For Catalog Retailers Pushing Online, the Check's in the Mail

Savings haven't been as great as expected.
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In a series of tests begun this fall,

Lands' End

(LE) - Get Report

, the catalog and Internet retailer of earthy, classic clothing, tried to discern whether its growing online business would allow it to reduce catalog mailings and thereby cut costs.

If only it were that easy.

Early results suggest that such cost savings, seen as a trump card for catalog companies as they move online, are more complicated to achieve -- and less substantial -- than anyone expected. Meanwhile, pure online retailers are taking a page from traditional direct marketers by mailing catalogs of their own, underscoring just how narrow the bridge is between the old and new economies -- and how hard it can be to reach customers without expensive mailings.

Paper Chase

The benefits that catalog companies expected to see in moving to the Net are manifold. There is the leverage of existing back-end distribution. Automation makes processing orders online cheaper than staffing telephone banks with warm bodies, companies say. And as more customers order online, the companies could reduce catalog circulation, their largest expense.

But retailers on both sides of the electronic divide are stumbling upon a common truth: "There are no cheap ways to reach people," says Lisa Sharples, chief merchandising and marketing officer for

Garden.com

(GDEN) - Get Report

, which recently mailed its first catalog.

Indeed, Lands' End found "a direct correlation between catalog mailings and online sales," says Charlotte LaCombe, the company's director of investor relations. "When the catalogs arrive in our customers' homes, we see a spike in Internet sales." The reverse also held true: Internet sales dropped dramatically for one group of customers that received no mailings.

"There's a lot more noise out there today," explains Seema Williams, an analyst with

Forrester Research

, which has consulted for Lands' End. "These companies forgot that they still have to remind consumers to show up on a regular basis."

Cost-Conscious

That means it won't be easy to escape the hefty costs associated with mailing catalogs. At Lands' End, for instance, the costs of printing, producing and mailing catalogs accounted for 17% of sales. "It's our single-largest cost," LaCombe says.

LaCombe maintains that Lands' End will lower these costs using the Web, but "maybe not as much as originally anticipated." The company, she says, is toying with the idea of reducing the number of books mailed to certain customers who show a greater propensity to order online. It remains unclear how much money that would save.

This finding has stark ramifications for other retailers that seek to cash in on the online push. At Lands' End's blossoming online business, sales are expected to more than double from a year ago, to $150 million for the current fiscal year, or around 10% of the company's $1.4 billion in sales. Investors richly rewarded this progress, pushing shares to a 52-week high of 83 1/2 in early November, valuing the stock at some 40 times 2000 earnings estimates.

But when the company warned, in its third-quarter earnings release, that it expected sales to decline slightly for the fourth quarter as a result of lingering inventory issues, the stock slid some 30% in a day. The shares are now nearly 40% off the 52-week high they reached earlier this month.

Pick Your Poison

"People may have overblown the savings and the ease with which you can get them" by selling online, admits Evan Guillemin, president of

dELiA*S

(DLIA)

, which began selling its trendy merchandise online last year through a joint venture with

iTurf

(TURF)

. For instance, Guillemin says that while processing via the Web can save as much as $2 per order, the added costs of running and staffing a Web site largely offsets those savings. "Maybe over time you could cut 1% out of your cost structure," he says. "But that's not going to radically change your business."

"People think that the Web will solve everything," adds Mike Moriarty, vice president of

A.T. Kearney

, which hasn't consulted for Lands' End. "There are a lot of theoretical cost savings. People think running a Web site is cheaper than printing and mailing a catalog --

but it's not."

Lands' End, for instance, has trained 200 employees to handle Web queries. That's 8.6% of the customer service reps it has to handle catalog orders, LaCombe says, although she points out that the company's innovative "shop with a friend" service is completely automated.

Wallet Share

And with the competition for customers' attention fiercer than ever as a host of dot-coms enter the direct marketing arena, catalogs remain an important way to reach people. When Garden.com, an online shop for gardening tips and products, mailed its first catalog this month, it targeted the 250,000 copies of the 50-page glossy book at people who had never shopped with the company before.

"For the new person who needs to be introduced to the brand, they need to be touched in other ways besides banner ads," says Garden.com's Sharples. While she declines to say how much the mailing cost, she estimates that it's substantially less than the dot-com marketing vehicle of choice: a portal deal that can run in the millions of dollars.

To be sure, existing catalog operations retain several advantages over their online counterparts, not least of which are established brand names and fulfillment capabilities that Web companies such as

Amazon.com

(AMZN) - Get Report

are desperately trying to replicate. Furthermore, Web sites still hold the potential to pay off big for old-line companies by increasing sales and customer awareness.

But before investors turn the page on the costs involved in achieving those payoffs, they may want to remember that, in retailing, even the best bargains come at a price.