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February 1, 2000

The New Retail Wars?

By Omar Sacirbey

Also in this article

  • The New Retail Wars?

Is Wal-Mart Stores Inc. (NYSE:WMT) going to let the wrecking ball loose on web-based retailers?

That's the prospect facing several publicly-traded dotcom retailers and other e-retailers planning IPOs. The reason: Wal-Mart's decision to spin off its dotcom component into an independent company. An IPO is expected before year's end.

The refurbished Wal-Mart.com will be roughly 80 percent owned by the Bentonville, Ark.-based retail giant. Wal-Mart turned to Palo Alto, Calif-based venture capitalist Accel Partners, tapping the firm for the remaining 20 percent equity stake. Wal-Mart, meanwhile, is moving its dotcom operations to Palo Alto.

Accel has invested in more than 100 Internet infrastructure companies, including recent IPOs from Agile Software Corp. (NNM:AGIL) and Redback Networks Inc. (NNM: RBAK). While the Wal-Mart investment is Accel's first foray into a pure e-commerce company, few are discounting the potential impact of the new entity.

"Could you see Wal-Mart buying Amazon?" said Daniel Binder, a senior retail analyst at Brown Brothers Harriman, "It's certainly possible down the line." (Amazon is often referred to as the Wal-Mart' of e-tailers.)

To be sure, Wal-Mart has learned that mammoths get around a lot less nimbly online than they do on land. On land, Wal-Mart has let loose the wrecking ball on brick and mortar competitors unable to compete with the retailing behemoth.

But Wal-Mart's Bentonville headquarters has not been a magnet for talented techies. In fact, some of Wal-Mart's best Internet executives have defected to Amazon, prompting the former to launch a now-settled lawsuit against the upstart.

By relocating its dotcom operations to Silicon Valley, Wal-Mart is hoping to reverse the talent flow.

The relocation, coupled with an independent management structure, will allow Wal-Mart.com to sharpen its tusks. That's without losing the weight of the retailer's $150 billion in annual sales and market capitalization of $300 billion. With big-league distribution and good customer service capabilities in place, Wal-Mart.com need only develop a first-class site to be in a position to gouge rivals' market shares.

Should e-tailers like Amazon and Buy.com Inc. (NNM:BUYX), as well as others soon to go public, be unsettled? The jury appears to be split.

In a Jan. 10 report, Sanford C. Bernstein analyst Emme Kozloff suggested that Wal-Mart.com could potentially capture up to 10 percent of business on consumer Internet sales. That means if it does go public it would realize a market capitalization of $45 billion to $150 billion. She did, however, temper the figure with a warning about the uncertainty of valuation levels carried by pure-play dotcoms.

While Wal-Mart.com's potential profits may be small compared to its parent, "they'll be competitive with Amazon," noted Barrett Ladd, a senior research analyst at Gomez Advisors.

Among the vulnerable, she says, are e-tailers in toys, books, home furnishings, and women's products. But many rival e-tailers seem unfazed. "Wal-Mart will have zero impact on us, because we're not on the lower end of the market," said Deborah Blackwell, president of privately held MyHome.com, which specializes in kitchen fixtures, lighting and other home furnishing products.