Jury still out on Megastore.com

Last week you asked me to complete a review of the financial press to discover what their views were regarding the success or otherwise of MegaStore’s.com initiative. I’ve now completed and attached that review.

As far as the financial press is concerned, there are three reasons why the jury is still out regarding Mega-Store.com’s success:

  1. Past performance is poor
  2. Current performance improvement initiatives are yet to prove themselves
  3. Some fundamental issues around integration and customer loyalty remain unaddressed.

I have discussed each issue in turn below.

Past performance poor
Since its lauch in July 1996, Mega-Store.com’s performance has been poor in terms of both sales and traffic.

Sales are low
Internet sales totalled only about $5 billion during the Christmas season last year. That is small in comparison to the overall size of Mega-Store, which had more than $160 billion in sales in 1999.

Traffic is low
About 23 million Mega-Store customers had internet access at the end of last year. Mega-Store.com had a little more than 1 million vistitors in August, according to Nielsen/Net Ratings. That was well behind Amazon.com, which led with 17 million visitors.

Media Metrix, Inc (Nasdaq: MMXI) reports that, in July, sears.com led the “department store” retail category by attracting 2.475 million unique vistors, followed by JCPenney.com with 2.242 million and Mega-Store.com with 1.477 million.

Current initiatives unproven
Mega-Store.com has taken a number of initiatives to improve its performance – including a planned site re-launch, creating a separate online company, and appointment of a new CEO with a relevant track record – but these are all recent measures which are yet to prove successful.

Site re-launch benefits not yet proven
The site was shut early October for an overhaul to get set for holiday selling: marking the third time Mega-Store unplugged the site for a relaunch. It had been criticised for being hard to navigate and for emphasizing product breadth over depth – it currently offers about 600,000 SKUs of product.

The site is moving to a newly acquired e-commerce platform and will incorporate customer-suggested changesbefore its scheduled reopening October 17. Among other things, customers suggested changing product categories, adding products and making it easier to log in to shop and place orders.

The January relaunch of the site was a step in the right direction, say analsyts. That upgrade introduced better page design and pricing, said Karl Haller, principal consultant with PricwaterhouseCoopers, but the program is clearly work in progress.

Spin-off benefits not yet proven
Earlier this year, Mega-Store.com was spun off as a separate venture from parent company Mega-Store Stores Inc. in Witherspoon, Ark. The online company is a joint venture of Mega-Store, which is one of the world’s largest retailers, and Bucks partners in Palo Alto, Calif.

As a seprate internet business, Mega-Store.com will be exempt from charging sales tax except in California, Utah and Arkansas (where the e-retailer has a physical presence). This allows it to be more competitively priced against other pure e-retailers. Higher pricing had been a big criticism of the program and posed a pecuilar conundrum for the low-price leader, which suddenly found itself undercut by Amazon.com and eToys during last year’s holiday season.

In addition, Mega-Store will be better able to take more risks now that Mega-Store.com isn’t as closely tied to the parent company. “The need to focus on earnings held us up and kept us from being as innovative and as creative as we need to be,” said Smith.

The spin-off has also brought in venture capital group Bucks Partners. The benefits here go far beyond financial, as Bucks gives the retailer access to a talent pool rich with new-ecoomy players. Combined with the relocation to Silicon Valley, the heart of internet country, the move allows the retailer to better attract the best and brightest in the industry.

“The splitting off of the company is good for attracting talent and for giving a small start-up division the focus it needs to be successful,” said Haller. “The risk is allowing it to stray too far from the overall brand propostion that Mega-Store offers.”

Still early days for new CEO
Never more important, analysts say, is the March 1 appointment of Joan Jet as the CEO of Mega-Store.com. Jet joins the company after four years at the Tweeter’s Orange Republic division. She is credited with building Tweeter’s .com business and integrating its various retail operations online. But, they say, it’s too early to tell if she will be successful in turning around Mega-Store.com.

Fundamental issues unaddressed
Moreover, analysts appear to think that the initiatives taken so far may not address some more fundamental issues – around customer loyalty and integration of site with stores.

Haller, for example, believes Mega-Store should manage customer relationships through Mega-Store.com by building a detailed loyalty program. The retailer has never had such a program, in part because so many people already shop at the chain. In addition, building and maintaining such a program adds cost to the system.

Analysts also say the retailer must focus on integrating its site with its stores and more aggressively marketing to online shoppers. In particular, Mega-Store.com could better differentiate its site from competitors if it were to generate the editorial in-house (currently, manufacturers provide the majority of product-related editorial).

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