Forum Archive Index - July 2000

["Warner Lamb" <cloud9@i4free.co.nz>]

Clicks still damage bricks

Last week, I focused on the likely convergence of horizontal and vertical
sites
where breadth meets depth. This week, the topic switches to analyzing this
week's bonanza of offline and online deals. In only five days' time,
wide-ranging marketing partnerships were announced this week between
Wal-Mart
(WMT) and America Online (AOL), Microsoft (MSFT) and Best Buy (BBY), Circuit
City (CC) and AOL, and Yahoo! (YHOO) and Softbank with Kmart (KM). These
deals
came on the heels of a similar partnership reached between Microsoft and
Radio
Shack last month. None of this offline distribution brouhaha is news to
Steve
Case and Bob Pittman over at AOL. In recent months, both have already cut
similar offline marketing deals with Blockbuster (BBI) and Universal Studios
theme parks.

Even with this week's tornado of deals, offline and online partnering isn't
finished by any means. In fact, I believe it's just begun to put on its
running
shoes. But does anyone understand what's at stake for both sides? Not
likely.
After receiving a flurry of coverage in the media this past week, I'm still
not
sure that the long-term implications for these relationships have been
properly
explored. In my eyes, these alliances have opened up a whole new world of
possibilities for both the online and offline worlds. This is the type of
convergence -- not the chatter about interactive TV -- that Net companies
should
be abuzz with. "Clicks and bricks" is finally showing signs of evolving from
the
Net buzzword of the moment into the core philosophy of every business.

Do clicks really need all these bricks?

So why did the bricks-and-mortar boys and some of the Net's most illustrious
dot-com cowboys decide to tie the knot this week? Without a doubt, that's
the
million-dollar question that investors should be asking themselves. The
short
answer for this recent spate of deals is pretty cut and dry. It all comes
down
to accessing multiple distribution channels and customer bases. Top-tier
Internet companies have finally awoken to the fact that their relationships
with
customers must transcend the digital boundaries of the Internet. People
don't
live in an Internet vacuum. Most users will always crave a face-to-face,
"see,
touch, feel" relationship in some product categories. In addition, a
significant
portion of the world population still requires some handholding to get onto
the
Internet in the first place. Think of this as AOL and Microsoft's strong
push to
get the Aunt Edna's of the world finally online in time for Christmas.

These are clear signs that major players like Yahoo!, AOL, and Microsoft see
Internet penetration rates slowing down considerably. To help remedy this
problem, this trio is morphing into "Web evangelizer" mode once again, as
they
all did at the dawn of the Web. While there's no reason to believe that the
penetration rate of the Internet won't someday surpass the penetration rate
of
television, it's a process that won't happen overnight. Big problem. In a
market
that only awards lofty valuations to companies with astronomical revenue
growth,
time is the greatest enemy of Web companies -- time to come to market, and
time
for a market to evolve. Therefore, these top Internet companies are under
the
gun to attract new customers and expand the entire Internet universe.

Complimentary distribution channels

To accomplish this Herculean task, the burgeoning online world is now
looking to
tap into the offline world's established and entrenched distribution
channels,
while the bricks-and-mortar guys are finally realizing that they can't
successfully run their Internet efforts on their own. This is the clearest
sign
to date that the bold talk of big offline retailers dominating the Net has
been
shelved. They just want to survive. Maybe some pundits and analysts will
finally
realize that the chances of any of these guys eating an Amazon.com for lunch
is
slim to none. If anything, Amazon.com is setting the place mats at the table
and
forcing the bricks-and-mortar world to sit and eat.

While I remain skeptical of the long-term profitability of many e-tailers,
they
have succeeded in striking fear deep into the boardrooms of the retail
world's
largest companies. Faced with a realm where products are sold at or below
cost,
land-based retailers are left with a real dilemma. They can either lower
their
prices and shave their profit margins, or keep their current pricing models
intact and watch their customer base decline with each passing quarter. I
don't
know about you, but that's the kind of strategic decision that would keep me
up
at night.

Fighting for a stalemate

On the other hand, by embracing the Net, these traditional companies know
deep
down they'll end up cannibalizing some of their core businesses. This
situation
will get even nastier a year or two down the line, when more shoppers will
own
wireless handheld devices loaded with price comparison shopping engines. Can
you
imagine a salesperson's face when a shopper is ready to make a rather large
purchase, but first whips out a Palm Pilot and searches the Net, pulling up
a
lower price on the same item? Talk about a rude awakening! I still think
we're
only at the beginning stages of watching land-based retailers get dragged
onto
the Web, forcing them to alter their pricing structure. They have no other
choice.

Signs of weakness for bricks and mortar

In other words, don't think for a second that these bricks-and-mortar
retailers
are dealing from a position of strength in these recent alliances. In the
short
run, they are indeed in an enviable position, since Web companies are
scrambling
to access these in-store distribution channels and customers. But in the
long
run, where do these deals really leave them? Once a customer has been lured
onto
the Net and gets a taste of one-click shopping and lower prices, what are
the
chances that customer will continue to frequent a physical store? Sure,
there
will be some consumers who will decide never to purchase products online,
but a
large percentage of them will become very comfortable with surfing the Net.
Say
good-bye to many second- and third-tier "big box" retailers.

In effect, these online partners will start looking like e-parasites,
sucking
away customers and porting them over to the Web. This isn't some grand
covert
scheme; it's just a fact of life. Of course, you would never hear an
executive
of a major Internet company describe these new relationships in those blunt
terms. It's better to sugarcoat reality for the time being. For now, though,
bricks-and-mortar retailers have gone from being the ugly duckling on the
outskirts of Web Street into the hottest date at the Web prom. This will
change
a few years out, just as I still see a huge number of commodity goods
e-tailers
going belly up in the next 18 to 24 months.

Possible upside for bricks and mortar

While my analysis sounds grim for land-based retailers, I still believe they
are
making the right move by aligning themselves with the dot-com crowd. It's a
risk
that many will have to take. Like I said previously, they're stuck between a
rock and a hard place. There are no simple solutions for this strategic
quandary. The best Band-Aid for the time being is partnering with
established
Net firms and setting up their online operations as separate dot-com
businesses.
However, behemoths like Wal-Mart have enough clout with vendors and
intricate
distribution networks to eventually succeed at this game. I believe they
will in
fact survive and prosper as their weaker cousins fall by the wayside. In
both
worlds, the same stark reality holds true: the big get bigger and the
smaller
eventually perish.

For those traditional retailers that have started to engage the nebulous
world
of cyberspace, few have really begun to leverage the inherent advantages of
their existing real estate. For example, by operating their online and
offline
arms as separate entities, these same retailers are shooting themselves in
the
foot by not integrating the two operations into one seamless experience. All
too
frequently, I seem to run across online units with different customer return
policies than their offline sister stores.

Integrating both worlds

That's a potentially terminal mistake in this current retail war. After all,
the
customer doesn't know that Bn.com (BNBN) has a different management team
with a
different return policy than Barnes & Noble (BKS). In fact, they don't care.
Shoppers simply expect an enjoyable shopping experience under that one
brand.
Expect to see land-based retailers increasingly use their physical stores as
pick-up and return points for online purchases. It would sure beat those
annoying trips to the post office, and would provide a secure way for
customers
to pick up online purchases at their leisure.

Of course, this is all pure speculation on my part about how this fusion
could
evolve. For the near term at least, the bricks-and-mortar crowd has the
coattails and mystique of the dot-com crowd to ride upon. The question now
is,
when does the growth of clicks finally start crushing bricks? That's a
question
that every land-based retailer will pretend they didn't hear this holiday
season. Regardless, the annoying chatter of mouse clicks and e-shopping
carts
rolling down the cyber-checkout aisles will continue to be in their ears as
we
enter the new year. One can only hope for their sake that it will be their
own
e-tail initiatives that are racking up the majority of these sales, but
don't
count on it.

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