Niche retailers once again thriving on Web

A decade afterwards pets.com and a string of other early Internet specialty retailers collapsed, a new wave of startups -- enabled by the power of cloud computing, advanced delivery systems and deep social relationships with clients -- is shaping e-commerce.

From diapers and eyeglasses to pool tables and, yes, pet products, entrepreneurs are developing specialty businesses to compete alongside one-stop shopping giants like Amazon.com and Walmart.com.

New generation -- Internet retail 2

"There is a new generation -- Internet retail 2.0," says Wharton marketing professor David Bell, noting that afterwards the 2000 dot-com bust, activity in online specialty retailers dried up as financing became difficult, or impossible, to get and industry executives struggled to evaluate failed business models. Now, engineers have dramatically reduced obstacles to creating Web-based businesses, and entrepreneurs have learned more about how to capture online consumers.

Online sales continue to outpace overall retail spending growth. In 2010, U.S. e-commerce sales totaled $165.4 billion, up 14.8 percent from 2009, the U.S. Department of Commerce reported. Looking forward, eMarketer, which tracks the digital marketplace, estimates online sales will rise to $188 billion in 2011 and $269.8 billion in 2015. According to eMarketer, 87.5 percent of U.S. Internet users over age 14, or 178.5 million people, will browse or innovation products online this year. Of that group, 83 percent will make an Internet purchase in 2011.

The Internet lends itself to specialty retailing because it allows companies to offer huge product portfolios without having to stock inventory in brick-and-mortar shops. Wharton marketing professor Stephen Hoch notes that Amazon itself began in 1994 as a niche player selling books only. Now, the $34 billion company markets everything from fine jewelry to industrial supplies.

According to Hoch, improvements in computer innovation and graphics allow consumers to get a better sense of what they are buying online.

Jeffrey Grau, principal analyst at eMarketer in New York City, predicts that social connections will continue to drive growth for Internet retailers as mobile innovation expands. "There are a lot of creative business models coming out all the time that involve social commerce or mobile commerce. There's a lot of research going on in e-commerce."

He uses the example of a consumer who buys a specialty brand of gentle laundry detergent for people with sensitive skin. That person is probably for all that buying name brands just as Tide to meet his or her other needs. A business based on the specialty detergent could never scale up enough to capture significant sales from the major brands, Fader says. Online specialty retailers can be successful if they understand their limitations, and construct logistics and marketing operations to suit that size.

According to Wharton marketing professor Leonard Lodish, diapers.com retailer Quidsi, founded in 2005 by Marc Lore and his business partner Vinit Bharara, has the important characteristics for an online specialty retailer today -- strong execution and lavish customer service. Lodish, who served on the board of Quidsi earlier its acquisition by Amazon, says the firm developed highly efficient distribution networks revolving around state-of-the art information research. Its warehouses are equipped with sophisticated robots handling automated fulfillment. Just in case, Quidsi developed a software program, called Boxem, that calculates the best sized box for any individual order, saving on shipping and other costs.