Big retailers proving less than adept at getting online

A series of botched efforts shows it may be harder than it looks to take a traditional business online.

In two recent examples, leading retailers Wal-Mart and Walgreens announced delays in their online plans. Wal-Mart, expected to relaunch its site this fall, said the new site won't appear until early next year. And Walgreens, the nation's leading pharmacy, said its new site has been delayed by a month and won't be up until later this month.

Earlier this year, Best Buy and Home Depot announced delays in their newly renovated Web stores. Amway sister site Quixtar debuted to near-complete site failure after a heavily touted opening, and Toys "R" Us saw its Internet strategy unravel.

In some cases the setbacks could be considered temporary glitches that will have little long-term impact. But for others the missteps mean the retailers will miss out on what is expected to be a huge online holiday season.

The reasons for the bumbles vary, but in many cases they can be traced to a common denominator: underestimating the difficulty of building a strong online presence.

"There was a belief that it was going to be easy," Argus Research analyst Alan Mak said. "They were wrong."

Many traditional players underestimate the time and expense needed to build a competitive online store, Mak said. In addition, offline companies are often beset by conflicts between their online ventures and their traditional businesses.

One of the problems such companies face results from a disparity in shareholder expectations. Investors have tolerated big losses by e-commerce companies such as Amazon.com and eToys, expecting that the millions of dollars those companies have spent on marketing and building their businesses will lead to future returns.

But investors have been impatient with traditional companies that post losses or become distracted by their Internet operations. Starbucks, for example, saw its shares drop this summer after announcing that its earnings would fall short of analysts' expectations, in part because of costs involved in its new Internet venture. The shares recovered after Starbucks laid out a more conservative strategy.

"If you're a huge brick-and-mortar firm, then you have expectations of making a certain profit," said Ravi Dhar, associate professor of marketing at the Yale School of Management. "The problem is that you're going to lose money at the outset."

This conflict on the outside often resonates inside the company. Many analysts agree that management teams, which have made their marks within traditional retail markets, often misunderstand, fear, and resent e-commerce. Part of their hostility comes from worries that the online venture is siphoning off business from the offline stores.

The term "cannibalization" is heard all too often in many corporate boardrooms, according to Dhar.

Adds James Schrager of the University of Chicago graduate school of business: "People don't understand in board rooms that the Internet is a different market. You have to be very creative, get used to new rules on the Internet, and probably be willing to lose a lot of money."

Management worries often extend from lost revenue to lost resources. Top leadership often must sit on the sidelines and watch as the company takes money away from its profitable business and sinks it into the online store.

The turf battles over resources are often compounded by the big salaries and stock options companies must offer to lure management teams to run their sites, analysts say.

Further, offline companies have often struggled with control issues concerning their online sites. Keeping their Internet ventures in-house can compound the turf battles and results in the losses showing up on the parent company's financial statement. But by spinning off their online business, traditional companies risk losing control of the operation and could forgo learning a new way of doing business.

Toys "R" Us faced just such a choice earlier this year. After getting trounced online by eToys last year, the company announced a high-profile deal with Benchmark Capital in April that involved spinning off Toysrus.com. But that deal fell apart in August when Toys "R" Us and Benchmark disagreed over the amount of control each would exercise over the site.

Dhar said companies need to figure out how to give their online sites some autonomy.

"CEO's have to ask themselves, 'How can I create an independent Web site in terms of resources and decision making to avoid conflicts,' " Dhar said.

A number of traditional retailers have managed to resolve many of these conflicts and succeed online. Barnesandnoble.com is often sited as an example of a traditional player missing the e-commerce boat. But in reality, the online sibling of the giant bookstore has done well, becoming one of the top e-tailers. Observers point to The Gap and Ethan Allen as other traditional players that have done well with their Net stores.

Despite their current difficulties, many observers expect that once traditional retailers get their acts together, they will quickly become significant e-commerce players.

Offline firms with an online strategy will be able to offer conveniences that online-only firms can't match, analysts say, such as allowing customers to pick up or return items ordered online to their physical stores. Plus, retail chains such as Borders are experimenting with Internet-enabled kiosks that will allow customers to order from the Web site when they are away from their computer.

Additionally, observers argue that with their offline clout, giants such as Wal-Mart can negotiate wholesale prices on bulk goods that their online rivals can't match.