Tales From The E-Commerce Front

By Rebecca Winters

In June, after three years of selling harmonicas on harp-city.com Bob and Barbara Lefkowitz held what may have been the first online going-out-of-business sale. Saying it was too much work, too much time and not enough dough, the Babylon, N.Y., couple abandoned e-commerce, sold their inventory of mouth harps and went back to focusing on their day jobs.

Plenty of bigger companies can probably sympathize. E-commerce is hard, and it's tough to know for sure if it's for you. But with total retail e-commerce sales nearly tripling, from $2.7 billion to $7.9 billion for the 12-month period ending in June, everybody from your broker to the corner grocer to the guy who sold you that recliner you're sitting on is paying attention to the online biz, no matter what the aggravation. And whether they're working for an aggressive Net start-up, a brick-and-mortar retailer who fears getting "Amazon-ed" or a company content for now to dip a toe into the scary world of e-commerce, they're all interested in the future of your wallet. Says Dan Burke, senior analyst at Gomez Advisors, a rater of e-commerce sites: "We're just getting to the really interesting part, where we see who's doing it right and who's doing it wrong."

As an aid in that effort, here's a look at how companies in three industries are faring in the wired economy.

FURNISHING THE FUTURE The toughest online sell: A sofa?

Conventional wisdom is that there are some things people just won't buy online, and one of them is a sofa. "You want to sit on it, feel the fabric, see the color, make yourself comfortable for a while," says John Baugh, senior analyst at Wheat First Union in Richmond, Va. But venture capitalists don't seem to believe it. In six months they have poured $200 million into start-ups with names like Furniture.com and Living.com In July, Ethan Allen, the Danbury, Conn., firm that has furnished upper-middle-class American living rooms for 67 years, decided to buck conventional wisdom and open an online store this fall.

Beside the sofa road-test issue, there are plenty of other reasons why this $40 billion industry might find e-commerce a risky road to take. Online furniture stores face costly returns, deliveries that can't be left to Federal Express and skeptical manufacturers. None of that is news to Andrew Brooks, CEO of Furniture.com Nevertheless, he thinks he can convert customers by making online sofa shopping much better than the showroom variety. Brooks is hoping to win consumers with features such as a program that allows them to click and drag pictures of furniture into a room on the website, to see how it might look at home. "This industry has been driven by the manufacturer's needs," says Brooks. "Online, we can be much more consumer-centric."

That's because every shopper's click provides data, Brooks says. And in the past eight months, he has used that data, along with information from focus groups, to redesign his site five times. Brooks is dubious that a brick-and-mortar retailer can adapt as quickly to consumer needs. "My sense of time is compressed," he says. "For someone who has spent 25 years as a retailer to adopt this speed will be very tough."

It may be a challenge, but Ethan Allen is willing to try, and the veteran company could be traditional furniture's best shot at e-commerce, says analyst Baugh. "They have a very sophisticated customer base and an established brand name," he says. Ethan Allen is also unique among furniture retailers in that its prices are consistent nationally, and the company manufactures 90% of its own products. For all these reasons, CEO Farooq Kathwari suspected that e-commerce might be a good fit.

"I realized that e-commerce is an attitude of doing things faster, being more accurate, having better technology," Kathwari says. "I saw that it could improve every element of our business." But first Kathwari had to finish a four-year project to integrate the computer systems at all Ethan Allen stores, 70% of which are privately owned. He also needed to convince store owners that they wouldn't be hurt by the new site, which he will do by crediting a fraction of each online sale to the Ethan Allen store of the customer's choice. Now that the site is built, the question is, Will the customers come?

Watching Ethan Allen closely will be Heilig-Meyers, the nation's biggest furniture retailer, with more than 800 stores. The traditional Heilig customer is lower-middle income and lives in a small town--not a big online demographic. Today Heilig has a modest informational website, where customers can print coupons and find stores but not shop. "We're not certain that anyone has got a profitable business model yet in this industry, and so we're taking a wait-and-see attitude," explains Brian Hopping, a Heilig spokesman.

TRADING PLACES How to win tomorrow's investors

If sofas are the last thing you'd expect people to buy online, stocks might be the first. "Financial service is a paper transaction," says Gomez Advisors' Dan Burke. "There's no need to worry about shipping, returns or any of the stuff that makes regular e-commerce so challenging." Yet it will be December before Merrill Lynch, the company that brought "Wall Street to Main Street," offers its first $29.95 online trade. That will be more than three years after both a tiny upstart called ETrade and the discount brokerage Charles Schwab began allowing investors to trade stock on the Net. "We weren't in any rush because our clients weren't clamoring for it," says Susan Thomson, a Merrill spokeswoman.

Maybe not, but plenty of other folks are. The number of online trading households in the U.S., which totaled 4.3 million in 1998, is expected to pass 20.3 million in 2003. And while the average online investor is 39, the average person investing with a traditional broker is 52. That age gap is what finally got to Merrill. Says Thomson: "We had to look around and ask, 'Are we going to inherit the children of our clients automatically, or are we going to have to put up our dukes and start fighting?'"

Merrill announced in June that it would put up its dukes, but the move has caused some of the company's brokers and stockholders to run for cover. Merrill intends to offer two kinds of online trading accounts. One, already launched, plays to its traditional strength as a full-service brokerage, promising advice and unlimited transactions for a fee of $1,500 a year. The other is a la carte at $29.95 a trade; it won't include personal advice. Merrill's stockholders may end up better off than its brokers: the huge company's revenue stream is diversified enough to handle lost commissions, but brokers may not be so well insulated.

Executives at Charles Schwab faced a similar painful trade-off in 1997. In 1996 the discount brokerage developed a separate online unit called e.Schwab. "But customers were understandably confused," says Martha Deevy, senior vice president of Schwab's electronic brokerage business. "The online customers wanted to go into a branch office to talk to someone in person, and the branch customers wanted the convenience of trading online." So Schwab gave the customers what they wanted, uniting the businesses and dropping the cost of all trades to the online price--$29.95. Schwab took a hit in the short run, the price cut shaving about $125 million off its revenues in 1998. But the move has since paid off: Schwab's total number of accounts rose from 3 million to 6.3 million, and it's now the No. 1 online brokerage.

Close behind is a company that never had to worry about eroding its core business or undercutting its work force. ETrade began in 1982 as an online trade service for professionals. In 1996, after current CEO Christos Cotsakos came aboard, the first incarnation of a website that today serves nearly 1.5 million investors was launched. This year, by acquiring several companies, including the largest online bank and a financial-news site, Cotsakos began transforming ETrade from an e-brokerage to an online financial-services supermarket.

"Etrade is very aggressive," says Burke. "They're more concerned with accounts and assets than with profits." ETrade was not profitable in 1998, or in two of three quarters in 1999. But because it can keep its own forgiving investors happy despite those numbers, and because it's not encumbered by expensive branch offices, the company is more nimble than its brick-and-mortar competitors, Burke says. But that may change soon: Cotsakos, who's thrived on the bold moves only Net moguls seem to get away with, said in September that he plans to form an alliance with a traditional financial company. The reason? To give investors personal attention.

BYTE-SIZE BUSINESS Grocers get a taste of the Web

It was fear that caused Tom Furber to found HomeRuns.com an online grocery-delivery business, in 1996. "I was very concerned that somebody else not in the grocery-retailing space was going to beat us to it," says Furber, vice president for Hannaford Bros., the Scarborough, Maine, supermarket chain that saw $3.3 billion in revenues in 1998, and has since been acquired by Food Lion. "In hindsight, we could have gotten into this later."

Too late for second guessing. Hannaford dived in aggressively, launching an online market in densely populated Boston, near one of its main distribution centers. Furber soon learned that being one of the first guys out of the gate meant tackling problems completely new to his industry. He and his team worked for almost two years on an inventory program for the website, which promises next-day delivery to Boston and surrounding towns. He also created a 24-hour crisis team to handle snags like system outages and snowstorms. Other considerations were more mundane but still time consuming and central to the business: it took three tries to find the right tote bag for delivering perishables--one that would keep eggs from breaking and lettuce from browning. All the while, Furber was operating not in the profits-optional world of an Internet CEO, like his competitors, but in the 1%-profit-margin world of the supermarket industry. "Because I'm part of a retailer and I have to answer to somebody, I have to constantly ask myself, Is this going to be an enduring business model?" Furber says. He thinks so, and he believes that within 10 years there will be three profitable online grocers. In the meantime, while he may not have the luxury of an initial public offering, Furber does have one big advantage over a start-up: Hannaford's large buying power stocks his shelves.

Nonetheless, start-ups are where a lot of the action is these days. Webvan, a San Francisco online grocer that just began filling orders in May, is already devoting $1 billion to building a national network of distribution centers. And Peapod, the category leader, recently abandoned its strategy of picking product from retailers' stores and began building its own warehouses. "That's allowed us to work more efficiently and to make fewer mistakes with orders," says Peapod co-founder and CEO, Andrew Parkinson. "Now that we're getting some competition, those improvements are critical."

One brick-and-mortar retailer that relies on Peapod as part of its e-commerce strategy is Kroger, the Cincinnati-based operator of 3,400 stores. Kroger signed a five-year contract with Peapod in its Columbus market in 1996. The company is also testing small pilot programs of its own in Huntsville, Ala., and Colorado, but has no plans to announce a national e-commerce strategy. As the country's largest supermarket chain, Kroger may be the traditional retailer with the best potential to launch a successful online brand. But, says Kroger spokesman Gary Rhodes, "with the razor-thin margins in this industry, we have to be cautious. Until we see some evidence that you can actually make money online in this industry, we're not interested in becoming a major player."

That may be prudent, but then again, maybe not. Like so many other companies waiting out e-commerce's tumultuous early days, the grocery giant will have to hope that in the meantime some online player doesn't take a major bite out of its sales.