Catalog, specialty e-tailers picked as winners

Look for online moves by cataloguers and others with strong brands, advised Lauren Cooks-Levitan, and don't go for the discount retailer. Cooks-Levitan spoke at the investment bank's annual technology conference here.

E-tailers that try to sell at the lowest prices aren't likely to succeed, she said. "There are almost always ways to get cheaper product, and customers really do want price and service." Loss leaders "a wonderful way to acquire customers," she said, but neither efficient nor effective in maintaining business.

Cooks-Levitan expects online merchants will begin using loyalty programs in the next couple of months in an effort to reduce the importance of price.

Cooks-Levitan likes the prospects of direct market cataloguers like Lands End, L.L.Bean, and Victoria's Secret, in part because they already have an infrastructure geared toward fulfilling mail orders.

As if to underscore the point, e-commerce leaders like Amazon.com are currently building out their own infrastructure to ease shipping and customer interaction. "Few categories have a third-party distribution structure already capable of shipping individual units directly to consumers," she said, forcing companies to build their own. The brokerage is recommending bookseller Amazon to investors.

Cooks-Levitan is also enthusiastic about manufacturers like Gap, women's specialty retailer Ann Taylor, and Abercrombie & Fitch, which sell direct to consumers and can take advantage of their established brands.

"The opportunities for branded manufacturers is the same as for retailers, but they risk alienating retailers who sell their products," Levitan said. Also, "We continue to be impressed that apparel is at the top of list of what is selling through America Online"--another stock BancBoston Robertson Stephens is recommending.

Cooks-Levitan is bullish on commodity retailers like Home Depot and Office Depot that have brands and distribution networks in place.

On the endangered list are specialty retailers of goods that are selling well online, such as books, music, and computers. But brick-and-mortar discounters could be hurt because online brands can go direct to consumers with overstocked merchandise, thus reducing the supply of excess goods.

"J. Crew and Gap will send you email to tell you what's on sale," she added.

Meanwhile, department stores, which have had some online success with bridal registries and replenishing personal items like cosmetics or hosiery, face greater challenges as they move to the Net.

Being first to market is critically important, but so is an undivided focus on Internet retailing, as opposed to conflicting priorities between online and physical-world ventures. Mainstream retailers are beginning to move from defensive strategies to offensive ones, reasoning that if consumers are embracing Net retailing, they must too; but investors should be sure a retailer's core business is healthy, saying that the spectre of Toys R Us falling on its face on the Net was caused largely by its entire business being in disarray.

Cooks-Levitan forecasts dramatic changes this year on the landscape of Internet retailing. New deals for Internet retailers to go public are in the pipeline, and she expects spin-offs of Internet stores by real-world retailers, similar to what Barnes & Noble is discussing.

"We see a great deal of consolidation," Levitan added, calling the pending merger of online music retailers CDNow and N2K, which runs the Music Boulevard music store, "an act of competitive desperation."

That bodes well for cash-rich Internet firms like Amazon, E*Trade, Ameritrade, Beyond.com, eBay, and Cyberian Outpost, because they are in a position to buy as needed.

"We also will see 'pure-play' [Internet] companies bought out by hybrids to jumpstart their online efforts," she said, without naming specific companies.

"Over time, we see more blurring between who is an e-tailer and who is a content or community site," she said, noting that sites like BabyCenter can email users to recommend purchases based on the ages of their children.

One winning strategy: Replenishing regularly purchased items like vitamins or drugs, she said, mentioning the prospects of Drugstore.com and PlanetRx.

Investors should not push for profitability soon, she advised. High volumes will eventually translate into profits. "Look for more than profitability--revenue growth, market share gains, and repeat customer rates."

On Robertson Stephen's short list: AOL, Amazon, eBay and Digital River, a software distributor and the leader in downloading software.