As a longtime retail executive and current investor in Internet ventures by brick-and-mortar businesses, I have watched with interest as New Economy pundits have done a turnaround regarding the strengths of Internet pure-players vs. offline brands entering the e-commerce arena. As pure-play strands of the web continue to unravel, the online prospects of brick-and-mortar firms look better and better.
Like the market cap of the average dot.com, hype about the obsolescence of such "Old Economy" values as profitability, frugality and hierarchy has collapsed. Awareness is building about the advantages of brick-and-mortar firms that commit to building online businesses. These advantages include brand equity, an existing customer base with comprehensive purchasing, integrated marketing, economy of scale, and experience with the logistics of order fulfillment and customer service.
Inaction is the greatest error Yet brick-and-mortar retailers' efforts to develop Internet sales have been tentative. According to a study conducted for RIS, only 29% of retailers currently sell anything online; 24% have no web presence whatsoever; and a third of retailers acknowledge that their website has "no strategic purpose." Another survey of 80 global businesses conducted by PriceWaterhouseCoopers and The Conference Board reported similar findings: only 28% of companies surveyed were able to process transactions online, and only 40% handle orders electronically. One can imagine retailers and other merchants late to the party breathing a sigh of relief, as pure-play market valuations seem to have validated their caution. The Internet, skeptics argue, promises nothing but razor-thin margins and massive investment in areas beyond a company's core expertise.
However, retailers that use the dot.com correction as an excuse to risk only incremental investments in online operations will miss the opportunity to play a leading role in the reinvention of their businesses. They will be caught off guard when major competitors emerge, cannibalizing their brick-and-mortar market. They will lose business as the web reshapes their customers' expectations.
The best defense Recent research by Jupiter Communications predicts that by 2005 consumers will spend $632 billion a year in offline channels as a direct result of research they conduct online. Within a few years, then, failure to open an effective web channel will likely restrict a company's existing sales arteries. In this case, a good offense - aggressive e-business development - is definitely the best defense for protecting market share.
Brick-and-mortar businesses can learn from the mistakes of the pure-play pioneers. According to research by Shop.org and the Boston Consulting Group, the average pure-play spent $82 to acquire each customer in 1999, versus just $12 for offline-based companies. The difference is partly a matter of culture, partly a matter of leveraging customer bases and brand equity.
Tough challenges While it's fashionable to ridicule the excesses of e-tailers, brick-and-mortar companies should embrace the best elements of the dot.com world. The Internet demands speed, tech smarts, healthy capital investment, willingness to experiment, and openness to strategic alliances. In particular, cultural adaptation is a subtle but necessary challenge; its results permeate all other decisions and operations. For instance, it is crucial to create a website with design fundamentals dictated by the needs and propensities of online shoppers.
Good commerce sites are easily navigable, searchable by a wide range of criteria, stocked with information as well as products, strong at highlighting items tailored to individual needs, and swift to download.
Brick-and-mortar sites too often look and feel like store aisles transposed into two dimensions. Cyberspace is multi-dimensional: customers should be able to structure a search according to multiple criteria.
The best retailers have always been open to new channels of branded distribution - think of the classic stores-within-stores concept that fueled the movement toward designer labeling in the 1970s. The e-business revolution is likewise a revolution in branding. Merchants that make the most of integrating online and offline sales will have done the most for their core franchise and in the process, have put themselves on track for profitability.
At the same time, e-businesses built on a solid foundation of brick-and-mortar retailing can become the true monuments to merchandising in the New Economy, for these are the companies that will have given the most lasting benefits to their customers.