eBay ventures into new territory with the launch of eBay Express. Its success--and that of other Internet companies looking to expand into new channels--may depend on applying lessons learned from brick-and-mortar retailers.

By Andrew Buss, Hannah Hamburger and Sarah Knox

With the launch of eBay Express, eBay--the online auctioneer renowned for its eclectic mix of products ranging from $20 million paintings to $1 hair clips to rare baseball cards--is moving into a channel dominated by online retailers (or "e-tailers") like Amazon.

Of course, expanding across channels is nothing new. For decades, brick-and-mortar retailers have been blurring what previously had been clear distinctions between traditional retail channels by expanding their offerings of products and services (for example, grocery stores adding pharmacies, encroaching upon the territory of the traditional drug store). Similarly, e-tailers now offer shoppers a variety of online channels through which they may buy a product or service. As barriers to entry lessen, e-tailers like eBay continue to stretch across these channels via acquisitions, joint ventures or homegrown solutions, providing similar tools and functionality to their shoppers--and driving the so-called "channel blur."

NEW CHANNELS, NEW CHALLENGES
It may seem like "déjà vu all over again," albeit with an online twist, to what has happened to traditional brick-and-mortar grocery, drug and mass-merchant channels. Companies like Wal-Mart moved into the grocery and drug businesses, while drug stores added grocery and mass-merchandise items, and so on. While many leading retailers have expanded into new formats and channels, success has come only to those who have continued to focus on making the shopper's experience something special and unique.

With the launch of eBay Express, eBay is now facing many of the same challenges met by the brick-and-mortar retailers that moved into new channels. It is encroaching into the set price space of established e-tailers. The new format is targeted at the shopper who wants an easy way to search for and buy items online without the added time or complexity of dealing with an auction. Two key changes being introduced are hallmarks of long-time e-tailers: 1) a shopping cart, where multiple items from multiple sellers can be placed and purchased with one click; and 2) a refund option for disgruntled customers.

eBay Express is just part of eBay's larger plan to expand into new channels. It has recently purchased a number of local classified sites (such as kijiji.com and rent.com), 25 percent of the popular Craigslist, as well as the online shopping comparison site shopping.com. eBay clearly is looking to increase its appeal along a broader spectrum of shoppers.

E-tail Marketplace Competitors
E-tail Channels	Example E-tailers
Internet-only vendors	Amazon, eBay
Brick-and-mortar retailers w/websites	Barnes & Noble, Wal-Mart
Hosted marketplaces	Amazon aligning with Nordstrom, Circuit City, etc.
Online auctions	eBay, Amazon, Yahoo
Online classified ads	Craigslist, Google Base
Aggregators	Froogle
Rewards portals	Upromise
Product comparison sites	shopping.com (eBay), BizRate
Search engines	Google, Overture

LESSONS LEARNED
As eBay and other Internet companies look to expand into new e-channels, they should heed the important lessons learned by the brick-and-mortar players that have successfully managed channel blur.

Have a differentiated positioning and deliver on the promise. Not only do e-tailers need to ensure the new channel into which they are entering is compelling to shoppers, but they also need to have an appealing, differentiated selling proposition--and deliver on it. Many brick-and-mortar retailers have tried to compete head on with Wal-Mart on price, but failed because they didn't have the scale to do so.

Savvy retailers across channels are looking to differentiate themselves from Wal-Mart and other competitors via attributes beyond price. For example, they might add more in-store services like florists and banks to become a more convenient, one-stop shopping experience, or put more emphasis on the quality of "perimeter" categories like fresh produce and meats or fish. Whether the e-tailer's point of difference is ease-of-navigation, price, assortment, service, warranty, reward programs or any of a variety of web-based tools, all are critical in attracting first-time shoppers. And they must be delivered consistently to establish loyal, repeat customers.

Don't lose sight of the core shopper group. Expansion into new markets affords opportunity, but it's important to remember that a company's initial success occurred for a reason. Straying from the original format comes with a risk of alienating current customers or cannibalizing sales, especially if their shopping experience begins to deteriorate. For example, when Gap Inc. expanded into new retail channels like Old Navy and babyGap, it took its eye off its core business. The clothing retailer failed to update its merchandise and it also commoditized some of its offerings, with similar apparel made available at the new channels--like Old Navy--at a lower price.

Don't expect competition to sit still. While their focus should be on the shopper experience, e-tailers also need to keep a watchful eye on their competition, trying to anticipate potential moves and stay a step ahead. Music retailers, for example, failed to anticipate the potential impact of MP3s and other downloadable music files as CD purchases waned. The door was opened for Apple--originally a brick-and-mortar retailer of computers--and its wildly popular iTunes and iPod.

In the Internet space, this sort of dramatic competitive response is all too easy when stores are virtual, prices can be changed in an instant and, for the consumer, information is almost perfect.

THE RIGHT MOVE
There's no doubt that launching eBay Express is the right move for eBay. The company has recognized the importance of increasing its appeal to new users, while also providing alternative shopping opportunities to its audience of over 100 million subscribers. eBay is acting now to avoid a continuation of the recent decline in profits and share price it experienced during the first quarter of 2006, when profits dipped by 3 percent and share price declined by 13 percent.

Additionally, eBay can hardly afford to sit back given the growth of the e-marketplace and the potential size of the prize. Industry experts expect online retail sales to grow from approximately $81 billion in 2005 to $144 billion by 2010. Competitors like Google loom as a major threat, with the potential to take away a share of this prize. (Google plans to launch an online auction site and payment system similar to eBay's PayPal.)

eBay's future success--and that of other e-tailers--will depend on how well they promote their offerings and their ability to offer differentiated, attractive products and service experiences across different channels, while improving their overall value proposition for shoppers and shareholders alike. In other words, it's dependant on whether they've learned the lessons of the brick-and-mortar retailers that have come before them.

Andrew Buss, Hannah Hamburger and Sarah Knox are consultants with Archstone Consulting LLC.