Alan Mitchell reports on how retailers are making a success of e-alliances, where adapting to a fundamental shift in cultural attitudes is the main challenge It's the new Internet landgrab. The old landgrab, where countless entrepreneurs rushed to set up their own dot.coms is over. Now the starting pistol for a new landgrab has been fired, as heavyweight bricks and mortar retailers rush to take on e-space for themselves. A spate of announcements over the past few months, including a Tesco tie up with, a Sainsbury's deal with Carlton, Asda with AOL and Internet price comparison service, marked the turning point. Since then, the initiatives have been coming thick and fast. A Boots deal with Granada one week. A Sainsbury deal with Oddbins the next. Everyone promising more. Comments McKinsey retail principal Alistair Ramsey, "the deals struck to date are only the beginning". Of course there's nothing new in partnerships, alliances and joint ventures. Companies have always found occasions when it was mutually beneficial to share costs, technologies or customers, or to mesh complementary capabilities to create a better offer. And to a degree that's also what's happening here. If Carlton wants to set up a credible interactive food TV channel with food sales, for example, it needs a partner with replenishment skills. So why not get into bed with Sainsbury? But there's more than meets the eye here. Decades-old industrial divisions of labour between "content" businesses such as the media, and "commerce" businesses such as retailing, are beginning to crumble. Longstanding retail marketing strategies and business models are being revisited, and re-invented. Currently, these alliances amount to financial chickenfeed. Fast forward 10 years, however, and they could transform the competitive landscape. Retailer strategies are taking many forms. One is simply to invest in up-and-coming dot.coms. As well as forging marketing partnerships with the likes of MSN, and Open, for example, Marks & Spencer has invested in lingerie e-tailer Kingfisher has taken control of Asda has combined both equity investment and marketing partnership in a complex tripartite deal which made it AOL's and Shopsmart's preferred grocery retailer, while giving it a stake in Shopsmart. The deal (which has European scope including Germany as well as the UK) helps round out AOL's shopping offer, gives Shopsmart access to both giants' customer bases, and helps reinforce Asda's low price brand image. The main purpose is to drive traffic to existing stores. With Tesco, the main aim is to drive traffic to its on-line transaction side. Its twin goals, explains CEO John Browett are first to maintain its lead in home delivery grocery, and second to use the internet to drive expansion of non-food sales "to sell as much non-food as food". To that end it has forged a deal with Otto Versand, the world's biggest mail order company, and a 50/50 joint venture with women's internet community operator iVillage. iVillage will, it hopes, become the UK's leading women's portal, beating off competitor, itself a joint venture between Boots and Hollinger Telegraph New Media. In the US, iVillage has found success with a multi-channel approach, and a promise to provide "the answers to everything from dieting and divorce to childcare and government foreign policy". The JV gives iVillage access to Tesco's massive customer base and promotional muscle, while giving Tesco the chance to target channels such as baby and toddler' to promote those crucial non-food sales. Similar deals could well follow, says Browett. But for Boots and Sainsbury, partnerships aimed at driving traffic to stores (whether virtual or physical) are not enough. They want to bet big on interactive TV. In a 50/50 joint venture Sainsbury and Carlton merge their respective Taste for Life and Simply Food web sites to aim for the holy grail of content-driven commerce combining digital TV, the internet and shopping. Specialist food programmes won't only stimulate viewers appetites but prompt them to point and click at recipes to create a new form of impulse-driven convenience shopping, the partners hope. It's "a golden triangle that allows everything to be connected", says Carlton Interactive CEO Rupert Miles. Content (such as watching a TV programme) and commerce were separate in time and place, but now they're converging. And that, says Sainsbury e-commerce director Patrick McHugh, creates "a new shopping experience". Sainsbury's objective is to stand for exceptional food. To this end it is cementing further partnerships such as a new joint venture with Seagrams-owned Oddbins. The JV brings the two companies together in direct-to-consumer sales of upmarket wines: higher value wines than Sainsbury's normally sells in its stores, through a channel (and customer base) previously not open to Oddbins. More deals are on the way, via the new (and as yet unnamed) Carlton/Sainsbury platform, says McHugh. Not only will Sainsbury's be selling its own range through the site, it will also connect consumers to specialist suppliers of say, smoked salmon or speciality chocolates, taking a cut in the form of transaction fees. The Boots/Granada venture is similarly ambitious. While Sainsbury's is going all out to win the foodie market, Boots hopes its new independent internet and broadband company (in which it will have a 60% stake) will become "Britain's leading e-business for health, beauty and well-being". All Boots range will be sold through the programming linked web site, and more: larger, slower selling lines will also be made available. Boots chief executive Steve Russell boasts: "We will create a store of unlimited scale, going far beyond our current offer and coupling this with advice and service from some of the world's recognised experts." Russell sees so much potential in the venture that he believes it to be "the natural platform for those with an interest in well-being, including professional associations, government bodies, commercial organisations and interest groups". The synergies presented by such alliances are obvious. But far more important is their role in accelerating a change at the heart of modern grocery retailing. And this is unfamiliar territory for retailers. Seizing the opportunity is as much of a cultural as an operational challenge, forcing retailers to rethink their formulae for success and change attitudes towards control and risk. Traditionally retailers have lived and breathed control. Even where a new business opportunity required partnerships, instinct has been to stamp their mark all over it: to be the uncontested senior partner. Look at the move into financial services, where retailers reduced big branded banks to the status of own label suppliers. The first stage of the e-commerce battle ­ internet ordering and home delivery ­ fitted this control mould perfectly. If anything, home delivery services extend retailers' control over customer' dealings with them. But offering expert advice, stimulating ideas, the support of a community, or the help of price comparison service ­ information-rich content in other words ­ is a different matter. While retailers may be expert at attracting footfall, they are novice when it comes to attracting eyeballs. As Browett comments: "iVillage does something that we find very hard to do". To access this expertise, retailers are having to accept that old own and control' instincts may be counterproductive. E-commerce business models also demand that retailers set aside deeply ingrained assumptions and priorities, say about how to earn money. For the traditional retailer it's simple. You make your money on your margin. But for some of these joint ventures, this revenue stream is just an also-ran compared to things like subscription fees (TV channels), advertising and sponsorship (programmes and web sites), and transaction fees to third party e-commerce partners. Traditional mentalities are not enough . Retailers also need to recast their operational and investment priorities. The basic ingredient of success, for a long time, has been build the right stores in the right places with the right stock and the customer will come'. In the emerging multi-channel world, retailers need to look beyond their property portfolios: to attract, keep, and maximise, their share of "customer purse". This is a fundamental mindset shift: from a property-centric' approach to doing business to a customer-centric' one. To illustrate the point, Patrick McHugh draws two pyramids, one upside. If you imagine four bands going from the base of the pyramid to its tip, traditionally the bottom band, accounted for the greatest input in terms of time, mental effort and financial investment, was physical capital ­ stores, distribution centres and the like, followed by working capital, followed by employees, followed by customers. Now that pyramid is being inverted, he suggests. "The major cost of a traditional retailer was building the store. The major cost in the on-line world in its broadest multi-channel sense is acquiring and keeping the customer," says McHugh. That's a big shift in priorities, skills and attitudes. Coping with internet time' is another challenge ­ though perhaps retailers' traditional cultures better prepare them for this than other bricks and mortar businesses. Tesco's John Browett notes that language like "old economy" and "new economy" has a pejorative element where old means "slow, didn't get it, bureaucratic". But because the Tesco culture "has always been proactive, non-bureaucratic, we are compatible with those cultures". How to deal with risk is potentially much harder. Retailers are well-used to dealing with certain forms of risk which they understand and know how to minimise ­ such as choosing retail sites or store formats. landgrab is a different ball game, however. The new ventures could, literally, transform the shape of the business. Sainsbury's McHugh predicts, for example, that within a "planning horizon" of eight to 10 years up to 20% of Sainsbury's sales could be generated electronically. This is bet-the-business risk taking, not business as usual. But if the risks of getting it wrong are far greater, so is the uncertainty. As Browett says: "It's difficult to know whether it's going to be 2% or 50% or whether it is going to happen in three years or 20." Hence Tesco's approach of "setting up sensible businesses which we can very dramatically expand if demand takes off. "That's one of the drivers behind the new partnerships: risk sharing and flexibility. Traditionally, JV's bring together companies with clearly defined skills to tackle well understood markets to seize clearly identified opportunities. With dot.coms it's all about exploring unknown territory. That's why the partnerships that are springing up are "not the sorts of models you can just draw on a blackboard", says Roy Hakin, a partner in CSC consulting's retail practice. It's also why, within them, the "people factor" is much more important. Both parties also have to be much more prepared to share the risks, adds Hakin. Only if both sides share the risks will they also equally commit to making the venture work, he argues. "Without the one, you don't get the other." Browett puts the same point the other way round. Tesco chose a joint venture with iVillage rather than a marketing partnership, he says, because "to get the best value we have lots of detail to work through. And you would not, unless you were to share the upside". So as McKinsey's Ramsey points out, today's retailers are pursuing a familiar quest for share of customer' but they are having to tackle it from new angles. And the choice of these angles is crucial to the perception of their brands. While on-line ventures might have little negligible immediate effect on sales volumes or margins their visibility means they have a disproportionately strong impact on brand image. There are too many imponderables to know if anyone is on the right track. It depends how consumers take to interactive TV as opposed to PC-based e-commerce and phone-based m-commerce; on priorities consumers give to each element of the e-holy trinity of content, community and commerce; and how many consumers take to shopping on-line at all. But one thing is certain. Those who invest now are in the best position to seize the big opportunities first. {{COVER FEATURE }}