A Look Forward A Look Forward

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What a holiday season 1999 brought! We continue to give much time and attention to the electronic retailing phenomenon. The growth in this area this past holiday season was nothing short of exhilarating. Everybody continues to talk about electronic retailing. "Click-and-mortar," "click-and-click" and "brick-and-mortar" continue to be new buzzwords in the new millennium. The equity markets continue to make large investments, and every day we hear about a new exciting "" concept. History has shown us that when things heat up at a white hot pace, they will cool down just as quickly. When that happens, what do we need to consider?

The Internet provides a more efficient platform for retailing. At the core, this more efficient way is driven by communication and distribution. Retailers can "speak" to their customers in a much more focused, educated, entertaining and consistent manner than the "brick-and-mortar" environment provides. It is anticipated (yet unproven) that this better way of communicating will leverage down costs and produce better shared information between the consumer and retailer. One of the most important operating tenets in retailing is inventory efficiencies. The leveraging of inventory over an expanded market with "just-in-time" information as to operating performance should produce enhanced bottom-line results. To date, although these are compelling points, results have shown that there is still much work to do.

In helping to define this strategy, lets look at the business in terms of eight value propositions:

  1. Information: Companies must offer superior information about the products that they are selling in an entertaining, organized way that is very customer-friendly.
  2. Choice: Customers demand choice; companies must meet the challenge by offering a range of products and by helping them to make better decisions in their choices.
  3. Convenience: Companies must break through the barriers of time and space by finding new and exciting ways to offer the customer as much convenience as possible.
  4. Customization: Offer products tailored to the specific wants and needs of consumers while giving them the personalized attention that they want and deserve.
  5. Savings: The online environment is supposed to provide reduced operating costs and a streamlined supply chain resulting in savings that can be used to everyone's mutual advantage.
  6. Relationships: By focusing on the interest of the customer, you begin to build and maintain a relationship that allows you to profitably target your products and leverage revenues.
  7. Entertainment: Offering the consumer fun and interaction can then leverage the attraction to that entertainment to sell customers a whole range of products.
  8. Trust: Companies must emphasize technology to ensure that information exchanged between them and the customer remains private. This is the first step in building customer relationships.

These eight value propositions help to define what the business is supposed to be. What effect will this business have on the retail landscape? From an investment standpoint, the flow of invested capital into this business has been incredible. This capital is sourced by the public markets and venture capital firms.

Currently, very little financing has come from debt. New companies have risen with some unbelievable results. When you consider that the capitalization of is larger than that of Sears, you begin to take note of the incredible changes that are taking place. The public markets and venture capital firms continue to fund losses in these businesses with the anticipation of making profits on stock multiples rather than operating performance. Intellectually, the evolving model makes sense. It's more than uncertain how and when we will finally get there.

What retailers are going to be most impacted by this phenomenon? As an example, I do not believe that will have a great impact on Barnes & Noble. Barnes & Noble's brick-and-mortar stores have been supplemented by an e-commerce strategy. While Barnes & Noble's brick-and-mortar stores regularly stock 175,000 titles, their online counterpart can offer an additional 2.5 million other titles. This allows them to now offer the customer a wider range and capture an expanded customer base. The click-and-mortar approach gives Barnes & Noble the opportunity to leverage its purchasing potential with its brick-and-mortar customer and capture customers from a new and expanded market. Results have shown that this type of e-commerce retailing has had greater success than the pure-retail or pure- e-tail companies. Barnes & Noble, because of its retail presence, is also able to leverage with very strong partners such as America Online, CNN and The Walt Disney Co. On the other hand, a regional book retailer with limited capital and limited customer base will not be able to make the investments or generate the revenues needed to compete in the long term.

What does that say for retailing? Well, keep some other things in mind. Retailing is a $2.4 trillion business per year. Internet sales account for (at current estimates) $20 billion. Most experts agree that the current attraction is limited to consumer products that are commodity in nature. Consumer purchasing dynamics are different when buying a brand name television vs. a new dress. Consumers continue to want to "touch and feel" products that they have a more personal and emotional connection with. Categories like apparel will require a longer investment of time and effort to achieve success in the e-commerce platform. The opportunity for retailers to expand their markets, better communicate and have more cost-effective and efficient distribution creates incredible leverage and wonderful profit potential. On the other hand, capital requirements to effectuate the envisioned model for implementation continue to be large and not well defined.

We will continue to widen the gap between those who can and cannot compete. Globalization, consolidation and more aggressive pricing will continue to put added pressures on those who lack the capital and other resources needed to compete. Those that do will continue to enjoy great financial success and create meaningful challenges for survival for those who can't. You can expect a continued increase in bankruptcy filings precipitated by this environment.

There will also be a meaningful amount of failure in these .com companies. There are just too many of them and the losses too great for all to survive. These companies will have different values than the "traditional" company. The value in a company is in its information—information about its customers, what they buy, how they buy it and when they buy. It will be interesting to see how that value gets monetized given the confidentiality and privacy protections anticipated to be provided to consumers. Further, the balance sheets of these companies will not have a lot of bank debt. As we discussed earlier, capital has been coming from venture capital equity and the public markets. These consistencies will have a much larger voice in these bankruptcy filings. Distribution fulfillment continues to be a challenge; .coms continue to outsource these efforts in the hopes of limiting capital investments in these areas and developing known and consistent costs. The asset-disposition process may be further challenged by the reliance on third-party creditors to help effectuate maximum asset return.

E-commerce retailing will be one of the many truly exciting and interesting phenomenon of this new millennium. At its current pace, many will succeed and many will fail. Market forces will not allow for average or mediocre performance. Consumers will benefit greatly and challenges will abound. What a great opportunity!

Journal Date: 
Saturday, April 1, 2000