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Specialty e-tailers risk dilution in growth

Online specialty stores are quickly expanding their sales offerings, a strategy analysts say is vital for their survival in cut-throat business with razor-thin margins and mounting stock market pressures.

Online specialty stores are quickly expanding their sales offerings, a strategy analysts say is vital for their survival in cut-throat business with razor-thin margins and mounting stock market pressures.

Added to a recent raft of expansion plans is eToys announcement today that it began marketing children's books. Online pioneer Amazon.com, which started as a bookseller, has expanded over the past year into music CDs and downloads, videos, auctions, and other products. The company is also rumored to be investigating an entry into the toy market.

The expansion strategies are designed to help these companies meet both long-term growth expectations, as well as help them live up to their sky-high stock valuations. At the same time, however, these companies risk major losses if their brand identity is diluted, analysts warned. A marketing and branding message that tries to sell too many products may push customers toward the familiarity of more specialized online stores.

"Don't forget [what] brought you to the dance," said Michael May, a digital commerce analyst at Jupiter Communications. "Maintaining areas of specialization, despite having wide product offerings, is vital."

Although off its earlier highs for the year, Amazon's valuation as of Friday was a whopping $19.4 billion. Meanwhile, eToys, which began business less than two years ago as an online toy seller and moved into children's software, video games, and baby products, is perched upon a $4.5 billion nest egg.

"Amazon has to expand. The market is demanding it," said Barry Parr, director of Internet and e-commerce at International Data Corporation. "[Amazon's] market cap wouldn't make any sense if they were only going to sell books."

Still, he and others note that it makes sense for a retailer to sell as many products to as many customers as they can. "The Internet offers some unique advantages to mass merchandizers because they don't have to pay for inventory holding costs," Jupiter's May said.

Amazon.com's stated goal is to be the leading e-commerce site online. In recent months, Amazon has expanded its site by adding new categories including auctions, and by partnering with companies such as Drugstore.com and Pets.com.

If Amazon's strategy is to be the online answer to Wal-Mart, eToys plan is to be the Amazon for children. Although the company started out as an online toy store, eToys spokeswoman Suki Shattuck noted that eToys was already offering software, music, and videos before opening its children's bookstore today.

Shattuck said the company wants to be the "one-stop shop for children's products online." However, she declined to say what categories the company plans to add to its site.

While companies such as Amazon, eToys, and Buy.com are expanding their offerings, Barnesandnoble.com and CDnow plan to limit their scope to select areas. Barnesandnoble.com recently opened its online music store, but company spokesman Ben Boyd said the company plans to focus on products that can be digitized.

"We understand the bandwidth of our brand and we won't go beyond that," Boyd said. "We're not going to sell pet food."

IDC's Parr notes that there may not be a single e-commerce model that is going to win for all because "it's hard enough to dominate a single category, let alone multiple ones."

Other analysts maintain that specialized players could be treading on thin ice.

The lesson from watching the Amazon and eToys expansion is "expand your brand and position or wither on the vine," said Jupiter's May. "If all you are selling are a single range of products, someone will eat your lunch."

May, however, also warns the online retailers from spreading themselves too thin as they expand.

"Amazon moves into music and videos and gifts and other things, [yet] they have to make sure they are still specialists at books," said May. "Otherwise, they are likely to lose the customers who were primarily and largely attracted to their book business. Amazon will find Barnesandnoble.com and Borders.com willing competitors."

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