What Works OnlineWhat Works Online

This holiday season, shoppers are trying to do more with less. So are online retailers. Web sales have proven to be a small slice of most sectors, so retailers are being more selective in what Web initiatives they invest in. They're starting to view their Web sites like any other store--now that it's built and functioning, what justifies spending more money on it?

Only a year ago, BlueLight.com, Kmart's Web site, which was spun off as a separate business unit, started advertising big sales and free shipping as early as November. Like BlueLight, most E-retailers were hawking numerous promotions, adding personalization features, and prepping sites for vast numbers of shoppers.

But this year, online retailing isn't what it used to be. At BlueLight, markdowns are rarer and the only thing delivered for free is Olympus cameras, thanks to a deal Olympus struck with Kmart. The E-retailer, which was dragged back under Kmart's corporate tent in July, has put a hold on fancy Web features. "If you're looking for new technology, this is the wrong year for that,'' a BlueLight spokesman says.

Scott Silverman, executive director of Shop.org, says few retailers are innovating online right now. "What retailers are doing is optimization, not experimentation," he says. Shop.org is an association of more than 100 retailers who also sell online.

Some are even more desperate. Federated Department Stores Inc. will stop selling merchandise on its Bloomingdales.com site Feb. 1, absorb a loss of more than $50 million, and reduce the amount of apparel sold on Macys.com. The retailer hopes the change in strategy will reduce the expected losses from the online businesses and keep them on track to break even in 2003, as was originally anticipated. Bloomingdales.com will become a marketing site for physical stores and offer electronic order forms for purchasing from the Bloomingdale's By Mail catalog. At Macys.com, big sellers such as gifts and jewelry will make up a greater portion of the merchandise, while most apparel will be removed. Federated also will shut down the Macy's catalog operation.

J. Crew Group Inc. recently reported that net income fell 93% in its fiscal third quarter ended Nov. 3, to $300,000 from $4.5 million in the year-ago quarter. The company is pinning its hopes for a rebound not on the Web, which accounts for 15% of revenue, but on new stores. It will continue to support its Web operations, but new investments will be used to open as many as 35 stores next year, and even more in 2003. "Physical stores are the priority for next year," CIO Paul Fusco says. "Our growth will come from the stores, from foot traffic."

Estimates for online holiday sales range from wildly optimistic to merely positive. Gartner G2 forecasts a 30% jump in online revenue in North America from last year, to $11.9 billion; Jupiter Media Metrix also predicts sales of $11.9 billion, 11% higher than its 2000 estimate. Traffic is up, too. Nielsen/NetRatings, which projects a 30% online sales increase, to $9.9 billion, says Web visits surged 59% the week ending Dec. 2, matching a similar upswing last year.

So why the online conservatism? Retailers, like everyone else, have to contend with the sagging economy and fragile consumer confidence. And since many department stores and discount chains--as opposed to Web-only companies--are in the driver's seat online, they've lowered the speed limit. There's no rush to add features; the focus is the bottom line.

At J. Crew, capital spending for IT will be cut in half next year, and the overall budget in 2002, including salary raises, will be less than this year. So rather than experiment with something new, it's going with what works: a robust, secure infrastructure that doesn't keep shoppers waiting.

With help from managed hosting provider Digex Inc., J. Crew has added an extra application server to reduce the time it takes a Web page to download to just over 1.5 seconds. Jcrew.com also bolstered its firewall security in late November with a Nokia IP740 security platform, which has 1 Gbyte of throughput. The firewall, which cost less than $5,000 plus service-related fees, provides stronger encryption without affecting performance and eliminates the need for extra firewalls to secure the site during heavy periods of traffic, Fusco says.

Eddie Bauer Inc. has spent much of the year working to improve site performance. Its in-house development team redesigned the site's help section and order tracking. "That's where the industry is at right now--redefining the processes that run the Web site. It's not necessarily about technological innovation," says Brian Walker, manager of business development for Eddie Bauer's E-commerce division. But the retailer did add a new multimedia feature. The site now offers streaming video clips for 27 items, mostly apparel. Each video cost $1,000 to $2,000 to produce; Vendaria Inc., which hosts them, charges 16 cents to 24 cents each time one is viewed. "This may be something that gives customers a little bit of a 'wow' factor," Walker says. "But if we were remiss in any of our fundamentals, [the video clips] wouldn't matter very much."

That's certainly the theory at Williams-Sonoma Inc. During the past two years, the San Francisco housewares retailer has greatly expanded its Web presence, but total spending on online has stayed "in the same neighborhood," says Shelley Nandkeolyar, VP of E-commerce.

That's because Williams-Sonoma has followed an online strategy similar to what it does with its brick-and-mortar stores--amortizing that investment over five, sometimes even 10, years. During that time, a retailer typically makes few changes to the physical stores. "We've reached the point where we've invested and gotten a lot of [online] functionality," Nandkeolyar says. "Now we need to get our customers comfortable with what we have."

To prepare for the holidays, Nandkeolyar switched a co-located data center from Exodus Communications Inc. to AT&T and used Topaz, a product from Mercury Interactive Corp., for security monitoring. More servers were added to improve speed--a feature Nandkeolyar thinks E-retailers neglect. The company is still 18 to 24 months from offering shoppers the ability to buy an item online and pick it up in a store. The internal order-management system will need to be revamped, and anyway, he says, there's no rush. "This is a business, it's not a 100-meter dash," Nandkeolyar says. "You need to continue to innovate over the life of this, and the life of this could be the next millennium."

Not all E-retailers are playing it conservative, though. Burlington Coat Factory Warehouse Corp. has undertaken two major initiatives to increase revenue and customer loyalty. In September, the company upgraded its InterWorld E-commerce application to version 5.0. The Java-based upgrade should help Burlington integrate its Web site with its legacy point-of-sale and gift-registry systems more easily, says Ginger Atwater, director of E-business for Burlington Coat Factory. It's also implementing E.piphany Inc.'s customer-service software so it can begin to track information about all customers--online and brick-and-mortar--and their spending habits. Burlington is hoping the systems-integration strategy and the E.piphany software will help it better understand its customers and develop targeted marketing campaigns.

Though clothing retailer Lands' End Inc. is known for taking the lead with innovative Web-site functions, it doesn't neglect the basics. In August, it upgraded the search engine on its site with natural-language technology from Easy Ask Inc. Now, a shopper can type in "red sweaters under $50" and get a list of just that, complete with photos. Still, it found time this year to add a jazzy new feature: The site now lets shoppers design their own chinos, and in January it will add "Design your own jeans." Shoppers choose from a list of styles, such as tapered legs or straight legs, colors, and input various measurements. The information is analyzed and sent digitally to the manufacturer, which custom-cuts the pants from the individual's personal pattern and produces a unique garment. The proprietary online process was developed by Archetype Solutions Inc.

Despite the few sites that are going beyond the basics, there's a different feel to shopping on the Web this holiday. One way to notice the change is to look at what's not there, says Cathy Hotka, VP of IT at the National Retail Federation, a trade association. "We go through cycles where retailers buy everything in sight and say, 'We need this now.' Then there's the cycle where they integrate them into the business," Hotka says. "It's time now to see how they work."--With additional reporting by Jennifer Maselli