BW Online | January 4, 2001 | "E-Commerce Failed on Its Own Merits"

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JANUARY 4, 2001


"E-Commerce Failed on Its Own Merits"
Retail anthropologist Paco Underhill talks about why e-tailing may never live up to its hype

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Thanks to Paco Underhill, American retailers now all know about the "butt-brush" factor. You see, store customers don't like narrow aisles, says Underhill, one of the country's top authorities on how consumers behave in retail stores: "Once you jostle someone from behind, the person tends to flee what is presumably an uncomfortable situation -- no matter how fabulous the product."

Common sense like that -- and thousands of hours of videotapes chronicling consumer behavior -- has given Underhill a reputation as a preeminent "retail anthropologist." Although it has been two years since the release of his book, Why We Buy, many of Underhill's published observations and predictions remain remarkably current.

Business Week Online's Stefani Eads recently caught up with Underhill in his office in New York's garment district. The topic of discussion: What about e-tailers? They've had a rough time of late. What went wrong? And how can it all go right?

Underhill's view: All retailers got too caught up with Net hype and forgot to focus on the consumer. They were far too worried with keeping up with competitors. The result is an unhappy and unsatisfied consumer public, Underhill says. "At the end of the day, retail is a god-awful business," he says. "It's all about running details and making them perfect day in and day out." Here are edited excerpts of their conversation:

Q: Let's start with what you said in your book. Do you feel vindicated?
Almost everything I predicted two years ago in terms of why we buy has come true. The Internet bubble has burst. And the things that sell well on the Web generally have no taste, feel, or smell. The Web has succeeded where there's a fundamental, profound disconnect between the manufacturer and the bricks-and-mortar retail chains. For example, books, where publishers are imminently closer to the authors than the reading public. Music, since the labels are closer to the producing artists than to the consumers. Movies. Pornography. And stocks.

People also felt the Net was going to be some global community, and that's proven not to be true. The future of the Web isn't global -- it's local. It's a way on a very tactical level for people to facilitate their lives as the technology exists wherever they are. For example, here in the U.S., we have a wonderful delivery system for products: mail, FedEx, UPS. Whatever criticisms we may level at it, it's remarkably effective and remarkably cheap. We have a nation that's spread out, and retail has to follow where people live.

Q: What have we learned from the past year's mistakes?
Opportunity begins once the Net has to operate with the same 19th century accounting rules to which everybody must adhere. Many of the dot-coms saw themselves as billion-dollar empires rather than as small, healthy businesses. Online pure-play opportunities do exist, and once we've blown the Boo.coms off the map, we can settle down to doing something where somebody says, 'Here's my business plan, and I plan on making money by the third quarter of operation, or I'm going out of business.' For example, in New York, something like a would be a very viable business if focused on a local level.

We've had trouble with the concept that technology doesn't lead -- it follows. The key piece that has been missing in this entire Internet disaster has been the lack of adoption by women. If women see technology as something that makes their lives more meaningful or more effective, it then makes the critical transition to an appliance.

Q: What are the e-tailing fallacies of the past year?
Retailing is like a sieve. Once you start losing focus, you lose customers, money, and staff. You have to keep the ship watertight and focused on a direction. Also Wall Street, which historically is about following where the trends are leading, tried to lead the charge. Wall Street did the larger retail business community a huge disservice by growing companies faster than they were maturing. This has caused the cost of hiring employees and buying real estate to exceed most realistic companies' budgets.

Q: What is the greatest challenge facing online retailers this year?
What my clients face this year is how to integrate the Net into an overall business offering. How does a company create a seamless experience between its catalog, Net store, and bricks-and-mortar presence and allow the customer to plan her life in a way that's uniquely effective?

The good news is that we're closer to this than you think. Barnes & Noble started to reintegrate into its corporate environment [rather than keeping it as a separate subsidiary]. Wal-Mart has been overhauling its site and wrestling with how to let customers pick up product in whatever store they want to without having to incur shipping charges. It's going to be companies like Wal-Mart and Target that have the infrastructure to be able to do it.

Q: So what about online pure-plays, such as profitless
I think the pure-play dot-coms will find niche opportunities when they find a specific customer who has been poorly served and when their site serves as an effective engine to get [customers] where they want to go. Take tall women. They have a terrible time finding clothes. Let's say you had a tall women's apparel site where your target audience didn't have to run around from store to store, where they could access online reviews, and where they could use the Net to find the merchandise and make sure it's in stock and ready to go. That's where the opportunity exists.

But that's also a $50 million to $100 million business. It's not a billion-dollar business. It's also one in which the needs cycle is total. The retailer doesn't want to stock too many tall sizes because they don't get the sales traffic. And customers are willing to pay a premium, and historically have paid a premium, because they haven't had the luxury of having their needs met in too many places.

Q: Many analysts call the "Wal-Mart of the Web." Is that presumptuous?
I'm willing to grant Amazon as much rope as it needs. It's still struggling with how to make a profit, which is something that Bentonville [Wal-Mart's headquarters in Arkansas] figured out a long time ago. Coming out of first-quarter 2001, some bricks-and-mortar assets will be up for sale and could be a good acquisition for Amazon.

There's going to be some major-league carnage the next two quarters. A lot of major businesses with a lot of real estate holdings across the country are at risk. Let's take a drugstore chain like Rite-Aid, which has a brilliant new management team but a backlog of debt that's astronomical and a basic infrastructure that's going to be hard to rescue. Look at a vulnerable old retailer like J.C. Penney. Their trouble is focus. They can't figure out whether it's a discount chain or not. It's not that [these businesses] aren't viable. It's whether they're viable in their current form.

Q: Why were retail sales this holiday season so disappointing?
First, we're part of an aging culture, and people don't need stuff. If you're 35 years old and younger, you're still acquiring possessions. If you're between 35 and 50, you're buying services. And if you're over 60, you're buying experiences. The problem with much of our marketing culture is that it's Generation X in the driver's seat, and they're focusing on themselves and Generation Y, and not doing a particularly great job of focusing on boomers and seniors. Gap has had trouble this year because they tried to compete with Abercrombie & Fitch rather than recognizing where the core of their customer base was.

Q: So is it a simple matter of losing sight of the fundamentals of retail?
Many retailers struggled to get online without any clear vision of what online could do for them. Today, most of my clients are bricks-and-mortar companies trying to make their Net investments successful. They're asking where to put Internet kiosks in their stores and how to do a better job of driving in-store traffic to their Web sites. The idea is to use a Net station as an ordering point so retailers pay less money to their landlords.

What if grocery chains in limited urban settings realized that if they took away the laundry section or the pet-food section and set them up as some form of advanced-order process, the supermarket would get infinitely more interesting. All the products that are dull as dishwater don't have to be on the floor. Managers can do more with the high-margin products. [Specialty supermarkets such as] Gourmet Garage or Trader Joe's can't be full-service providers the way they exist now. In combination with some form of Web ordering process, they could make that evolution. It breaks retail from the necessity of needing 40,000 square feet. In other words, the "big-box" concept ultimately could be deflated.

Q: Was this year's dot-com bloodbath, then, just a consequence of the retail sector's general problems with pricey real estate, aging infrastructure, aging properties, and expansive growth that makes changing directions difficult?
Absolutely not. Dot-com e-commerce failed on its own merits. It wasn't helped by the [holiday season's] lack of fresh, new products, an aging population base, and an economy that slowed to 50 miles an hour after rolling along at 80. But let's also not forget that the dot-coms were a sideshow in terms of the general consuming world. Catalogs make up 8% of total retail sales, and dot-coms are responsible for 4% at the most.

Q: What are the most common challenges facing e-tailers these days?
Sites must make sure they offer something reasonably simple to use and something that plays to a general denominator. From an e-commerce standpoint, the Web has been designed for technophiles. Most shoppers don't have the same level of [computer] literacy as the technologists. Sites forget that they have to acquire and support a customer base that doesn't always "get it."

Edited by Beth Belton

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