Commerce: Turning Sales into Profits

Everything Must Go!

Whether boom or bust, Internet retailers still struggle to turn sales into profits.

When the world stops turning, consumers stop shopping. Or so it seems. According to BizRate.com, on September 11, retail e-commerce dropped 39 percent, more than $36 million, from the day before. Oddly enough, while many screamed recession, things had returned to normal within two weeks of the attack. And a new Nielsen//NetRatings and Harris Interactive study measured a 54 percent jump in e-commerce spending for the month over September 2000. BizRate predicts holiday spending this year will top last year by 25 percent.

For retailers, it's back to business as usual—but is that necessarily a good thing? E-tailers like Amazon.com have been suffering since the turn of the century; the list of dot-coms that have thrown in the towel altogether now stretches into the hundreds. For unprofitable companies, higher holiday sales will actually mean deeper losses.

As such, whether or not the economy picks up, retailers are more focused than ever on a positive bottom line. While layoffs and slashed budgets become the norm, a few companies are following some interesting and aggressive paths to get into the black.

Long Live the Middleman

If e-tailers ever intend to make money, it won't involve a warehouse.

In 1997, Gartner (and everyone else) made the bold prediction that the nascent Internet was about to drive retailers and wholesalers out of business as the world began "cutting out the middleman." Why go to a megamall to purchase a six-quart crock-pot, the conventional wisdom went, when you could get it right from the source by ordering it from the manufacturer's Web page? Because even if the manufacturer had a Web page, it wasn't equipped to sell kitchenware one unit at a time to the teeming masses, that's why.

Four years later, buying direct is still a fantasy for all but a few products (computers, namely). By and large, manufacturer Web sites have become dry repositories for vague product information and press releases, as companies seem to rely on business-to-business marketplaces to work with suppliers and wholesalers. Why bother with an e-commerce strategy when you have Amazon.com to do the heavy lifting for you?

But Amazon doesn't want to do the heavy lifting anymore, either. In August the company launched an ambitious PC sales campaign, but unlike most of its product segments, Amazon doesn't carry any inventory of computers. Instead, Ingram Micro warehouses all of the equipment and drop-ships it to buyers. Even used and refurbished PCs are sold through the site but never pass through Amazon's doors. As Amazon computer store general manager Richard Chin says, "A lot of people have lost a lot of money because people have misforecast inventory."

Of course, the real success in Internet commerce has been eBay, a die-hard middleman that has never seen one box of inventory and has been profitable since 1996.

Kevin Pursglove, senior director of communications at eBay, doesn't like the middleman label, saying instead that "eBay set out to be the marketplace, and we allowed the buyer and the seller to determine how the marketplace could be used." Since eBay doesn't have to worry about storing merchandise, cataloging it, or even pricing it, the company is free to innovate.

As a result, success has found the company in the most unlikely of places. "Nobody ever thought that this site would be a good place to sell used automobiles," says Pursglove, citing the difficulties of shipping a pickup 2,000 miles. But users figured it out on their own, and eBay took notice and provided extra auto sales tools. Now, eBay Motors boasts approximately $700 million in gross merchandise sales a year, the fastest-growing segment of the company.

In a related theme, David Schehr, research director at Gartner, says pure-play dot-coms are all but dead and that innovative offline players like JCPenney and J. Crew will eventually dominate the Web. Brushing the company's strategic shift aside, he says, "Amazon may turn out to be the exception to the rule, the rule being: Pure-play dot-coms are generally not successful in mainstream retailing."

Great Minds Think Alike

What do the digerati have to say about the current economic climate?

We asked a handful of the Internet elite: "What will it take for the U.S. economy to turn around?" Their responses were surprisingly candid.

Charles "Garry" Betty, CEO, EarthLink The economy will turn around when the period of speculative investment that occurred from late 1998 to early 2000 runs its course. Barring an acceleration of political unrest, we won't see a full recovery until late 2002.

John A. Challenger, CEO, Challenger, Gray & Christmas Americans will not begin to resolve the uncertainty that pervades all of their decision-making until the government shows how they can participate in the war effort. That is the way Americans act in a crisis: "We want to help." Absent that, it remains doubtful that any meaningful economic recovery will begin in such an atmosphere.

Rob Reid, founder and chairman, Listen.com It's all about confidence. Markets are as dominated by the psychology of their participants as they are by anything, and contagious attitudes become self-fulfilling prophecies. At some point—after we've grown accustomed to the post–September 11 status quo, whatever that is—there will be a gradual strengthening in key economic indicators, which will result in a gradual renewed optimism that will be as contagious as the current market pessimism. My crystal ball is as muddy as anybody's, but my sense is that we can start looking for this toward the end of next year. Rock on.

Greg Drew, CEO, 800.com As soon as consumer confidence stabilizes and market valuations achieve equilibrium, we should see an upturn in the economy. This could take 18 to 24 months. In the meantime, we all need to adjust our business models to adapt to more conservative consumer spending patterns.

Terrell Jones, CEO, Travelocity Getting people to travel again. Travel is the third largest sector in our economy after food and automobiles, and it is an American way of life. An increase in travel will be important to improving the economy.

Mark Cuban, Broadcast.com founder and owner of the Dallas Mavericks It won't be from government economists and experts tripping over themselves to provide solutions. The solution will come from the people of our country being themselves. Entrepreneurs will be entrepreneurial, shoppers will shop, creative people will be creative, and inventors will invent. Out of the composite efforts will come the stimulus that turns things around. I would love to also say to people to not invest in the stock market. That is probably the least patriotic thing they can do. The vast majority of stock purchases result in taking money from consumers and buying pieces of paper, which doesn't help the economy, or anyone for that matter.

Ted Waitt, CEO of Gateway Time.

Ship Shape

With long delays and the risk of legal liability, global trade might never be the same.

While heightened border security helps keep terrorists out, it also bars the thousands of regular deliveries that arrive from neighboring countries every day. Immediately following September 11, trucks at the Canadian-U.S. border found themselves backed up for 12 hours or more, waiting to get through the battery of new inspections by U.S. Customs.

Even well-oiled supply chain companies like Exel delayed some shipments as customs standards became more stringent, especially for potentially hazardous materials like chemicals and high-tech components that might not pass muster.

For the shipping industry, long fraught with errors, mountains of paperwork, and misinformation, serious impetus for streamlining logistics has finally arrived: Accidentally ship chemicals to a suspected terrorist and your company faces heavy fines, loss of export licenses, and even a prison stint for the CEO. "Now there is zero room for error," says Adrian Gonzalez, senior logistics analyst for ARC Advisory Group. "This affects every business that imports or exports."

To better manage customs intricacies, many companies are turning to Web-based trade compliance systems. Net-based solutions like ClearCross and Xporta determine what paperwork is needed, cross-checking their databases for information about foreign trade duties and taxes, U.S. labor law restrictions, and federal regulations from the Food and Drug Administration or the Bureau of Alcohol, Tobacco, and Firearms.

Both solutions ensure shipments don't end up in the wrong hands by checking receivers against a database of suspected terrorists or other suspicious parties. (At least one Web-based logistics provider had red-flagged one September 11 hijacker's name on its restricted-party database.)

But in the future, just knowing where your shipments are headed may not be enough. Companies that once relied on phone calls and faxes for destination updates will likely need to turn to real-time tracking tools from companies like Savi Technology, which tracks containers with radio frequency identification (RFID) tags and sends an alert if an airfreight container has been opened or tampered with after it's cleared customs.

—CAROLYN ABATE AND LANE ANDERSON

Inside the Supply Chain ClearCross Prescreens shipments against a database of people, businesses, or countries considered dangerous or deemed illegal. Descartes Systems Group Real-time tracking lets businesses reroute shipments if emergencies arise while cargo is in transit. G-Log Net-based system lets companies track and alter shipments on the fly in case of delays. Savi Technology Web-based logistics management and tracking using RFID tags to provide location and status of containers in real time. Xporta Helps avoid illegal shipments by flagging denied parties, like known or suspected terrorists.

Copyright © 2004 Ziff Davis Media Inc. All Rights Reserved. Originally appearing in Ziff Davis Smart Business.