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December 13, 1999

E-Transformation
A Winning Approach To E-Business
Retail, travel sites learn to make the most of the Web

Illustration by James O'Brien etailers and travel companies have established such strong reputations on the Web that, for consumers at least, they may be the first E-business brands that come to mind. But when gauging the actual progress companies have made in their E-business efforts, the retail and travel sector isn't that different from other industries.

While some online retailers have chalked up huge market caps based on unique business models and investor expectations of future earnings, the majority of retailers and their counterparts in the travel industry are still learning to play the online game. Retail and travel companies say 7% of revenue is generated by their Web sites or extranets, according to InformationWeek Research's E-Business Agenda Study. That's a lower percentage than reported by IT, financial-services, or manufacturing companies.

Among the various approaches to E-business, retail and travel companies are most aggressive compared with companies in other industries when it comes to establishing Web-only business divisions. However, just like businesses in other industries, retail and travel companies are pursuing a variety of E-business models.

One high-profile approach is the Web spin-off, often followed by an initial public offering. Only 11% of retail and travel companies have done it, but 30% more say they have plans to do so. "The reason a lot of companies are spinning off is because they are trying to create an economic value so they can compete with guys like me," says Paul Rajewski, chairman and chief technology officer at startup Jewelry.com.

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Just four months ago, Nordstrom Inc., the 98-year-old retailer with 103 stores across the country, spun off its online site, Nordstrom.com, as a subsidiary. Nordstrom owns 85% of the business, while Benchmark Capital and Madrona Investment Group have minority stakes. Nordstrom.com is on the receiving end of its owners' $26 million investment.

The spin-off gives Nordstrom.com a "startup feel" that attracts and motivates top-notch employees, says Bob Schwartz, VP and general manager of Nordstrom.com. The big difference, Schwartz says, is that Net-only companies "live and die by their business. If they don't succeed, they can't go back to the big mother ship."

Issuing tracking stocks or merging with a publicly listed competitor are other ways to increase investments in online operations without hurting a parent company's finances or stock price. Staples Inc. began issuing tracking stock in mid-1999 for its online business. A few months later, in late November, Staples unveiled partnerships with several investors who have acquired stock representing a 5% interest in Staples.com.

In October, Sabre Inc.'s Travelocity online unit disclosed plans to buy Preview Travel Inc., a rival online travel service that trades on the Nasdaq stock exchange. Travelocity now stands to gain from the high valuations given to some Internet stocks.

Nordstrom.com recognizes that bolder measures, such as going public, may be required to compete in E-retail. "We know that our future holds a time when we will need more capital infused into this organization to run it," Schwartz says. "And going public is one of those options."

But Schwartz says Nordstrom. com and its parent are big believ-ers in the "clicks-and-mortar" model, in which Web commerce and physical retail stores coexist. After all, Nordstrom.com has the advantage of the Nordstrom brand, along with its established merchandisers, distribution centers, and fulfillment systems.

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