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Christmas Gift Guide
Tech Industry

Sites take on features of offline malls

Shopping malls, still a big draw across the United States, are bringing their popular appeal to the Net.

Struggling to stand out on the increasingly crowded Web, small e-tailers are finding strength in numbers.

Just as shopping malls transformed the retailing landscape decades ago, Web-based malls are sprouting throughout the Web, promising one-stop shopping for overwhelmed holiday consumers.

For e-tailers that can't afford a massive marketing campaign or the high cost of linking up with a leading Web portal, the malls offer merchants a way to attract customers at a lower cost.

Unlike the shopping sites built by Yahoo and America Online, a growing number of Net malls, including ShopNow.com, ShopperConnection.com and Webtailer.com, let merchants set up shop on their sites without the agreements costing millions of dollars required by the portals.

For example, KBkids.com, eToys.com and Toysmart.com have links on several Web shopping malls. The stores listed at the online malls are as varied as their physical world counterparts, ranging from sporting goods store FogDog.com to food seller Omaha Steaks and perfume store FragranceNet.com.

For some merchants, being part of a mall is a matter of survival.

"Small stores want to do as much as they can for distribution," said Michael May, an analyst at research firm Jupiter Communications. "Since they don't have the marketing budgets of some sites, they want to be as visible throughout the Internet without paying portal tenancy fees."

Most shopping malls generate revenue based on their performance, either by receiving a cut of the profit after someone buys something via their site or simply by driving shopper traffic to merchants.

"[As a shopping site], if I can contain my customer acquisition cost and pay these malls based on performance, that works for me," said John Robb, president of research firm Gomez Advisors. "There are so many different ways to acquire customers, I can't expect to cover them all myself."

Analysts say that as more mainstream, inexperienced people come online, they are looking for simplicity on the Web.

"From the consumers' perspective, the biggest issue is that they want a clear, focused way to shop," said Timothy Klein, an equities analyst at U.S. Bancorp Piper Jaffray--which last week raised its rating on ShopNow.com to a "strong buy" from a "buy."

"A lot of them don't have the knowledge of where to go yet, and that is what is giving [Web malls] their traction," said Klein.

Gomez Advisors' Robb noted that sites such as Yahoo and AOL often only have merchants that have shelled out big bucks to be on the network.

"I looked at all the AOL deals and MSN deals for e-commerce and what these portals were charging and what the return on that kind of investment was didn't make sense," said Roger Bohner, president of Webtailer.com. "Merchants are going to have a tough time making a profit with those kinds of deals."

The rising popularity of the mall has not gone unnoticed by investors. Netgateway, a company specializing in software and Web sites that allow companies to do business over the Net, this week said it plans to acquire Galaxy Enterprises for $50 million in stock. Galaxy's Web-based mall "houses" more than 2,800 merchants.

Meanwhile, ShopNow.com, which went public in September, has a market capitalization of about $750 million. ShopNow.com said it has more than 40,000 member merchants, including OfficeMax, Petopia.com, PetSmart and WineBins.com. ShopNow.com also generates revenues by helping stores set up shop on the Net, handling the processing of transactions and performing direct-marketing services.

Others, like Webtailer.com, are at a younger stage and are still in negotiations with venture capitalists to help power their expansion and name recognition.

While malls may be gaining a foothold in the market, analysts say there is no doubt that the AOLs, MSNs and Yahoos are still the only ones that can bring big-time traffic to an e-tailer's site.

"They have a ton of traffic so you get a lot of eyeballs in a hurry," said Klein. "The quality of those eyeballs is what they are going to have to work on. Many people mill about on those sites for other things than shopping."

Some companies, like KBkids.com, plan to continue a multi-pronged marketing outreach campaign.

"We do have a link on Webtailer.com, and other sites; we have online advertising and mainstream advertising," said Cecilia Atkinson, vice president of marketing at KBkids.com. "We work to generate traffic in different ways and get people from all walks of life."