Luring Mall Rats to the Internet

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Since

Amazon.com

(AMZN) - Get Report

burst on the scene with a surreal market capitalization, regular old stores shuddered. Would this new way of doing business cannibalize existing brick-and-mortar retailers, or would it be incremental?

It's been accepted for some time that items like books and services like travel are well-suited for the online shopper. "The big question was would anyone bother to buy clothing online?" says Keith Benjamin, an Internet analyst with

BancAmerica Robertson Stephens

in San Francisco.

America Online

(AOL)

has gone a long way to answering that question in the affirmative. Last Christmas clothing was the No. 1 seller, says Kathie Lentz, an AOL spokeswoman. While she won't break out dollar figures, clothing continues to rank as one of the top 10 items sold on AOL, Lentz adds.

So can traditional department stores, specialty chains and catalogs grab what appears to be a growing market for online apparel?

"Brick-and-mortar retailers will be too slow to respond to the online threat effectively," Benjamin says. He points to

Barnes & Noble

(BKS) - Get Report

, which is preparing to sell its Internet business to the public. "Amazon.com crushes Barnes & Noble like a bug," he says. Robbie Stephens hasn't participated in Amazon.com's underwriting.

Benjamin adds that there are two crucial factors for a successful Web business: a brand name that consumers identify with the Net and many product categories. Amazon.com wins on both accounts. "The challenge to get customers on the Web is you have to spend a ridiculous amount of money to market. Amazon can spread those costs over multiple product categories.

Delia's

(DLIA)

is one real-world retailer that has a fighting chance of making it online. It has a powerful brand name and its approach to the Net is a supermarket of sorts for the teen customer. "We have a bit of a different game plan," says Evan Guillemin, Delia's chief financial officer. "We're focused only on a demographic, and we want to own it from an information standpoint."

Virtual Mall Rats

Approaching the Internet by focusing on a tight demographic niche may pave the way for one of the first successful shopping malls online. "People have been trying to do shopping malls online, but they haven't worked," says Joyce Dickerson, an electronic commerce specialist at consultant

McKinsey

. "They haven't been targeted enough to a specific niche. And they haven't included a broad enough selection of stores to allow the segmenting you see in the real world."

Now

ModaCad

(MODA)

, a softwear firm, is preparing to launch Fashion Trip in September. Focused on young women ages 15 to 28, the site already boasts

Wet Seal

(WTSLA)

,

Steve Madden

(SHOO) - Get Report

and

Levi's

-- all brick-and-mortar companies that expect to broaden their market share by selling online.

Gail Laguna, ModaCad's investor relations manager, says the site has 40 participants and expects to boast 100 by year end.

What will differentiate Fashion Trip from other Web malls is the high level of interactivity. Customers will be able to dress a virtual body similar to their own in shape and skin color with clothes from different retailers at the same time -- a Wet Seal shirt with a pair of Levi's jeans, for instance. That offers an edge over shopping in the real world, where customers must lug packages from store to store. Music, books and advice from fashion editors will supplement the clothing.

Fashion Trip receives an undisclosed fee based on the advertising and content it develops for participants. The company expects to turn a profit in 1999 with sales of $20 million.

Internet, Schminternet

Let's pause for a minute from the hyper-frenetic online world, where almost any company that so far has used the "I" word has watched its stock go through the stratosphere, and place Web shopping in context.

It's taken more than 100 years, ever since

Montgomery Ward

launched its first mailer in 1872, for catalog sales to approach anything more than a speck on the retail landscape. In 1997, total mail-order purchases accounted for 2.5% of the $1.9 trillion in retail sales, excluding autos, according to the

Department of Commerce

. That's up from 2.3% in 1996.

Online shopping, while growing rapidly, is still less than 1% of total retail sales -- a figure that the Commerce Department considers too small to track. Internet shopping totaled $3.2 billion in 1997, more than double the previous year, according to Benjamin's estimates. He expects online sales to jump 325% to $13.6 billion by 2000.

While Internet sales are ballooning (albeit off a very small base), there are still several factors impeding wide-reaching use. Less than half of American households owned a computer as of last year, according to

Dataquest

, a division of

Gartner Group

(GART)

. While that figure is expected to reach 61% by 2000, that still excludes one-third of the population. In contrast, all a consumer needs to make a catalog purchase is a mailbox, a telephone and a credit card.

Kenneth Gassman, an analyst with

Davenport

in Richmond, Va., says the Internet won't take a large chunk out of the retail dollar anytime soon. "In the 1980s, when the

Home Shopping Network

went public, everyone said it would put catalogers out of business," he says. "Today, HSN doesn't even register on the radar screen of retail sales."

Part of the barrier that catalog retailers have faced as they've tried to grab market share hits the crux of why people shop in the first place. Aside from buying necessities, people shop as a form of socialization, entertainment and to satisfy a tactile need to touch and feel. Those same issues are likely to dampen online shopping. "Most people at heart are true tire kickers," Gassman says. "And they don't get their jollies by shopping in front of a computer screen."

Still, there's a growing belief among real-world retailers regarding the Internet: Ignore it at your peril.

That's why

Federated Department Stores

(FD)

created a free-standing division out of Macys.com in June. Kent Anderson, the division's president, says his goal is to grow Macys.com to 10% of Federated's total sales over five years -- all of which he bets would be incremental business.

"We're acquiring business in states where we don't have a Macy's store, and we're now doing business (over the Internet) in small towns, where the customer is several hours from a Macy's store," he says. "The issue for Federated is this will produce profits. But really it will drive comp-store sales growth. Federated will take a larger share of market."

Still Benjamin, the analyst, remains skeptical. He doubts that department stores will spend enough money to market their brands on the Net and he says specialty stores are limited in the breadth of product they sell. Catalogs will make the best use of the Web by transferring some of their mailings online. "If you're a brick-and-mortar business the best you can do is use the Web to mitigate losses," he says.

And You Thought Asian Deflation Was Bad

Another challenge for retailers is the Internet's role as a price crusher. The same

Calvin Klein

bikini briefs sold on Macys.com for $8 can be found on bluefly.com for $5.95. Bluefly, a new site produced by one-time golf apparel maker

Pivot Rules

(PVTR)

, is set to launch next week as the bargain hunter's Net dream.

Tired of sifting through over stuffed racks in

TJ Maxx

(TJX) - Get Report

only to find the store doesn't have those

Polo

jeans in your size? That's exactly the customer Ken Seiff, founder and chief executive of Pivot Rules, plans to win over. "Our customers will be people who are disappointed with the discount shopping experience," he says. "People who are looking for better customer service."

In the end, however, brick-and-mortar companies may find themselves in a tight spot. "They're stuck," Benjamin says. "They'll have to make an attempt. But the formula won't work for them."

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