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Do Kmart, Circuit City Web plans make sense?

The recent flurry of deals between Internet heavyweights and retailers signals a new stage in the development of e-commerce, with most of the benefits falling to brick-and-mortar chains, analysts say.

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The recent flurry of deals between Internet heavyweights and retailers signals a new stage in the development of e-commerce, with most of the benefits falling to powerful brick-and-mortar chains that have yet to click with online shoppers, analysts say.

Today, America Online and Yahoo inked cross-marketing agreements with retailers Circuit City and Kmart, respectively, in an effort to tap non-Internet-savvy consumers. A similar deal between AOL and Wal-Mart is widely expected by year's end.

Faced with signs of slowing online growth, Internet behemoths are hoping to tap Main Street to bolster traffic and revenues. But analysts predict it's the retailers who stand to see the greatest upside from such deals.

"Next year is going to be the revenge of the brick and mortar," said David Cooperstein, an analyst at Forrester Research. "And this is a good starting point."

The deals come at a critical juncture for established retailers, which have struggled to transfer their dominance offline to the Internet. By partnering with seasoned Internet veterans who have battle-worn online marketing expertise, retailers get a ready-made package for their e-commerce plans.

"It's not about getting more traffic to Yahoo--it's Kmart piggybacking on the strength of Yahoo," said John Segrich, an equity analyst at CIBC Oppenheimer.

Creating cross-promotional deals with retailers could signal a shift in how Internet companies reach out to new users. Traditionally, Internet companies have created deals with other companies within the technology realm. They've paid each other for placement on their sites, or they've piggybacked with PC manufacturers to get their brands in front of users when people turn on their computers.

Although Internet leaders such as Yahoo continue to see traffic growth, some analysts point to reports suggesting that previous robust online growth has slowed in the United States over the past few months. As a result, companies traditionally luring experienced Internet users may be under increasing pressure to tap consumers still waiting on the sidelines.

With this recent round of deals, Internet companies are stepping out from behind the computer screen and into the aisles of superstores. In the case of the AOL-Circuit City deal, the electronics retailer will sell AOL's products and services, including home connectivity packages for both dial-up and broadband access, throughout its 615 store locations.

As part of its agreement, Kmart will distribute CD-ROMs of its co-branded free ISP service with Yahoo throughout its stores.

Microsoft recently began this trend in its agreement with Tandy's RadioShack stores.

But some analysts appeared unwilling to endorse the strategy of tapping low-market retailers such as Kmart as a way to address the problem.

Segrich, for one, seemed skeptical that deals like those announced today offer a significant vehicle for increasing traffic.

"I don't think Yahoo has a traffic problem," he said.

According to Cooperstein, rushing to the mainstream consumer frontier could Click or miss actually have adverse consequences for hip Internet brands such as Yahoo. Today's deal with Kmart, he said, offers lop-sided branding benefits that could hurt Yahoo down the road.

"This is great for Kmart's brand, but it drags down Yahoo's brand, making them seem like the discount, mainstream Martha Stewart of the Internet," Cooperstein said.

Still, these established distribution channels already contribute significantly to portals' traffic efforts, according to Abhishek Gami, an equity analyst at William Blair. Adding retailers does not necessarily result in a significant boost in mall rat consumers, but it becomes one of many ways in which portals can increase their audience sizes.

"AOL will still say their number one customer source is through referrals," Gami said. "The store within a store concept will be one cog in the machine."

Wall Street has so far had a muted reaction to the burgeoning alliances between online and offline companies. Kmart, for example--whose stock has dropped as much as 50 percent from its year high of about 18--was off 8.67 percent today in a generally soft market.

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