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Virtual Stores Rewriting The Rules of Retail

They’ve yet to show a profit, while countless millions pour in from venture capitalists and consumers. They seem to have the goods, despite the muddled distribution policies of their suppliers. And depending on who you talk to, they’re either the salvation or the damnation of the consumer electronics industry.

They are the virtual electronics retailers, the pure play Internet stores that are giving wired shoppers a charge and brick-and-mortar merchants insomnia.

If they seem a bundle of contradictions, they are, which is the price to be paid for pioneering an uncharted and extraordinarily high-tech distribution channel. But be they get-it-for-you-wholesale price warriors, or service-oriented trade-up specialists, they’ve got a jump on everybody else in online CE sales, and they appear to be here to stay.

What follows is an examination of some of the best, brightest and boldest players in the high-stakes game of electronics retailing, Internet style: It took president Anthony Link three-and-a-half years to develop the Tulsa, Okla.-based CE, home theater and appliance site, which debuted last September.

Decrying traditional retail service and product knowledge as “severely horrible,” Link positioned his business to compete on support rather than price, having signed MAP agreements with his major suppliers. “Online service and fulfillment are top priorities,” he said, which he insures with real time e-mail and online assistance and a network of 500 distributors.

Buyitnow charges a 15% to 25% restocking fee for returns and, with 100 employees, maintains one of the larger work forces in e-tail. The site is the three-year-old offshoot of CDW Computer Centers, the Vernon Hills, Ill.-based direct-marketing business founded in 1984 by chairman/CEO Michael Krasny. Leveraging its parent’s vendor relationships, carrier agreements, and 300,000-square-foot warehouse, the online effort provides “competitive pricing” on computers, peripherals and consumer electronics for its largely commercial customer base.

“Can you find lower prices elsewhere? Sure,” said a CDW spokeswoman, “but we offer significant cost-savings plus a 15-year history of stability and reliability.”

Services include lifetime technical support via a toll-free phone number, custom configurations, e-mailed Buyers’ Alert updates on new products, technologies or pricing, and a 30-day window for returns.

The Fortune 1000 company generated more than $1.7 billion in net sales last year, of which some 6%, or $100 million, were Internet derived. Launched in 1997 by Hewlett-Packard veteran and self-described “gadget nut” Greg Drew, the content-rich site is one of a handful of virtual stores that narrowly target the consumer electronics and home entertainment categories.

Drew brought national attention to his Portland, Ore.-based business last year by offering a three-for-a-dollar CD promotion that helped establish a 110,000-strong customer base and propelled growth at twice the pace of projections.

But despite aggressive promotions, the e-tailer’s value-added approach to pricing is “music to the ears” of manufacturers, Drew said, which, along with a “well-connected senior merchandising team” that includes Sun TV veteran Frank Sadowski, helps secure supplier support.

Inventory, which in-cludes about 1,000 CE products and some 300,000 CD, DVD and home video titles, is warehoused in Portland for “100% control over availability,” Drew noted, while shipping, at least for the near term, is free. There’s also a 30-day, no-questions-asked return policy and a fully staffed 1-800 call center that’s open seven days a week.

But Drew’s true pride is the site itself, which provides product reviews, tutorials, chat rooms, in-stock status, and streaming media and image manipulation, all set to a hip, slightly irreverent editorial tone. “We took a much more comprehensive approach to servicing consumers,” Drew said. “We wanted content and community to go along with the sales aspect.” The self-proclaimed pioneer of the online auction format built its four-year-old business by selling refurbished and end-of-line computer and home office products, as well as sports and fitness gear, and vacation and travel packages. Merchandise carries manufacturer warranties, and the web site provides extensive product descriptions of the items to be auctioned.

Although Onsale maintains two warehouses, “the business model prefers that vendors ship direct,” a spokesman said. Consumers are charged to have their purchases shipped overnight or via five-day UPS service, and all sales are final unless the product is damaged, in which case it is returned directly to the manufacturer.

Fourth-quarter sales hit the $59 million mark, the company said, with computer products accounting for about 75% of its business.

In January, the Menlo Park, Calif., company added, which sells distributor-obtained computers and peripherals at honest-to-goodness wholesale prices. Atcost realizes its profit through a transaction fee, a 2.4% financial fee for credit card approvals, and a small markup on shipping. “People thought we had three heads when we started knocking on vendors’ doors,” recalled Keith Clougherty, founder and chairman of the Hopkinton, Mass.-based virtual boutique. But within three years, the digital specialty shop was named retailer of the year by the Satellite Broadcasting Council of America; was cited as a Top 30 Internet retailer by Silicon Alley magazine; sold a 20% stake to general merchandise catalog Fingerhut, now owned by the Federated department store group; and forged marketing agreements with Excite!, Disney, Microsoft and CBS.

How did Clougherty do it? “We focus on products that require a lot of information and service,” he explained. “You won’t find us selling VCRs.” Instead, digital products — which he predicts will become the largest of all consumer product categories — make up most of the mix, which is priced from a value-added perspective.

“We don’t go after it from a price angle,” Clougherty continued. “We sell bundles of product and approach it from a service and value angle.”

To help the process along, Roxy boasts proprietary software that presents shoppers with ancillary products to complement their purchases and carries 175,000 music and movie titles with which to try the new equipment out. The e-tailer also offers a 30-day, money-back guarantee policy, free shipping on smaller orders, 24-hour e-mail technical support, and a nationwide DSS installation network.

Roxy’s 1,000-odd CE products are either supplied by distributors or, for higher-volume items, warehoused in company facilities, although Clougherty has begun back-ending his operations into Fingerhut’s infrastructure. “We’ll have access to Fingerhut’s completely automated fulfillment centers and Federated’s brand expertise,” he said.

While the new partnership precludes discussion of Roxy’s financials, Clougherty described its growth curve as “phenomenal” and said that a conscious decision was made to forgo profitability for the short term while revenues were plowed back into the front end of the business. Last month Compaq completed its acquisition of the online hypermart, which carries an A-Z selection of sharply priced consumer goods. Following the buyout, the site became an operating division of the AltaVista web portal, another wholly owned subsidiary of Compaq.

“Our goal is to make the most satisfying place to shop on the Internet,” said Mike Rubin, VP/general manager of e-commerce for AltaVista, citing its “state-of-the-art transaction capability.”

While has imposed an information blackout as it stays “internally focused” in the weeks following the acquisition, the company said it has begun implementing a series of new features and policies focusing on high levels of customer service. These include around-the-clock technical support, a doubling of its customer service staff, and the issuance of $250 gift certificates to customers who had complaints on file with the Better Business Bureau prior to March 1. The three-year-old business, based in Charlottesville, Va., is a virtual superstore with product offerings ranging from apparel and appliances to software and sporting goods. Founder and chairman Craig Winn, a contemporary of Fedmart’s Sol Price, borrowed his mentor’s Price Club business model in developing ValueAmerica, which has grown from a dozen em-ployees to over 200 since going online in 1997.

Fueling growth was an aggressive advertising campaign, launched early last year, that encompassed major daily newspapers, national magazines and cable TV. The retailer also boasts strategic alliances with over 800 brand-name manufacturers, including Compaq, HP, IBM and Panasonic, and a fully interactive, database-driven web design with a proprietary software system and the latest EDI technology to expedite the ordering process.

“Every decade, a new retail strategy revolutionizes the way we shop,” Winn says in an online address. “By using the technology of the Internet to reduce overhead, to create a more direct link between consumers and manufacturers, and to provide valuable product information and customized service, we have created a revolutionary new way to shop.”

Describing the 40 million people accessing the Internet daily as “toe-in-the-water stuff,” he predicts that “cyberspace will be the marketplace of the new millennium.” — Additional reporting by Steve Smith