Dot-com Woes Aren't Affecting Hybrid Retailers

FRAMINGHAM (04/10/2000) - Financial difficulties have hit several high-profile Internet-only retailers in recent weeks. But their misfortunes are doing little to slow down or alter e-commerce efforts at many of their counterparts with catalog and brick-and-mortar operations, not to mention business-to-business marketplace plans.

Coldwater Creek Inc. is a prime example. Last week, the Sandpoint, Idaho-based retailer of women's clothing said it has no plans to slow down development of its online business, even as Peapod Inc., CDnow Inc. and Value America Inc. have disclosed money problems and staff cutbacks and suffered declining stock prices.

Coldwater Creek's e-commerce site is already making money, with profit margins in the high single digits - a percentage similar to what its flagship catalog business makes.

"I think our [multichannel] concept is proving to be correct. We're looking at it and saying, ‘This makes money,'" said Dennis Pence, head of Internet sales at Coldwater Creek.

Next year, Pence said, he expects 25 percent of the company's sales to come via the Web. Being able to use the catalog to advertise the Web site while also sending information via e-mail has been a big help in attracting business, he said.

Jim Schanzenbach, chief technology officer at the online operation of Drug Emporium Inc. in Powell, Ohio, said he wasn't surprised or alarmed by the recently publicized financial difficulties of some online-only retailers. The problems, he said, serve to underscore the operational differences between pure dot-com companies and hybrid retailers, which benefit from brand recognition associated with stores.

"We've never spent a dime on advertising," Schanzenbach said. "A lot of those other companies have gotten into trouble by passing money right onto advertising agencies. We've invested mostly in the site."

James Dion, a retail analyst at Toronto-based J.C. Williams Group Ltd., said the brick-and-mortar retailers he works with are continuing to forge ahead with their online efforts. "They can afford however long it takes for the Web site to become productive," Dion said.

At the same time, he added, many retailers are realizing that doing the Web right is more complex and expensive than they originally expected. For example, synchronizing inventories across multiple retail channels and converting batch-oriented inventory systems to real-time systems are difficult technical challenges for some companies.

"At first, everybody was just interested in getting out there," Dion said.

"They thought they'd put up a Web site, people would order, and they'd ship the products. Now, companies are doing a lot more examination and rationalization [of their plans]."

Meanwhile, opinions vary widely on how the rumblings in the consumer e-commerce world will shake out in the now white-hot business-to-business Internet arena.

Frank Parth, vice president of development at Overstockmarket.com, a Long Beach, California-based Internet exchange for distributors, said he already has felt an impact because venture capitalists and other investors are spooked by the online retailers' financial woes.

"We had some leads for angel funding, but they're getting scared off now," Parth said. "They're demanding more detailed information. They want good, thorough business analysis. They want to see not only that you'll be making $50 million in two years, they want the project plan that shows exactly how you'll achieve those goals," Parth said.

"All of the emotion is over," he added. "You can no longer stand in front of a group, show them a business plan with dot-com at the end and have money thrown at you."

When Boise Cascade Office Products Corp. in Itasca, Illinois, built its site three years ago, it took a conservative approach, targeting the corporate customers that compose its core business.

"In the beginning, we had to justify every dollar," said Terry Kallen, manager of emerging technologies. "But as more and more customers came onboard, it became apparent we had to spend the money regardless of the [return on investment]. We couldn't risk having computers go down."

Kallen said the site is bringing in $1 million per day, but just 12 percent of customers are using it. She said she doubts if more than 75 percent of customers will ever use the Web site, and "getting to that number will be slow."

John Jordan, an analyst at Ernst & Young's Center for Business Innovation in Cambridge, Massachusetts, sees B-to-B gold in B-to-C red. "The failure of the consumer side of e-commerce could fuel the growth of business-to-business," he said.

"There have been predictions all along that said consumer commerce is just a fraction of the real serious stuff," Jordan said. Failures in the consumer space will work to drive investors to business-to-business ventures all the faster, he predicted.

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