Can traditional retailers make it online?

PHILADELPHIA -- Traditional retailers are debating the same issue that the computer industry has been wrestling with for years: How do you branch out into a new channel without upsetting your old one? The issue came to the fore Monday during a panel presentation at the National Retail Federation's e-commerce show here.

PHILADELPHIA -- Traditional retailers are debating the same issue that the computer industry has been wrestling with for years: How do you branch out into a new channel without upsetting your old one?

The issue came to the fore Monday during a panel presentation at the National Retail Federation's e-commerce show here.

"While it may be great for an online retailer to say, 'We did $10 million in sales,' we have to worry about whether those sales have been transferred from our existing stores," said Angela Kapp vice president of special markets for Estee Lauder Companies Inc.

And it's not just the manufacturers who have to worry about how existing businesses may be pressured by e-commerce initiatives. Traditional brick-and-mortar retailers are also taking a significant look at cybersales.

"The question is how much do you believe e-commerce will take off? If you believe it will be 5 or 10 percent of your business, you have to remain focused on the place where the vast majority of sales will take place, and that's in the stores," said Jerry Storch, president of credit and new business at Dayton Hudson Corp., the parent company of stores including Marshall Fields and Target.

Battle of the brands
The issue is not new to the retailing world. The past year has seen many skirmishes between manufacturers and retail partners over selling big-name brands direct online. And there have been fights between manufacturers and offline retailers over who will be able to discount online.

Monday's debate sought to determine the strategic advantages for internet-only companies versus multichannel retailers. For example, can a pure-Internet play use its speed advantage to overcome the brand leverage of an offline player? Do the offline player's infrastructure and fulfillment resources help them leapfrog startups -- or hamper then with old technology?

Many of the arguments begin and end with pricing. Some e-commerce sites have attempted to lure consumers online by lowering their prices or offering deals and bonuses. But existing stores and brands have been reluctant to compete on that level. That's a mistake, said Ben Narasin, CEO of Fashionmall.com.

"It isn't that retailers need to go online and sell at a discount. But if you're fighting someone with a gun, it's foolish to pick up a sword and rush into battle," he said. "That's what's happened again and again in this space."

But Internet-only outlets have their own problems. A price discount strategy brings with it lower margins. And because cyberstores oftentimes are building new brands rather than leveraging recognized names, potentially enormous amounts of money need to be spent raising brand awareness.

Offline branding not always the answer
Storch argued that his company's real world brands, such as Target, is powerful enough to drive traffic online without the need of additional marketing campaigns.

"To our guests it's not the Internet versus the stores, it's Target the brand," he said.

But a brand that is strong offline does not always translate well online. Robertson Stephens analyst Lauren Cooks Levitan, speaking to attendees about the economics of different retailing models, warned that "in some cases a retailers brand is their own worst enemy."

"eToys owes Toys R Us a big deal of thanks. They built their whole brand on We're not Toys R Us, and consumers loved it," she said.

And while the retailers may count on existing promotions to also push the Web site, retailers need to do more than just "slap a URL on a shopping bag," she said.

"Where in a store would I have a clue that there is a benefit to going online? To me, that (education) is when traditional brands have an advantage," she said.

Special operations
One way companies can try to have it both ways is by setting up special operations to handle their Internet business. KB Toys, for instance, merged part of its company with BrainPlay.com to form KBKids.com. And on Monday, Nike announced plans to invest in FogDog sports, a deal that will allow the online retailer to sell its products online.

Levitan predicted that the market would see more tweaks to the model.

The way to make deals like that work, Storch said, is to ensure that both sides think they're getting a fair deal.

"The key for vendors is to partner with retailers in such a way that neither partner feels like its using this channel to beggar the other," he said.

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