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) - Get Report

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) - Get Report

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)

?

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) - Get Report

), 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) - Get Report

.

And established retailers such as

Gap

(GPS) - Get Report

and

Intimate Brands'

(IBI)

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) - Get Report

and

CVS

(CVS) - Get Report

. 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) - Get Report

and

Pfizer

(PFE) - Get Report

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.