Chasing Retail's Tail

Net impact: $20 billion (1999)

In the beginning...

There was a restless, 30-year-old hedge fund manager named Jeff Bezos. Early in 1994, working for D.E. Shaw in New York City, Bezos began researching the commercial possibilities of the Net. A year later, Bezos drove west, raising venture funds for a new small online book shop (originally called Cadabra.com), to be launched from his garage in Bellevue, Wash.
 
The rest is some astonishing retailing history: Running on a Website and a warehouse, by its third year Bezos's precocious Amazon.com toppled $150 million in annual sales — a milestone that Wal-Mart founder Sam Walton needed 12 years (and 78 stores) to reach.
 
Today, Amazon might still look Lilliputian sitting next to America's fattest retailer (Wal-Mart's estimated 1999 sales were $162.8 billion), but Bezos's little Web shop now is capitalized at more than $28 billion, has 12 million customers, and has branched out into auctions, electronics, music, videos, and gifts. Its biggest landlocked competitors — Barnes&Noble and Borders — are together worth less than $3 billion.
 
Although Prodigy and America Online had sown some seeds of online retail — Prodigy was running text ads and selling flowers in the early '80s — Amazon's arrival in 1995 more definitively sparked the Web's retail gold rush. Along with books came big budding markets in personal computers, CDs, flowers and gifts, clothes, and food — the basic ingredients of your average strip mall, right?
 
The Web-as-mall concept soon had some of America's most popular brands smelling blood. But lame, circa-'96 attempts at Web megastores — such as Time Warner's DreamShop and IBM's World Avenue — all quickly tripped over failed assumptions, namely that online retailing simply meant cutting and pasting a suburban tract mall into a Website. Bezos, meanwhile, did his hyena-laugh through a $54 million public offering.

Serious business

In November 1998, the wizards at New York-based Jupiter Communications issued the ecommerce forecast heard 'round the world: revenues from online holiday-season shopping that year would top $2.3 billion — an appraisal that seemed to wake up the masses (and the media) to the Web's potential.
 
Why? By year-end '98, 55 million Americans were active Net users; and 34 million people were already shopping online. Total Web sales for the year shot past $8 billion, nearly triple from '97. And holiday sales even surpassed Jupiter's optimistic guess. "It was a wake-up call," says Forrester senior retail analyst Seema Williams. "Nobody believed any of this before holiday '98."
 
Web retail sales have jumped from a mere $700 million annually in 1996 to an estimated $20 billion in 1999, according to Forrester, and $184 billion by 2004. Some major product categories have paved the way: travel services ($5.95 billion in 1999 sales), computer hardware and software ($5.8 billion), books ($1.7 billion), gifts and flowers ($730 million), music ($540 million), and apparel and footwear ($460 million), according to eMarketer.
 
Mainstream Net adoption is only one reason behind the growth. Innovations such as the online shopping cart — designed by AOL and perfected by Amazon and others — deserve more credit. Next came one-click-buying, further putting consumers, not merchants, into the driver's seat of the most successful Websites.
 

Next steps

Net retail already has enough mainstream momentum to propel growth across all the big product categories. Other shifts and innovations lie ahead:
 
1. Women take control. Women make or influence 80 percent of household sales in the United States, according to WomanTrend, despite the fact that they make up 51 percent of the population. Expect the Net retail industry to shift its marketing focus heavily in their direction. "It's no longer a [demographic] anomaly, predominantly men," says Kate Delhagen, formerly Forrester's head retail analyst and now vice president of business development at lucy.com. "Consumers have reached a sophisticated buying stage, and that will characterize 2000."
 
2. The untapped get tapped. Two highly touted markets — $509 million health and beauty, and $513 million grocery — still lag behind expectations. "Of all the categories," says Delhagen, "consumer behavior here is most entrenched.... It's hard to move the masses out of a rut." Expect the masses to come out of the woods this year.
 
3. More "click and mortar." Traditional retailers — Circuit City, Crate and Barrel, Sears, Toys R Us, Wal-Mart, and Federated Department Stores — missed the boat in 1995 and 1996, but rest assured they "get it" now, and are attempting re-entry, this time around with more money and smarts. Watch out.
 
Jeffrey Davis (jdavis@business2.com) is the senior features editor at Business 2.0.