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.

And of course, there’s $3.3 billion Barnes & Noble (www.bn.com), the biggest land-based bookseller in the US Although it may rank second to rival Amazon.com (www.amazon.com) in online book sales, the retailer’s online joint venture with media giant Bertelsmann AG, Barnesandnoble.com, sold more than $82 million in merchandise in the fourth quarter of 1999. Combine the dot-com’s sales with those rung up at Barnes & Noble physical stores, and the clicks-and-mortar duopoly moves far more books than Amazon.com.

This does not mean that traditional businesses are waltzing their way through cyberspace. Far from it. Old-economy companies face their own set of problems when setting up online businesses. At the top of the list: In most states, bricks-and-mortar operations are required to charge sales tax on customer purchases. Dot- coms, on the other hand, get off scot-free — assuming they don’t have a physical presence in a tax jurisdiction in which customers reside. Typically, the tax break translates into a 5 percent to 8 percent discount on merchandise huge drawing card for online retailers. In fact, studies show that consumers would be far less likely to shop online if E-tailers were forced to levy sales tax on transactions.

Beyond taxes, Wall Street has shown a seemingly limitless capacity for backing pure-play E-commerce ventures — often with little regard for how long it might take these E-tailers to actually turn a profit. Conversely, investors have refused to reward established companies that have diverted dollars to an Internet initiative, sometimes punishing companies for daring to disrupt earnings. “When you are a bricks-and-mortar company looking to break into E-commerce,” observes Nancy Babine-Kucinski, president and chief operating officer for Lids Corp., “it’s harder to spend money that doesn’t reward you right away than it is if you are a startup that gets rewarded for losing money.”

Lids (www.lids.com), a privately held hat retailer, operates about 370 stores in 46 states. The company launched its Web site in 1999. Although the site is doing well, Lids still has a lot more milliners than millionaires at its headquarters in Westwood, Massachusetts. “If you are a physical company,” says Babine-Kucinski, “investors look at your financial statements in a very structured manner.”

Absent the reward for investing in their online stores, established businesses tend to spend less on them. “We’re finding that dot-com companies are spending nearly twice as much on their sites as traditional companies,” says Forrester’s Modahl. “And that has largely to do with the two markets that have developed on Wall Street — one for traditional companies, and the other for dot-coms.” The numbers don’t lie. Through the first two months of 2000, the S&P 500 fell 7 percent. Meanwhile, the tech-heavy Nasdaq Composite index rose 15.4 percent.

Patricia Seybold, head of the Patricia Seybold Group, an ebusiness and technology consultancy, believes investors prize online customers more than offline shoppers. Consider retailer Wal-Mart Stores (www.walmart.com). The Bentonville, Arkansas, department store giant reported sales of $165 billion in 1999. That’s 100 times the revenues generated by Amazon.com, a pure-play E-tailer Yet Wal-Mart’s market capitalization is only 10 times that of its online rival. “Amazon.com knows a hell of a lot more about its customers than Wal-Mart does,” argues Seybold. “And that makes its customers much more valuable.”

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