Originally created 08/08/99

Online business was a bright idea



Meet Steven Rothschild, one of the "Web natives" leading the great e-tailing charge of 1999. The online commerce light bulb went on for a second time inside his head when the 40-year-old entrepreneur's wife asked him to replace a burned-out bulb in their dog pen.

Finding just the right halogen double-spade end bulb proved to be such a hassle that Rothschild decided to take the $3.5 billion-a-year light-bulb industry online. Never mind that he'd already founded the Web's leading furniture sales site. This week he launched Bulbs.com, which allows people to choose from 5,000 different varieties.

His story goes a long way toward explaining why Web natives have such a wide lead over what analysts call "land-based" stores. Partly it's because the natives -- companies born online that do almost all of their business online -- tend to be long on speed, alacrity and venture capital. Partly it's because they start with a cheaper distribution system, a core advantage they strive to widen with laserlike focus.

And partly it's because the Web is what they wake up thinking about in the morning.

To be fair, the opening shots have barely been fired in the e-commerce battles, which will escalate between now and Christmas. But already I smell blood -- the blood of real-world retailers who are short on electronic self-esteem and whose profit margins often can't withstand a 10 percent hit on sales. Nine percent, for example, is the level of household goods that industry analyst Forrester Research Inc. projects consumers will buy online by 2003.

To see how e-tailers are gaining the upper hand, look at the recent rush to sell furniture online. Less than a year ago, analysts said the $178 billion-a-year home furnishings industry was not ripe for e-commerce because consumers would insist on sitting on their sofas and chairs before taking them home.

Now two heavily funded Web natives are busy flogging sofas, rugs, tables and every other kind of home furnishing online, along with a half-dozen smaller players. Rothschild's Furniture.com went on the Web in January 1998, followed by Living.com two weeks ago.

Both have distribution deals with hundreds of manufacturers. Furniture.com sold nearly $1 million in May alone. Tens of millions of dollars in venture capital is being hurled at these companies.

Analysts clearly underestimated the pull of 24-hour shopping and broad product selection. "In most communities, furniture stores do not have the selection that consumers are looking for," Rothschild said. "We have over 50,000 items on our site. And it is convenient: When Mrs. Jones puts her three kids down for the night, she doesn't want to jump in the car and drive to a furniture store, but the Web empowers her to do that."

The only way to really know what consumers will do is to make them an offer and see how they respond. And guess who is making these risky first offers to consumers? In category after category, whether it's books, toys, music or shoes, Web natives are striking first, while traditional merchants worry about cannibalizing store sales or alienating sales and distribution partners.

After six months of strategizing, Ethan Allen Interiors Inc., one of the nation's largest furniture makers, announced last week that it will launch a direct sales site on the Web in September. The site will use its own 72 stores and more than 250 independently owned franchises to handle deliveries and returns.

Franchisees are being wooed with a big slice of profits from each Web-generated sale they deliver. "We are sharing 70 percent of the gross profits with them on furniture, and 25 percent on smaller items that we ship directly," said Ethan Allen chief executive Farooq Kathwari.

The site will offer about 5,000 products, including all of Ethan Allen's wood furniture. Ethan Allen owns three sawmills, 21 manufacturing facilities and 100 distribution centers. It put an electronic inventory system in all the stores last summer, allowing its 4,000 retail workers to place orders and have them instantly transmitted to the nearest plants and distribution centers. The new Web site will be plugged directly into that computer network.

Kathwari argues that integration of the Web with his physical assets -- mills, plants, trucks and showrooms -- will give him the edge over electronic upstarts. "I don't think the e-tailers can really operate well without creating a service structure to service the consumer," he said. "Furniture is an expensive product to be returned. Department stores got out of the business because they couldn't handle the service. The fact is, we've already got all that in place."

But Rothschild argues that Internet players have two advantages that I find pretty powerful: wider selection because they can tap multiple manufacturers, and lower prices because they avoid expensive showrooms. Indeed, about 10 percent of a traditional merchant's expenses go to property and equipment, including rent.

"Look at the overhead of bricks-and-mortar stores, and compare that to the economics of the Web," Rothschild said. "We are able to cover the entire nation with a small network of distribution centers. They have expensive stores that only cover a few towns or a county."

Living.com chief executive Andrew Busey said traditional merchants, for a variety of reasons, typically underinvest in the human talent and technology needed to create consumer-friendly Internet sites. "It's hard for the bricks-and-mortar people to make the monetary commitments necessary to win," he said, noting that salaries for Java software programmers often run $90,000 or more, a price many old-world companies have trouble stomaching.

Keeping up with technically nimble Web natives is not easy, either. Living.com, for example, plans to add new product segments every 60 to 90 days, and is developing visualization technology to let consumers type in the dimensions of their rooms and automatically see computer-generated images of how certain pieces of furniture will look inside.

Traditional retailers often copy Web natives, but before they can finish, the pure Internet companies are trying something new. "This stuff is very hard," said Toby Lenk, chief executive of eToys, in explaining his lack of concern about the recent Toys R Us Inc. move to spin off an independent Internet company. "Like our wish-list feature -- they will copy it, but we are about to launch our next-generation gift registry already."

With his bulbs venture, the founder of Furniture.com has already moved on. While he has done one round of "angel" funding for the new site and is seeking venture capital now, Rothschild says he already has a third Web idea in the works. No doubt it will surprise people. "Nobody believed I could do furniture over the Web, and now obviously there is tons of money being thrown at that category. The difference was that with Furniture.com I initially got laughed at, while with Bulbs.com I only get giggled at."

It will take years for us to see who ends up laughing, giggling or weeping. For now, I wouldn't bet against the Web natives.

Walker's e-mail address is walkerl@washpost.com