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*2001: The Return of the Traditional Retailer

NEW YORK — Business will be conducted the old-fashioned way this year: one customer and one SKU at a time, like direct marketers and catalog companies.

That is according to Anthony Noto, vice president and e-commerce analyst at Goldman, Sachs & Co.

“I think in 2001 you'll see a continuation of 2000: the rapid consolidation and elimination of many pure-play retailers,” he told a session yesterday at the National Retail Federation's 90th Annual Convention and Expo.

Companies focused on specialized niches have a better chance of survival, he said.

There were 32 e-commerce companies quoted on the Nasdaq last year, a figure now down to 22.

“By mid-2001, we'll be down to eight [public e-commerce companies], primarily due to lack of capital,” Noto said.

Of these survivors, Noto expects four companies to be profitable or to remain two quarters or less from being profitable.

Michael Goldstein, chairman of Toys 'R' Us Inc., shared Noto's thumbs-down take on Internet-only retailers and their struggle to stay afloat.

“I have a fairly pessimistic view of pure plays,” Goldstein said. “I never thought most would survive, and most haven't.”

Goldstein, whose company's Toysrus.com subsidiary escaped bad press this holiday season for the first time in three years, declined to name the Internet-only retailers he thought would go out of business.

This reluctance to name names brought guffaws of laughter from the panel.

“And also Anthony [Noto] recommended some of those companies,” Goldstein said, in reference to the cheerleading role played by analysts at securities firms eager to handle Internet IPOs.

Goldstein said most Internet-only retailers sold products with less than 25 percent margins, competing with players such as Wal-Mart and Target. Also, without the advantage of physical stores where online inventory can be pushed, most Internet-only retailers have been forced to offer post-holiday discounts of 70 percent to 80 percent.

Mark Goldstein, CEO of Kmart Corp.'s BlueLight.com joint venture, said that while the profile of Internet consumers was getting closer to that of store customers, the online audience was still younger.

“The youth of America is really what we're after on the Internet,” BlueLight's Goldstein told the audience.

It is that audience that greatly interests Toys 'R' Us, which in August struck a strategic alliance with Amazon.com to jointly run the Toysrus.com store.

Toys 'R' Us' Goldstein said his company would now be very aggressive online, though it still is grappling with maintaining merchandising consistency across the offline and online stores.

“We're still in a learning curve about what to store online,” he said.

To maintain reasonable gross margins, Toysrus.com would have to stay clear from low-ticket items that are expensive to pick, pack and ship, he said.

Of course, if that low-ticket item is a best seller, Toysrus.com will have to take that into consideration. The solution is to have “larger packs so that the gross margins are much higher,” he said.

BlueLight.com has another problem. It cannot stock all the items sold in Kmart stores, especially the larger ones. Besides, it is in the process of weeding out certain products.

“Impulse seasonals is one thing we're not going to be focusing on,” BlueLight.com's Goldstein said. “What is working is brands, brands, brands, brands.”

Brands are already established in the consumer's mind, he explained. Plus, they have already seen the products and do not need the tactile association before placing an order online.

Toys 'R' Us' Goldstein brought up two issues that will loom large for multichannel retailers this year.

One is the traditional retailer's constant refrain: There should be a level playing field in sales tax collection. Currently, Internet-only retailers that do not have a physical office or warehouse in a state are not required to charge consumers of that state any sales tax on purchases.

“That will impact us,” Toys 'R' Us' Goldstein said.

Toysrus.com, because of its affiliation with Toys 'R' Us, is forced to charge sales tax in many states — which, the company protests, puts it at a disadvantage.

Next is free shipping, a ploy used by many online retailers to acquire customers in blatant disregard of the consequences on the company's profits and losses.

“If you want to get revenues, this is pure heroin,” Toys 'R' Us' Goldstein said.

But that may not be a problem if the Internet-only retail competition dwindles at the rapid pace it did last year.

“Now people will be looking to [compete] with people who are looking for profits,” he said. “It was very difficult to do business with people who didn't care for profits.”

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