July 12, 1999
Cover

Retail: Shopping at the cyberspace mall

From CDs to appliances, online vendors offer it all

BY WARREN CARAGATA

Sam Sniderman, better known as Sam the Record Man, is pumped. As he holds court in his absolutely uncool Toronto office -- with carpet up one wall and two paper Rolodexes on his desk -- what has Sam's attention at age 79 is the Internet. This is a guy who remembers not just vinyl but the 78s that he sold out of his brother Sid's radio store. When his store expanded and moved downtown to Yonge Street, Sam says out-of-towners would come in and look at his stock -- now about 500,000 titles -- and tell him they wished there was a store like his where they lived. "We're going to be able to do that," he says of his new Internet location. "People who wanted to clone Sam the Record Man in their city can now clone it in their house."

The newly launched cyberspace version of Sam's (www.samscd.com) now offers about 200,000 music titles. It joins a growing list of other Canadian retailers who are making the shift to Internet commerce, offering everything from books to groceries to refrigerators. They are bewitched by forecasts that $80 billion worth of business will be transacted in Canada on the Net by 2003. And they are frightened by the come-from-nowhere success of U.S.-based companies such as bookseller Amazon.com, which has gone from $22 million in sales in 1996 to $892 million last year, and now sells far more than just books, including CDs and electronics. As they confront the fact that Internet commerce is not a fad, companies are "waking up and they're quite worried," says David Pecaut, head of the global electronic-commerce practice at Boston Consulting Group's Toronto office.

Companies that have established brand names on the Web have a huge advantage. Amazon.com is successfully fending off larger rivals who have arrived later to the Net. Experts warn that with change coming at the warp speed of the Internet (seven years ago, the World Wide Web didn't exist), merchants adapting to electronic commerce have no time to waste. "Traditional retailers can be very successful," Pecaut says. "But they need to move quickly."

Nowhere are the changes more evident than in the music industry, where the product is already in digital form. Retailers, artists and the big recording labels are all being swept up in the transformation. From his experience, Sam knows that a winning formula doesn't last forever. When he started in the business, Promenade Music was the market leader in Toronto, but "they couldn't see the change from 78s to micro-groove long-play" (albums or LPs). When he moved his store to Yonge Street in 1961, A&A Records was the market leader. Sam's (the firm still bears the quaint name Sniderman Radio Sales and Service Ltd.) later had its turn at the top before being displaced by British giant HMV Media Group. The shift to Internet commerce is one change he hopes he has seen in time.

Sam and son Jason, who runs the Web site, insist they have some strengths in the coming battle with established U.S. players like CDnow Inc. and Amazon. The big advantages any Canadian retailer enjoy are that prices are set in Canadian dollars and there are no customs duties. But companies such as Sam's also bring an entrenched brand name and a reputation. "I'm hopeful that will be the magic," Sam says of the 62-year-old image.

His national chain of 65 stores and the Web site will promote each other. Web customers will be able to search Sam's database, which will eventually include every one of the half-million titles in the flagship Yonge Street store. "The store is a wonderful resource," says Jason, "but it's sometimes a challenge to find what you want." In time, terminals displaying the Web site may be added to the stores so shoppers can do their own searches.

While Sam's launched its Web site in early April, some artists were already in place. Toronto musician Jane Siberry has had her site for three years. Siberry's Sheeba Records site (www.sheeba.ca) allows fans to buy her CDs and place advance orders for new releases. But in an early portent of the potential revolution in music retailing, Siberry has imminent plans to allow consumers to download high-quality music off the Web, eliminating the manufacturer and the middleman. While her company handles some sales through stores and mail order, the Internet "is my main outlet," she says, although declining to say how much music she has sold at the site.

Siberry once had a lucrative contract with Warner Bros. Records, but left to go independent in a tussle over artistic freedom. Similarly, the latest album by the Toronto-based Cowboy Junkies, Rarities, B-Sides and Slow, Sad Waltzes, is available only online (at Amazon.com) and at their live performances. For years, musicians have hawked independently produced CDs from the stage, but the Internet promises to make independence more profitable. With a format known as MP3, music that is near-CD quality can be quickly downloaded and played on computers and portable players or burned onto a personal CD. Artists such as Siberry, Prince and rapper Chuck D of Public Enemy are hoping the Net will allow them to make music and money. "What it creates is so positive on so many levels," says Siberry. "There's such a direct connection between the fans and the artist."

The music industry, dominated by giant players like Seagram Co. Ltd.'s Universal Music Group, clearly hopes to outflank the Web start-ups. The industry detests the MP3 format because it can be freely copied and distributed across the Internet. Record companies are pushing for a standard format that will foil use without payment. But Sony Music Entertainment and Universal have jumped the gun on plans for a common format: each has announced its own plans for selling music over the Net.

Whether or not artists ever wrest control from the corporate giants, MP3 or other formats may spell the end of mass-produced music. Sam's online store may have downloadable libraries available late this year that will allow customers to put together their own CDs, with the music they like, in the order they want.

While Sam Sniderman challenges Amazon in music retailing, Larry Stevenson, president of Chapters Inc. (www.chapters.ca), is waging a similar battle in books against that same U.S. gorilla of e-commerce. Stevenson believes that he, too, has an edge or two on Amazon. Chapters rang up $578 million in total sales last year -- with just an undisclosed fraction from the Internet. With 59 stores, the Chapters brand is well-known and that helps to draw Web site traffic. Electronic kiosks linked to the site are being rolled out in the stores, while banners unfurl the message that Chapters is open for cyber-shopping. Stevenson is also banking on Canadians and Americans having different reading tastes.

The Net is going to become an important way to sell books, with Stevenson expecting that Web sales could capture as much as 15 per cent of sales in four to five years. But even such partisans of electronic commerce do not believe that bookstores will soon become historical relics. "The Internet is going to be very large, but it won't replace stores," he says. "A large number of people who enjoy books love bookstores."

It's one thing for books and music to become staples of electronic commerce, but refrigerators? Paul Walters, chairman of Sears Canada Inc. (www.sears.ca), says he can use Internet sales to push Sears' market share in the appliance category to 50 per cent from its current 33 per cent. The company's stores and agents are as close to ubiquitous as is possible in the real world with 109 department stores and 1,932 catalogue pickup locations. But Sears on the Web can be anywhere there is a line and a computer. So this year, the Web site will begin offering more than 2,000 different models of major appliances, in addition to what is now a limited selection of general merchandise. The Sears site now offers fewer than 10 per cent of the products found in its stores. While appliances may seem a bit bulky to be sold over the Net, consumers typically absorb a lot of information before buying. "It's a category that is information-dependent," says Walters -- and making sense of mountains of data is one thing the Web does well.

Some retailers worry their Internet sites will steal business from existing operations, depreciating their huge investments in real estate. Walters has no such fear. Sears is already a big player in catalogue sales, with all the logistics in place: its own trucking company, widespread locations to pick up goods, processes to handle not just orders but returns -- 30 per cent of merchandise ordered by catalogue gets sent back. Books and music were the easy part of Internet commerce, says Walters. "It's another thing to move a refrigerator."

Many Web retailers are not yet making money, their eyes trained on future growth, not present profits. Walters believes that with his operations already in place, the Internet can quickly lead to profits. The cost of handling a catalogue sale by phone is $11, but Walters estimates the Web can shave $2 off that. "In electronic sales, the customer does the work of the sales associate."

If books and music are the staples of Web commerce, others salivate at the prospect of what can be done with groceries. So far, several services exist in the United States, although none makes money and none attracts the kinds of sales numbers that make future profits a possibility. In Canada, the one major supermarket chain now experimenting with Web sales is Sobeys Quebec Inc. The Cybermarket (www.iga.net), created in 1996 and available only to Quebec residents, allows placement of an order with an individual store over the Web. The system only handles about 120 orders a week and groceries can be picked up or delivered. The problem so far is time: it takes about 45 minutes for the average person to shop in person and about 40 minutes at Sobeys' site for a first order, says company president Pierre Croteau. To reduce order time, Sobeys is running a test with 20 people using a so-called CyberPen, a handheld, wireless scanner that customers stroke across bar codes on used cans and other goods to build a shopping list. So far, says Croteau, online grocery shopping "is something for the future."

But the future of online retail is what mesmerizes everyone. Online sales in 1998 in the United States -- which is showing the way in e-commerce -- accounted for about one per cent of retail revenues, according to a study by the Ernst & Young consulting company. That will grow to nine per cent by 2001 and it is anyone's guess what the estimates are beyond that. "The current revenue is not the issue," says Walters at Sears. "It's where it's going." Sam Sniderman cannot conceal his enthusiasm: "I just can't wait." This, after all, is a man who has previously learned how to spin vinyl into gold.