Egghead cracks the mold

Egghead (EGGS) may not have gotten its name for putting all its eggs in one basket, but that's essentially what it's doing by moving its entire business online. And if the Internet soothsayers prove right, it may have been a smart move.

In a dramatic announcement last week, Egghead said it would close all 80 stores and shift its resources online. Although analysts don't usually recommend this course of treatment for all ailing businesses, certain high-tech sectors like hardware and software resellers do have a good chance of making it on the Web.

"This is the beginning of a trend," said Erica Rugulies, an Internet commerce analyst at Giga Information Group. "This is the first time we've really been able to say, 'Electronic commerce is here.'"

The model is an established one on the hardware side of the computer business. "Direct" PC sellers such as Dell Computer and Gateway 2000--those that sell directly to the consumers through catalogs and Web sites, bypassing retail stores--have already proved that the Internet is viable as a medium for electronic commerce.

But according to chief financial officer Brian Bender, Egghead is the first brick-and-mortar chain to try to stake its entire future on the Net.

Bender and analysts agree that a key advantage for Egghead is that software is one of the leading sellers on the Net in terms of revenues. Software consumers already feel comfortable making high-tech purchases online, notes Melissa Bane, an analyst with the Yankee Group. "Right now, hardware and software are the top sellers online."

John Lyons, a retail analyst with ABN AMRO Chicago, points out that customers of Egghead and other tech retailers are computer literate and early adopters of new technology, including electronic commerce. "This is a way to get exposed to really educated, computer-oriented people. Those are the people that are on the Internet," he said.

After years of struggling to turn a profit with a small store format, Bender said, Egghead faced a crossroads: It was either going to move to the superstore model or close up shop and go online. In the end, the cost-cutting advantages of the Web were undeniable. Internet storefronts have no rent and a minuscule payroll compared with their real-world counterparts.

The online move was not entirely unexpected for Egghead, which has clearly been focusing more attention on its Internet business in the last year. The company has steadily added features and salespeople to its Web site over the last several months.

So far, the strategy has apparently paid off: Egghead was ranked third by Media Metrix among sites showing the highest growth in "unduplicated" audience last September.

John Scott Dixon, director of electronic media for Insight, a PC direct seller that is gradually adding resources to its electronic commerce offering, applauds Egghead's move and expects to see others follow soon.

Dixon and Jill Frankle, an analyst at International Data Corporation, believe that Egghead was smart to make the move before the advent of Electronic Distribution Software, which is expected to be rolled out in the next year and a half. According to Dixon, EDS is going to be the turning point in the widespread adoption of electronic commerce in software sales.

"What they're recognizing is if they don't get out there as the big place right now, they're going to be left behind," Dixon said. "Retail is going to die. It's on its way out."

However, Frankle pointed out: "This change in strategy doesn't necessarily mean that they will be successful," she said. "While the Internet is a very important and viable distribution channel to have, keep in mind that only 18 to 20 percent of all U.S. households are online right now."

Struggling businesses should consider two things before closing their real-world doors and setting up an Internet storefront, analysts say. Retailers that are already in one of the leading e-commerce categories have a better chance of survival on the Net, as do sectors that rely on catalog sales and customers who are predisposed to buying wares without seeing them in person.

Frankle believes that office supply companies, which rely on repeat business by customers who already know what they want to buy, could prosper with a Net-only offering. Rugulies said that, in addition to hardware and software, music and books are two other categories that appeal to online consumers.

The key to electronic commercial success, Bane said, are "products that are well matched to the Internet, not just technology."