Meet the New Retailer -- Same As the Old Retailer

Updated 7:33 AM ET October 18, 2000

By Deepa Babington

NEW YORK (Reuters) - Consumers who expected the Internet to transform their shopping chores into an armchair click-and-save lifestyle are having to think again.

In the past few weeks, three of the most high-profile companies that had pledged to change the way we buy everything from books to filet mignon and gasoline have had to close down key operations or raise prices.

Last week, Urbanfetch.com -- which promised to deliver just about anything to doorsteps in major cities within an hour -- closed its consumer operations in the United States and Britain. It will now only focus on serving businesses, in the process becoming little more than a courier service.

The week before, Webhouse Club -- the gasoline and groceries affiliate of name-your-own-price online company Priceline.com Inc. (PCLN) -- said it was shutting down. Meanwhile, the king of Internet retailers, Amazon.com Inc. (AMZN), has reduced its discounts on books -- the product on which it built its reputation. That means finding a bargain not available in a local bookstore, especially once shipping costs are included, has become that much more difficult.

The promised revolution has fizzled out, analysts say, because investors lost patience with companies that showed little immediate sign of delivering profits, and because many Web retailers underestimated how much money it would take them to get their name around and to literally deliver the goods.

At the prime of the Internet shopping frenzy in the past two-and-a-half years, people thought the Internet would "redefine the retailing experience," says Ken Cassar, senior analyst at Jupiter Research, an arm of Internet research firm Jupiter Media Metrix. "It's become clear that that is not the case -- it'll be a nice supplemental channel, while bricks and mortar stores will remain the primary channels."

OVERBLOWN EXPECTATIONS

Indeed, consumers have been slower than expected to abandon brick-and-mortar shopping -- be it driving to large out-of-town malls or hopping to the corner grocery store.

"The expectations were overblown two years ago," says Norman White, an associate professor of information systems, who teaches e-commerce at New York University. "They thought consumers would change overnight. Obviously, they won't."

Now, the main thrust of shopping on the Internet seems to be for items that are too far removed from the mainstream for the corner store to stock, or orders large enough to mitigate shipping and handling costs, experts say.

Despite all the fanfare, online shopping still represents just 1 percent or less of all sales, according to Robert Labatt, research director at research firm Gartner Group.

While shoppers stick to their familiar brick-and-mortar markets, it is the stock market that has forced the decisions by the likes of Priceline, Urbanfetch and Amazon.

The technology-dominated Nasdaq stock market's composite index (INDEX:COMPX) has plunged more than 35 percent from its highs in mid-March and TheStreet.com's Internet index (.DOT) has lost about 60 percent in the same period.

The carnage in the Internet retail field has been much worse. Priceline stock has lost more than 90 percent of its value since March and Amazon has plunged about 80 percent from a 52-week high in December.

CALLING FOR PROFITS

The slump has prompted investors, be they venture capital providers, institutional shareholders or individuals, to demand that Web retailers focus on producing a profit now rather than vaguely offering the possibility of gains in the future.

As a result, many leading players have closed or filed for bankruptcy. Casualties include Value America Inc. (VUSA), Boo.com and Amazon-backed Living.com.

The financing squeeze also has exposed concepts that may not have been workable from the moment they were dreamt up.

That may have been the case with Priceline's WebHouse affiliate. Priceline founder and Vice Chairman Jay Walker, who just a couple of months ago pumped $125 million into WebHouse by selling part of his Priceline stake, said he was unable to raise enough money to keep the idea going.

Walker had hoped that the Priceline model -- which allows consumers to bid down prices for airline tickets and hotel rooms -- could succeed with groceries. But in the end, the major grocery manufacturers were not playing ball, effectively leaving Walker to subsidize consumer purchases.

The inability to reach critical mass may also be a problem.

"People began to believe that Internet retailers would become a huge, high-volume, low-margin machine," says Cassar. "It's become apparent now that it will not be able to generate as much volume as it was thought."

PURSE-EMPTYING ADVERTISING

Part of the reason for the lower-than-expected volume is that consumers are choosing products on the Web that make economic sense even after shipping and other charges, he said.

Ironically, one of the main attractions of online shopping -- deliveries to the doorstep -- is partly responsible for putting the idea of low cost Internet shopping in jeopardy.

For example, bicycle courier costs for services such as Urbanfetch.com, which offered free delivery, may be too high if the customer just wants coffee and a video.

And for consumers, shipping and handling charges can transform a bargain $5 paperback into an overpriced $10 novel.

E-tailers also have been hurt by high marketing and advertising expenses, once expected to ultimately head toward zero on the theory that loyal Web veterans wouldn't need to be reminded about the site, Cassar says. This proved wrong.

"They have to remind customers because they don't have the brick-and-mortar store that Wal-Mart (WMT) has that I drive by on my way home from work," he said.

Many Internet retailers also have yet to build up the infrastructure, including large warehouses, that heavyweight retailers such as Wal-Mart and Kmart (KM) already have.

Ultimately, the future of profitable Internet retailing lies in serving a niche market for goods unavailable at the corner store or mall and in traditional retailers supplementing their businesses with the Internet, says Cassar.

For while consumers have taken to buying some products online, there hasn't been a shopping revolution.

"It has made consumers' lives easier, but it only allowed them to do that for 1 percent or less than 1 percent of their lives," says Gartner's Labatt.

-- capnfun (capnfun1@excite.com), October 18, 2000

Answers

Iv'e had a theory for a long time that the internet would not become,at least not for a very long time,a worldwide mega mall.That it lacks the personality and customer services required to build a successful business.

Instead,I believe the'net'will be more important and useful on a local level,supplementing RL shopping experiences by delivering "store" information about sale items,super specials,services and products,further giving patrons more reasons to shop with you over the competition.

Maybe this is an example of internet commerce imploding on itself,becoming a microcasm of what was envisioned for ecommerce.I think that the "net'will become more important on a local level,as far as business is concerned,morphing into an extreme sales tool and consumer contact point.

At least that's where I'm banking on it heading,by merging my 18 yrs of retail marketing experience with web technology.

-- capnfun (capnfun1@excite.com), October 18, 2000.

I believe the internet shopping revolution is here to stay. What is happening is that the brick-and-mortar stores and the established mail-order houses have been playing catch up. Many of them have now caught up and passed the internet startup stores. They have an established infrastructure which allows them to add on internet shopping without having to build a distribution network.

-- Buddy (buddydc@go.com), October 18, 2000.

I do a fair amount of online shopping (more than the 1% figure quoted in the article), but I also do a fair amount of returning those goods, so I've cut back. I think that might be a lot of the problem as well. You can't "see" what you're buying and, unless it's something you *know*, you might have problems.

Lately, I buy things online that I don't need to "see" beforehand; e.g., re-stocking health and beauty aids, maybe books and music (though the shipping and handling charges are outrageous, and I have a giant Barnes and Noble a short drive from me), some clothes from "catalogue companies" from which I've been ordering for years, and lately, wine (from wine.com -- the recommendations/reviews have been on-target so far; and this is an area in which I enjoy the "adventure" of not knowing exactly what it is I'm buying). I think I am fairly representative of many online "consumers".

The other thing I like about online shopping is what you mentioned -- as a supplement to RL shopping. I get notices of sales, discounts, etc. Some can only be done on the 'Net, but some are valid either way. It's convenient, especially if it's something I already know.

The other thing you mentioned -- customer service -- I have found to be somewhat better with the online retailers with which I regularly do business (repeat purchases). But it's also true that if a brick-n-mortar store has good customer service as a rule (e.g., The Gap), their online customer service is good as well. The other convenience that I really like is if I buy something online, I can return it to the store (there is an online retailer that won't let you do that, can't remember which one, but I don't buy anything from them any longer because of that).

Yes, going to the mall or the corner store (which does not exist in this town!) is a pain in the butt, especially when you have to drive to get anywhere you want to go (NYC is an exception). I had thought about grocery-shopping online, but the prices really weren't competitive and there are those shipping and handling charges again. Hey, I don't mind going to the supermarket; it's financially better to do it myself.

I don't know that "brick-n-mortar" stores will ever be replaced -- at least in our lifetimes. And I can't see the Internet being any different than brick-n-mortar, aside from the fact that it's "cyber- space". In fact, just as was stated in the article, I have always felt that the Internet will (for the time being anyway) merely supplement the brick-n-mortar entities. And I'll bet that will be mostly through repeat purchases.

Good article. I'll be interested in seeing other people's experiences with this.

-- Patricia (PatriciaS@lasvegas.com), October 18, 2000.