U.S. retailers debate exiting e-commerce

Some traditional retailers could start to pull the plug on their e-commerce sites during the coming year – or at the very least, re-evaluate and scale back investments in their online operations, according to some electronic retailing executives and experts who spoke at yesterday’s eTail 2002 event in San Jose, Calif.

They said the harsh economy is forcing many 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, sales generated from Web sites still represent a small fraction of their overall sales.

“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 Corp. in Walnut Creek, Calif. He added that he expects to see some retailers shut down their e-commerce operations.

Kilcourse said one of the problems that retailers face is the high cost of entry with e-commerce technologies. “The idea that 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,” he said. “So one of the things the [chief financial officer] will ask rightly is, ‘Am I going to get four or five stores’ worth of [return on investment] out of this investment?’ “

Kilcourse said retailers need to keep in mind that e-commerce sites are intended to build their brand, not only to generate sales.

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

“A lot of companies are realizing they spent a lot of money on this channel and haven’t necessarily gotten anything out of it, and I think companies are going to be making some hard decisions about the scope of their presence online,” said Triffo.

Triffo said a storefront or Yellow Pages-type presence may be adequate for some retailers. Others, however, may be faced with tough choices because their consumers have grown to expect transaction-based sites, she said.

Ralph Briskin, director of e-commerce at Houston-based The Men’s Wearhouse Inc., said major retailers such as Federated Department Stores Inc., J.C. Penney Co., Wal-Mart Stores Inc. and Kmart Corp. face staggering threshold points “to be profitable on this year’s basis or this month’s basis or today’s basis, let alone payback on the investment they’ve made.”

Briskin said the costs to invest in technology, infrastructure and product display are “phenomenal.” “This is not like going into a store and putting up some fixtures, and then they stay there for years on end. It’s not like that,” he said. “And you don’t pay the same price to your technology people as you do the person [who] shows up on the truck and builds the fixtures for you and then goes off and does another store for you.”

Briskin said he wasn’t surprised to see Federated eliminate the e-commerce portion of its Bloomingdales.com site late last year, nor was he surprised when Kmart and Wal-Mart pulled their e-commerce arms back in-house after trying to operate them independently.

Federated last year announced that it would reduce the number of items offered on its Macys.com site and that it would stop selling goods through its Bloomingdales.com site, leaving only the site’s online bridal registry and electronic order forms for buying products from Bloomingdale’s mail-order catalog.

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