Checkout Time?

By Chris Taylor/San Francisco

To understand how drastically the landscape of the online shopping world has shifted since holiday season 1999, you could do worse than pay a visit to Bluelight.com based in San Francisco. Incongruities abound. Here we are at a converted warehouse (major points for geek chic), but it's in the heart of Fisherman's Wharf, Middle America's greatest open-air tourist trap, miles from the hipster hangouts. Inside are all the signs of an unstuffy start-up--pets roaming the halls, people with green hair. Yet what gets them really jazzed is flipping the switch that signals a virtual blue-light special.

The dotcom world has gone to work for K Mart? It certainly looks that way. Refugees from Pets.com Eve.com Productopia, PlanetRX and just about every other recent flameout have landed here. Last Christmas, Bluelight.com (60% owned by K Mart; other investors include Martha Stewart) was an industry joke. Now it boasts an inventory of 30,000-plus items, more than 1 million unique visitors monthly and a massive, last-minute rollout of 3,600 Internet kiosks in 1,200 K Marts across America. CEO Mark Goldstein is blithely turning away job applicants--unheard of in employee-hungry Silicon Valley--and even considering buying a failing dotcom or two for Christmas. "There's some great stuff out there," he muses. "We can make them profitable, take them under our wing."

Call it the revenge of the real-world retailers. After years of being told they didn't get the Net, sites like Walmart.com and Target.com are suddenly the fastest-growing shopping destinations on the Web. Over the past five weeks, visits to "multichannel" dotcoms (a.k.a. clicks-and-mortar, those with a catalog or store behind them) have shot up 67%, compared with a 42% seasonal rise for "pure-play" merchants (which exist only online, like Amazon.com) Walmart.com alone is gaining 80% more cybershoppers every week. Incoming CEO Jeanne Jackson raised eyebrows when she closed the site for renovations two months ago. Now the revamp is paying off. "We're just starting to figure out how this functions," she says. "It's barely Round 1 1/2."

Those who want to make it to Round 2 had better hope Santa is good to them. Even before a single retail site burst online, America had too many retail stores. By 2000, it also had too many e-tail stores. Result: shuttered sites, struggling shops and shredded profits across the sector. Poor performance by such companies as the Gap, Nordstrom and J.C. Penney added to the dotcom carnage in the stock market. And new worries that consumer spending is slowing, presaging a recession, have made this Christmas the most critical in years.

So as multichannel dotcoms cheerily dip into bottomless parent-company purses, e-tailers that used to burn cash like a yuletide log have turned into Scrooges--slashing costs, scanning the bottom line and praying fervently for a Christmas Future. Sites such as eToys, whose stock has dropped 94% in a year, openly admit they will need cash transfusions by the end of 2001. "We need one more round of financing to break even," says Toby Lenk, founder of eToys. That's why grabbing an impressive chunk of the estimated $12 billion being spent online this November and December is "absolutely critical," adds Lenk. Trouble is, his top two rivals from last year--Amazon.com and Toys "R" Us--have since teamed up in a classic clicks-and-mortar partnership.

Even Amazon.com was not immune to role-reversal last week, when embarrassing leaks from its internal website showed the e-commerce poster child taking a harsh, Wal-Mart-like stand against a nascent move to unionize some of its warehouse workers--would-be dotcom millionaires now turned wage slaves. Last year, with employee stock options booming, Jeff Bezos looked like Kris Kringle; this year the market turned him into the Grinch. To keep top execs tethered, Bezos has had to put cash on the table, not paper.

Not that Amazon.com which clocked a record 54 million visits in November, needs to worry about underperforming. Much more vulnerable is Buy.com the second largest pure-play e-tailer, which last week topped a Goldman Sachs list of the most cash-hungry dotcoms, ahead of Cyberian Outpost and Drugstore.com Buy.com CEO Greg Hawkins, who has spent more than a year overcoming the reckless price-cutting legacy of founder Scott Blum, is in a somber wait-and-see mode: "Last week didn't disappoint us, but we didn't walk out saying, 'Yee-hah, this is going to be a great Christmas!'"

To make it as merry as possible, Hawkins has followed what is becoming the classic cost-cutting model for pure-plays: fewer of those annoying TV ads and more online marketing, focused tightly on your base (in Buy.com's case, 18-to-49-year-old college-educated men earning $80,000 a year). For dotcoms on a budget, it makes more sense to reel in previous customers than to waste time attracting new converts. "We'll never make enough money on the first transaction," says Mike Lannon of Boston-based Send.com which has slashed what it spends acquiring a customer 95% since last year. "Last year was the land grab. This year we have to live off the land."

Which means things like customer service and prompt delivery have suddenly become a whole lot more important. The nightmare before last Christmas, the plague of site outages and delivery snafus that caused mass customer outrage, left plenty of sadder, wiser veterans in its wake. "It was chaos," recalls Kenny Kurtzman, CEO of luxury site Ashford.com based in Houston. "I had to take phone orders myself right up to Christmas Eve. We had the whole company down in shipping because we didn't know what to expect."

Kurtzman may not know what to expect this season either, but he has been contingency planning since March. If anything, he's overcompensated by promising free next-day delivery, a year's free insurance on big-ticket items and a bunch of roses if the package doesn't make it on time (out of 20,000 orders in the past three weeks, he had to send flowers 25 times). It seems to be working. Ashford's all-important repeat-customer rate has gone from 18% last year to 33%. That's how pure-plays have to build a trustworthy name for themselves--lots of grind and the florists on speed-dial.

Multichannels, of course, have the maddening advantage of starting out with trustworthy names. And in some cases, the dotcom version of the name is becoming more trustworthy than the original. Take J.C. Penney, whose mall stores have been struggling and whose stock has dropped 16% this year. The retailer says it's the victim of a bad fashion year. For JCPenney.com on the other hand, Christmas has come early--the site doubled 1999's $102 million revenue before the holiday season even began (and expects to add $100 million more by the time it's over). It's now the most visited clothing and home-furnishing site on the Web.

How did it get there? Partly through new technology. "Just4Me" virtual models were a hit, allowing shoppers to re-create themselves and try on clothes without any tedious changing-room encounters. But it's also about clever use of the parent company's infrastructure, like call centers that can process 1,000 orders a minute. "Don't forget," says JCPenney.com CEO Paul Pappajohn, "we've been in the direct-to-consumer business for 37 years with our catalogs."

These wily but tiny multichannel dotcoms are starting to look like the tail wagging the corporate dog. Bluelight.com and JCPenney.com have fewer than 300 employees between them, barely enough to run a single store. The big-box guys have created energetic, effective start-up clones that just happen to have multibillion-dollar corporations grafted onto their side. That's going to be an unassailable advantage in Rounds 2, 3 and 4. The other kind of start-up isn't done fighting yet. But don't be surprised if many of them start the next holiday season as just another blue-light special.

--With reporting by Cathy Booth Thomas/Dallas

With reporting by Cathy Booth Thomas/Dallas