The latest step

A year ago, Internet companies looked unstoppable.

Investors plowed money into online retailers and service firms. Surely these sleek global companies of the future would crush those old bricks-and-mortar establishments.

But a funny thing happened on the way to the New Economy's victory party. Traditional stores proved resilient. Internet-only firms look weak.

So now companies on both sides of the digital divide are reassessing their strategies and trying a new tack: cooperation. Online retailers are sidling up to physical commerce; traditional retailers are moving onto the Internet.

It's like a complicated tango where both partners are still learning the steps.

The convergence suggests an awkward period ahead for businesses as they negotiate buyouts, mergers, and alliances. But for consumers, it means the best of both worlds. Increasingly, they'll be able to shop the same stores whether they're walking through the mall or sitting at their computer.

Analysts call the new look "clicks-and-mortar" or, lately, "clicks and bricks."

"The two feed each other," says Ilene Lanin-Kettering, senior vice president of $hopper Decision$, a division of Elrick & Lavidge, a market-research firm based in Atlanta. "If you love to shop, you are more likely to love to shop in real stores. If you love to buy and hate to shop, you're perfect for online."

Most consumers, it turns out, want both physical and online access - a trend that's hurting Internet-only stores and services.

Internet banking is a prime example. All the early fanfare about virtual accounts has fallen on mostly deaf ears in the consumer world. "Internet-only banks have been very, very poorly received," says Kelly O'Donnell, a consultant with Cerulli Associates, a Boston-based research and consulting firm.

It's the same story for stock brokers. "Traditional discounters - Quick & Reilly [and] Charles Schwab - seem to have the advantage" over Internet-only trading firms, Ms. O'Donnell says. That's because customers want multiple ways to interact with brokers - sometimes online, sometimes in person.

Some 75 percent of Schwab's online accounts are opened in branches, she points out, which explains why the discount broker continues to add bricks-and-mortar branches every year.

Meanwhile, virtual brokerage E*Trade opened a 400-square-foot financial center last month at a Target superstore in Roswell, Ga. If the clicks-and-bricks strategy works, E*Trade could roll out financial centers in Target superstores across the country.

Delia's, the once hot teen-apparel retailer, has also changed its tune. In the spring of 1999, at the height of Wall Street's dalliance with the dotcom economy, Delia's spun off its booming Web business into a separate company. The stock traded at $60. But share prices fell as investors started looking for profits. Last month, after the price for the Internet-only firm slipped below $3, it announced it was merging again with Delia's, which would concentrate on opening new traditional retail stores.

Even the cream of the dotcom crop - Amazon.com - has not escaped the investor revolt as analysts worrythe Internet bookseller willrun out of money before it turns a profit. "Can Amazon Make It?" a Business Week cover story asked in July. The answer wasn't particularly comforting: Maybe.

The cold winds from Wall Street have taken their toll on dotcom employees. Since December, some 169 Internet-only companies have announced plans to cut 11,785 jobs, according to Challenger, Gray & Christmas, an international outplacement firm. More than a third of those cuts have come in the past month. The biggest casualty: Internet-retail or "e-tailing" jobs.

"E-tailing on its own is very difficult to do," says Chris Karkenny, chief executive of NetCatalyst, a year-old Web services firm in Santa Monica, Calif. "If they don't have profitability within the next four quarters, they can't get there."

It's not hard to see why investors have become so sober. The Internet doesn't have enough buyers. Excluding automobiles and travel, Internet sales only account for about 1 percent of the US retail market, says David Thompson, senior research consultant with Hackett Benchmarking & Research, an arm of e-business-services firm answerthink in Hudson, Ohio. Within five years, the Internet's share is expected to climb to 6 percent, which still won't match catalog sales and come nowhere near bricks-and-mortar totals.

Even the most dedicated online shoppers still make an average 70 percent of their purchases at physical stores, points out Ms. Lanin-Kettering of $hopper Decision$.

Nearly 4 in 10 consumers sampled in Greenfield Online's latest quarterly study said they felt more comfortable when purchasing online from merchants that have a retail store nearby.

Of course, the new climate won't freeze out all Internet-only companies. Take eBay, the Internet auctioneer. Before the San Jose, Calif., company appeared on the scene five years ago, people would sell their antiques or second-hand items by holding a garage sale or putting an ad in the local paper. Now they advertise around the world on eBay.

With its commissions and listing fees, eBay has made a tidy business. "We've been profitable since day one," says Jennifer Chu, a company spokeswoman. The service counts more than 15.8 million registered users and recorded in June quarterly revenue of $87.9 million, a 130 percent jump over the same quarter last year.

"It's all about business models," says Tom Pike, a global managing partner of growth and strategy for Andersen Consulting. "Where we create new business models - like eBay has - we will see new winners. [But] in the main, where we replicate today's business models, clicks and mortar will be the winner."

Indeed, traditional retailers are embracing the new model. While their virtual competitors are going physical, they're moving onto the Internet.

"This is a tremendous opportunity for them," Mr. Thompson adds. "They bring a tremendous amount of momentum when they do enter that online channel."

Often, they're snapping up online companies at deflated prices. Sometimes, they set up partnerships with Internet firms or build their own Web sites from scratch.

Among the bricks-and-mortar chains that have gone digital: the Gap (shop its three branches with one cart) Neiman Marcus (with three-dimensional Web viewing), even Amway (as Quixtar, which sells other products besides Amway).

But the strategy contains risks. Open a physical store in a bum location and your business suffers. Open a badly run Web site and the world sees your mistakes, Thompson says.

And morphing a bricks-and-mortar entity into a Web site isn't easy. When Resource Marketing, a Columbus, Ohio, research and consulting firm, tested 50 large Web shopping sites this spring, it found that the sites of well-known retailers Kmart and Wal-Mart ranked dead last because of poor response and follow-up. Kmart says it will relaunch its Web site this fall. Wal-Mart had already relaunched its site when the study was done.

"We've seen real difficulty for traditional firms to get into the clicks side," says Mr. Pike of Andersen Consulting. "On the other hand, retailing is much different than e-tailing."

For now, the Old and the New Economy will tango until their steps are just right.

(c) Copyright 2000. The Christian Science Publishing Society