Online Retailing's Glass is Half Full

  |  September 1, 2000   |  Comments

Dana thinks the future is bright for online retailing. But those lovely manic-depressives on Wall Street are now punishing retailers for getting into e-tailing, something they demanded last year. Outfits like Staples and Kmart, which have grossed millions from online sales in the last year, have basically been "taken out and shot," in the parlance of the stock trade.

Yesterday we discussed the future of content, and I asserted that the future looks bright. Today I want to do the same for online retailing.

Those lovely manic-depressives on Wall Street are now punishing retailers for getting into e-tailing, something they demanded last year. Outfits like Staples and Kmart, which have grossed millions from online sales in the last year, have basically been "taken out and shot," in the parlance of the stock trade.

In fact, except for Wal-Mart, which has managed a slight gain, nearly all retailers have been getting hammered this year. Whether you run a warehouse store, a food store, a discount store, or a mail-order catalog, chances are if you bought shares a year ago, you're further underwater than the Kursk. There's been no way to win.

Nevertheless, the future of online retailing is very bright indeed. Gartner Group estimated in June that online retailers will gross $29.3 billion this year, up 75 percent from last year's $16.8 billion. That figure, in turn, was up 157 percent from a year earlier.

You can see the problem in the law of numbers. Sales actually grew more in absolute terms between 1999 and 2000 than between 1998 and 1999, but because the 1999 figure was so large, the percentage increase is smaller.

Gartner's June report insisted "the large vendors will begin to emerge," and "industry consolidation will grow." The problem is that you can't scale like that and earn a profit. Small retailers are making money, but the big guys expected to dominate the market are losing money.

The fact is it's easy to get people to click, but it gets harder and harder to deliver at a profit as sales grow. Mail-order merchants are nearly all specialty retailers, so outfits like Lands' End that understand fulfillment are still subject to changing fashions. Moving merchandise out of a store is different from moving it from a central warehouse. No retailer I know of has yet figured out how to link local in-store inventory to its web site so it can tell folks whether it has what they need before they drive over.

All these are real problems, but they can all be fixed. Once a network of fulfillment centers is in place, you can turn a big profit without even increasing sales. Integrating in-store inventory systems to online clients is hard, but it's still just system integration we can do that.

Wall Street cares about numbers and trading, not about business issues. The prospect of fast sales growth excites traders, but the difficulty of fulfilling those orders at a profit depresses them. We're at that point in the movie where the hero can see the light at the end of the tunnel while the second banana has convinced the audience that it's an oncoming train.

So here's a prediction. Some very patient managers are going to find themselves with a huge online profit in the year 2002. I can't predict who's going to win the game. I only know that you can't win if you don't play.

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ABOUT THE AUTHOR

Dana Blankenhorn

Dana Blankenhorn has been a business reporter for more than 20 years. He has written parts of five books and currently contributes to Advertising Age, Business Marketing, NetMarketing, the Chicago Tribune, Boardwatch, CLEC Magazine, and other publications. His own newsletter, A-Clue.Com, is published weekly.

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