TOPICS > Economy

Growing Pains

November 24, 2000 at 12:00 AM EDT


MARGARET WARNER: Finally tonight, the holiday shopping season begins as the online economy is going through a major shakeout. Our business correspondent, Paul Solman of WGBH-Boston, sorts it out.

PAUL SOLMAN: All of a sudden, ’tis the season to be shopping– for consumers, that is. For us, it’s time to be discussing the retail industry and it’s most striking recent development, electronic– better known as “e”– commerce. To tell us what’s happening to e-tail this year, we’re joined here in Boston by Thomas Eisenmann, who teaches at the Harvard Business School; Mike Lannon in Silicon Valley, CEO and founder of Send.Com, an e- tailer which got its start in the wine business here in Boston; and in Madison, Wisconsin, Bill Bass, senior vice president for e-commerce of mail-order catalog clothing giant Land’s End. And welcome to you all. Mike Lannon in California, we’re hearing about companies failing, barely hanging on. How tough is it out there for start-ups like yours?

MIKE LANNON: Well, last year it was irrational exuberance; this year all the optimism has been sucked out of the room from a market and a capital perspective. From a consumer perspective, business is better than ever.

PAUL SOLMAN: Better than ever?

MIKE LANNON: Our business particularly is better than ever as well.

PAUL SOLMAN: So what are you doing right?

MIKE LANNON: It really comes down to three things: We’ve executed and we continue to execute really well the customers’ demands– good convenience and great service; we’ve got a really good business model, we actually make money on every transaction; and then thirdly, we think we’re in a great space. The gift space is one of the few large, very successful e- commerce categories, and it continues to grow.

PAUL SOLMAN: Space, you mean… Most people don’t think of… Don’t use the word that you guys use all the time. Space means what exactly?

MIKE LANNON: It’s a category. So gifts as a category has always been one of the… it was one of the first and it’s been one of the biggest categories of e-commerce on the Web.

PAUL SOLMAN: Bill Bass, you’re with a more traditional catalog business. You’re having success online as well. Any advantage to being Land’s End, having warehouses, I guess, and stuff like that?

BILL BASS: A huge advantage. We’ve been selling direct to consumers for 40 years, and so when the Internet came along, that was really just another channel. So, you know, we already had a shipping operation in place that mails out 15 million packages a year, we already had a brand that people knew and trusted, and so we could really focus on developing tools on the Web site. I didn’t have to deal a lot with going out and building warehouses like an Amazon or some other companies have had to work with.

PAUL SOLMAN: And that gives you a leg up, you think?

BILL BASS: A huge leg up because if you can focus on building a great Web infrastructure and not have to worry about can you provide customer service, can you handle returns… last Christmas, a lot of companies shot themselves on the foot on even being able to deliver packages in time for Christmas. The fact that we can take orders up until December 22 in a process that’s been honed over years gives us a huge advantage over other companies.

PAUL SOLMAN: All right. Well, Tom Eisenmann you’ve heard both of these guys. They’re both apparently doing well, how would you assess them, you and your students, look at these two companies? What do you make of them? What do you evaluate them in terms of?

THOMAS EISENMANN: Well, we study Send.Com in my class at the Harvard Business School, and..

PAUL SOLMAN: So you know Mike.

THOMAS EISENMANN: I’ve… Mike’s visited our class. We like the model. As he said, gifts is a good category for electronic retailing. It’s a category where consumers are actually less price sensitive. You pay a little bit more for a gift, that’s okay, and you don’t need it in your hands. It’s going to somebody else. So the fact that it’s being shipped someplace else, you don’t need that instant gratification. So that bodes well, but what Mike said about the capital markets being not very forgiving is very much true, especially for these pure-play online retailers. We’ve seen a number of failures– Fogdog, a sporting goods retailer…

PAUL SOLMAN: What is it called?

THOMAS EISENMANN: Fogdog, is what was it called.

PAUL SOLMAN: Fogdog. “What was it called.”

THOMAS EISENMANN: We’ve seen Pets.Com with the famous sock puppet.

PAUL SOLMAN: The little black and white sock…

THOMAS EISENMANN: Gone in the last couple of weeks. We’ve seen furniture.Com struggle. We’ve seen Living.Com, same category, struggle. Right through the list– Petstore.Com– quite a number of pure-play retailers have been closed in the last few weeks and months.

PAUL SOLMAN: And why? I mean, why is Send.Com and Land’s End making it and these guys going to the place of no return?

THOMAS EISENMANN: Well, Send.Com has a very different model. It relies on existing retailers. You mentioned its wine business.

PAUL SOLMAN: Reporter: That’s where it started, I take it.

THOMAS EISENMANN: Right, and it’s still, I think Michael confirmed, a very important part of its business. In that case you rely on existing wine stores to package the gift and actually arrange for a courier service. So they’re not maintaining the inventory in their own warehouses. That gives them a big advantage.

PAUL SOLMAN: So they don’t have to worry. Bill Bass has this advantage, which is he’s got the warehouses already. They don’t even have to ever have…

THOMAS EISENMANN: Fantastic supplier relationships, warehouses, call centers, and established relationships with customers. Something like three-quarters of catalog retailers that have moved online are already profitable. So that’s a terrific set of advantages.

PAUL SOLMAN: I see, and that’s not a disadvantage that you have, Mike Lannon? In other words, you’ve managed to circumvent that disadvantage.

MIKE LANNON: Well, when we started the business, legally, because of all the wine regulations, we were forced to partner with the local retailer rather than, I guess, the mantra at the time was called disintermediation. It was cut out the little guy and sell direct to the consumer.

PAUL SOLMAN: Cut out the intermediary– that’s the intermediation; disintermediation, cut them out.

MIKE LANNON: Absolutely. That was where you saw a lot of companies building huge warehouses, and what we did, which, as I said, we had to, to start in the wine business, we partnered with the local retailer, and we turned… we basically brought the Internet to them rather than trying to go around them, and once we did it, we figured out, this is actually a pretty good business model, and we, instead of looking to build warehouses, we said, where else can we, can we gather and aggregate all these little local retailers and turn them into a sizable business segment? So we aggregated restaurants, golf courses, spas, things like that, where we turn those into gift networks all around the country.

PAUL SOLMAN: I see. So then you’re the guy we go to to get the gift from the local retailer, who then… and you are the intermediary?

MIKE LANNON: Absolutely. You know, it’s funny. The Internet, when it started, was supposed to be so much more efficient than catalog retailers.

PAUL SOLMAN: Right, right.

MIKE LANNON: Well, catalog guys, you know, Bill can tell you, they’ve been successful for a long time, and rightfully so. They should migrate easily on to the Internet. We looked at it and said, “how can do something and bring some of the efficiencies of the Internet without having to build warehouses, et cetera?” So we think we’ve got… you know, it’s a pure-play model, which, you know, by definition is you’re only an Internet retailer, and that’s pretty unpopular in the capital markets right now, but we think we’ve created what was originally supposed to be designed, which was, you know, it’s a little bit passé, but a virtual, a virtual e-commerce comp company.

PAUL SOLMAN: Bill Bass, let’s talk about what the problems of others are. If we’ve got all these successes here at the moment, what’s been happening? The thing I keep hearing about is, well, just what mike was talking about, the fact that all these companies need to build warehouses where supposedly they weren’t going to need to, and bottom line, if you’ll pardon the obvious expression, profitability: Everybody was betting on some future in the past and now suddenly, instead of a land grab, it’s profitability that’s the key. Is that what you see?

BILL BASS: Yes, it is. I mean it’s interesting. You were talking about disintermediation. I mean, companies like Lands’ End, we’ve always gone direct to consumers. So we early on were kind of in the let’s make our own products and sell it directly to consumers, and if you look at who’s really done well online, it’s companies like that. It’s like a Land’s End or a Dell, a Gateway– you see it in the computer space. Gap is doing well online. It’s companies that have not had to go through intermediaries because you’ve already got the infrastructure in place to deal directly with individual consumers, which is hard to do, especially…

PAUL SOLMAN: Infrastructure, just to keep it straight, infrastructure meaning you have the so-called bricks and mortar, you have the warehouses – you have the actual merchandise.

BILL BASS: Yeah, it’s the actual merchandise, but also the customer service. We have almost 3,000 customer service reps here in Wisconsin that take phone calls when they come in. When we went online, we also put that facility into our Web site so that you can actually, if you have a problem with an item, you can return it, you can talk to a customer service rep. We try and make it very easy to have the whole, entire purchase cycle be easy for the customer. The companies that have had a harder time doing it online are ones that don’t do that. Toys-R-Us you saw had real problems last year because they were great at selling things through stores; very hard to sell on an individual basis to customers from their homes. Other companies, Wal-Mart’s been having some problems with that. So there’s a lot of companies that, even if they’re traditional companies, if they don’t have that skill set in place to sell directly to consumers, they’ve been having a hard time.

PAUL SOLMAN: So what are the key mistakes here, Tom Eisenmann? What have we learned from this, since the last time we did this discussion, which was just a year ago?

THOMAS EISENMANN: Well, we’ve learned two things, and one hem’s related to what Bill just said. Retailing– we should known this all along– retailing is very executionally intensive. You have to pick the goods, you have to pack the goods, you have to send the goods, you have to be prepared to answer questions about “why didn’t they get here when you said they were going to get here?” And we thought that magically the Internet was going to automate all that. It didn’t. We still have something like one customer service contact, an e- mailer or a telephone call, per order for the pure-plays. The catalog-based companies who know how to do this…

PAUL SOLMAN: Pure-plays are the start-ups.

THOMAS EISENMANN: Are the Amazons and the Fogdogs that I mentioned, the Pets.Com.

PAUL SOLMAN: The new e-tailers?

THOMAS EISENMANN: Exactly. So the magic of automation wasn’t quite there. There’s still a lot of people who have to do things right and answer questions. The second thing we learned is that what we call a get-big-fast strategy is a perilous strategy when we’re talking about Internet retailing. Get-big-fast means this massive up-front investment in customer acquisition and brand building. We’ve seen it over and over on the Internet, and in many places it works. It’s the strategy that Yahoo followed; it’s the strategy that e-bay followed.


THOMAS EISENMANN: Amazon, exactly. The phrase really in a lot of ways comes from Jeff Bezos, the CEO and founder of Amazon. It turns out to be very hard to pull this off in online retailing because there are so many things that can go wrong — also because, unlike a lot of the these other businesses, retailing customers aren’t necessarily sticky. Once you start trading beanie babies on e-bay, you’re likely to stay there because everybody who’s trading them is there, but there’s very little to keep me from jumping to Barnes & Noble if I bought my last books at Amazon.Com. So you pay a lot to get the customers, but it’s a leaky bucket.

PAUL SOLMAN: I see. You mean… So the idea of establishing a brand name isn’t as easy as people thought? Is that what you mean?

THOMAS EISENMANN: Establishing a brand name you can do. Then the question is can you keep the customers coming back and spending heavily?

PAUL SOLMAN: Reporter: And can you? Bill Bass, can you keep the customers coming back? Your experience is that they do come back, yeah?

BILL BASS: Yeah. I mean, the thing is, you can’t go out, and you can’t buy a brand. I mean, last year you saw a lot of companies go out and spend a lot of money trying to buy a brand, and really, when we think about a brand, that’s something that you build up over millions and millions of interactions with consumers, and so, you know, as a company that’s already had many interactions with consumers, it is easy then to keep them coming back because if you provide them with a great experience, they will keep coming back; but a lot of companies last year really focused on getting them into the door once so that they could hit their next round of financing, and not on keeping the customers happy so that they would just keep coming back.

PAUL SOLMAN: Yeah, and I guess with NASDAQ down around 3,000, a year ago it was about 3,400 and went up as 5,000 this year, there are a lot of people promising a lot of things that didn’t happen. Well, we’ll get back to this I’m sure again sometime. Thank you all very much.