This seer sees e-tail coming back for those with unique products

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Let's see. You can't invest in digital upstarts like any more because they're about to run out of money. But you can't fly to quality because companies like Coke and Procter--well, because they suck. Brokers are being disintermediated, conventional media have been defenestrated, the S&P 500 needs to be defibrillated. What's a wary investor to do?

Bet, says Scott Galloway, on the second coming of e-tail. By this Christmas.

Don't laugh. I didn't. Mr. Galloway is one of the most rational advocates for the New Economy I've encountered. He is founder and CEO of Brand Farm, an incubator of Internet retailers, all high margin, specialty marketers targeting not's mass audience but the educated and affluent hipsters who are and will remain the core Internet demographic. The key to their hearts and wallets is not the lowest price on widely available goods, Mr. Galloway says; it's the matchless product, obtainable nowhere but here.

"The Internet commoditizes brands," he explained over lunch at Asia de Cuba, a mixed metaphor of a boite in midtown Manhattan's stylish Morgan's Hotel. "It's scary. The model for success is not Ralph Lauren, which you can get anywhere, but Kenneth Cole, which is only available at Kenneth Cole. Only by selling original, unique products can you charge a good margin and thrive."

Mr. Galloway provides a sane alternative to those who posit the possibility of "fast branding," a particular bete noir of this space. To be successful, he says, an online brand must offer the qualities of a winning offline brand: unique products and merchandising, over-the-top performance, and an aspirational hook. "If you can do those three things, the reward is higher margins," he says.

Brand Farm's companies include Gold Violin, an e-tailer of tony gift items affluent baby boomers can buy for their aging relatives; and Room 12, a travel-services company aimed (a la the original Banana Republic) at the hip, urban traveler. The models for these online catalogues are such successful offline retailers as Williams-Sonoma and Pottery Barn--no surprise because both are clients of Prophet Brand Strategy, a consulting firm Mr. Galloway started with brand marketing expert David Aaker. In the mass-to-class evolution that gave rise to such brands, Messrs. Galloway and Aaker see a model for Internet merchandising.

"Right after World War II, the great retail concept was massive selection at low price--the department store," Mr. Galloway said. "Then niches evolved, and you got a Williams-Sonoma. And then urban cool pops up. From Sears to Frontgate: that's what's happening on the Web."

In this analysis, e-tailers have been hobbled by a mass rush to a mass market difficult to locate and almost impossible to make profitable. They have also hurt themselves by their almost willful capitulation to commoditization.

"In the Net space, most B2C companies have gotten it exactly ass backwards," Mr. Galloway complained. "They spend millions on the brand before they even have a value algorithm." And they've been prodded toward destruction by the ad industry.

"Ad agencies have been a party to the biggest one-night stand in business history." Massive media advertising "felt good, but the next morning you have a huge hangover and a ton of regret. Building a brand is no faster or slower than ever before. Perhaps slower, because it's so crowded."

The lack of true brand distinction--plus, naturally, the lack of profitability--helped lead to the collapse in B2C stocks this spring. Although its companies are all still privately held, Brand Farm suffered along with the rest; financing has grown far more expensive. Yet Mr. Galloway is downright optimistic. This year, he predicts, will be when etailing finally breaks through as a conventional consumer activity; Web retailers who survive the current shakeout will reap the rewards.

"Mark my words, in the third quarter, people will look at undervalued B2C stocks and there will be a buying spree. It just seems so obvious to me."

Indeed, as we peered down from our second story perch to the animated conversation around Asia de Cuba's communal atrium table, he said he thought we would forever relish the memories of this strange era of new new things and new new wealth. "Like Paris in the '20s and San Francisco in the '60s," Mr. Galloway said, "I think that's how we will remember New York at the turn of the millennium."

Mr. Rothenberg can be reached at [email protected] .

Copyright July 2000, Crain Communications Inc.

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