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Internet - related alliances are proliferating — ICSC looks at who is partnering with whom, and why ICSC monitors and periodically writes about merger and acquisition activity in the retail and retail real estate sectors. With the rapid growth of the Internet we have increasingly had to focus on the implications of mergers, acquisitions and alliances among Internet companies on the one hand, and Internet and land-based companies on the other. The steady stream of announced deals in the daily media attests to the fact that alliances are being formed at a very rapid rate and for a number of different reasons. Each partnership is announced with great fanfare and with quotes from participating company principals extolling the deal’s benefits. However, it is sometimes not certain that the benefits are really there. This article examines the Internet-related merger and alliance activity of recent months and identifies common themes among the many transactions. First, it pulls together a comprehensive list of the major transactions themselves; second, it groups the transactions into six categories based on what the participants to the deals hope to accomplish; third, although the ultimate success or failure of any of these transactions is uncertain, it suggests some possible implications for retail real estate, the structure and concentration of retailing online and the consumer. OVERVIEW
OF THE TRANSACTIONS The deals in Table 1 represent a diverse array of transaction types, levels of commitment and objectives. Some are simple mergers wherein one company acquires another in the same product area; some are partial acquisitions involving an equity stake of less than 100%; some are marketing alliances that involve no equity position by one company in another. Some resemble landlord-tenant relationships. ICSC has
placed each of the transactions into one of six categories, according
to our assessment of the principal impetus for the alliance. The categories
are as follows:
Each of these is now discussed in turn, with examples. ALLIANCES
THAT DEEPEN PRODUCT OFFERINGS AND DIVERSIFY REVENUE SOURCES
Amazon.com’s growth has followed a similar path. While Amazon has used its brand recognition to expand directly into a diverse range of goods, it has also taken an equity stake in other dot.com retailers and given them prominent links to Amazon’s site — for example, Drugstore.com and Living.com (a home furnishings retailer). In January 2000, Amazon took a 28% equity stake in Drugstore.com, which will sell its products on Amazon’s site in return for a payment of $105 million over three years. Less than a week later, Amazon acquired an 18% interest in Living.com, which will also be linked to Amazon's site in return for $145 million over five years. Similar deals were struck with online car dealer Greenlight.com, digital audio company Audible.com and others. Amazon, then, is both an online retailer and a rent collector from a diversified group of “tenants” that sell their products at Amazon’s site. For the retailer attaching itself to Amazon, this means increased customer traffic and marketing support; for Amazon, it means additional revenue and a diversified product base without the need to invest in additional distribution facilities. Another alliance that involves a type of landlord-tenant relationship — in this case on land rather than in cyberspace — was made between Starbucks and Kozmo.com (an Internet-to-door delivery service for convenience products such as videos, DVDs, games,specialty foods, magazines, books and CDs). Under the terms of this deal, Starbucks receives $150 million over five years for providing space in its stores for drop-boxes that Kozmo.com’s customers can use to return videos and DVDs. The association with Starbucks will presumably also heighten Kozmo.com’s own brand recognition.1 Meanwhile, Starbucks will be hoping for additional customers from the deal and a convenient means of having its own coffee and tea products delivered to homes. ALLIANCES
THAT MERGE PRODUCTS WITH CONTENT, SERVICES AND COMMUNITY
Despite the attractiveness of some of these concepts, it remains to be seen whether online destinations of this kind translate into truly significant online product sales, or simply result in an entertaining online experience, and/or create a more efficient product research mechanism for subsequent offline purchases. ALLIANCES
THAT GIVE ONLINE RETAILERS FULFILLMENT CAPABILITIES Other online retailers — most notably Amazon.com and grocery retailers like Webvan — have opted for the costly route of building their own fulfillment infrastructures from scratch. However, for smaller dot.com retailers in markets of uncertain potential, partnering with existing fulfillment companies is still the favored option in the short term. ALLIANCES THAT GIVE lAND-BASED RETAILERS AN INTERNET “OUTLET” This kind of partnership is the converse of the previous one — land-based retailers either without any Internet presence or seeking an additional third-party outlet to market their goods online are partnering with dot.coms in compatible consumer interest areas. Examples of this include store-based pet products retailer GEORGE partnering with Petopia.com, and San Francisco Music Box Company marketing a selection of its products through Collectibles.com. ALLIANCES
THAT GIVE INTERNET COMPANIES AND LAND-BASED RETAILERS ACCESS TO EACH OTHER’S
CUSTOMER BASES On the Internet companies’ side was a need to expand their customer bases beyond the educated, high-income group that has dominated online usage and shopping. On the retailers’ side, the deals represented an attempt to gain a firmer foothold on the Internet by partnering with Internet portals that could direct a steady flow of customer traffic to the retailers’ sites. To understand things from the Internet companies’ side, it is important to look at some basic statistics of computer and online usage in the United States. The first thing to note is that although U. S. household computer ownership now exceeds 50%, many analysts believe it will be difficult to increase this percentage more than incrementally unless “non-wired” consumers are given significant incentives. Stagnating growth in household computer penetration is reflected in projections of Internet usage: According to Internet research firm eMarketer, the annual growth rate of the U. S. online population will fall from over 60% in 1998 to 12% in 2002. (See Figure 1.) The reasons for this are well known: Most Internet users are relatively well-educated; three-quarters have some college education and have high incomes (two-thirds have household incomes above $50,000) — and the pool of consumers in this demographic group not already on the Internet is evaporating quickly.2 The hope for growth in Internet sales, therefore, rests on two planks: first, that the average online expenditure per shopper increases (and it will — according to eMarketer, online expenditures per buyer will increase from $532 in 1999 to $1,030 in 2003); second, that it is possible to make inroads into the technology-averse and/or financially strapped segments of the consumer population. This second idea underpins some of the recent alliances between Internet companies and large, land-based retailers. These alliances involve free or low-cost Internet sign-up for customers at the retail stores; in return, the retailers are promoted at the Internet company’s Web site, often with a prominent and convenient link to the retailer’s site.
There have been several previous attempts by Internet companies to encourage non-Internet users to go online. In July 1999, a number of highly publicized deals were made between Internet Service Providers and computer retailers in which customers were offered heavily discounted PCs in return for signing long-term contracts to use the ISPs’ services. This served the additional purpose of reducing “churn” in the ISP memberships. Continuing slow growth in the household computer ownership rate indicates that the success of the PC giveaway strategy was limited. ALLIANCES
FOR MARKETING AND DISCOUNTING SERVICES Meanwhile, a number of land-based supermarket chains have entered into agreements with Priceline.com, which lets consumers bid and receive significant discounts on some of their groceries, in much the same way as they bid for airline tickets and other products and services. Although this is novel for shoppers and may help grocers to make some incremental sales at full price (since the difference between the sale price and the full price is made up by Priceline.com and the manufacturer), it is not yet making a great deal of impact. However, it is one of numerous experiments by food companies to innovate in the customer incentives area. CONCLUSION
Second, what will be the effects of these mergers and alliances on the structure of online retailing? Here, the impacts promise to be greater. A few large retailers such as Amazon.com are using their brands to diversify both their product offerings and their revenue sources. Assuming that these companies can achieve profitability, there is little to stop them from eventually selling every kind of product and service, thus putting small independent online operators out of business. Also, destination sites offering products, content and services are being built around specific consumer interests. These two types of sites — the one diversified across product lines and the other across business types — may be models for the dominant future Internet retail sites. Third, will the consumer benefit from these alliances? To the extent that the shopping process becomes more efficient and/or entertaining (regardless of whether the ultimate purchase is made online or offline), the consumer is likely to derive some benefit. Most dot.coms now understand that an online presence without a strong real estate connection is unviable, since consumer satisfaction and loyalty partly depend on service in multiple channels. As noted in this article, many of the mergers and alliances discussed result in a more seamless interaction between cyberspace and stores. This is likely to be a positive development for consumers. This
article was written by Michael Baker. 1 Kozmo.com subsequently also received a $60 million investment from Amazon. 2 Mediamark research Inc., MRI CyberStats, Fall 1999 |
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Web
of Alliances 
The potential advantages for the Internet companies are readily apparent:
AOL, for example, gains access to the approximately 100 million customers
going through Wal-Mart stores each week, perhaps only a quarter of whom
already have Internet access at home. Meanwhile, Yahoo! accesses 30 million
Kmart shoppers, only about half of whom already have home Internet access.
The presumed benefit for the retailers is a healthy stream of online customer
traffic emanating from the portal’s Web site.