Will e-tail arms cling to the parent for protection and wisdom or go it alone in order to flourish in an atmosphere of dynamic reinvention asks Belinda Gannaway The economists might not have liked it. Why expensively cannibalise your market on a whim, they asked. But the multiples did it anyway and the large high street grocers have tiptoed into the new economy. So their e-operations are up and running, but what happens to them now? While the debate over the fortunes of old versus new rumbles on, should retailers seek to capitalise on their offspring by setting them free on the thermals of the market, unhindered by corporate ties and restraints of old economy thinking? Perhaps it makes sense to distance the disruptive upstart as far as possible from the staid but profitable parent. Or could there be more to be gained by keeping the e-baby close to hand? There are benefits and drawbacks with both models. But, critically, there is as yet no blueprint. This is the experimentation age and, in the US at least, everything is being tried. As Asda @t home md Octavia Morley puts it: "A lot of retail is about evolving. But this is about making it up as we go along." Investors like the idea of the internet toddler being disentangled from the apron strings. It's all about resource allocation. An existing business "will never give a new business enough money to truly succeed," believes Karl Haller, principal consultant at PricewaterhouseCoopers in New York. And why would they, when they have a proven business model through which to generate highly satisfying returns, where revenue and profit streams flow in a reassuringly predictable fashion? Until very recently, pure play e-tailers were deemed more adept in the new marketplace than their bricks and mortar counterparts. But multiformat is the way ahead. And the e-business arms of traditional retailers will need to be not simply as good as, but better than, the pure players. And that costs. A lot. Despite seeing revenues double to £36m, Amazon last week reported a loss of £76m. But Investec analyst David Stoddart, for one, is unconvinced Tesco and Wal-Mart et al are playing the separation game simply to raise cash. He sees it much more as a people issue. E-tailing requires a skill set, risk analysis and culture a million miles removed from anything seen in traditional store groups. Wal-Mart has spun off its e-tailing operation, creating an independently managed company based in Silicon Valley rather than Bentonville. It wants experts on board to take the business forward, so it went to where they were. And in the process, it's picked up some venture capital backing from Accel Partners. Not, Stoddart believes, because it needed the money ­ it could well have sourced it elsewhere and quite likely cheaper ­ but because it wanted the brainpower. "Venture capitalists don't just bring money. They bring contacts and expertise, and that's critical," he says. Dutch giant Ahold has taken the acquisition route to knowledge commandeering in the US, buying up first US Foodservice then Peapod. The potential for any of the UK multiples achieving this in the UK is slim ­ only a handful of independent e-tailers exist. The supermarket sector has never had an easy time attracting high level recruits and, increasingly, a separate operation is deemed vital to do just that. When internet start ups are offering big bucks and share options to win staff, why would those brains be attracted into the grocery aisles, virtual or not? Ira Kalish, director of global retail intelligence at PwC, says: "A very large part of the incentive to spin a new business arm off is to stop losing your best staff." It's a double pay off ­ increasing the sex appeal of a business and the opportunity to offer stock options. "In this business environment, with young hotshots wanting to make money as quickly as possible, it's an inevitable thing," Kalish says. Inventive companies in the US are looking at ways to allow senior employees to share in the profitability of the business rather than a straightforward hiving off. PwC is doing just that and it's happening all over. In the US, mixed businesses are offering equity to their e-employees, even though colleagues in the bricks and mortar end don't get the same treatment. It's deemed an internal carve out rather than a spin off, and poses a host of challenges for the human resource function. Stoddart foresees UK retailers going down the same route but doesn't think it's a great idea. "The returns are too far distant and go through too many different factors to make it a motivational tool," he believes. So even when the business is run as a single unit, the culture and rewards can be very different. And the culture of an e-venture ­ more than just an e-enabled operation ­ needs to be different. Even a year ago, many companies farmed responsibility for e-commerce on to the IT department, seeing it as a way of tightening existing business functions. But e-business is new business. It's about the future direction and success or otherwise of the organisation. UK retailers now willingly flaunt their e-commerce directors and e-commerce certainly needs to be a board issue. But simply changing the IT director's title does not alter the way they think. The speed of change in e-business needs a more fluid, feisty atmosphere. There's no point adding an e-element to your business if everything that supports it stays the same. And that is increasingly what UK retail operations are finding. Asda @t home's Morley runs the operation from the Watford depot. That proximity to the coal face is critical to the new business, she believes. "People need to be prepared to take risks. We need to evaluate our actions every week. We need to be prepared to say that didn't work, let's try something else'." A new environment is also more conducive to a fresh partnership approach. One thing online ventures need is lots of online buddies, and that is something venture capitalists can bring to the party. It's much easier to set up a partnership deal ­ for instance between Tesco.com and Amazon ­ if that deal can be strictly delineated within the e-operation rather than floating somewhere within the plc. Booker is in talks with a banking partner to offer online credit and insurance services. Enterprises like that find it more difficult to flourish in the confines of the conventional business, executive director in charge of e-commerce Charles Wilson believes. In management-speak, new businesses provide new opportunities to think outside the box, to challenge norms, and find new ways of doing things. But the benefits of going it alone are not boundless. Tesco, which last month spun off and rebranded its internet business, has backed off from any flotation, seeing its wholly owned subsidiary Tesco.com as an "integral part of the business" ­ not least because of instore picking. Not so Dixons, which floated its Freeserve ISP ­ now a FTSE-100 member in its own right. So a flotation of any of the internet arms of the supermarket businesses may not be on the cards for some time. Asda @t home's Morley does not see the case for any further separation between the on and offline ends of the business, believing the balance "which allows us to tap into the vast expertise in Leeds" to be just right. For the bricks and clicks retailers, the most favourable route looks like the creation of separate divisions or units operating under one core corporate umbrella. The challenge will be keeping the two parts of the business working sufficiently at arm's length but still presenting a cohesive front to the consumer. PwC's Kalish believes a pitfall is the failure to integrate the store based operation into the internet business. "That's a good way to offend customers and lose them permanently," he warns. Barnes and Noble, the store based book retailer in the US, set out out mimic the success of Amazon.com. But it failed to leverage its store infrastructure or its multi-million customer base ­ its opportunity to offer something Amazon didn't. What is needed is an end to end approach. The organisational challenges of being a multichannel are sizeable, but the rewards immense. Booker's Charles Wilson believes there are "pros but real cons of isolation". "Competition and petty politics" should be a real concern between parent and spin off, he believes. The Toys'R'Us experience supports his fear. Store managers effectively blew up the group's global e-commerce strategy which threatened performance based store targets and bonuses. Booker is developing a separate head office for its e-commerce activities away from the Wellingborough HQ but will keep it closely tied into the company's core objectives. "Plugged in isolation is a good way of developing at the right speed," Wilson says. "But the new activities have to fit into the core business. We don't want cash and carry customers getting frustrated if they have a bad experience on the net." E-ventures that succeed find new ways of delivering products to the consumer which have an inherent benefit to the consumer and, hopefully in the long term at least, maintain profit streams for the retailer. If existing business functions within an organisation can manage this, so much for the good. But, for the most part, this is not the case. While companies must look at e-implications cross-departmentally and at every level, a totally new business enterprise needs a new way of thinking. So a new business unit often makes sense. Although they've taken their time, the signs are that UK multiples are heading in the right direction if they're to comfortably straddle the old and new economies. It remains to be seen how much toddler taming will be done in the months ahead. {{COVER FEATURE }}