Certain businesses may be forever incapable of crossing the great divide from traditional to Web retailing. How easy is it for a traditional retailer to switch its business to the Internet? And how much is a brand name established in the world of billboard and television advertising worth when it comes to electronic commerce?
Thousands of investors must have asked themselves these questions during the last few weeks as they watched the share price of K-Tel International soar from less than $10 in early April to nearly $80 in early May.
Until a few weeks ago K-Tel was a well-known retailer of recorded collections of popular and easy listening music through traditional direct advertising channels, particularly radio and late night television. But on May 1st, K-Tel opened its music retailing Web site and announced that its future was on the Internet.
K-Tel is not the first company to attempt the transition from bricks and mortar or direct marketing to e-commerce. After Amazon.com demonstrated the success of book retailing through the Internet, Barnes and Noble, the largest US book chain, set up a competing Web site. More radically, Egghead, a retailer of computer software, closed all its stores and replaced them with a Web site.
A slew of companies with established brands in different businesses, from cigars to perfumes, have taken the same route. They have assumed that their brand names will benefit them in e-commerce as they have in regular commerce. And since the Web offers retailers a vast new sales opportunity, the argument goes, extending their brand to the world of electronic commerce makes sense.
Many are in for a shock. The Internet has its own retailing rules. Rule one: Don't try to sell products that customers want to touch or smell before purchase. Forget trying to sell cashmere coats, perfumes or aromatic cigars unless the customer has bought the product before or truly trusts the brand name. Goods that require careful viewing are also problematic. Would you buy an engagement ring off a computer screen?
Rule two: shipping and postage costs must be a reasonably low proportion of the purchase price. That favours goods with higher value, smaller size and lower weight. Books are fine, cheap canned food less so.
A more subtle point: the ideal e-commerce business should also have more to offer than its nonWeb counterparts. The online bookstores allow their customers to search by topic and theme in a way that physical bookstores cannot, and they offer larger selections.
The final rule: remember that the typical Web surfer is still predominantly young, white, male, and computer-orientated. That is why software retailers have fared better on the Web than art galleries.
So where does this leave K-Tel and its stratospheric stock price? It passes the product rules: K-Tel sells compact discs, which do not require touching or smelling before purchase and shipping costs are low.
With its roots in direct marketing, K-Tel can exploit the inventory management advantages of a Web business without having to close physical shops.
Moreover, the Web offers KTel an advantage over its nonInternet competitors: you can listen to songs over the Internet before purchase, and even compile a customised CD of your favourite songs. So K-Tel's business seems well-suited to the Web.