauren Cooks Levitan, an analyst with

BancBoston Robertson Stephens

who tracks e-commerce.

"I'm sure there's someone who thinks they can be the Amazon of the office world," she says. "But I think they're nuts." Companies like Staples and Office Depot, she explains, have already exploited distribution and pricing inefficiencies in the real world. These advantages can be transferred online thanks to strong relationships with suppliers and local delivery networks that are already in place.

Who'll come out on top? The likelihood is that plenty of winners and losers will be culled from both the real and virtual worlds. One point is clear: With Wal-Mart suing Amazon over allegedly trying to steal trade secrets by hiring away its employees and with Amazon filing a counter complaint (they've since settled), the battle should be a juicy one.

As originally published, this story required a clarification. Please see

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