InformationWeek

Several brick-and-mortar retailers have made multimillion-dollar deals recently to kick their Internet strategies into high gear (see box). CVS Corp.'s move to buy Internet pharmacy Soma.com for $30 million in stock is just the latest example (see story).

The need to establish an online sales presence quickly is knocking down old barriers. Some businesses are partnering with, investing in, or acquiring Web-only competitors, while others are aggressively funding internal units. The strategies differ, but the goal is the same: to grab online market share.

Last week, $4 billion retailer Consolidated Stores Corp. disclosed that it's partner- ing with BrainPlay. com, a Web-only competitor in Denver, and spending $80 million to spin off its fledgling online toy site, KBToys.com, as a separate entity. Consolidated Stores will own 80% of KBToys.com LLC, but the unit will be run by BrainPlay.com, which will own the remaining 20%.

Real E-Deals Recent moves by brick-and-mortar companies to ramp up their E-commerce efforts quickly: Cendant drops plans to sell Rent Net and will use it to enhance the Web sites of its three real estate brokerages, Coldwell Banker, Century 21, and NRA Consolidated Stores invests $80 million in KBToys.com, a site it will jointly own with startup BrainPlay.com CVS spends $30 million to buy online pharmacy Soma.com PetSmart plans to invest $16 million this year in PetSmart.com, a site it will jointly own with startup PetJungle.com Toys "R" Us invests $80 million to relaunch Toysrus.com, which will be run as a standalone business DATA: INFORMATIONWEEK

"We put up the KBToys Web site last November with a limited product assortment and virtually nothing in marketing, but we've learned a lot since then," says Michael Potter, CFO of Consolidated Stores, in Columbus, Ohio. "There's no doubt in our minds that the Internet is here, that toys will be big sellers on the Net, and that we need to be part of that."

Other executives are reaching the same conclusion in their own markets. Some 30% of CEOs and senior executives say the Internet is forcing them to overhaul their companies' strategies, according to a survey released last week by Booz, Allen & Hamilton and the Economist Intelligence Unit. That realization is creating a new sense of urgency. "CEOs, when pressed by their directors about their Web-commerce capabilities, realize they can't get from here to there using traditional project methods and measures," says Booz Allen VP Charlie Callahan. "So they're much more apt to partner with new players, as long as they can get to market faster."

Toys "R" Us Inc. has been selling toys online since mid-1998, but its site offered only selected items and had little marketing support. Last month, the $11 billion company launched Toysrus.com as a separate business partially funded with venture capital. It has hired Bob Moog, a West Coast entrepreneur who founded Areyougame.com, as president and CEO of the unit, which will be based in Menlo Park, Calif.-3,000 miles from Toys "R" Us' Paramus, N.J., headquarters.

"Toys "R" Us decided that its Web business can't succeed unless it is its own company," says Moog. "That's a gigantic step for a big corporation." Moog says the site will add features every week until it's fully ramped up for the Christmas selling season.

The moves by Toys "R" Us and Consolidated Stores are a direct result of the success of eToys Inc., whose stock jumped from $20 to more than $76 on the first day of trading after its initial public offering last week. That gave eToys a market capitalization of more than $7.7 billion-about 35% greater than that of Toys "R" Us. While eToys has annual sales of just $30 million-less than 1% of Toys "R" Us' sales-it can use its highly valued shares to buy up competitors or Internet startups.

"If you're an offline giant and looking at one of these digital gnats flying around, you swat at it and it doesn't really bother you too much," says Tim Klein, a research analyst with Banc One Piper Jaffray. "The question is, when does that gnat turn into a killer bee?"

Even companies that have moved fairly quickly onto the Web are hooking up with new partners to turbocharge their E-commerce efforts. PetSmart Inc. is merging its online business with PetJungle.com, an online pet supplies retailer backed by Idealab, a Web startup incubator. PetSmart will invest about $16 million in PetSmart.com, which will be headed by Tom McGovern, currently CEO of PetJungle.com.

The goal is to combine PetJungle.com's entrepreneurial pace and skills with PetSmart's offline brand awareness and existing PetSmart Direct catalog distribution center in Rochester, N.Y. PetSmart.com will also use PetJungle. com's E-commerce infrastructure based on InterWorld's Commerce Exchange application and an Oracle database on Sun Microsystems servers. "PetSmart already had a nascent E-commerce group, but this will let them quickly scale up with a team already focused on E-commerce," says McGovern.

Companies are realizing they need to serve their customers and not worry about how Web commerce might hurt in-store sales. "The idea is total investment in the lifetime value of the customer, regardless of the channel," says Paul Gaffney, senior VP of the The Office Depot Inc.'s commercial sales division. "We can't tell our customers how to do business with us."

Successful Web startups are playing the acquisition/partnership game, too. Earlier this month, Amazon.com invested in online pet supplies company Pets.com. CVS's acquisition of Soma.com was partially in response to Amazon.com's investment in, and partnership with, Drugstore.com. Health-care Web startup Healtheon Inc. upped the ante last week when it confirmed plans for a $5.5 billion merger with WebMD-with outside investments from Excite, Intel, and Microsoft.

Aggressive Response
Cendant Corp., a $5.3 billion consumer-marketing conglomerate, belatedly realized it had to respond more aggressively to a threat from Realtor.com, a Web-only company that established an early lead in the online property market. Cendant had planned to sell off its Rent Net site, which provides apartment listings and other services, as it struggles to recover from problems involving accounting irregularities. But it reversed that decision and last week moved to leverage Rent Net's skills and experience to establish a larger Web presence. Cendant plans to move Rent Net from its direct-marketing division to its real-estate division and use it to build a property portal incorporating the sites of the company's real-estate brokerages, Century 21, Coldwell Banker, and NRA. Rent Net co-founder and president Jed Katz admits it would have made sense to integrate Rent Net with the brokerages sooner. "There wasn't a set strategy to pull everything together," he says.

Not all companies are worried about startups taking the lead in the online marketplace. Wal-Mart Stores, Home Depot, and other large retailers haven't launched major counterattacks against Web-only competitors-yet. Will it hurt them? "Every brick-and-mortar retailer needs to have an aggressive Web strategy, and the people who haven't been pushed to do it now will regret it," says Moog of Toysrus.com. "On the Internet, it will always be harder to catch up later." with additional reporting by Gregory Dalton