* Big retailers gain expertise from smaller online firms
* Online retailers also see benefits from offline partners
* Some venture capitalists view trend skeptically
By Olivia Oran and Sarah McBride
Dec 21 Bricks and mortar retailers like
Nordstrom Inc and Walgreens have found a way to
deal with growing pressure from Amazon, by joining
forces with small e-commerce companies.
Through acquisitions, investments and partnerships with
smaller, emerging start-ups, large retailers are breaking into
new markets and tapping into the social media and marketing
expertise of the firm's often tech-savvy founders.
And as consumers keep hitting the mousepad instead of the
mall, the trend is likely to keep growing in 2013 and beyond.
U.S. retail e-commerce during the third quarter grew 17.3
percent from the year-ago period to $57 billion, or 5 percent of
total retail sales, according to the Census Bureau of the
Department of Commerce. Total retail sales rose just 4.6 percent
during the same period.
"It's a market-share shift," said Kristen Green, a venture
capitalist at Forerunner Ventures who backs online companies
such as men's retailer Bonobos and cosmetics company Birchbox.
It is also a change for retailers who have woken up to the
threat from Amazon fairly recently.
"When I was meeting with brick and mortar retailers 24
months ago they weren't thinking about online," said Carlo
Bronzini Vender, a senior partner at New York-based investment
bank Sonenshine Partners who helped advise the sale of
Drugstore.com to Walgreens. "Now people are being more proactive
LOOKING FOR ONLINE SMARTS
The deals are frequently small, driven by retailers'
attempts to master online, rather than to immediately boost
sales. Women's clothing site GoJane, which Aeropostale Inc
acquired in November, generated just $19 million in
sales last year. Aeropostale net sales were $2.3 billion last
"They're buying learning, people and energy," said Bruce
Cohen, a strategist at retail consulting firm Kurt Salmon.
"They're buying labs to test and learn to see what works."
Other recent deals within the last year include Nordstrom's
acquisition of flash sales site HauteLook and investment in
men's clothing company Bonobos; Walgreens' acquisition of
Drugstore.com and PPR SA's partnership with e-commerce
Fast growing e-commerce start-ups pegged by bankers as
potential acquisition candidates by large retailers include
vintage-inspired clothing site ModCloth, customized-jewelry site
Gemvara and eyeglass company Warby Parker.
Missing out on digital expansion can sting. Wal-Mart
Chief Executive Mike Duke said at a conference last week his
biggest regret was not moving more quickly into e-commerce.
In fact, some prizes may have grown up too fast to be
Several online retailers have raised large funding rounds at
such high valuations that venture capitalists say initial public
offerings are likely the only way that investors can make back
Among the list this year are One Kings Lane, a furnishings
company that raised $50 million earlier this month; Zulily, a
children's clothing company that raised $85 million last month;
and Fab.com, a flash-sales site that raised $105 million earlier
Web companies also see real-world benefits to offline
Bonobos, which received a $16.4 million investment led by
Nordstrom in April, now has access to the Seattle-based
retailer's distribution network. Bonobos' fitted chinos,
non-iron trousers and other staples are now available on
Nordstrom's website and in their department stores.
"We realized there was a big portion of the available target
market that we weren't reaching through online," said Jeremy
Liew, a partner with Lightspeed Ventures and a Bonobos investor.
Since then, the company has opened five "offline showrooms"
across the country in which men can try on clothing that they
can then order from the Bonobos website.
BE AMAZON OR BE DIFFERENT
Some venture capitalists view the rush to invest in online
retail with a skeptical eye. Bessemer Venture Partners' Jeremy
Levine, who backs companies including online diapers company
Quidsi, sold two years ago to Amazon for $500 million, thinks
investors need to be on guard.
"Online retail is a natural monopoly business and people
aren't seeing it," he says. "These companies are going to start
to feel serious pain from Amazon."
While it is relatively easy for smaller sites to generate
meaningful sales in the short term, Levine says, the long-term
outlook is cloudier. "As soon as Amazon decides it doesn't want
you," he says, "they will just crush you."
Amazon's March acquisition of order-fulfillment company Kiva
Systems will further widen the gap between the e-commerce giant,
brick and mortar retailers and upstarts struggling to keep up,
bankers and analysts say.
That is why Fab.com CEO Adam Goldberg says the company
focuses on crafting personality for its site so browsing is fun.
He also aims to triple the percentage of unique products to 15
percent of merchandise in 2013 from 5 percent this year.
"Nobody is going to beat Amazon selling the products Amazon
already sells," says Goldberg.