Building big brands on the Internet.

Feeling frustrated and flabbergasted by the Internet imperative? The CEOs gathered here hope to seize the moment and build their brands on-line. Visit their Web sites to see how well they've succeeded.

BEFORE E-COMMERCE WAS COOL

It's the one e-commerce certainty: if people and businesses are buying stuff on-line, then that stuff has to get to them. Fred Smith helped to drive one business paradigm shift when he founded Federal Express back in 1973 and convinced us that we "abso-lutely, positively" had to have everything over-night. He offered symposium participants his views on another paradigm shift, and shed light on how one big brand has built itself on the Internet.

Our involvement in electronic commerce reminds me of that old song a few years ago: "I Was Country Before Country Was Cool." We were the first company to put together an interactive order fulfillment or a call center integration with our operation units. That allowed FedEx to actually book orders on the telephone, and then electronically transmit those orders for fulfillment, which in our case were pickups, straight through to the cab of the vehicle, so there was no human intervention after the call was made.

Today many of these transactions are being done on the Internet directly with the customer, in essence interfacing with one of our 45,000 trucks, with no human voice interchange whatsoever. To handle the same number of transactions today with call centers, we would have to have about 20,000 additional employees at work. That's just part of what the Internet and our proprietary systems are able to do for us.

In 1994, we launched our Web site, which we upgraded in 1996 so you could actually do a transaction with us completely on-line.

Despite aggressive actions taken by our competitors, they have been unable to match our e-commerce innovations. Part of the reason is that we spend inside FDX [the holding company for FedEx and four other transportation and logistics companies] about $1.5 billion on IT per year, with capital and expense both. People are very surprised at that, because it really ranks us in the top 20 telecommunications information companies in the world.

If you really think about it, a warehouse is nothing more than a place to put something so you know you've got it. It has no other function in the world. It's total expense, no value added whatsoever. So what we decided some years ago inside the FedEx and the FDX systems is that we had to have every shipment we carried, millions of them, totally visible instantaneously to our customers so that they could put their goods in the FedEx system and constantly keep up with their inventory.

THE PARADIGM SHIFT

There is an enormous business paradigm change that's underway here, and e-commerce and the Internet portion is just a part of it. And if you don't get this thing, you're going to get into a lot of trouble.

The power generally in business was focused in between the consumer and the manufacturer. That middle person was providing the palpable feel of the customer demand, whether it was a supermarket operator who figured on the shelf space that was going to go for Wheaties or Cheerios, or the electronic parts distributor that knew its customers, put their products in the warehouse, and got it to them.

That's all going to change in a very big way in the next few years. The best estimate that we can find is that e-commerce between businesses, which is far and away the largest component of e-comm, this year is roughly $105 to $110 billion. About 46 percent of that is in the computer and electronic sectors - they are the early adopters of e-commerce on a business-to-business basis. Forrester Research believes that business-to-business e-commerce will be a $1.3 trillion marketplace by 2003. The business-to-consumer marketplace will be roughly $120 billion, up from this year's roughly $15 to $18 billion.

So there's an enormous power shift, because both businesses and consumers can now buy on the Internet and have access to goods and products without regard to time and place. And any product that can be put on the Internet can then be moved in a system like ours door to door within a matter of 24 to 48 hours.

The growth in high value-added and high-tech products as a percentage of the GDP has been compounded by 15 to 20 percent per year for the past 20, 25 years. The low value-added or commodity - lumbering, agriculture, mining, the extractor activities - the relative expenditures on those as a percentage of GDP are shrinking.

Underlying all of this has been this extraordinary logistics efficiency improvement. Remember that logistics is defined as the cost of transportation for moving goods, the carrying cost of that inventory, including obsolescence, and the interest on the inventory in warehouses, not the goods itself.

Dell Computer doesn't build the computer until you order it. What begins is this enormous choreography of parts and pieces around the world. They come into the point of manufacture; they own that inventory for a few hours; and then it goes back on the other side.

The profundity of this logistics and e-commerce revolution is such that companies who do not adopt it really are not going to be able to compete - you simply will not be able to compete on the basis of the cost structure of a more nimble competitor who's using the customer's money as working capital.

People have spent an enormous amount of time trying to figure out how to manage this inventory. But the smart competitor at the end of the day recognizes a key: It's not having to get smart at managing inventory, it's to have no inventory at all. Now, obviously that's an ideal which is difficult to reach, and it may not apply for commodities; obviously certain value per pound items will always be handled in the traditional echelon-type distribution center But for any type of item that has any value, intrinsic or otherwise, that has any potential for obsolescence, any requirement to randomly supply for a demand that can't be accurately predicted, you're going to have to move to this paradigm.

And for the companies that recognize opportunities [in international trade and industrialized countries], this Internet revolution is going to give them a global reach. Powerful forces have been unleashed by the telecommunications and transportation revolution around the world, and I, for one, think that the development of the Internet is going to be like a supercharger, like an afterburner for these forces in international trade.

FOUNDATION CONCEPTS

Born and bred on the Web, Value America is one company embracing the dot com possibilities. Founder and chairman Craig Winn gave symposium participants an in-depth explanation of the philosophies and strategies he believes more CEOs can adopt - and with which they can succeed. An off-line case study with an on-line textbook.

Craig Winn (Value America): The Internet is as close to alchemy as has ever existed in American business. We have the most unlevel playing field in the history of economics in America. Whereby the more we advertise - that's how we lose money, we promote - the more we sell, the higher our value. It's an unbelievable set of circumstances.

So how to capitalize and build brands on this new big monster called the Internet? I want to use the company that we have created to explain some of these opportunities and concepts. We were founded on five core concepts.

The first of those is to be comprehensive. No one is going to learn to navigate and purchase products from thousands of sites for each unique need, and they most certainly aren't going to share personal and financial information on a wide scale. You need to have extraordinary critical mass to prevail.

The second core concept is great products need to have their story told, and so we've created informative product presentations that help communicate the features, functions, and benefits of products so the customers can make better buying decisions.

The third concept is convergence. This world is moving to a convergence of the television, the personal computer, and the telephone. And a convergence solution gives the customer the best of the anonymity and the convenience of the on-line solution with real integrated customer support, people talking to people.

A radical concept was this [fourth] idea, of off-line advertising to drive on-line revenue. Selling in this space is all about demand generation, and unlike anyone else, we drive our revenues through off-line advertising.

And, finally, it's all about creating a new marketplace, about disintermediation. It's about pulling together production and consumption, literally linking people who want to buy products with factories that want to make products. And having all of the gunk in between production and consumption carved out. Friction-free capitalism.

Now, retail changes, and you've got to know when to jump in and when to capitalize on an opportunity. We think that we're in a position to have a real influence on the next retail revolution, because we're in the arena, not just a bystander. Five members of our management team were part of the entrepreneurial team that led Price Club, which was founded on four concepts, all of which we think are advantageous to building a brand and which we have brought into this solution.

The first of those is only sell quality, branded products. The second is to be the low-cost solution. Ultimately we all love going into a Nordstrom's and buying goods; the quality is wonderful. But somebody's paying for the granite floors and the piano player. What if you could take retail and put it upside down and put the best quality products in the store with the lowest overhead? That's ultimately what we want as consumers.

The third concept is that businesses are early adopters. Business-to-business overwhelms business-to-consumer at this point. I believe they will reach parity much faster than the experts say, because the consumer marketplace is many times greater than business-to-business. But Value America started as did Price Club, serving the small business community.

The last thing is that we're a membership site. It's either membership because they joined valueamerica.com, or they've joined through Falwell Ministries or one of the organizations like Make-A-Wish Foundation, to create a sense of belonging which is very important to us. We like to congregate around organizations that are important to our lives.

It also galvanizes our energies as a company. We get up every morning with one goal in mind: We have to serve our member.

CHANNEL CHALLENGES

Winn: Every bit of the success that any company is going to have in this space is based upon alliances. The opportunity is too big internationally, it's too big in terms of the technology and investment one has to have to capitalize upon it. Talk about building a great brand on the Internet; it is not about digging down and saying, "We're going to create a vertically integrated solution and what we're going to do is make great products and then figure out how to make an electronic interface that appeals to our customers. And then make another one that works logistically to get the product to the customers, and maybe have an investment in the infrastructure of the Internet to communicate all that." It is impossible to prevail without forming alliances.

Wolfgang Schmitt (Newell-Rubbermaid): We've been very much focused on trying to find solutions that deal with the channel conflict. It reminds me an awful lot of discounting. We learned how to sell and not lose the department store business, and not lose the "traditional business." I think that's what we wrestling with today more than anything.

The debate's going to be over who gets what share of the pie. So if you're selling our product for us, what share do you get versus what does the manufacturer get? And how do we still excite and give a good value and a good deal to the consumer? My personal view is that we're all much too focused on looking at e-commerce through our business, versus from the outside as the consumer back in to our businesses. I think the solution is going to come from there rather than from here.

Ultimately, we've got to be where the consumer wants to buy our goods. We have to be responsive to that, and at the same time we've got to deal without totally destroying our current business formula.

Winn: The way to resolve the issue during this transition period is to choose partners or alliances that respect the value proposition of your product, and make sure it is merchandised in such a way that it's not destructive to the other channels. To service the needs of those people who have chosen to be the gatekeepers of this new frontier is mainly a value proposition, and does not destroy that which you already have.

Rick Goings (Tupperware): We have 85,000 dealers in the U.S. So what we're working on is a progression of how to make this U.S. sales force feel comfortable that there's still going to be a business for them. And that's why we're calling it integrated direct access. There's about 40 percent of the population that we know would like to buy via a Tupperware party. So the channel gives us some advantage there. They like the product, but they also like the way we sell it from there. We'll continue to sell in this way.

But we're also teaching that local Tupperware distributor how to act more like a Coke bottler, so that the Coke bottler sells most of his through retail stores, but he'll also be in the vending business. So we're teaching our people how to do kiosks in malls. They still control it, they like that, and they're finding out that in soft periods of the year it's great business for them.

Now we're doing infomercials. We'll launch next month the biggest Tupperware party we've ever held in this country on the Home Shopping Network. What will happen is while it's on, there will be 85,000 parties going on out there in homes also, and they'll tune it in. So what you see is a convergence of these coming together, where one is adding to the other.

And we'll start by the end of the year with pure e-commerce. We'll give our dealers a commission for customers they send into the site, but will sell direct and make a bigger margin when we go. But we're trying to settle on how it can all come together so it's not either-or.

J.P. Donlon (CE): Is it not somehow tied to the buying experience? After all, some people will want to buy through the Internet because they like that experience. Others want to touch, feel, and attract people. Are these two mutually exclusive? Do they come together?

Winn: The better a brand has established its reputation to the customer for quality, the less a tactile experience with the product means anything. Which means that this realm that we are moving toward is all about brands. The brand has already earned the respect from the customer, and now it's just a matter of giving the customer the power to learn about that product and to buy it, and then receive it more efficiently.

PLAYING IN THIS SPACE

Winn: This is not Field of Dreams: Build it and they will come. Seventy-five percent of our budget is spent in advertising. That is not uncommon; branding and promoting in this space is the big ticket item. The ultimate barrier to entry is the amount of money one must raise to be able to play effectively.

We use off-line advertising to drive on-line sales. And I'd like to encourage you to also think about something. As a company that makes goods or as a company that wants to partner and expand its opportunity on-line, advertising is a period cost. If your shareholders are enriched based upon your earnings, you cannot play in this space, because it is 75 percent of the cost. You've got to partner with someone who does get the dot com multiple, who can invest in the promotion of the product, and drive shareholder value as a result of having done so.

Gerard Roche (Heidrick & Struggles): [Value America's ads are] pushing IBM and Weber and Amana. Do they help, do they co-opt the advertising costs?

Winn: Of course. Skin in the game is a very important thing. We've changed a huge amount of the metrics surrounding advertising, since it's the fuel that drives e-commerce. The first thing is that we've made all of our ads brand-centric. They serve a single brand; they talk about the features, functions, and benefits. They're an education on behalf of those products.

The second is we've created the first link for most brands between advertising and revenue. Rather than running an ad to create brand awareness, the ad ends with a call to action, "Click here to buy; call here to buy." It's a direct link between advertising and revenue.

Third is co-op advertising. And the nature of co-op advertising is typically that a company will pay 125 percent of the actual cost of the ad, and typically get about 50 percent of the benefit of the ad. Advertising is a profit center for most retailers. We have a very unique strategy because of the dot com multiple. You put up a dollar as a brand, we'll match it with a dollar. So now you get two times the advertising, and it's also a direct link to revenue.

One of the great changes in branding on the Internet is the fate of the portal. It is our view and our experience with almost everyone we talk to, that the portal is in some degree of trouble, that they have overly widened themselves where they are no longer a great value to anybody. We're Yahoo's most integrated e-commerce site, and yet in its ability to drive revenue and traffic, of all the forms of advertising on-line and off-line that we use, it is our least productive.

In trying to build a brand on the Internet, we spend 85 percent off-line, 15 percent on-line. Of the 15 percent on-line, the most productive by far is the affiliate programs. To put it in perspective, in the first 60 days of the affiliate program, we generated more revenue from it than the first six months of the Yahoo project, and spent one one-hundredth of the amount of money.

Schmitt: Would you say that's the most productive advertising investment today?

Winn: No. Our most productive in terms of just raw revenue would be national newspapers. In our space, television creates brand awareness, radio drives traffic, and newsprint drives revenue. In terms of dollars spent per revenue generated, electronic direct mail is by far the most efficient. But they ali have a function. We'd love to say "We'll just do the most efficient one," but you've got to build your brand, you've got to form the alliances, you've got to drive traffic, you've got to drive revenue, you've got to get people to come back. There are about 20 different things that I believe you have to do, and if you don't do all of those things, then you're not what you need to do to succeed.

OH, AND ABOUT MAKING MONEY...

Winn: I believe you can make money on the Internet. We wouldn't be in this space if we did not think so. I do tell every investor in our company and everybody that's a partner with the company, that for the next two years we're only going to focus on driving scale and driving customer satisfaction. It is not our intent to make money, nor would it be in our shareholders' or our brands' best interests if we were to focus on making money now.

The solution that we created was designed to enable great brands to be able to ship the individual customer one at a time more efficiently than they sell an independent retailer. Now, that sounds pretty radical. How in the world can you do that?

We had companies come in and study what we do and look at the order fulfillment mechanism that currently exists in the retail business. And they said, "You know, it's about $65 for us to receive an order, process the order, side swipe every cart with that stencil that says it's going to Store No. 103, follow the routing guide, the compliance index, negotiate with the freight company, get it to Store No. 103." And the hoops that a manufacturer must now go through because of this idea of just-in-time inventory has made that process awesomely expensive and cumbersome.

We use the power of EDI [electronic data interchange] to form an automated link between consumption and production. To receive that order from the customer, capture the funds from the customer, transfer all the delivery information that we've already stored in the database directly to a printing label so they know where it's going to go, and they don't even have to reenter it. That label goes on the side of the carton. We're responsible for getting it to the customer, responsible for paying the freight bill. We have been invoiced by EDI, which most retailers don't like to do because it's too fast and too accurate - how do you make deductions when it's too fast and too accurate? And we pay by wire transfer. The entire process is automated. It costs less. And so the power of technology is such that you can do business directly with the individual consumer, less costly, more efficiently, than you can ship a retail store.

RETAIL IS BROKEN

Winn: If retail weren't broken, we would not have this opportunity. Through consolidation, most manufacturers of consumer goods are dependent on one, two, or three retailers. And they've used that clout to profit at the brand's expense, and have separated brands from the customer, and have used the accounts payable to literally steal money from these brands.

Roche: Do you see any thinking in that broken retail matrix that says, hey, there's defensive action being taken on their part?

Winn: I think there will be very few, if any, traditional retailers that will succeed in this space. Everything that is an asset to them is a liability in our space.

We can lose money and increase our value at the same time. They cannot. Their shareholders and therefore their positions to a large degree are driven by ability to create shareholder value. And the moment they advertise as aggressively as one needs to advertise to succeed in this space - because you have to advertise very differently; you're reaching a different group of people from those that trudge into those stores - the moment they do that, it's a period cost, it destroys their earnings, therefore it destroys their shareholder value.

OWN THAT CUSTOMER!

Gregory Slayton (My Software Co.): Just one thought for the manufacturers and developers: At the end of the day, whether you're on the Web or whether you are selling through traditional channels today, I believe you have to own the customer.

And electronic direct marketing is a fantastic way to be close to your customer, to understand their service needs. So inbound and outbound e-mail management is going to be critical for all of our companies, no matter what industry, because you've got to be close to that customer. Otherwise you risk being disintermediated.

Mark Kvamme (USWeb/CKS Group): You have to own the relationship with your customer or you're not going to be able to provide the products and services that the marketplace wants. Now, the interesting thing is to really go to complete arbitrage price and availability. And what's going to happen is, the guy who can run the fastest and be the most direct in how they do that will be very successful.

In four years, buying products will be like trading commodities. And basically what's going to happen is you, as a manufacturer, are going to be setting prices on a nanosecond basis. As I like to call it, the brand manager of the future is going to be like an air traffic controller.

Schmitt: I think ultimately we're going to be a software company, and we're going to design product; the consumer is going to buy our product design through the Internet.

Slayton: Ultimately everybody's going to be a software company. And I don't mean that in a funny way - I think that's really true. Even for commodity products. The way you add value to a commodity product is by understanding how the consumer, whether it's business or an end user customer, uses it and by adding value via that knowledge.

Schmitt: The best way I know to getting a laugh in our company is by saying we'll be a software company.

Kvamme: But another way of putting it is we are changing from a capital-based economy to an intellectual property-based economy. That's what's happening. And the people who understand how to move that intellectual property around faster, more efficiently than the next guy, are going to win.

BELIEVE IN THE BRAND

Winn: So to prevail in this space as a brand, I think you have to have a solution that is database-driven, that has multimedia product capabilities, that will deal with customers one-on-one. That's still very comprehensive and that integrates this entire process between communicating and advertising and propelling and compelling purchasing, to logistically facilitating getting it to the customer.

All we are as a company, by the way, is a collection of brands. We're just a company of brands. We don't think there's anyone that's ever come to us to buy us, they come to us because they want access to quality brands. And so we are the first to admit that we are nothing more and nothing less than the collection of brands whose products we're honored to sell.

Roche: Are you trying to develop Value America as a brand?

Winn: Yes. It is a requirement in this space to be a brand. And we're taking a different tack towards it. We wish to be identified as the brand that is the gateway to great brands, so that we are just a value-added informative and direct link between people and the products they want the most. So we want our brand tied to IBM, Icon, Rubbermaid, Tupperware, American Heart Association. So it's a brand that only exists in people's minds as a gateway between them and the brands they really want. It's a very different kind of branding.