E-tailers and Space Invaders

Some thought Internet startups would wipe out whole sectors of traditional bricks-and-mortar firms. But old-economy companies are carving out their own presence, and some may become the biggest winners on the Web.

That seizing has revealed a surprising truth about competing in the virtual world. When an established business moves into cyberspace, it brings its brand name, its existing customer base, and its physical network of shops and distribution centers. Often, this puts the company light years ahead of its pure dot-com competitors.

Catalog operators have an even bigger advantage. They’re already accustomed to making sales and fulfilling orders without stores. “It’s been proven time and time again that when a major retail brand comes online, it immediately sees enormous traffic,” says James Vogtle, director of E-commerce research in the Toronto office of Boston Consulting Group, a management consulting firm. “By contrast, pure-play E-tailers are spending enormous sums of money trying to build a brand.”

Wising Up

That kind of heavy lifting has sapped the resources of more than a few E-tailing startups. Online music destination CDnow, for one, reported a 154 percent increase in revenues and a 181 percent jump in traffic in the fourth quarter of 1999 — both records. But the online retailer still lost $34 million, and CDnow management intends to slash the company’s marketing expenses. “If you’re not already a Yahoo or an Amazon.com, you’re looking at a lot more than $100 million to establish your brand name on the Internet,” explains Modahl. “That’s an enormous hurdle — even for companies that are swimming in venture capital.”

Bolstered by marquee brand names, traditional companies have been able to stake out entire quadrants of cyberspace. Charles Schwab (www.schwab.com), the world’s largest discount brokerage firm, is now the world’s largest online broker — outpacing pure E-commerce rivals, such as E-Trade (www.e-trade.com) and privately held Datek Online (www.datek.com). Other financial services firms, including mutual fund giant Fidelity Investments (www.fidelity.com); investment bank Donaldson, Lufkin & Jenrette (www.dlj.com); and commercial banks Wells Fargo (www.wellsfargo.com) and Bank of America (www.bankofamerica.com), have made huge inroads on the Web.

Among the retailers, Lands’ End (www.landsend.com), J. Crew (www.jcrew.com), L.L. Bean (www.llbean.com), and Victoria’s Secret (www.victoriassecret.com) have managed to duplicate their success in the catalog business on the Internet. Dell Computer (www.dell.com) has taken its direct sales approach into the virtual world — and flourished. KBkids.com (www.kbkids.com), a joint venture between toy retailer Consolidated Stores Corp. and children’s product E-tailer Brainplay.com, has generated sizable sales since launching last July.

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