E-commerce builds new layer on brick-and-mortar retailing

More bad news for bricks-and-mortar retailers: A new survey has found that 30 percent of the personal computers bought by American households in the last six months were purchased directly from the manufacturer. That represents a sharp jump -- up more than a half -- from the previous six months, according to the market research firm Odyssey, based on its twice-yearly surveys of the technology buying habits of 2,500 American households.

The trend should further strengthen the position of Dell Computer and Gateway, the leading direct marketers of PCs. It can also be seen as a more general sign of things to come. After all, Internet commerce is merely the direct-sales model on steroids, as Michael Dell says, with customers and suppliers enjoying an electronic connection, any time, any place.

"The businesses that should be most concerned are the retailers," said Nicholas Donatiello, president of Odyssey in San Francisco.

In some industries -- computers, travel, banking -- the Internet direct sales threat is severe, to be sure. But the notion that people are about to do any substantial portion of their overall buying online is suspect, if not downright nonsense.

Oddly, few things drive home that point more clearly than a recent study on the outlook for online retailing from Forrester Research, which is regarded as an unequivocal bull on e-commerce. And it is the kind of research that helps put in perspective some of the revolutionary rhetoric about the "new economy."

Forrester's widely quoted projections on the growth of online sales have a hockey-stick trajectory, and its report issued two weeks ago is no exception In fact, the forecasts in its new report have been revised upward: Forrester now expects online retail sales in the United States to rise sharply this year, to more than $20 billion.

By 2004, Forrester predicts that retail sales over the Internet should reach $185 billion -- a huge number, representing striking growth.

Still, even assuming that this heady forecast proves accurate, the $185 billion will be just 7 percent of total retail sales in the United States, Forrester reports.

Guess who accounts for the other 93 percent?

"Obviously, the bricks-and-mortar world is not going away," noted David Cooperstein, an analyst for Forrester.

The modest lesson here is that a passing familiarity with economic statistics is a useful tool for anyone trying to make sense of the Internet-driven new economy. Yes, there is a lot of growth, excitement and substance to the Internet economy.

There is also a lot of hype and churning and many failed start- ups -- but that is all part of the process of entrepreneurial endeavor. Hype encourages investment, which accelerates the innovation cycle of trial and error, leading to growth-creating breakthroughs.

Yet for all the attention given to Internet companies, they still represent mainly an innovative ferment on the surface of the nation's economy. As Kevin Kelly, editor at large of Wired magazine and author of New Rules for the New Economy (Viking Press), has noted, the new economy doesn't replace the old economy; it builds on top of the old, and its technologies eventually permeate the underlying layers.

In America's $8.5 trillion economy, that two-step process will not happen overnight, even if the Internet enthusiasts are correct in saying it is inevitable. Recognizing that reality, Forrester called its recent report "post-Web retailing."

Established retailers from Wal-Mart to Tiffany are already building up Internet presences, and more will follow. But as Cooperstein of Forrester sees it, the future belongs to those who pursue a "multichannel strategy."

Look no further for a pioneer of that future than Gateway. Starting in 1997, Gateway began opening retail stores across the country -- 180 so far, heading for 400 over the next few years.

But they are retail stores with a difference, likened to petting zoos for PCs, so people can come in and try out the Gateway machines, which are all connected to the Internet.

These stores have no inventory on shelves in the back room. Customers place orders and receive delivery a few days later at their homes. So all the advantages of scale of Gateway's direct business model -- made-to-order manufacturing, warehousing and delivery -- remain intact.

Further and more futuristic second thoughts on Internet retailing can be found in an intriguing research paper by Hal R.Varian, an economist at the University of California at Berkeley. In his paper, Varian raises questions about economic efficiency and consumer benefits often predicted for Internet shopping -- a world, it is said, in which a person's "software agent" will roam the Net on his behalf, seeking the best bargains.

Perhaps, but perhaps not, Varian says, if the predicted shakeout occurs in some online markets. He looks at two established electronic markets with a limited number of suppliers -- airline computerized reservations systems like Sabre and market makers in Nasdaq stocks -- and suggests that a result can be price-signaling and implicit collusion among those suppliers. At Nasdaq, of course, a price- fixing investigation was prompted.

"Everybody says the Internet will be a consumer paradise," Varian said. "But it is not so clear that consumers will be the winners in the long run."

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