The Future Of Retail

1. The Future Of Retail Seema Williams Senior Analyst Online Retail

2. Agenda • Consumers adopt eCommerce • The new rule of engagement • What’s happening to Dot Coms?

3. The Net takes off at home

4. Three stages of Web buying • Convenience spending • Small-ticket, low-risk items • Examples: books, music, apparel, gifts • Researched purchases • Information-intensive big-ticket items • Examples: travel, appliances, computers • Fulfilling essentials • Low-information habitual purchases • Examples: groceries, prescription medication

5. $184 $37 $79 $69 Retail Spending Growth

6. The New Rule Of Engagement Dynamic Trade is the ability to satisfy current demand with customized response

7. Services eclipse products Dynamic trade Dynamic Trade

8. Service eclipses products • Online services exceed pre-Web standards • Garden.com, Lands’ End • Carpoint

13. 24 hrs. 25% 48 hrs. 11% >48 hrs. <5% The Carpoint experience If a dealer responds within . . . The close rate is . . .

14. Services eclipse products Demand drives production Dynamic trade Dynamic Trade

15. Dynamic trade • Online services exceed pre-Web standards • Garden.com’s landscaping • Carpoint • Demand drives production • Herman Miller 2-day built-at-order chairs • BMW’s configurator points to future demand

16. Services eclipse products Demand drives production Pricing matches market conditions Dynamic trade Dynamic Trade

19. Dynamic trade • Online services exceed pre-Web standards • Garden.com’s landscaping • Carpoint • Demand drives production • Herman Miller 2-day built-at-order chairs • BMW’s configurator points to future demand • Market pricing • Buy.com, Value America, eBay • Shopping engines MySimon.com DealTime

20. The Demise of Dot Com Retailers

21. 86% 48% 46% 42% 26% 18% 18% 10% 2% Retailers focus on growth for 2000 Grow the business Improve site design Build brand Raise customer satisfaction Add content Synchronize channels Achieve profitability Build B2B business Retain staff Percent of 50 retailers responding (multiple responses accepted)

22. Differentiation 70% Customer satisfaction 44% Fulfillment capabilities 38% Financial health 34% Site design 32% Funding 24% What are your greatest challenges this year? Percent of 50 retailers responding (multiple responses accepted)

23. What are the most important assets of your business? Brand 50% Staff 36% Partnerships 32% Site design 30% Fulfillment capabilities 30% Customer service 26% Customer data 24% Content 16% Channel synchronization 14% Percent of 50 retailers responding (multiple responses accepted)

24. 2000 20% 2001 18% 2004 4% 2003 2% 2002 24% When will you be profitable? Don’t know/ won’t say 32% Percent of 50 retailers responding

25. Don’t know/ won’t say 32% 42% Parent company Venture capitalist 34% Business angel 24% Public markets 18% 24% 5% 11% 11% 2000 1999 Where will funding come from this year? Percent of 38 retailers receiving funding in 1999 and 2000 (Percentages do not total 100 due to rounding)

26. State of online retailers • Focused on growth • Challenge: Differentiation • Asset: Brand • 40% expect profitability within 19 months • Future sources of funding seem scarce

27. What ails online merchants? • Funding dries up

28. egghead.com drugstore.com eToys Ashford.com Value America 10/99 11/99 12/99 1/00 2/00 3/00 Online Retailers Watch Their Market Caps Plunge +300% +250% +200% +150% +100% Stock price relative to IPO +50% 0 -50% -100% Note for comparison: Amazon.com is 4,444% above IPO price

29. What ails online merchants? • Funding dries up • Financial pressures -- price pressure • Competition intensifies • Consolidation is inevitable

30. What it takes to survive • Scale • Registered unique users: 1M+ • In-house fulfillment • Adult supervision

31. What it takes to survive • Scale • Service • Selling in multiple channels • The right product offering

32. What it takes to survive • Scale • Service • Speed • 99.9% site up-time • Sophisticated commerce and merchandising skills • Outsourcing only emerging skills

33. Consolidation criteria • Market maturity • Percent of category sales online • Amount of online revenues • Annual online revenue growth through 2004 • Product commoditization • Differentiation of product set • Operating profit potential • Competition • Number and strength of competition • Dominance of current leaders • Stock performance

34. Categories at risk • Commoditized, mature markets • Media, computer hardware, flowers • Highly-competitive, adolescent markets • Autos, toys, sporting goods, replenishment, leisure travel, tools and garden • Nascent, highly differentiable products • Furniture, appliances, apparel household goods

35. Who’s got it: • Wal-Mart.com: Multiple channels, fulfillment expertise, lots of customers • Amazon: Fulfillment, customers (20M), and technology • eBay, Priceline: new selling models • eZiba: New market that wouldn’t work off-line

36. Who doesn’t: • Any brick and mortar holdout • Dot-coms that don’t already have scale • (most besides Amazon)

37. Summary • Consumers will spend more than $180 billion online in 2004 • Dynamic trade rules • Dot Com retailers struggle to survive

38. Thank you! Seema Williams 617-613-5768 swilliams@forrester.com www.forrester.com