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E-Commerce May Get Bump During Wartime

How would an invasion of Iraq affect e-commerce — the sole bright spot for retail in this suffering U.S. economy?

The nation is still reeling from the tech meltdown, anemic demand for products and services and the unfinished business of squelching terror. But many express measured optimism that online retail would not be hurt by war with Iraq.

“I think it'll be the second lift of the Internet,” said Shelley Nandkeolyar, president of Martha Stewart Living Omnimedia's e-commerce and catalog division in New York.

E-commerce has a lot going for it, most obviously the ease of shopping for consumers. If fears of possible Iraqi or terrorist retaliation rise, some foot traffic in bricks-and-mortar stores will move online. And though e-commerce has not lived long enough to predict shopper reaction to military endeavors, retailers can learn from the response to 9/11.

“Online usage experienced increased participation immediately following the tragedy of Sept. 11,” said Elaine Rubin, a consultant to 1800flowers.com and chairwoman of the National Retail Federation's Shop.org online retail trade association.

“So there is some historical reference of how consumers will react in troubled times,” she said. “They tend to stay glued to the news online — and it seems to grow online usage, which results in increased usage and increased sales.”

That online use comes at a cost to other media and channels. Television advertising would suffer because of wall-to-wall coverage of the conflict. Magazines would see advertisers pull back on restoring marketing budgets. Foot traffic in stores would drop drastically.

“E-commerce has had to contend with an unprecedented triple punch — the dot-bomb, weak economy and war on terrorism — which has forced most marketers and advertisers to operate on a very lean basis,” said Michael Mayor, CEO of NetCreations Inc., a New York company that supplies prospecting lists to retailers.

“War with Iraq may put a tighter squeeze on a few holdouts,” he said, “but more importantly, it will stall any possibility of growth in '03.”

More importantly, consumer and corporate confidence may dip again, enough to ignite a vicious cycle. Consumers would spend only on essential items. Marketers would limit testing of new products and investment in technology or concepts. Less demand for products and services eventually would lead to more job redundancies.

“It will primarily impact new business as marketers are less likely to test new sources and channels when they are backed up against a wall,” Mayor said.

But many of these conditions were present last year. And while the other sectors suffered, e-commerce did not. Even as retailers bemoaned the 2002 holidays as the worst in three decades for in-store sales, it was a bright season for the online channel.

Admittedly, the online growth is on a smaller base, making up less than 3 percent of all retail sales. Still, consumers spent $7.92 billion from Nov. 25 to Dec. 25, up 23 percent from the year-ago period, according to BizRate.com. This increase came despite six fewer shopping days in the 2002 holiday season vs. 2001.

A trend most retailers noticed after 9/11 was cocooning, or staying at home. Consumers invested in furnishings, computers, online use, appliances, electronics and other home comforts.

“Consumers will be using the Internet as a means to communicate with their loved ones,” Rubin said. “If they want to send goods or gifts to loved ones, the Internet is a convenient shopping destination that provides for shipping and delivery and avoids the crowds and public places.”

What Rubin expects consumers to trim is frivolous spending on extras as they focus on necessities. Categories to benefit include garden, home, health, beauty and groceries. Purchases of automobiles, travel, vacation packages and potentially luxury goods could suffer.

Distance also matters. Iraq and, for that matter, North Korea are far from the United States.

“We'd done a little survey work after the Sept. 11 attack, and it really did not have much of an effect on e-commerce — and that was obviously quite literally closer to home,” said David Schehr, research director at consultancy GartnerG2, Stamford, CT.

However, the supply chain process could be disrupted if war affects West Coast shipping lanes from China and other parts of Asia. Schehr is confident that will not happen. But another consultant is less sure.

“I don't remember what the numbers were, but I remember Amazon reporting lost revenue because of [last year's shipyard] strike,” said Patrick Thomas, senior analyst at Nielsen//NetRatings Inc., New York.

For all the gloom, NetCreations' Mayor is confident that retailers and marketers already have earned their battle scars. He does not expect them to panic or close. They will continue to make decisions that are in their best long-term interest.

Besides, customer acquisition efforts are already so threadbare that there is little retailers can do without cutting into muscle.

“Normally, I would say that prospecting would curtail,” Mayor said. “However, marketers have been in such retention overdrive for nearly two years now, and you can only go back to the well so many times. Marketers must find new customers or their futures are in jeopardy.”

So what should retailers selling online do in times of war? Rubin has a checklist. First, promote goods that play on the comforts of home. Second, promote goods made in the United States. Then evaluate the supply chain and imported goods. Be prepared for a stoppage or slower delivery of merchandise, making alternative plans for inventory availability. Finally, retailers should wrap themselves in the flag. They should outwardly express patriotism and make contributions to the community, troops and the war effort.

“After Sept. 11, most retailers placed American ribbons on their Web sites as a show of support, and many had fundraising efforts to support the victims,” Rubin said. “This was a successful way to get consumers purchasing and supporting their country through patriotism.”

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