Retailers Mull Pulling Plug on E-Commerce

Some execs say harsh economy may lead some firms to scale back Web presence

San Jose

Federated Department Stores Inc. stunned the retail world late last year when it ceased selling merchandise on its site.

At last week's eTail 2002 conference here, some retail executives and experts predicted that more traditional retailers may pull the plug on their e-commerce sites this year - or at least re-evaluate and scale back investments in online operations.

They said the harsh economy is forcing retailers to take a harder look at their Internet commerce operations, which were expensive to launch and can be costly to maintain. For most retailers, online sales still represent a very small fraction of overall sales.

The ROI Factor

"I think there's going to be some fallout. It'd be naive to think there isn't going to be," said Brian Kilcourse, CIO at Longs Drug Stores Inc. in Walnut Creek, Calif., noting that he expects to see some retailers shut down their e-commerce operations.

He said one problem is the high cost of entry for e-commerce. "You need to spend $20 million to get the beginnings of a Web offering - well, in our case, that's four or five stores," Kilcourse said. "So one of the things the CFO will ask, rightly, is, 'Am I going to get four or five stores' worth of ROI out of this investment?' "

But Kilcourse added that retail executives need to keep in mind that a Web presence is intended to build their brand, not merely generate sales.

Ralph Briskin, director of e-commerce at The Men's Wearhouse in Houston, said he doesn't see how major retailers' e-commerce sites can "be profitable on this year's basis or this month's basis or today's basis, let alone pay back on the investment they've made."

"This is not like going into a store and putting up some fixtures and then they stay there for years on end," he said.

Dyan Triffo, a financial analyst at Deutsche Bank Alex. Brown Inc. in New York, said retailers are facing tremendous pressure to focus on the bottom line. "The economic environment is forcing people to make strategic decisions about what areas they can cut, where they can save money," she said, "and [e-commerce] is an obvious area to look at first because it's the newest [and] it's taking a lot of money out of the budget.

"A lot of companies are realizing they spent a lot of money on this channel and haven't necessarily gotten anything out of it," Triffo said.

A storefront or Yellow Pages-type presence might be adequate for some retailers, but others face tough choices if their customers have come to expect transaction-based sites, Triffo said.

Debate continues about Federated's decision to halt e-commerce on Geri Spieler, an analyst at Gartner Inc. in Stamford, Conn., said scaling back a site to offer fewer items, as Federated did with, makes sense. But pulling the plug on the site was a "knee-jerk reaction" and a "huge mistake," she said.

"It was very, very shortsighted, because they have to relaunch it and differentiate it all over again, which is a lot of money," Spieler said, adding that she doesn't think other retailers will start pulling e-commerce from their sites.

Larry Promisel, manager of Internet marketing at New York-based luxury retail company Coach Inc., said retailers should scale back their sites rather than shut them down. "Every initiative we do is at least profit-neutral," he said.

For instance, the company once nixed a potential investment in live chat because it couldn't prove that the investment would pay off.

"There was no analytical data, and it was just too expensive and too time-consuming from a customer service standpoint," Promisel said. He noted that Coach would have had to train sales representatives and install and test the software.

Coach is reconsidering live chat, with plans to do tests on a small scale to see whether it will help the company close more sales, he said.

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Copyright © 2002 IDG Communications, Inc.

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