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HIVE EXCLUSIVE: Survival of the Fittest is the Ruling Theory of Online Evolution

3 Aug, 2001 By: Joan Villa

With the feet of online retail planted firmly back on Earth, the bold future of cyberspace may belong to the dot-com divisions of established retailers and a sprinkling of pure Internet plays with common-sensebusiness plans.

“We went from the euphoria stage to the evolution stage,” says Mark Gilman, Blockbuster executive v.p. and president of new media whooversees Blockbuster.com. “Now there’s a whole rationality that’shealthy.”

The online evolution may help retailers carve out a more realistic and profitable future that emphasizes service, value or convenience and doesn’t expect consumers to make a sea change in their lifestyles.

Research firm Alexander & Associates says Web survivors will offer a complementary, rather than a supplementary, business model that makessense for consumers, such as Netflix’s DVD rental service or the online reservation system that Blockbuster is testing in three cities and will soon roll out nationwide.

“People are not radically changing their behavior” to adapt to online innovations, says Bob Alexander, president of Alexander & Associates. “Alot of these new services that the techno guys thought up assume and forecast incredible changes in personal and household behavior.”

The online fallout is another reminder that consumers adopt new technologies at their own pace, and many futurists and Wall Street analysts simply projected ahead of the curve. Forrester Research recently lowered its estimates of online domestic sales for 2001 to $65 billion from $73 billion. The new number is based on 35 millionhouseholds shopping online rather than the 41 million previously expected. ACNielsen projects consumers will spend $9.9 billion onlinedomestically during the next three months with 42% of Internet users buying online in the third quarter.

Online VHS and DVD sales comprise only 2.9%, or 6 million, out of a total 176.3 million DVDs and VHS units sold from Oct. 11, 2000, toJan. 2, according to Alexander & Associates Holiday Market OnlineSnapshot. That compares to 5.4% for mail order and 90% for retail during the same period. On a percentage basis, VHS and DVD salesdid not grow from 1999. For the same period in 1999, online sales were also 2.9% of the market, representing about 1 million fewer unitsthan in 2000 based on a smaller video pie of 165.1 million units.

The real change has been in the consolidation among online video retailers, says Alexander’s research director Greg Durkin. Loss leadersFamily Wonder and Bigstar.com, which ranked in the No. 2 and No. 5 spots, respectively, in 1999, disappeared entirely from the top site listings in 2000. Amazon jumped from 39.1 market share in 1999 to 51.4in 2000, while eBay ranked a distant No. 2 with a 12.3% share, followed by Buy.com (11.9%).

Low margins and lower profits forced some early deep discounters to eliminate sales and evolve to content-only, while still offering video streaming and harboring the hope they will play a future role in moviedownloading. With financing a constant struggle, Express.com (formerlyDVDExpress.com) filed for bankruptcy in March and recently changed management, according to a July 22 e-mail to customers. The note saidmanagement will restock DVD and clear out overstocked product. Bigstar discontinued its own sales and instead offers visitors a link toHalf.com. Even market leader Amazon.com just accepted a $100 million cash infusion from service provider AOL in what some are painting as alikely takeover attempt.

“Instead of these virtual sites people started in dorm rooms or out of their garages, the e-commerce we are now seeing is e-commerce attached to older line, brick-and-mortar-type players, like Bestbuy.com and the e-commerce side of established retailers,” says one distributor with online accounts.

Nielsen/Netratings’ most recent figures report bricks-and-clicks have made great strides over the last year, with mass merchants increasingoverall online sales by 20% or more. Netratings’ figures show a whopping 133% sales increase at Walmart.com from June 2000 to June 2001 and significant hikes for other e-tailers like Kmart’s sitebluelight.com (36%); JCPenney.com (34%); and Sears.com (23%).

Blockbuster uses its Web site to extend the in-store relationship, establishing a “two-way dialog” with the consumer that suggests holidaygifts, drives traffic into stores, promotes sellthrough purchases and ultimately transitions them into online video-on-demand “to the extentthat channel starts to develop,” Gilman says.

While Blockbuster doesn’t see its online consumer as different from the one who shops in-store, Kmart Web site bluelight.com discovered that the online experience can attract new and often more affluent consumers,according to spokesman Dave Karraker. Last Christmas, Kmart learned that its online consumer was not the typical in-store demographic of a mother in her mid-40s with kids and household income in the $50,000 to $75,000 range, but a younger mom with younger kids and a higher household income, Karraker says.

“The Kmart kids are in high school, [the online] kids are in elementary school,” he adds. “We are introducing a younger demographic to Kmartthrough the Internet.” Those consumers are more likely to shop in store because they’ve experienced the retailer online, Karraker says. Bluelight tracks thesuccess of online promotions by how many of the site’s coupons are redeemed in-store, he notes.

So the promise of online retail may be strongest in its ability to link consumers to stores. “It will be brands and people who haverelationships with consumers in the physical world [who successfully] convert that into the e-world,” Gilman says.

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