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.

Faced with skyrocketing demand — and thus skyrocketing expenses — some companies might be tempted to cut corners. But as several online retailers painfully discovered during the 1999 Christmas season, it does not pay to skimp on the infrastructure of a virtual store. Several virtual merchants were unable to deliver products until after the holiday season, something that didn’t endear the E-tailers to customers. “Companies have learned that just being on the Web is not a strategy,” says Cheryl Shearer, IBM’s London-based global services director for ebusiness. “Being there is just visibility. Being there successfully means the back end has to work as well as the front end.”

That bodes well for traditional companies that are moving into cyberspace, argues Rich Leggett, e-solutions analyst for Friedman, Billings, Ramsey & Co., an investment firm based in Arlington, Virginia. “Traditional companies have a long heritage of delivering goods to customers,” Leggett says. “All they really have to do now is change their channel of distribution.”

Clicks with Bricks

But CFOs at some dot-coms don’t necessarily see it Leggett’s way. Robert Swan, CFO at online grocer Webvan, believes certain businesses are just better suited to a pure dot-com approach: “Our model enables us to operate with less real estate as a percent of sales, and fewer people,” he explains. “That means we will enjoy three times the profitability of traditional bricks-and-mortar grocers.”

Webvan, which already services customers in the San Francisco area, is planning to expand its operations across the United States. Despite the high visibility of large grocery chains, Swan thinks established food retailers face an uphill battle going from bricks to clicks. “For traditional food retailers to catch up to us in a clicks-and-mortar environment,” he argues, “they need to make a significant capital investment in technology while operating on a business model that already has rather slim profit margins.”

Nevertheless, a number of pure dot-coms appear to be embracing the clicks-and-mortar strategy. Drugstore.com (www.drugstore.com), for example, has partnered with Rite Aid (www.riteaid.com), a drugstore chain with some 3,800 stores in the United States. The partnership will make it possible for Drugstore.com customers to order prescriptions online and then pick them up at Rite Aid outlets. And computer maker Gateway (www.gateway.com), a pioneer in the telephone and Internet direct sales channel, has recently been building a network of stores to complement its online operations.

Even E-Trade (www.e-trade.com), one of the most successful online brokerage companies, has opened a walk-in office in New York, and it plans to open another. What’s more, in early March, the company announced it was going to buy Card Capture Services, an operator of about 8,500 automatic teller machines. The acquisition would give the high-profile E-Trade a substantial bricks-and-mortar presence.

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