Shake Off Dot-Com Defensiveness!

Top executives at Staples, Inc. thought they had done everything right. Recognizing the need to take decisive action on the e-commerce front, they calmly consulted experts from the Harvard Business School to devise an effective strategy.

Only when they felt confident did they go public with their plans to attack the dot-com world. They said they would make the initial public offering of their e-commerce arm a tracking stock — a special type of stock issued to track the value of one segment of a publicly held company. They also said that their online operation would likely sustain a first-year loss of up to $175 million (US$).

The result? The announcement helped to drag the company’s stock down to less than half its 52-week high. The lesson? If there is one, it might be that no matter how traditional retailers approach the online world, it will hurt — at least at first.

But in almost all facets of life, pain is often a necessary step to growth, and the business world is no different. The fact is, the long-term benefits of a successful e-commerce venture can far outweigh early financial losses. Internet companies should stop tucking their tails between their legs — they are investing in the future.

Internet Will Not Go Away

Retailers like Staples face difficult e-commerce decisions with myriad choices available — unless they decide to do nothing, an approach that can only lead to failure as the Web continues to grow.

In Staples’ case, ignoring the Internet certainly did not appear to be an option. The company’s chief real-world rival, Office Depot, was making online moves, and such pure-play sites as Onvia.com and the domain name-driven Business.com were already lurking in the shadows, waiting for an opportunity to pounce. It was the same type of threat that helped to convince Barnes & Noble to spin off its online efforts.

Once a corporation decides to take the plunge, the choices keep coming. Should the company spin off the dot-com division, letting it sink or swim on its own? A year ago, this approach seemed like a great idea. An IPO could raise enough money to keep an online venture afloat until it got its legs under it without draining cash from the brick-and-mortar segment of the business.

Or the company could keep the e-commerce operation completely in-house, running it as an integrated part of the main business. Companies that went that route quickly found that doing business in the dot-com world is so different from doing things the old way that some big adjustments would be essential.

Upbeat Environment, Downbeat Financials

Staples opted for the plan to issue a tracking stock. The company physically separated the dot-com operations as well, gutting and remodeling part of its headquarters to create an Internet startup feeling for the new venture — complete with a pool table and free drinks and snacks.

It will be a while before any judgments can be made on the merits of Staples’ strategy. Revenues are climbing, but losses also mounting. However, one thing is certain: So far, investors don’t like it one bit.

Staples’ tracking stock IPO has been delayed and may be on the shelf for a while, given the mood on Wall Street. For the foreseeable future, the dot-com losses will continue to drag down the company’s stock — though analysts point out that some weaknesses in the retail side of the business and concerns over higher interest rates have also contributed to the slide.

Millions of dollars will be lost — not only by Staples, but also by Office Depot, Wal-Mart and scores of other retailers as they set up shop on the Internet. That hurts. But what alternative does a retailer have?

Wanted: Aggressive Posture

Doing nothing is out and making a low-cost effort would be just as futile. Investors do not want companies to do things halfway on the Internet any more than they do in the real world.

Yes, the mood on Wall Street and Main Street has changed and the appetite for digging huge financial holes has waned. But successful companies do not take a quarter-to-quarter approach to doing business. The upside of having a strong online presence, in the long run, is too great for any company to shy away. Retailers have to stop apologizing for Internet losses.

Six months ago, Toysrus.com stumbled into a holiday nightmare when it was unable to make all of its deliveries on time. But as the dot-com shakeout blues hit the toy segment with a vengence — Toysmart and ToyTime have both gone down in recent weeks — Toysrus.com is pulling ahead. The company has just announced some significant infrastructure investments, which will only help to solidify its position.

It is true that the shakeout has only just begun, and e-tailers are on the front line ducking for cover. Investors may feel like holding their collective breath and stamping their feet, but there is still no magic formula for opening up shop online and turning an instant profit.

Customer acquisition — even for a retailer with millions of real-world shoppers — is an expensive and time-devouring task. Companies like Staples should shake off their dot-com defensiveness, stop making excuses for short-term losses, and stay focused on the long-term goals. And smart investors will commit for a long run and quit whining about the heat.

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