Online malls experience profit pressure

In polar contrast to the exuberance marking the opening of IBM's World Avenue cybermall last August, IBM quietly shut the doors to the site this past July with just a terse announcement. Less than one year had passed since IBM's Chairman Lou Gerstner dedicated the site as a showplace that validated "secure, industry-leading e-commerce technology".

World Avenue's failure typifies the pitfalls that imperil online merchants and mall operators who strive to succeed in direct-to-consumer retail sales. In the online world, solid-looking strategies that model traditional, successful marketing concepts frequently fail. Often the failures have multiple explanations, depending on who you ask.

For example, IBM publicly said that World Avenue closed because the merchants elected to operate their own sites. IBM officials connected with World Avenue declined requests for interviews. According to other cybermall operators, however, it's likely that both IBM and the merchants were mutually disappointed with the site's lukewarm return on investment and lack of shopper traffic.

The perils of proceeding

"Vendors have a warped sense of how e-commerce works," said Dan Housman, whose own VirtuMall folded last year. "It's not all that different from the real world. If they had ineffectual marketing techniques in the real world, they just transfer that same flaw to the virtual world."

As the operator of World Avenue, IBM assumed the unfamiliar, even uncomfortable, role of a landlord and marketer of third-party products. IBM's revenue model consisted of taking about 5 per cent of each World Avenue transaction. For that fee, IBM provided collection services, site management, and related services.

IBM also reportedly charged some World Avenue merchants as much as $US30,000 to design the site and as much as $US2500 in monthly maintenance.

IBM's approach, although costly, initially appealed to the mall's tenants. For them, it eliminated the need to design and maintain their own Web site and to process credit card orders. Merchants anticipated that traffic from neighboring World Avenue sites, plus the draw of IBM's name, would attract shoppers to their sites. But when that traffic failed to materialise, World Avenue merchants complained that their meagre revenues, the result of as little as four sales per day, could not support the overhead.

"It's a difficult way to make money," said Marshall Wieland, marketing director at American Information System, operator of NetMall. "Shopping on the Internet is on a case-by-case basis. If you intend to make a profit, you have to start with a core technology, but then you need to add substantial extra value to it."

Wieland said that IBM simply did not add enough value.

"I think IBM established the site just to have a mall," Wieland continued. "They rushed into a business really unrelated to their core business. When big companies like IBM, MCI, and AT&T enter into a market, it's primarily for the media attention and name recognition, so they overspend and have trouble recouping."

Parallel promotions required

World Avenue merchant Omaha Steaks complained that IBM failed to adequately promote the mall in print and television ads, an essential strategy for rising above the Internet's background noise. Other merchants said that when IBM promoted its other Internet initiatives, it inexplicably failed to promote World Avenue.

IBM has its defenders. Housman, operator of VirtuFlex, a Web software vendor, doesn't blame IBM for the failure.

"Meeting the sales expectations of vendors and adding enough value to satisfy consumers make it a hard game to play," Housman said.

Operators of other malls said that both IBM and their World Avenue merchants failed to understand the dynamics of operating an Internet commerce site.

Diana Escher, a representative of New York-based WebFrontier cybermall, emphasised that many merchants have succumbed to the Internet's siren song and have unreasonable expectations of costs and consequences. "A major problem is merchants who expect to throw something up on the Web for $US500 and watch the orders roll in with practically no overhead," Escher said.

Escher stressed the need for merchants to fully integrate the marketing of their Internet sites with the rest of their marketing efforts. Specifically, merchants need to emphasise the location and existence of the Web sites by prominently displaying the sites' URLs in their print and television ads. Escher also acknowledged that her company's successful cybermall formula extends far beyond fulfilling the passive role of a landlord. For example, WebFrontier offers site design, maintenance services, and marketing assistance.

Success strategies

High-profile flops such as World Avenue and an apparently underwhelming performance by MCI's I-commerce site leaves merchants wondering about the future of cybermalls. It also spurs merchants to investigate alternate solutions for online retailing, such as operating a stand-alone Web site or allying with mega-site operators such as America Online (AOL). Although AOL does not release specific sales figures, its merchants apparently enjoy an adequate or better rate of return.

As Wendy Brown, AOL's vice president of electronic commerce, described it, AOL's formula for successful I-commerce has four primary elements.

"Make the site convenient, with great navigation, great offers, and great brands. And do it on an awesome scale," Brown said. "In other words, we offer compelling reasons to buy because we promise the consumer if they shop on AOL we will save them money or time."

According to Brown, the best kinds of products to sell consist of impulse buys such as flowers, books, and CDs.

In pursuit of profits

Despite all the extra services a mall operator provides, NetMall's Wieland questions if it's even possible to make a profit as a mall operator. NetMall lists nearly 100,000 vendors in its effectively self-governing and highly automated mall. But it does not charge a fee for listing a vendor because American Information System sees the mall as a worthwhile extension to its marketing efforts. Wieland admits that if NetMall tried to transform into a profit centre, "most of those 100,000 vendors would disappear".