E-tailers look for profits with Net-only products

Taking a page from direct sales companies such as L.L. Bean and Dell Computer, a growing number of e-commerce firms are introducing products that consumers can only buy online.

Stefanie Olsen Staff writer, CNET News
Stefanie Olsen covers technology and science.
Stefanie Olsen
4 min read
Taking a page from direct sales companies such as L.L. Bean and Dell Computer, a growing number of e-commerce firms are introducing products that consumers can only buy online.

The new Internet-only products could help profit-pressed e-tailers improve their bottom lines, just like supermarkets use in-house brands, such as Lady Lee and Safeway Select, to boost their razor-thin margins. The new products could also help product manufacturers avoid competing with their distributors and retailers and give them some needed Internet cache.

"This is a potential antidote to the bleak margin outlook of many e-commerce companies and the channel conflict concerns of traditional manufacturers," said Forrester Research e-commerce analyst Evie Black Dykema.

Among the new and upcoming products are:

  • Pets.com-branded dog food, cat food and kitty litter, to be sold on the e-commerce site beginning in the first half of this year.

  • Customized Nike running and training shoes. Consumers can pick the colors, trim and even add their own names to the shoes.

  • Personal care products from Ingredients.com. Customers can choose the ingredients they want such as chamomile or lavender for their desired effect.

    The Internet-only products come as investors have put increasing pressure on e-tailers to show profits. Despite reporting huge gains in holiday sales, e-commerce leader Amazon.com, for instance, is down 34 percent from its 52-week high of $106.69 set last month. Meanwhile, CDNow, eToys and Barnesandnoble.com are all trading at or near their 52-week lows.

    At the same time, several major manufacturers have had a difficult time figuring out the correct Internet strategy. Struggling apparel maker Levi Strauss, for example, recently decided to scale back its Internet store because of slow sales and conflicts with its resellers; the company plans to market its products online through traditional retailers.

    Pure-play online merchants may find the same problems in selling their own products online. But for now, a number of them are pressing forward.

    Ingredients.com was one of the first firms to create a Web-only brand, according to company founder Kathryn Legatos. The company saw the Internet as an opportunity to let consumers customize their own bath and beauty products to suit their needs.

    Because the company is offering its own line of products, it doesn't have to pay manufacturers such as Estee Lauder to sell their high-priced branded products. Instead, the company sees 75 percent to 80 percent profit margins on the goods it sells, Legatos said.

    "Our margins are much greater than a department store or a retailer that aggregates other manufacturers' products," she said. "We thought if we're going to build a brand, we want to have equity in the products themselves."

    For Pets.com, the idea of turning its name brand into profits is key to selling its own line of pet products, the company said in a regulatory filing. The company, which is in an SEC-mandated quiet period preceding its initial public offering, could use all the help it can get when it comes to profits.

    During this past quarter, the goods Pets.com sold cost the company more than twice what it sold them for. Combining those losses with the company's operating and marketing expenses, Pets.com lost more than $42 million during the quarter.

    But the company sees selling Pets.com dog food and cat food as a way of turning that around. "Our private label business should provide further margin enhancement, continued growth of our brand and enhanced consumer loyalty and repeat purchases," the company said. "Over time, we anticipate that 10 percent to 20 percent of our revenues will come from our private label products."

    The concept of retailers selling self-branded products directly to consumers is as old as retail sales, said Gartner Group research director Kevin Murphy. But the trend did not take off until recently because retailers such as supermarkets felt they should keep trusted brands such as Crest or Palmolive on their shelves.

    In recent years, as retail companies have merged and grown, they have built brand names that rival those of the manufacturers in terms of trust and recognition, Murphy said. Already, in Europe, the giant retailers reserve significantly more space on their shelves for their own products than do their counterparts in the United States.

    "There's been a shift in brand power from the manufacturers to the retailers," Murphy said. "The shift is more advanced in Europe than in the United States, but I expect as consolidation continues in retail in the United States, the same thing will take hold here."

    Despite the shift in power, selling products only online could exclude a huge chunk of a company's potential customers. Most Americans have never shopped online, and even those who have tend to make the majority of their purchases offline.

    Companies that sell Internet-only products also have to persuade consumers to buy products they have never seen or touched. And that too could prove a big impediment, Dykema said.

    "The real issue of tangibility is a problem," she said. "Putting it on, smelling it is a part of the buying process. If you're trying to make decisions online, this could be problematic."

    Ingredients.com will try to get around this barrier by mass mailing samples of its products to potential customers, Legatos said. And despite the potential problems, she sees a huge upside to Internet-only products.

    "It is inevitable that this strategy will be followed," she said. "This model capitalizes on the Web as an information and distribution channel."