Amid all the gloom and doom about e-commerce, it’s easy to overlook that for some large companies, the Internet is living up to its advance billing. For them, the Internet is a fast-track vehicle to revenue and profit growth and consequent increases in shareholder value. What kinds of companies are achieving such success?
Try clothing companies on for size.
According to a recent survey by consulting giant McKinsey & Co., clothing is the most profitable e-tailing category — way ahead of books, CDs, electronics, specialty foods, and flowers. Clothing e-tailers “achieved an average operating margin of almost 21 percent even though their revenue per customer wasn’t very different from that of other types of e-tailers,” reported “The McKinsey Quarterly.”
But not just any type of online clothing retailer did so well. Rather, those online retailers that have brick-and-mortar establishments did the best: “They get the benefit of existing brands, marketing arrangements, and installed information technology — such as the order-fulfillment systems used by catalog retailers. Almost 86 percent of the e-tailers in the best-performing quartile were offshoots of incumbents, compared with 7 percent of those in the worst-performing quartile.”
That kind of data helps explain the awesome performance of Talbots, a retailer of upscale women’s clothes that sells via catalogs and a chain of more than 700 stores, with a heavy presence in the Northeast. In its news release earlier this year announcing record sales and earnings for 2000, the company stated, “Our catalog sales grew a substantial 29 percent to $269.0 million, including Internet, which surpassed our expectations by contributing approximately 10 percent of total catalog volume. All of these factors helped us to achieve record earnings per share of $1.80, a 96 percent increase over 1999 results.” In other words, Talbots sold about $27 million of clothing online last year, at margins likely better than those of its catalogs and stores.
The Internet is fast becoming a significant force in the company’s performance, which may help explain why the company’s key investment metrics are so far ahead of the market’s. Its return on equity is 27.5 percent versus 13.7 percent for the market as represented by the S&P 1500 companies. Its after-tax profit margins are 7.2 percent versus 5.9 percent for the market. Return on assets stand at 13.4 percent versus 2.7 percent for the market.
That the Internet and clothes work so well together must be explainable by more than such factors as brand recognition, marketing arrangements, and installed IT. Companies such as Amazon.com and CDnow have such advantages in spades. No, I suspect that the success of clothing on the Internet can be explained partly by the fact that brand-name clothing can more easily escape the curse of commoditization than can brand-name electronics and specialty foods. A woman who has had satisfying shopping experiences at talbots.com is much less likely to be lured to a competitor’s lower-priced offerings than, say, a man shopping for a Palm or a Phish CD. That’s not to say that shoppers can’t get hooked by the selection and ease of shopping at Amazon, because many do, to the extent that they’ll even pay higher prices than they might elsewhere.
And therein lies one of the realities of marketing via the Internet: The right company in the right industry with the right Web site can do great things. The challenge is to identify the factors that make things “right.”
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