Retailers mull pulling plug on e-commerce

Federated Department Stores Inc. stunned the retail world late last year when it ceased selling merchandise on its site.

At last week’s eTail 2002 conference in San Jose, Calif., some retail executives and experts predicted that more traditional retailers may pull the plug on their e-commerce sites this year or at least re-evaluate and scale back investments in online operations.

They said the harsh economy is forcing retailers to take a harder look at their Internet commerce operations, which were expensive to launch and can be costly to maintain. For most retailers, online sales still represent a very small fraction of overall sales.

The ROI Factor

“I think there’s going to be some fallout. It’d be naive to think there isn’t going to be,” said Brian Kilcourse, CIO at Longs Drug Stores Inc. in Walnut Creek, Calif., noting that he expects to see some retailers shut down their e-commerce operations.

He said one problem is the high cost of entry for e-commerce. “You need to spend (US)$20 million to get the beginnings of a Web offering – well, in our case, that’s four or five stores,” Kilcourse said. “So one of the things the CFO will ask, rightly, is, ‘Am I going to get four or five stores’ worth of ROI out of this investment?’ ”

But Kilcourse added that retail executives need to keep in mind that a Web presence is intended to build their brand, not merely generate sales.

Ralph Briskin, director of e-commerce at The Men’s Wearhouse in Houston, said he doesn’t see how major retailers’ e-commerce sites can “be profitable on this year’s basis or this month’s basis or today’s basis, let alone pay back on the investment they’ve made.”

“This is not like going into a store and putting up some fixtures and then they stay there for years on end,” he said.

Dyan Triffo, a financial analyst at Deutsche Bank Alex. Brown Inc. in New York, said retailers are facing tremendous pressure to focus on the bottom line. “The economic environment is forcing people to make strategic decisions about what areas they can cut, where they can save money,” she said, “and [e-commerce] is an obvious area to look at first because it’s the newest [and] it’s taking a lot of money out of the budget.

“A lot of companies are realizing they spent a lot of money on this channel and haven’t necessarily gotten anything out of it,” Triffo said.

A storefront or Yellow Pages-type presence might be adequate for some retailers, but others face tough choices if their customers have come to expect transaction-based sites, Triffo said.

Debate continues about Federated’s decision to halt e-commerce on Geri Spieler, an analyst at Gartner Inc. in Stamford, Conn., said scaling back a site to offer fewer items, as Federated did with, makes sense. But pulling the plug on the site was a “knee-jerk reaction” and a “huge mistake,” she said.

“It was very, very shortsighted, because they have to relaunch it and differentiate it all over again, which is a lot of money,” Spieler said, adding that she doesn’t think other retailers will start pulling e-commerce from their sites.

Larry Promisel, manager of Internet marketing at New York-based luxury retail company Coach Inc., said retailers should scale back their sites rather than shut them down. “Every initiative we do is at least profit-neutral,” he said.

For instance, the company once nixed a potential investment in live chat because it couldn’t prove that the investment would pay off.

“There was no analytical data, and it was just too expensive and too time-consuming from a customer service standpoint,” Promisel said. He noted that Coach would have had to train sales representatives and install and test the software.

Coach is reconsidering live chat, with plans to do tests on a small scale to see whether it will help the company close more sales, he said.

Lane Bryant Web Site Pays Off Without E-Commerce

In contrast to the scores of retailers struggling to turn a profit on their e-commerce operations, Lane Bryant claims that it’s making money even though it doesn’t sell any merchandise from its Web site.

The Reynoldsburg, Ohio-based women’s apparel retailer spent less than US$500,000 on its Web site last year, yet it traced US$21.2 million in store sales to the electronic coupons and bar-coded gift certificates it e-mailed to registered customers, according to Jennifer Campbell Peterson, director of brand development.

Gift certificate sales grew 20 per cent from 1998 through 2001, with US$500,000 of the US$3 million in total sales via the Web site, she added. “We’re scrappy,” Campbell Peterson said. “We don’t have a big budget. We use guerrilla tactics to get a huge bang for our buck.”

Lane Bryant launched its site in 1997 as a tool to help it change its image as a “dowdy brand for grandma,” Campbell Peterson said. Now, the e-mail database contains more than 1 million names, and the site logs 700,000 unique visitors per month, with its ChickChat customer forum attracting the most usage.

The site’s 3-D virtual models have drawn 250,000 people to try on clothes displayed through the site, and 387 television stations have aired news stories about the site, including 52 in major markets, according to brand development manager Becki Rundels. One recent webcast of a Lane Bryant fashion show, featuring the rock band Kiss, drew 65,000 viewers.

Data analysis has shown that 40 per cent of the Web visitors are new customers who haven’t made a trackable purchase in any of Lane Bryant’s 653 stores or turned up on any direct-mail lists, Campbell Peterson noted. She said Lane Bryant would love to make its site transactional because surveys have overwhelmingly shown that customers “want it so desperately.” And she said she has even started to sense some customers harbouring “a little incredulous attitude that we don’t have one.”

But e-commerce wasn’t an option under Lane Bryant’s former parent company, The Limited Inc. in Columbus, Ohio, which hadn’t made it a priority, Campbell Peterson said. The new owner, Bensalem, Pa.-based Charming Shoppes Inc., has shown interest in making the site transactional, and Campbell Peterson hopes Lane Bryant will launch e-commerce next year.

“For certain types of goods and services, consumers are really beginning to expect that,” said Dyan Triffo, a financial analyst at Deutsche Banc Alex. Brown.