Let's face it, plenty of Internet business models have us scratching our heads. Here's a look at how companies are attempting to overcome the limitations of the digital world.
Furniture shopping can be a rich sensory experience-admiring the dark coffee color of a leather armchair, noting its smooth grain, sampling the softness of its plump cushions and drinking in the earthy aroma that surrounds it like a fog. Of course, hoofing your way through a labyrinthian furniture store in search of that perfect chair can also be about as much fun as dental surgery without drugs. The salespeople are either obnoxiously omnipresent or nowhere to be found; and consumers, armed with little more than a measuring tape and a pile of swatches, frequently have to trek to five or six stores before finding what they want.
Furniture.com Inc. has taken these familiar laments as its raison d'être. It claims to offer a superior shopping experience by providing online access to a greater selection of products than its real-world counterparts. The company also promises customer service that's there when you want it-and not when you don't. Judging by its faltering finances (in 1999, the company lost four times more money than it took in), that may not be enough.
Even if an online site is able to improve upon the nuts and bolts of the shopping experience, the question remains: Can a website sell to the senses? On an 8 x 10 screen, fine Italian leather and gen-u-ine Naugahyde look awfully similar. And without the opportunity to actually kick back in a chair, it's hard to tell if it will provide adequate cushioning for all five hours of Sunday afternoon football.
Internet businesses like Furniture.com aren't simply running up against the tactile barrier of needing to see and touch a product. A variety of fundamental stumbling blocks in Internet business models are making consumers and analysts alike scratch their heads in wonder. Why would anyone want to do that online? We looked at a range of Internet businesses to find out what works on the Web and what doesn't. Here's how companies are adjusting their strategies and harnessing technology to try to attract customers-and avoid the dotcom dead pool.
Virtual Model, Physical Realities
Specially formulated food, fashionable fur-wear and luxury pet domiciles sell briskly because Americans are notorious spendthrifts when it comes to their beloved kitties, pooches and sundry domesticated wildlife. So why have online pet supply retailers fared so poorly? Despite the frenzy over its zany sock puppet, Pets.com posted a net loss of $61.7 million on $5.8 million in net sales in 1999. Petsmart.com Inc. hardly fared better, with 1999 net loss of $47.5 million on revenue of $10.4 million. The problem can be chalked up mainly to the conflict between the logistics of shipping mammoth bags of dog food and the consumer's expectation of saving money online.
When Pets.com Inc. launched in February 1999, it offered consumers a flat shipping fee of $4.95 on chew toys, biscuits, collars and even heftier items like economy-size bags of kitty litter-a great deal for consumers buying in bulk but lousy for the company's bottom line. In its first quarter, the San Francisco-based company lost $5 for every $1 of merchandise sold, a business no-no blamed largely on shipping losses. With only one distribution center, located in California, Pets.com found itself shipping many orders over great distances, and therefore racking up huge freight bills. However, the opening of a second center in Greenwood, Ind., earlier this year has already helped lower the cost of goods sold in the second quarter of 2000 by 16 percent. In addition, the new distribution center allows Pets.com to reach 90 percent to 95 percent of the United States in one to three business days using ground shipping. The company plans to open other distribution centers as well, with an eye toward eventually making shipping a profit center.
Earlier this year, Pets.com also tacked on a 10-cents-per-pound surcharge for items over 11 pounds, bringing the shipping cost for a 40-pound sack of kibble to $7.85. When faced with paying $35.83 online or $31.99 with a little manual labor, price-conscious shoppers might well risk the hernia. Although Pets.com's Q2 announcement said that the company expected to be gross-margin positive in the third quarter, analysts still see trouble ahead for Pets.com and its competitors. Even if online companies streamline logistics, in many cases consumers will still be spending almost as much on shipping fees as on the actual food, points out Andrew Bartels, vice president and research leader with Giga Information Group Inc.'s Electronic Commerce Knowledge Center. Bartels predicts that online pet stores will either have to partner with online supermarkets like Webvan.com Inc. or Streamline.com to leverage their distribution systems or become niche retailers of hard-to-find, high-end and readily shippable products like, say, furlined doggie mucklucks for inclement weather.
Napa, Calif.-based Wine.com faces a very different kind of logistical challenge-a legal one. State laws prohibit Wine.com and other online purveyors of wine and spirits from shipping alcohol to five states. In many of the other 45, they must ship through a three-tiered network of wine producers, distributors and retailers (a holdover regulation from Prohibition designed to stymie organized crime). Three-tiered distribution means that consumers have to wait seven to 10 business days for their orders to arrive; expedited shipping is impossible. And because the site delivers through local distributors, it can sell you only what your area's distributors stock. Customers who log on to the site for the first time expecting access to every label shown will therefore be disappointed to discover that many brands can't be shipped to their address. Once customers have created an account, however, the site recognizes them on subsequent visits, and will show only wines available in their area.
Because Wine.com is private, it's difficult to tell the extent to which shipping restrictions have affected the company's financial fortunes. The presence of customer complaints about restricted access on the company's online message board suggests that sales ($9 million in 1999, according to Hoover's estimates) would be higher without the restrictions. And it's clear that the company takes this issue seriously. Peter Granoff, Wine.com's cofounder, senior vice president and master sommelier, is on the board of directors of Free the Grapes!, a national coalition of consumers and winemakers working to provide consumers greater access to wine.
Realizing that it can't offer consumers every bottle of wine they might want, Wine.com also serves up a healthy side dish of education. CEO Bill Newlands attributes much of Wine.com's consumer value to the "blush factor"-and he ain't talkin' ros. "In a liquor store, the salesperson's knowledge is often so great that many people are afraid to ask [a question]," he says. "We have a team of wine experts who have reviewed everything on the site, and that creates trust and confidence." In addition to testing and rating each bottle it sells and letting consumers ask anonymous questions on the site's message boards, Wine.com includes a complete set of tasting notes with every order to increase customers' knowledge of-and interest in-wine. Wine.com also tracks customer purchases and uses that information to recommend other wines that the customer might enjoy. And as consumers get more educated about wine, they will be able to create their own cellars on the site to "store" wines they would like to purchase some day.
Can I See Some ID, Please?
Wine.com cannot legally sell its products to individuals under the age of 21. So once you've decided to entrust the company with your business, it needs to establish whether it can trust you. Because the order-fulfillment folks never have the opportunity to eyeball customers with the searching suspicion of a veteran liquor store clerk, the company must rely on other means of preventing alcohol sales to minors. On Wine.com's homepage, a rather inconspicuous underage drinking statement warns consumers that they must be at least 21 to purchase alcohol on the site (big deal, right?). Then at the time of purchase, individuals are required to enter their birth date on the penalty of perjury (which probably scares only the underage law students). Finally, when the wine is delivered, a person who is at least 21 must sign for it and present ID (this youthful reporter answered the door in overalls and a ponytail and signed for her plummy Bommarito merlot with no questions asked, no ID requested). Those of you who recall the machinations that underage drinkers of yore had to go through to procure alcohol are probably justifiably unimpressed, but Newlands defends the current system. "Think about the process of how you buy locally," he says. "Online a person has to lie three times [to acquire a bottle of wine], locally you only have to lie once."
Although the age verification issue isn't insurmountable, it does complicate matters for online wine merchants trying to convince nervous state governments to loosen rather than tighten the already onerous restrictions. For its part, Wine.com is among a number of companies looking into age verification technology that R.J. Reynolds Tobacco Holdings already uses on its site to block underage visitors. When logging on to rjrdirect.com you can't get so much as a peek at Joe Camel or a pack of cigarettes without making it through a registration process designed to weed out those too young to legally buy tobacco products online. Visitors must input a credit card number, home address and e-mail address; that information is then compared against a database of more than 500 million records, including voter registration lists and home ownership records, for matches. The site also supports filtering services like Net Nanny and Cybersitter so that parents can block their kids' access to the site. Good luck getting in, by the way. We couldn't!
Can't Touch This
The desire to feel, try on or test items before plunking down the plastic has been a long-standing business barrier for mail-order and Internet companies alike. Perhaps that's why online retailers have been so aggressive about using technology to replicate, and even improve upon, the experience of shopping in a store.
Analysts often hold up Furniture.com as an example of a company that is swimming against the tide of consumer psychology. But Carl Prindle, senior vice president of product development for the Framingham, Mass.-based company points out that furniture purchases have been blind for a long time. "The vast majority of brick-and-mortar furniture sales come from customers who are looking at catalog images or holding a swatch over a frame to see what the sofa would look like," says Prindle. "They haven't been that good at showing product because floor space is limited and inventory costs are so high."
To lure shoppers online, Furniture.com has put a great deal of energy into developing visualization technologies that will help customers see how a piece of furniture will look in their home. On the site, customers can view a picture of any item in any available fabric, and the company is also experimenting with 3-D visualization that would make it possible to see an item from any angle. Furniture.com currently offers a room planner that allows customers to input the dimensions of every piece of furniture in their living rooms to see whether a sofa might be too large. By the end of this year customers will be able to e-mail a scanned picture of a room with its existing furniture and drop items into the picture to see how they look and fit.
But the company has no time to waste in its efforts to convince shoppers to buy online. Its 1999 earnings reflected a loss of $43.7 million on just $10.9 million in sales. And although the company pulled in more than $20 million in customer orders during the first six months of 2000, between April and June Furniture.com withdrew a planned IPO, lost its senior vice president of operations and vice president of engineering and cut its workforce by about 41 percent.
"Furniture.com is pretty overextended," adds Giga's Bartels. He notes that customers have been using sites like Furniture.com largely for research but then go into a regular store to actually see the item and make the purchase. Click-and-mortar companies like Pottery Barn and Ethan Allen may have the best of both worlds. Customers can research their products online and then go into a store to check out the product or make the purchase. Either way, they get the sale.
Virtual Fitting Room
Whether visualization technologies will be enough to close online sales on big-ticket items remains to be seen. But for an established cataloger like Lands' End, the Web represents a new, and decidedly more dynamic, medium for doing what the company has long done: sell clothes that people can't touch before buying. And the stakes are considerably lower than they are for Furniture.com. After all, clothing is relatively inexpensive and easy to return-and the pressure on Lands' End to make its Web venture profitable quickly isn't as intense, given its successful catalog business.
But while its clothing might not be the trendiest, the Dodgeville, Wis., clothier has been on the cutting edge of online retailing since going virtual in 1995. Two years ago the company launched the first online personal model, a customizable computer-generated figure shoppers use to "try on" clothing online. Today, women can fill out a detailed questionnaire to create a model from their exact measurements and get depressed about how they "virtually" look in a swimsuit. Lands' End also suggests outfits that would flatter their particular body type. For 1999, Lands' End's Internet sales hit $138 million, a whopping 226 percent increase from the previous year. The company attributes much of its online sales growth to the personal model.
Who Asked You?
With so much junk floating around on the Internet, it can be very hard for a website to develop credibility-especially if it doles out advice and shares expertise. After all, who wants to take counsel from some nameless, faceless entity?
When Gazoontite, a San Francisco-based allergy care retailer, launched its website as an extension of its four store locations, providing an online nurse to give out information and advice was a risky move. Nurse Carlene Gibbons-that's "Nurse Carlene" to the Gazoontite faithful-has proved to be a hit both on the site, where she answers questions weekday mornings, and in the company's San Francisco store, which she visits twice a month. Lawyers advised the company's founder and former CEO Soon-Chart Yu against becoming a source of medical advice, fearing malpractice lawsuits. After weighing the decision carefully, Yu concluded that making Nurse Carlene's advice available to consumers not only offered a valuable service but also created a degree of confidence in the company's brand. As for the legal worries, "Lawyers tell you everything is problematic" says Yu. "You weigh the consumer benefit versus the risk." Of course, Gazoontite appears to benefit from Nurse Carlene's advice as well; the company maintains that the conversion rate of browsers to purchasers hovers near 5 percent when she is online. (The average for online retailers is 1 percent to 5 percent.) Innovative technologies and a nimble approach to business strategy can prolong a company's survival in the wilds of online commerce. But these days, impatient investors and venture capitalists-not consumers-have the biggest say in what flounders and what flourishes on the Web. In August, Living.com, one of Furniture.com's main competitors, filed for bankruptcy, joining the growing number of corporate corpses strewn along the rocky path to profitability. Even the backing of coffee colossus Starbucks and a powerful branding partnership with Amazon.com Inc. couldn't attract enough venture funding to save the ailing Austin-based company. Although this doesn't necessarily spell disaster for the online furniture market, it does suggest that Furniture.com may want to adjust its sensory priorities. The company may be able to get around a customer's need to touch and feel a sofa, but there's no avoiding the fact that its investors want to see the green.