Giant Retailer Targets Web

Jerry Storch scoffs at the notion that traditional retailers are late to the online retail party.

The party, he insists, is just getting started. "The Internet is very important. I'm not about to trash it," says Storch, president of credit and new businesses at Dayton Hudson, parent company to discount and traditional department stores, including Dayton's, Hudson's, Marshall Field's, Mervyn's and Target, and to cataloger Rivertown Trading. "But as a corporation, we'll pass the $30 billion mark this year selling the kinds of products that - as whole - totaled about $4 billion in online sales last year. So that means we sold nearly eight times as much off the Internet as the whole online market in our product categories."

Despite optimism on the growth of online commerce, Storch says Dayton Hudson also doesn't expect the Web to be a significant revenue channel for the company anytime soon. Online sales for the recently revamped Target.com, the online version of the upscale discount retailer known as "Tar-shay" by the well-healed, bargain-hunting "guests" Dayton Hudson considers the store's primary customers, "won't be material to the company," Storch says.

So, while many brick-and-mortar retailers are being roundly criticized for taking their time setting up shop on the Web - and giving pure-play, or Internet-only retailers, a window of opportunity to capture the attention of online consumers - Storch remains unapologetic that it's taken Dayton Hudson a few years to get its online act together. It's taken consumers, he argues, those same few years to feel comfortable shopping online.

While pure-play retailers have spent their time building their brands and grabbing investor attention with their initial public offerings, Dayton Hudson instead has spent its time quietly building up the back-end infrastructure and fulfillment capabilities it needs to support Target.com and the eight other online stores it plans to open before year's end, Storch says. They include one site for each of its four other department stores - Dayton's, Hudson's, Marshall Field's and Mervyn's - as well as four online stores built around the catalog businesses operated by Rivertown Trading.

By year's end, Target.com, which already offers baby products, gifts, home and office accessories, housewares and outdoor equipment, will also sell toys.

Recognizing it didn't have the expertise to process individual customer orders, Dayton Hudson last year acquired direct-mail marketer Rivertown Trading for $120 million to handle Web order fulfillment for all of the company's online stores. It's no coincidence, Storch says, that the fulfillment center is located in St. Paul, Minn., just down the street from Fingerhut, the direct-mail company acquired earlier this year by Federated Department Stores to handle order fulfillment for Macys.com and its other line brands.

"We're in the middle of nowhere," Storch says, "which puts us in the middle of the country. That means it's just two days to ship everywhere. The bottom line is that we're going to fulfill accurately and expeditiously."

But with the relaunch of Target.com earlier this month, the company says it's more than ready to join the party. And it's fairly confident that the retailers that will waltz out with Web shoppers won't necessarily be the ones that invited them to the online party in the first place.

"My belief is this Christmas there will be a projection that will come true and a projection that won't," Storch says. "The one that will come true is that sales over the Internet will increase by several hundred percent this holiday season. The one that won't come true is that there will be prosperity for all e-retailing companies."

That's because he believes those pure-play retailers have had the market primarily to themselves over the past three years. Now that multichannel retailers such as Dayton Hudson, Federated and Wal-Mart Stores have become serious about turning their Web sites into a sales channel to consumers, pure-play retailers will have to fight the battle of the brands.

"Even though the market will grow by several hundred percent, the competition will increase. The pie is growing more rapidly, but that means each e-retailer's piece will be smaller," Storch says. "By next spring, there will be a shakeout, and a lot of the Internet-only companies who have shot their wad on marketing - if they haven't come up with anything unique - will either go out of business or be bought out by a multichannel retailer."

That may sound like wishful thinking. But Shop.org, a trade association of more than 200 companies, supports many of Storch's claims.

To begin with, the online retail party seems to be just getting started - comparatively speaking. While the online retail market is expected to grow from $14.9 billion in 1998 to $36 billion by year's end - representing more than 145 percent growth - Shop.org notes that 1998 online revenue was less than 1 percent - in fact, just 0.5 percent - of all retail revenue. The promise is there, though: Online retail revenue is expected to account for 5 percent to 10 percent of overall retail revenue within the next three years to five years.

Click-and-mortar winners

Shop.org also says the companies that made the most headway among online consumers in the past year were the multichannel, or click-and-mortar, retailers. According to the trade association, multichannel retailers captured 62 percent of the $14.9 billion spent online in 1998, compared with 38 percent earned by pure-play retailers.

Storch says his multichannel peers have a few distinct advantages over the pure-plays, not the least of which are brand names they can leverage on and off the Web. "It doesn't cost me anything in marketing dollars to promote the Web site at the store," he says.

In comparison, Shop.org says pure-play retailers spent 76 percent of their revenue - or 76 cents of each dollar in revenue they generate - on marketing and advertising. Multichannel retailers, meanwhile, spend only 13 cents of each dollar of revenue they generate on promotions.

The brick-and-mortar store network that many pure-play retailers have disdainfully dismissed as costly overhead also offers multichannel retailers an advantage in reaching out to customers. Dayton Hudson claims that customers of Target.com and the other online stores will be able to return unwanted products directly to one of the 1,200 stores it operates in 44 states.

Will Dayton Hudson be among the retailers aiding the consolidation that Storch predicts, using some of its earnings to buy up pure-play retailers? Acquisitions are definitely being considered - though not at present, because of what Storch considers the inflated market valuations of many Internet companies.

"We're not going to pay the kind of prices that we would be required to pay today for something that we could build ourselves for a couple of hundred million dollars," Storch says. "But I'm going to be real interested in what the world looks like a year from now."