How'd They (E-Companies) Do?

By Maryanne Murray Buechner

The Douglas Firs are long gone, the bells and bulbs back in their boxes. But experts are still unwrapping the fortunes and failings of electronic commerce--the economic centerpiece of this past Christmas--in an ongoing critique of the first true e-holiday.

Yes, lots of people shopped online in 1998. Quite a few did even in 1997. But it wasn't until the final months of 1999 that transaction by mouse shed its novelty status and "dot-com" became part of the consumer lexicon.

The number of consumer e-commerce sites had multiplied tenfold in 10 months while the marketing machine went into overdrive, flooding the airwaves with ads (and making broadcast radio and TV networks arguably the season's biggest winners). An estimated 26.4 million Americans shopped online between Thanksgiving and New Year's, and total online sales reached $5 billion, treble those of 1998, according to Forrester Research of Cambridge, Mass.

All things considered, the 1999 holiday season "was an enormous success," says Allen Weiner, vice president of analytical services at NetRatings, an e-commerce tracking firm. Jill Frankle, director of retail research at Gomez Advisors, agreed. An online poll her firm conducted the week after Christmas that showed 86.2% of online shoppers were at least somewhat satisfied with their experience; 46.5% were very satisfied, 25.7% were satisfied, 14% only somewhat so. Less than 2% of the 1,000 survey respondents said they would never shop online again.

Congratulations would be a waste of time, however. Some of those "satisfied" shoppers may have been willing to put up with a few snags because they were spared a trip to the mall. After all, the leading reason people shop online is to avoid crowds. More important, today's online shoppers have seen what a three-year veteran like Amazon.com can do. They recognize a good site and good service. And they will expect the same and more from everybody else. E-tailers who want to survive long-term will have to do better. Much better.

Here's how.

MARKETING MANIA

One of the most common mistakes made by e-tailers eager for a piece of the 1999 holiday market was advertising overkill. Some spent lavishly to build their brands and drive people to their website but then short-changed the rest of the operation. The result: misplaced orders, late deliveries and some unhappy customers. And much of the marketing millions spent after Nov. 1 probably drowned in the sea of other dotcom ads. "Many e-tailers spent way too much money way too late in the season," Weiner says. Toy seller KBkids.com did things right, launching its $43 million ad campaign at the time of the site's July debut. The payoff: traffic and sales soared.

Though Toysrus.com did more business than KBkids, it provided the season's best examples of what not to do. One of its mistakes was to do heavy-duty holiday marketing before it had the infrastructure in place to back it up. The site got slammed and spent most of the season scrambling. "The lesson here is, don't try to launch four weeks before Thanksgiving," says Paul Bates, vice president of research at e-commerce tracker BizRate.com "You can't learn how to be an e-tailer from soup to nuts in the amount of time that they gave themselves. It's too aggressive."

WHAT'S OFFLINE MATTERS

If the e-commerce winners of 1998 were those with the slickest websites, the strongest players in 1999 were those who knew how to warehouse merchandise and pick, pack and ship customer orders in a timely manner. "Order fulfillment became very critical," says Anand Sharma, president of TBM Consulting Group, a firm that specializes in improving production lines. "You cannot win in this business without a supply chain that supports a quick turnaround."

E-tailers should align themselves with suppliers and manufacturers who can do quick replenishment, he advises. Most had to guess well in advance how many Amazing Ally dolls they needed for the season. "Overestimate," Sharma says, "and you're left holding the bag. Underestimate, and your customers are putting rain checks in people's stockings." It's a tricky balance, and it affects the bottom line. Many e-tailers have abandoned all hope of profit in their race to win market share. "But if customer-acquisition costs are only part of the red ink," Sharma warns, "then your cost of doing business is too high or you're not charging enough, and you won't be able to survive." A lot of the reasons Amazon has done so well--bigger warehouses, superior customer service, low prices--have kept it deep in red ink. It will be harder for lesser-known e-commerce companies to get away with that. "Investors," Sharma says, "will become less and less tolerant of the money losers."

WATCH THE FRONT END

There is a critical moment during online shoppers' visits to an e-merchant: the point at which they have identified the product they want to buy but haven't completed the transaction. Some stay. Some bolt. A little hand holding can help reduce the chance of a cut-and-run considerably. First tip: Post a toll-free number, and staff the phones. Ken Seiff, CEO of Bluefly.com which sells discount designer apparel (big holiday seller: $79 pashmina scarves), attributes his company's favorable traffic-to-sales ratio to having enough live customer-service reps (70 during the busiest December weeks, up from just four in September) on hand to answer customer calls and reply to e-mail inquiries. "Everybody who's on the payroll took a turn," he says.

Electronics dealer Crutchfield.com isn't the only e-tailer that e-mails customers to confirm that an order has been received, and e-mails again when the shipment has left the warehouse. But the company is one of the savvy few that post whether a given item is in stock (a more helpful variation of Amazon's "usually ships within 24 hours"). Many consumers Gomez surveyed said they wished more sites tracked inventory in real time, Frankle notes.

Of course, a well-managed front end does no good if customers can't get through to your site. Toysrus.com erred when it threw an online shopping party but didn't have enough cyberspace for all the guests. A pre-Thanksgiving surge in traffic overwhelmed the toy site's servers, freezing out customers and causing a public-relations nightmare. "They underestimated their popularity," says Bates. Servers were added, and the company says the upgrades supported traffic for the rest of the season. The lesson: You can never have too much infrastructure in place. E-tailers should enlist the aid of a top third-party firm (like IBM) that has set up other major online retailers and can tell you what you need, Weiner says. "Too many companies think they have the expertise in-house," he says, "and they don't."

CLICKS-AND-BRICKS STICKS

The big winners of e-commerce so far have been the pure plays, the online-only stores that understood the new shopping environment and burned their brand names into consumers' brains early. But 1999 marked a shift in power to the bricks-and-mortar players, even those who stumbled (Toys "R" Us) or whose online efforts were halfhearted (Wal-Mart, which held off on a site relaunch until Jan. 1). Many suffered growing pains this time around but are expected to kick butt come Christmas 2000 and beyond. An established name and customer base helped launch them as e-players in 1999, but there's another, more important differentiating factor that will handicap their competitors: wherever and whenever customer service fails online, they've got their physical stores to fall back on. Toysrus.com realizing it wouldn't be able to deliver all orders by Dec. 25, issued $100 gift certificates so that empty-handed customers could finish their shopping in its regular stores. While the gesture doesn't guarantee those customers will give the site another try, Weiner says the chances of forgiveness are good. eBay has suffered plenty of website outages, he points out, and not only did people go back, they went back in droves.

The key to long-term success for the clicks-and-mortar players will be close integration between their online and offline operations, like the in-store kiosks that promote beauty retailer Sephora's website. And it will never really be too late--at least in most cases--for a bricks-and-mortar retailer to launch a Web arm, Weiner argues. If you have the star power and the brain power to build it, they will come. "Some category killers like Amazon and eBay will be hard to knock off their throne," he says, "but if you're strong in some other channel, you can do well."

BUILD STAYING POWER

Will the successful holiday e-tailers hold on to all their new customers? Many think they can--provided they build personalized customer relationships that involve offering return customers new products based on their past purchases, and other targeted marketing. Amazon.com is a master of the technique.) The key is to give people a reason to shop year-round for everyday items.

The first test is how well e-tailers handle postholiday returns--a critical area of customer service because it involves a different set of people, the gift recipients. Their attempts to return or exchange gifts bought online could be their first dealings with an online merchant. Vendors that mess up at this stage could alienate both the recipient and the original buyer.

There is another sizable chunk of the holiday market still left to be served--the procrastinators. E-commerce traffic began to taper off in mid-December as shoppers worried that online deliveries wouldn't arrive on time. Who could blame them? Wal-Mart and others warned Web shoppers as early as Dec. 12 that they couldn't guarantee delivery by Dec. 25. But with overnight delivery, Weiner says, "I don't see any reason why the Net couldn't serve that last-minute shopper." Better get cracking on that back end. --With reporting by Jacqueline Savaiano/Los Angeles

With reporting by JACQUELINE SAVAIANO/LOS ANGELES