As bricks-and-mortar and Internet retailers join battle for business on
               the web, it is the bricks-and-mortar firms that are likely to win
 
               NOTHING stands still for long in cyberspace. Six months ago, on the web and
               on Wall Street, people expected the Internet to drive conventional retailers off
               the map. Web retailing was cool and new. Customers were excited by the
               convenience and choice compared with physical stores. They liked the chat
               rooms, free information and smart features such as birthday reminders.

               Pure web companies had a price advantage over the big retail chains, too. Web
               retailers had lower property and stock-keeping costs than their land-bound
               brethren, and avoided the printing and postage expenses of catalogue retailers.
               Updating their offerings did not involve closing stores or refitting. And, in
               America, retailers which have no physical presence in a state do not have to
               collect the local sales tax, usually around 6%, giving Internet-only retailers
               another advantage over the bricks-and-mortar guys.

               Investors seemed to believe that, even if bricks-and-mortar companies tried to
               venture on to the web, the Internet-based companies would triumph. Stodgy
               old retailers, after all, did not “get” the web. And, true to stereotype, many of
               the bricks-and-mortar companies regarded Internet retailing as a fad, or a way
               of losing money, or both.

               Today, much of that thinking has changed. Convergence is the new religion.
               With e-commerce in America alone set to rise from $12 billion this year to $41
               billion by 2002, according to Jupiter Communications, traditional retailers can
               no longer ignore it. At the same time, and against all expectations, Internet
               retailers are being forced to recognise the importance of having a physical
               presence. Many firms are now betting on the power of integrated
               shopping—combining stores, the Internet, catalogues, the telephone and
               eventually television.

               Already, bricks-and-mortar or catalogue companies that sell online—known as
               multi-channel retailers—account for 62% of e-commerce (see chart). That is
               mostly because these retailers are selling high-value goods such as computers,
               tickets and financial services. But most of the high-street retailers have been
               slow to get online. In America only two—bn.com (website of Barnes & Noble,
               a bookseller) and Ticketmaster—count among the top ten most visited sites in
               June, according to Media Metrix, an Internet ratings company.

               But they are coming, now. David Pecaut, an analyst with the Boston Consulting
               Group (BCG) expects the multi-channel retailers to generate 85% of online
               revenues within five years. The biggest of them all, Wal-Mart, is soon to take
               the plunge. After an experiment last year with a dull site and a limited range of
               products, it is scheduled for a big relaunch this autumn. Wal-Mart is teaming up
               with Fingerhut, a catalogue distributor, and with Books-A-Million, which will
               help with fulfilment. Also this autumn, Tiffany, having sworn a year ago never to
               sell its diamonds and pearls over something as common as the web, will do just
               that. Department stores and discounters such as J.C. Penney, Kmart,
               Nordstrom and Sears are upgrading their websites.

               At the same time, Internet retailers are venturing offline. Alloy.com sold clothes
               and accessories, but became a hit only after it launched a catalogue. The day
               the catalogue was launched, the group’s server crashed as teenagers flocked to
               the site. In June, Drugstore.com, which once dismissed bricks-and-mortar
               retailing, agreed to sell a 25% stake in itself to Rite-Aid, a large drug chain, not
               long after its rival, Soma.com, was bought by CVS, America’s largest drug-store
               chain. eBay, an online auction house, has acquired tradition and trust with the
               purchase of Butterfield, a firm of auctioneers.

               One reason for this U-turn is a loss of faith in the pure web model. Fierce
               competition has forced web companies to slash prices. The drive to improve
               service through better content, faster delivery and live telephone support has
               raised costs. Amazon’s efforts to build itself a top-class distribution system is
               racking up huge losses.

               Building a brand from nothing overnight is also expensive. Boo.com, backed by
               Bernard Arnault, a French billionaire who is chairman of LVMH, is spending a
               fortune on public relations to get its glamorous Swedish founders on magazine
               covers. For bricks-and-mortar retailers, the cost of sticking a web address on
               an existing advertising campaign is marginal (see chart). While Internet-only
               retailers are spending massively on marketing, their multi-channel rivals acquire
               new customers for around half the cost, according to BCG.

               The biggest real-world retailers have another strength: market clout. Wal-Mart,
               whose sales, at $138 billion, are considerably more than all electronic retailing
               combined, has huge buying power with established suppliers that helps keep its
               prices at rock bottom. Bert Flickinger, managing director of Reach Marketing,
               a consultancy, says: “With its $4 billion capital spending budget and
               procurement power, Wal-Mart could wipe the floor with Amazon.” Traditional
               retailers also have access to an unfashionable resource—profits. They can use
               that cash to subsidise a website in its early years.

               Established companies also have established distribution and fulfilment systems.
               That has helped catalogue retailers, such as LL Bean and Land’s End, to
               exploit the web: they already know how to handle millions of small orders. The
               older companies also have the kind of brand loyalty—built through years of
               investment in marketing—that most virtual retailers can only dream of. And
               shoppers like the ease of returning products bought online to a store.

               Traditional retailers can cross-market between the website and the stores.
               Marie Toulantis, chief financial officer of bn.com, says that the 300m visits
               made each year to Barnes & Noble’s 530 superstores create a huge
               opportunity to collect purchase and credit-card data and use that information to
               recruit online customers. The Gap has begun collecting e-mail addresses of its
               online visitors and has computers in its shops allowing customers to order online
               what they cannot find in the store.

               The main uncertainty is exactly how online and physical retailing will knit
               together. The hardest part will be uniting two different cultures. Toys “R” Us’s
               online operation, set up as a joint venture with Benchmark Capital, blew apart
               this week. Benchmark dropped the project, which has had two chief executives
               in four months, and observers doubt that Toys “R” Us will achieve its aim of
               beating eToys, its Internet-based rival, in this year’s Christmas sales.

               This tension will be difficult to manage. Web and physical stores need to work
               together, but online businesses need to be at arm’s length to save them from
               suffocation by stodgier bricks-and-mortar businesses. Financial
               engineering—through stockmarket spin-offs or so-called tracking shares—can
               create the necessary currency for rewarding employees and making
               acquisitions.

               Traditional companies will also need to learn how to use their bricks and mortar
               differently. In the future, physical sites may be used mainly to attract and sign up
               customers to the web. Charles Schwab has done just that in financial services:
               around two-thirds of its online customers are recruited through its branches.
               Gateway sells computers through catalogues and the web, but also has 164
               shops across America which are in effect computer petting-zoos, carrying little
               stock, but allowing buyers to get the feel of a machine before ordering it. Even if
               the old retailers dominate the new channel, shopping will never be the same
               again.