Playing with the Big Boys

Online buyers’ ability to comparison shop -- aided by a vast array of shopping bots -- has turned traditional retailing on its head. But customers are looking for more than just low prices.

Some web-wise merchants have responded to the Internet’s new retail rules by including comparison shopping on their own sites; others put their heads in the sand. Leading the list of slow-to-get-online retailers is Home Depot, who – according to the August 16, 1999, issue of Fortune – recently issued “a Godfather-esque” directive to its suppliers selling goods online.

“Dear Vendor,” the May 19th letter began, “It is important for you to be aware of Home Depot’s current position on it’s(sic) vendors competing with the company via e-commerce direct to consumer distribution. We think it is short-sighted for vendors to ignore the added value that our retail stores contribute to the sale of their products.... We recognize that a vendor has the right to sell through whatever distribution channels it desires. However, we too have the right to be selective in the vendors we select and we trust that you can understand that a company may be hesitant to do business with its competitors.”

What Home Depot is really worried about is its customers going straight to the manufacturer and bypassing Home Depot.

Going head-to-head with Home Depot won’t be simple for any company. Stanley Tools, for one, has scrapped its e-commerce plans in the face of Home Depot’s threat. After all, Home Depot is one of the “category killers” that put thousands of mom-and-pop hardware stores out of business. “Who’s to say,” Fortune reporter Katrina Brooker muses, “that it can’t do the same to pesky suppliers with dot-com dreams?” Web shoppers, that’s who!

Several factors come into play:

• Online shopping does not provide instant gratification. Sometimes, all a customer wants is to buy something and use it right now.
• People are still willing to pay more for superior service, even online.
• Few retailers will be able (or want) to sustain prices that are so low, they cannot make a profit.
• Although low prices might bring customers to a site, discounts alone won’t necessarily keep them there or convince them to return.
• Online, a store that provides complete information from a variety of sources can be more valuable than a single site that provides only its own or partial information.

Online comparison shopping is available at myriad sites. These sites promise that “you’ll never miss a sale again”; “40-60% off retail in 13 categories”; daily or weekly sales updates; and e-mail bargain newsletters tailored to your shopping interests. Some claim to scan 50 million products. Each of these services is powered by shopping bot software. Some even provide shoppers with the ability to search, compare, and buy in a secure e-commerce environment. The majority accept advertising, but a few, like Price Scan, claim to be unbiased and objective because they eschew advertising. Some online shoppers do study the information on these price-comparison sites before they make a buying decision -- then there is everyone else.

The Ignored Factor Online: Service

What makes a shopper decide that price isn’t all that matters? Extraordinary service – the very same quality that allows some stores to charge more for their items because they make shopping convenient, pleasant, and reliable -- still can win over price. Superior service makes fancy cars, designer duds, and luxury travel appealing. It also allows L.L. Bean, Nordstrom’s, and a handful of other merchants to charge more for their products than bargain merchandisers selling essentially the same goods. And great service is not going out of style anytime soon.

In terms of costs, online retailers seem to have obvious advantages over bricks-and-mortar retailers. Traditional retailers need to spend $3-5 million to open a store. They usually can only pull from a 25-mile radius, meaning they need to make a fair margin. While online merchants can set up shop for less, and sell internationally, many have set prices so low that it is impossible for them to make a profit. Therefore, the good deals consumers now expect won’t be sustainable over the long haul. Only the ones with the deepest pockets can hold out -- and one begins to wonder why they would want to.

Retailers are dealing with online sales in different ways. Barnes & Noble made the mistake of not being first in their category to get online. Like so many other traditional merchants, they finally realized they could not afford to ignore the brand reinforcement of the Internet. Now they charge more for the same books in their bricks-and-mortar stores, where overhead prohibits Amazon-like bargain prices. It seems they are betting that the instant gratification of talking to informed sales help and being immediately able to read a selected book in soft, in-store chairs is worth a higher price. They may be right.

Meanwhile, like Amazon, a handful of online merchants realize that they need to emphasize superior service. Although low prices might bring a customer to a site, discounts alone won’t necessarily keep them there or get them to return.

“We recognize we’re a price leader, but we don’t say to ourselves every day, ‘Let’s just slash and burn,’” said Brian Marley, director of operations for online electronics retailer NECX, to The New York Times. “I think it would be irresponsible for all of us just to compete on price, without doing the heavy lifting that goes into creating a value-added service.”

Attracting Comparison Shoppers

One very innovative online approach has come from Fruit of the Loom, whose e-commerce storefront provides not only its own t-shirts and underwear but also its competitors’. The company got 24 of the nation’s top 30 t-shirt wholesalers in its $5 billion industry to commit to its e-commerce platform. Fruit of the Loom provides consulting and software to t-shirt wholesalers setting up online stores. The stores’ customers then search for t-shirts from any number of manufacturers. Fruit of the Loom only demands that its products be the first replacement option offered when another company is out of stock. Online, a store that provides complete information from a variety of sources can be more valuable than a single site that provides only its own or partial information.

NECX lets customers compare their prices to other stores’ prices on the same item. Customers are comparing prices anyway, they reasoned, so why not help them? The result? NECX is losing customers but making money. Sales are up 20% even though the comparison engine is the site’s most common point of departure.

Still, bricks-and-mortar merchants have the distinct advantage of giving customers what they want when they want it -- an experience that can supersede low price. Online shopping, no matter how pleasant, cannot (yet!) provide the immediate reward of buying something and then wearing or using it an hour later.

There is a long way to go before Internet commerce shakes out. At this point, I’m betting that at end of the road, the lowest price won’t be the winner.

B.L. Ochman, http://www.whatsnextonline.com, is an award-winning marketer who has helped local, regional, and multi-national corporations to increase awareness and sales of their products both online and off. Please subscribe to our Marketing Newsletter at http://www.whatsnextonline.com. Phone: 212.385.2200 Mail to: BLOchman@whatsnextonline.com