January, 2000

From the Editor

Deli.com Future?

This past Christmas was seen by many as the make-or-break season for Internet shopping. Indeed the volume ballooned and it seemed like everyone was hawking something or other over the Internet.

The characteristics of the business of Internet selling to consumers never struck me as particularly favorable. In most cases, the Internet is like a catalog and catalog shopping has only grabbed about 10 percent of retail sales. The web could do much better because, theoretically, once the creation cost is paid, it is free to get “catalogs” into consumers’ hands and thus, potentially, many more consumers would buy.

The problem is really that the price competition is going to be very fierce. The same dynamic that allows someone to instantly call forth a particular catalog online will also allow a consumer to do a massive web search, perhaps by an electronic shopping service, to see if the same item is available less expensively elsewhere.

What this means is that the value in web retailing is likely to come with either large purchases that consumers will buy direct from manufacturers – perhaps cars, for example, once the manufacturers figure out what to do with all the dealers – or the value will be added through end-delivery services – such as Streamline or Webvan selling product for cost but making money on drayage.

Of course, the big news item this past holiday season was the failure of many of the retailers to make promised Christmas delivery dates. The toy business is always tough because it is so centered on Christmas. Ultimately, Wal-Mart will beat Toys R Us on toys, because Wal-Mart has more flexibility to reduce shelf space during the off season.

A dedicated toy retailer winds up with a real dilemma. If the retailer builds the capacity to handle the Christmas peak, he is destined to lose money the rest of the year. If he doesn’t – well, what good is a toy store that can’t handle Christmas business?

E-tailers have some of the same problems. What investors are beginning to realize is that these are not “virtual” operations. When it first started, Amazon.com could avoid keeping inventory by relying on a big wholesaler to supply books as needed. But as volume increased and competition compelled faster response times, Amazon started building warehouses all over the place.

For the most part, Amazon tries to avoid buying inventory, instead demanding that manufacturer’s warehouse product in Amazon-owned warehouses. But this is, to some degree, an accounting trick. Sure it keeps the inventory off of Amazon’s financial statement, but manufacturers know the cost and risk of holding this inventory. If Amazon offered to buy it outright, Amazon could get better prices.

The tremendous valuations that the stock market has provided e-tailers gave them the incentive to be munificent in failure, lest the markets see growth slowing and thus reduce valuations. When Toys R Us.com failed to meet Christmas delivery promises, it gave every disappointed customer a $100 gift certificate; Amazon.com was giving out $10 gift certificates like water.

Stock market prices on e-tailers have been falling as the investors begin to wonder how, exactly, these companies are ever going to make money. One key ingredient is likely to be tie-ins with traditional retailers. Ordering over the Internet, like ordering from a catalog, is especially attractive when one is buying gifts that need to be shipped. In this situation, the bête noir of e-tailing – shipping costs – would be incurred anyway, so e-tailing is very competitive.

But returns are proving to be a big hassle. How many people want to force the recipient of a gift to spend money shipping things back if they don’t want or already have the item? It is reason enough not to buy over the Internet.

So e-tailers have to either have their own brick and mortar stores or create alliances with conventional retailers to handle returns. It seems likely that, in the end, most e-tailers also will be conventional retailers.

Supermarket delis are about as well insulated as anyone from Internet competition. Ham and cheese on a roll – now – is not a likely e-purchase. There is some competition from shopping services, often with delivery, but density issues seem to be making this an uncertain road to riches, as well.

One lesson e-tailers can teach us is that our focus on training personnel may not be the only or even the most productive approach. Just as if you want your employees in clean aprons, you don’t merely make a policy requiring clean aprons; you make a policy requiring a freshly laundered apron be worn at each shift. In other words, don’t rely so much on training, but rely on structure.

The business of training our people to provide the kind of help and deli knowledge we would like may simply be hopeless for many operators. Perhaps we should be focusing on automating much of this process. Web sites with any info valuable to consumers can be created and, not only can web addresses be given out to consumers, but kiosks can be set up in the store to allow customers to answer their own questions.

If customers have questions or requests, e-mail inquiries can be centralized and handled by dedicated staff trained with pre-written responses to most inquiries.

It is a mistake to worry too much about being put out of business by the web; it is a bigger mistake not to think about how one can use the Internet to make one’s business better.  DB