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Vertical vs. broadline e-tailers: which will survive?

An ongoing debate in the Internet e-tailing sector is whether "category killers"--companies that focus on vertical segments such as eToys for kids--can coexist with broadline e-tailers, or companies that sell products in broad categories, such as Amazon.com, Webvan, Wal-Mart.com and Kmart.com.

An ongoing debate in the Internet e-tailing sector is whether "category killers"--companies that focus on vertical segments such as eToys for kids, Reel.com for videos and PlanetRx.com for drugstore items--can coexist with broadline e-tailers, or companies that sell products in broad categories, such as Amazon.com, Webvan, Wal-Mart.com and Kmart.com.

Some argue that in the frictionless world of the Internet, a shopper's ability to conveniently switch from site to site, combined with the cost of shipping, centralized distribution and virtually unlimited shelf space, will cause e-tailing to migrate to a mono-format of broadline stores. The proponents of this belief argue that consumers will want to buy everything at one location to save on both time and shipping costs and to avoid dealing with potential returns to multiple locations.

Although there is some merit to this argument, it is only half the story. Category killers and broadline e-tailers can coexist online because they serve different consumer needs. In the same way that a consumer seeing a doctor will see a generalist for some things and a specialist for others, people will shop at an online category killer for some items and at a broadline e-tailer for others, depending on the purchasing occasion. The ability to provide a complete "solution" is the key determinant of where a consumer will shop and why multiple e-tailing formats will likely exist as they do in the offline retail world.

Consumers have different purchasing occasions that require different solutions, or e-tailing formats. For example, consumers will seek an "authority" when in need of a complete buying solution that provides incremental selection, information, suggestions and service. Customers are not likely to shop for everything they need at once (on one site), because they are not necessarily trying to fulfill all needs simultaneously.

Each purchasing occasion is stimulated by specific events at different times, which results in different shopping needs. If consumers shopped for everything they needed simultaneously, then perhaps they would only require one place to shop. Holiday shopping is probably the most likely purchasing occasion when a consumer seeks for multiple items at one time and would be more likely to shop at one location that could provide a complete solution. But even during this time, specialized sites can be more appealing because not everyone knows exactly what they want and therefore will look to a category authority for a solution. Different shopping formats lend themselves to different shopping occasions, which is why offline retail formats will for the most part be replicated online.

Purchase occasion drives purchase location
Consumers have a variety of needs, and there are a variety of ways for them to satisfy those needs. Ultimately, a consumer will choose the best store format for each purchasing occasion. According to a Goldman Sachs/PC Data joint online study from December 1999, there are at least three types of shopping occasions that account for a third each of online shopping.

The three types of shoppers consist of directed e-shoppers, or shoppers who know exactly what they want; seeking e-shoppers, or shoppers who want to buy something in a specific category for a specific need but are not sure what to buy; and browsing e-shoppers, or window shoppers. Each type of shopper requires a different solution that is sometimes best addressed by vertical category killers and other times by broadline e-tailing formats.

Shoppers require different levels of information, service and selection to find the best solutions to their shopping occasions. For example, directed e-shoppers, who know exactly which toys they want, do not need additional information, selection or service. These shoppers are great targets for a broadline e-tailer such as Amazon.com, where shoppers can find anything they want to buy.

Meanwhile, seeking e-shoppers looking for the perfect gift for nieces or nephews require a deep and broad selection, a significant level of information, suggestions, and assistance in finding the perfect gift, as eToys does through its Hobby Shop, Idea Center or "When I Grow up I want to be..." areas.

People are more likely to start searching at e-tailing sites that have perceived or actual "authority" for anything related to their needs, such as eToys for children, rather than at a broadline e-tailer like Wal-Mart. Likewise, consumers seeking medical products for health ailments are more likely to go to health care Web site PlanetRx.com than to Kmart.com.

That said, this does not mean that a category killer is always the best solution. For example, when a directed e-shopper knows he wants to purchase Sun Tzu's "Art of War" or Clausewitz's "On War," AC/DC's "Back in Black," (I'm older than you think) and Barbie's Boom Box (and I have kids), he is more likely to shop at a broadline store like Amazon or Wal-Mart rather than make separate visits to Barnesandnoble.com, eToys and CDNow, where he will have to pay three shipping charges. Although a consumer is more likely to select a category killer based on incremental information, selection and expertise, that consumer is more likely to choose between broadline e-tailers based on ease of use, price, product availability, and customer service.

The vertically challenged
While most vertical and broadline formats offline will be replicated online, there will be exceptions. There likely will be categories of vertical formats that exist offline that will struggle to survive as standalone public entities online. The vertically challenged categories are characterized by the following attributes: loss-leader products (items that are sold offline below cost to drive traffic, and the purchase of higher-ticket, higher-margin products such as CDs and videos); low average selling price (ASP) products; and categories with less than $15 billion to $20 billion in annual offline sales.

But while a category alone suffers from the economic challenges described above, it can be combined to overcome these challenges in the way that Barnesandnoble.com, for example, sells books, music and videos to be an entertainment- and information-related destination. Similarly, other related categories can be aggregated to create a deep vertical segment that offsets these issues but still creates an authoritative perception.

Authority attracts consumers seeking solutions rather than products
An e-tailer has authority when consumers associate the brand name of the company with the most reliable information, services and selection, as well as with the most relevant products in a specific area. An e-tailer that gains authority in a specific category becomes a destination for providing a solution for the purchase occasion in that specific category.

To be successful as a category killer, an e-tailer needs to establish authority in that category by becoming the best in a specific area (via content, breadth and depth of product, suggestive selling techniques, multiple search functions, gift wrapping, and so on). Vertical e-tailers that devote every resource to becoming the category authority stand a greater chance of achieving this distinction. Broadline e-tailers are challenged in becoming authorities because of resource allocation issues and issues surrounding the marketing message communicated.

For example, with every dollar that Amazon may spend on marketing to communicate that it is the best consumer electronics store, it would offset this effort by trying to say it is the best book site, the best children's site, and so on. Amazon recognizes this challenge and positions itself as the place where people can find anything. Amazon's lack of specificity in its positioning is an example of the trade-offs that dilute the effort of a broadline e-tailer in becoming an authority in a specific category.

As long as the category killer delivers a comprehensive value proposition via the best selection, information, convenience and value, then the vertical player should continue to be perceived as the authority. If a vertical e-tailer loses authority and begins competing on price alone, it increases the risk of losing category leadership to a broadline e-tailer, much in the way Wal-Mart gained category leadership in the offline toy sector.