InformationWeek

Toys "R" Us Inc. said it will spend $80 million in a bid to become the leading online toy retailer. First Union Bank disclosed that about $30 million of its $155 million five-year IT budget will be spent on E-commerce. And United Parcel Service of America Inc. formed a dedicated E-commerce sales force and technical-support team.

"Up to now, many companies have placed only small bets on E-commerce," says Roy Satterthwaite, a research director at Gartner Group. Increasingly, companies are spending tens of millions of dollars on their projects, he says. "The cost is high, but it's still a bargain," says Satterthwaite. "Where else can you grow a channel that has as much reach as the Web?"

Toys "R" Us' E-commerce investment is one of the biggest to date. The company didn't reveal what technology it will use, but said it will create a separate business unit, Toysrus.com, which will be partially funded by Benchmark Capital, a venture-capital firm that has backed high-flying Internet companies such as eBay Inc. and Ariba Inc.

The investment includes the purchase of a $30 million, 500,000-square-foot warehouse and distribution center in Memphis, Tenn., which will handle only products sold online. Toys "R" Us says that by year's end it wants to be "the clear leader" in electronic sales of toys and children's products-a distinction currently held by upstart eToys Inc., which sells only online.

Toys "R" Us was forced to acknowledge the strategic importance of E-commerce because it was "Amazoned." That is, it's an established company blindsided by the quick success of an Internet-only competitor, like Amazon.com, that didn't exist a few years ago. While eToys' revenue soared from $530,000 in 1997 to $23.9 million in 1998, Toys "R" Us saw its 1998 operating profit fall 15% on sales of $11.2 billion. Revenue was up just 2% over 1997.

Such examples aren't as obvious in business-to-business commerce, but analysts cite Compaq's inability to match Dell Computer's success online as an example of what happens when companies fail to develop and execute a cohesive E-commerce strategy. Many business-to-business sellers are taking aggressive action now to make sure they don't get left behind.

"Don't Wait"
"The message about E-commerce is simple: Don't wait," says Jim Worth, director of E-commerce at Philips Lighting Co., a $5 billion lighting-products manufacturer in Somerset, N.J. Next month, Philips will roll out a Web ordering system called TradeLink to its smaller distributors that don't have electronic data interchange. TradeLink was developed with Microsoft Active Server Pages and C++ and links to a Microsoft SQL Server database on the back end.

Philips aims to have about 400 smaller distributors linked electronically by year's end, and its entire distributor base of 1,000 online by the end of 2000. "By then, you'll do business with us electronically, or you won't do business with us," says Worth.

As part of its Web effort, First Union will disclose this week that it has signed a contract to use Netscape's products to enhance its online channels. The financial firm is licensing Netscape's application and directory servers and BillerXpert software for several new services it's offering business customers. Netscape's application server will be "the core of most of our product offerings," says Sandi Larsen, VP of Internet development in First Union's cash-management division.

This fall, First Union will begin presenting bills from companies to their customers on the bank's Web site. Around the same time, First Union will also start providing Web access to invoices and other documents that the bank collects on behalf of its business clients.

UPS is adding 40 new account managers and support reps to push its E-commerce offerings, which include Web-based applications and tool kits, as well as delivery and logistics services. The package-delivery company attributed strong first-quarter earnings in part to

E-commerce. UPS couldn't say how much of its $499 million net profit came from E-commerce because it's developing new metrics for measuring its online business, but it has seen a sharp rise in E-commerce revenue recently. "The difference between March and now has been phenomenal," says Alan Amling, director of E-commerce for UPS. "We're starting to see that hockey-stick growth."

The Payoff: Revenue Growth
Other companies are also reporting that their initial investments in E-commerce are starting to pay dividends. In most cases, revenue from online sales is growing much faster than revenue from other channels. W.W. Grainger Inc., a $4.3 billion industrial-products distributor in Lincolnshire, Ill., has invested $26 million in E-commerce technology over the past three years. The company said last week that revenue from online sales in the first four months of this year surpassed the $13.5 million it took in during all of last year.

One reason: The convenience of the Web leads to more sales. "Online customers are our better customers," says Grainger group president Don Bielinski. "Corporate buyers who use the Internet really like that experience. They're coming here, staying longer, and buying more."

A typical company that purchases online from Grainger is buying 32% more in 1999 than it did last year, Bielinski says. By contrast, sales growth for businesses that buy through Grainger's traditional channels is in the single digits.

Ticketmaster Online-City Search Inc., which handles online sales for Ticketmaster Corp., said last week that revenue for the first quarter rose 156%, to $16 million, from the first quarter of 1998. The company says online sales now account for 10% of all Ticketmaster tickets sold, up from 2.5% a year ago.

Amazon.com reminded conventional companies again just how important a sales channel the Web has become. The online retailer reported first-quarter sales of $293.6 million, more than three times its revenue for the year-ago period. Customer accounts grew by more than 2.2 million, to 8.4 million. The company still lost $61.7 million for the quarter because it continues to make acquisitions, market aggressively, and invest in IT infrastructure.

But conventional businesses are finding that online initiatives are paying off because they help cut costs and improve margins. Call-center inquiries account for about half of Philips Lighting's customer-support expenses. The TradeLink pilot program reduced costs by cutting customer phone calls by 80%. At the same time, it tripled the amount of information actually exchanged with customers, according to Worth.

Online customers also cost less to support. "The margins we enjoy [on the Web] are significantly greater than on any other services we provide," says Michael Daley, senior VP in the wholesale product group at First Union, in Charlotte, N.C.

Citigroup would agree. It's aggressively developing online banking (see story, p. 44). The company says it has more than 300,000 U.S. customers banking on the Internet, and is adding 25,000 more each week. Citigroup senior corporate officer Ed Horowitz says it costs Citigroup $450 a year to service a customer in branches, compared with less than $150 on the Web.

Companies such as Citigroup, First Union, Grainger, and UPS are proving that E-commerce's benefits are real-and that businesses that ignore those benefits do so at their peril. "Electronic selling and purchasing are going to be the default method of doing business, not the special case," says Stu Feldman, director of the IBM Institute for Advanced Commerce. "And 'going to be' is a matter of months, not decades."