1. The Future Of Retail Seema Williams Senior Analyst Online Retail

2. Agenda  Consumers adopt eCommerce  The new rule of engagement  What’s happening to Dot Coms?

3. The Net takes off at home

4. Three stages of Web buying  Convenience spending  Small-ticket, low-risk items  Examples: books, music, apparel, gifts  Researched purchases  Information-intensive big-ticket items  Examples: travel, appliances, computers  Fulfilling essentials  Low-information habitual purchases  Examples: groceries, prescription medication

5. Retail Spending Growth $184 $37 $79 $69

6. The New Rule Of Engagement Dynamic Trade is the ability to satisfy current demand with customized response

7. Dynamic trade Services eclipse products Dynamic Trade

8. Service eclipses products  Online services exceed pre-Web standards –Garden.com, Lands’ End –Carpoint

13. The Carpoint experience The close rate is... If a dealer responds within... 24 hrs.25% 48 hrs.11% >48 hrs.<5%

14. Dynamic trade Services eclipse products Demand drives production Dynamic Trade

15. Dynamic trade  Online services exceed pre-Web standards –Garden.com’s landscaping –Carpoint  Demand drives production –Herman Miller 2-day built-at-order chairs –BMW’s configurator points to future demand

16. Dynamic trade Services eclipse products Demand drives production Pricing matches market conditions Dynamic Trade

19. Dynamic trade  Online services exceed pre-Web standards –Garden.com’s landscaping –Carpoint  Demand drives production –Herman Miller 2-day built-at-order chairs –BMW’s configurator points to future demand  Market pricing –Buy.com, Value America, eBay –Shopping engines MySimon.com DealTime

20. The Demise of Dot Com Retailers

21. Retailers focus on growth for 2000 Retain staff Build B2B business Achieve profitability Synchronize channels Add content Raise customer satisfaction Build brand Improve site design Grow the business 86% 18% 26% 42% 46% 48% 2% 10% 18% Percent of 50 retailers responding (multiple responses accepted)

22. What are your greatest challenges this year? Percent of 50 retailers responding (multiple responses accepted) 44% 38% 34% 32% 24% 70% Differentiation Financial health Fulfillment capabilities Customer satisfaction Site design Funding

23. What are the most important assets of your business? Percent of 50 retailers responding (multiple responses accepted) 36% 32% 30% 26% 24% 16% 50% 14% 30% Brand Site design Partnerships Staff Fulfillment capabilities Customer data Content Customer service Channel synchronization

24. When will you be profitable? Percent of 50 retailers responding Don’t know/ won’t say 32% 2002 24% 2003 2% 2004 4% 2000 20% 2001 18%

25. Where will funding come from this year? Percent of 38 retailers receiving funding in 1999 and 2000 (Percentages do not total 100 due to rounding) Don’t know/ won’t say Parent company Venture capitalist Business angel Public markets 2000 1999 5% 18% 32% 24% 42% 34% 11%

26. State of online retailers  Focused on growth  Challenge: Differentiation  Asset: Brand  40% expect profitability within 19 months  Future sources of funding seem scarce

27. What ails online merchants?  Funding dries up

28. Online Retailers Watch Their Market Caps Plunge Stock price relative to IPO egghead.com drugstore.com Ashford.com eToys Value America Note for comparison: Amazon.com is 4,444% above IPO price -100% -50% 0 +50% +100% +150% +200% +250% +300% 3/002/001/0012/9911/9910/99

29. What ails online merchants?  Funding dries up  Financial pressures -- price pressure  Competition intensifies  Consolidation is inevitable

30. What it takes to survive  Scale –Registered unique users: 1M+ –In-house fulfillment –Adult supervision

31. What it takes to survive  Scale  Service –Selling in multiple channels –The right product offering

32. What it takes to survive  Scale  Service  Speed –99.9% site up-time –Sophisticated commerce and merchandising skills –Outsourcing only emerging skills

33. Consolidation criteria  Market maturity –Percent of category sales online –Amount of online revenues –Annual online revenue growth through 2004  Product commoditization –Differentiation of product set –Operating profit potential  Competition –Number and strength of competition –Dominance of current leaders –Stock performance

34. Categories at risk  Commoditized, mature markets –Media, computer hardware, flowers  Highly-competitive, adolescent markets –Autos, toys, sporting goods, replenishment, leisure travel, tools and garden  Nascent, highly differentiable products –Furniture, appliances, apparel household goods

35. Who’s got it:  Wal-Mart.com: Multiple channels, fulfillment expertise, lots of customers  Amazon: Fulfillment, customers (20M), and technology  eBay, Priceline: new selling models  eZiba: New market that wouldn’t work off- line

36. Who doesn’t:  Any brick and mortar holdout  Dot-coms that don’t already have scale –(most besides Amazon)

37. Summary  Consumers will spend more than $180 billion online in 2004  Dynamic trade rules  Dot Com retailers struggle to survive

38. Thank you! Seema Williams 617-613-5768 swilliams@forrester.com www.forrester.com