The online retailing world is looking more and more like an episode of "Survivor"

There is no doubt etailers have had a tough time over the past six months. 2000 saw a number of major brick and mortar retailers getting their online act together and beginning to compete effectively with pure-play companies.

The dominance of traditional retailers in the online world is after all, hardly surprising; traditional retailers have a number of advantages over their etailing cousins:

• Brand recognition
• Merchandising expertise
• Physical presence
• Established infrastructure
• Established vendor relationships
• The ability to provide in-store services (e.g. pickups and returns)

Meanwhile, many etailers have seen much of their initial advantage eroded as they have struggled to implement advanced distribution facilities that were never envisaged in those early business plans. Compounding this problem were unrealistic expectations of market penetration, which failed to take into account the noise in the market caused by so many competitors. Although some etailers still have the advantage of a broader assortment, they are often no longer able to offer a price advantage over their click and mortar rivals.

One of the biggest problems for etailers has been their inability to create recognizable brand identities. Without a strong brand, it is difficult for shoppers to personally identify with a particular store. The result - brand switching on a massive scale.

For etailers, the most crucial question is: What is our survival strategy?

Survival Options

A strong survival strategy will combine two or more of the following options:

• Reduce marketing / cut costs
• Redirect marketing
• Broaden product range
• Become a destination site
• Develop mail-order
• Partnership or merger
• Sale to another company
• More of the same

Reduce Marketing / Cut Costs

By reducing marketing to sustainable levels and concentrating on developing ownership of a specific market niche, an eRetailer may be able to achieve steady growth in a narrow, smaller market.

This is likely to work best for a company with a distinctive merchandise assortment (one that is not dependent on commodity products). The offline equivalent of this type of retail store would be the specialty store, often an individual store or small chain whose reputation is built upon the expertise and knowledge of the founders.

Companies with Venture Capital backing may not be able to generate the returns that VC backers require with this strategy but it can lead to long term success.

Redirect Marketing

Building brand recognition through expensive marketing has proven folly in the past, so it is unlikely to win backers in the future. However, redirecting marketing dollars to channels where there is a measurable return on investment may prove a more successful strategy.

Increased spend on consumer direct marketing such as email and traditional snail mail allows companies to tightly target specific consumer segments.

Spending on marketing must still be supported by revenue unless the company has very deep pockets.

Broaden product range

The Amazon.com strategy of continuously adding merchandise to the product range is not a highly recommended strategy. A broad assortment increases the merchandising and distribution complexity as well as increasing the exposure to inventory accumulation.

Because it is difficult for any one company to be all things to all people, building a strong brand around this strategy is inherently difficult. WalMart and Kmart have achieved this in the offline space, and they are continuing to develop a similar identity online.

Even Amazon.com is likely to struggle to maintain its dominance as traditional retailers eat into its market share.

Some limited product expansion may be appropriate within a specific market niche if it helps to establish ownership of a category. In this case the expansion can be used to build an image that correctly positions the brand against competitors.

Become a destination site

Ownership of a market niche means becoming a site where the target consumer goes for information about that market. For a canoe shop, this might mean becoming the online canoeing site for expert canoeists, while for an art gallery, it might mean becoming the place people go to find out about undiscovered artists.

Becoming a destination site involves developing in-depth content around the interests of the target consumer and the existing product assortment. This is the online equivalent of employing product experts in a traditional retail store. Although it is expensive, it can yield higher margins resulting from increased brand loyalty among visitors.

If the company's target market is already served by an established destination site that does not sell merchandise, there is the potential for a mutually beneficial partnership. (If however, the destination site already sells competing products, it may be time to rethink the target consumer unless the existing destination site can be usurped).

Develop Mail-Order

Mail-order is the closest retailing channel to online retailing, so it is a natural extension option for the pure-play online retailer. It is no accident that many of the best online retailers also happen to have started out as mail-order companies before they went online.

Mail-order requires the use of targeted marketing and an understanding of how catalog page layout and design impact sales. The logistics of mail-order are also more complex that online retailing since catalogs must be distributed and sales tend to come in waves following catalog drops. Mail-order also requires more telephone support than online retailing. Establishing a successful mail-order business may require mail-order expertise to be brought into the company.

However, mail-order can help build a brand identity for the online retailer and help to develop customer loyalty.

Partnership / Merger

As can be seen from the preceding section, partnerships can take many forms online. One of the most exciting possibilities for an online retailer is to develop a partnership with a traditional offline retailer that serves the same market but lacks a significant or credible online presence. However, partnerships are frequently difficult to establish effectively.

Any traditional retailer that does not already have a well-established online presence probably doesn't 'get it', which may lead to organizational conflicts. Overcoming these differences may present an insurmountable obstacle to progress.

In theory, the relationship seems ideal: By teaming up with a traditional retailer, the online retailer gets access to physical stores which can be used to provide local pickup and returns facilities (although the difficulty of integrating systems to achieve this should not be underestimated). In return, the traditional retailer can expand their market to new geographies almost overnight. In reality, the outcome may be somewhat less than this ideal scenario.

The most striking example of this strategy was demonstrated by Amazon.com and Toys"R"Us when the announced their partnership in mid-2000.

Sale to another company

Companies are not rushing to pick up the remains of failed dotcoms, so finding a buyer may be difficult but not impossible, especially if the eRetailer has established a strong technology infrastructure that is not heavily dependent upon people.

Unfortunately, many retail CIO's believe it is just as easy to build an online retail operation from scratch as it is to acquire one. In many cases they are probably correct, especially where key technical people have already left the online retailer's payroll or where the technology is based upon standard licensed software which is readily replicated. However, if technology licenses are transferable to a new owner (many are not), acquisition may be a cost-effective way for a company to purchase needed technology.

Aside from technology, buildings and inventory, the only other significant asset that remains is the brand and many traditional retailers want to keep their existing brands, so even this has little or no value.

More of the same

Recognizing there are some highly successful pure-play online retailers out there, one strategy must be to continue to do what has been working well so far.

Summary

Whichever survival strategies are chosen, online retailing is going to become more competitive before the end of 2001, as both etailers and traditional retailers battle to win the loyalty of online shoppers. The winners in this game will probably be the ones with the strongest alliances!

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Market Trends 2001

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