E*Trade Group Inc.: Class of 1996

Four years ago E*Trade Group was considered a threat to traditional retailing. Now the online stock brokerage is throwing itself into that business

When online financial company E*Trade Group Inc. first graced the Inc. 500, in 1996, it represented a bold approach to company building -- one that seemed to threaten the very existence of traditional businesses. In its 1997 secondary-offering prospectus, E*Trade confidently declared, "Consumers are showing strong preferences for transacting certain types of business ... electronically, rather than in person or over the telephone." The document's purpose was to convince investors that E*Trade was the company poised to capitalize on consumers' changing buying habits.

But that was then. Today the online business has decided there is little virtue in remaining all virtual. This winter the company plans to open an old-fashioned retail outlet on Madison Avenue in Manhattan. Billed as a glitzy "concept store," E*Trade's midtown haven will feature touch-screen, quick-trading kiosks; reams of marketing propaganda; and helpful salesclerks. "Pushing our brand into the real world is the next evolution for E*Trade, on track with what we've been doing for the past two to three years," explains Michael Sievert, chief sales and marketing officer for the Menlo Park, Calif., company.

E*Trade's maneuvering suggests some surprising ways that low-tech, traditional businesses may be cashing in on the latest evolution of E-commerce business models. Consider the case of fellow former Inc. 500 winner the Staubach Co. (#224, 1988). Founded by Football Hall of Fame quarterback Roger Staubach, this commercial real estate business is as oldfangled as they come. The Staubach Co. helps the Gap and Disney negotiate leases for prime retail, call-center, and office space. Staubach, based in Dallas, has always had annual growth in excess of 20%. Yet this year is the company's best ever. Part of the reason for that is a surge in business from one distinguished customer: E*Trade.

The Staubach Co.'s growing relationship with E*Trade is remarkable given that the former is headed by a CEO who admits that he has yet to master some of the basics of technology. "I read that if you still do E-mail through your secretary, that was a big red flag," Roger Staubach says. "I feel guilty about that."

Still, what he lacks in tech savvy he makes up for in good salesmanship. "We're trying to be real creative, working with companies that might be the next Microsoft," he says. "We're involved with a lot of Internet companies right now, and who knows where they'll be in 10 years?"

Given E*Trade's plans, it appears that the company will be everywhere. Though its Manhattan foray is the most vivid illustration of its newfound respect for the physical world, it's not the only one. E*Trade has announced plans to open "E*Trade Zones" in perhaps as many as 200 SuperTarget stores across the country. Staffed by E*Trade retail clerks, the first 400-square-foot venue debuted in Target's Roswell, Ga., outpost in September. "We're headlining it as 'Stocks with Socks," jokes Target spokesperson Susan Eich. "We think it will be really popular."

The reason E*Trade is throwing itself into learning the grubby basics of retail is that like many dot-coms, the company is struggling post-bubble. Its stock price has fallen below $15, from a high of $72 just prior to a two-for-one split 18 months ago. And the company trails competitors Charles Schwab and TD Waterhouse in such key metrics as assets under management and average account size, even though E*Trade spends significantly more than its rivals do on marketing and advertising.

"Pushing our brand into the real world is the next evolution," insists E*Trade's sales and marketing chief.

Some analysts believe that E*Trade trails its opponents precisely because it has no real-world presence. "TD Waterhouse and Charles Schwab already have branches, and both of them are vehement that most of their assets have come through their physical locations," reports Scott Appleby, senior analyst at Robertson Stephens, the San Francisco investment bank that underwrote E*Trade's initial and secondary public offerings. Appleby is particularly enthusiastic about E*Trade's alliance with Target. "People still want to have a physical location to bring their assets to, and E*Trade has a chance to expand in a way that's less costly because they can team up with Target," he explains.

Can't picture the average Target shopper buying 1,000 shares of Enron while perusing Michael Graves clocks? "It may sound counterintuitive, but because Target's traffic volume is huge and because they have a lot of stores in highly affluent places, they really do reach in a big way the large number of affluent customers E*Trade wants to attract," Sievert says.

Perhaps Sievert's enthusiasm is justified. After all, his company's core competency may not be nailing E-commerce so much as evolving from one business model to the next with aplomb. Founded in 1982 by Bill Porter, E*Trade started out as a service bureau providing automated online securities-transaction services to various brokerage firms. A decade later the company decided to tackle the consumer market, providing online investing services for AOL and CompuServe users. And in 1996, E*Trade as we now know it debuted on the Web and on the Inc. 500. Christos Cotsakos, the former co-CEO of AC Nielsen, took the helm of E*Trade in March of that year.

At the time Cotsakos's move was big news because working at a dot-com was not yet in fashion. "I called a bunch of my friends," Cotsakos told Inc. in 1997, "and they all said, 'Don't do it. You'll be out of the mainstream. You can't command the big armies anymore." Now he commands a workforce that has grown to about 3,500.

Though the date of E*Trade's grand opening in Manhattan hasn't yet been scheduled, the company has big plans for the 30,000 square feet it will soon inhabit. Sievert says he's worked with several retail consultants to create a lively interior. The company will certainly need something special to draw shoppers away from the well-traveled Sony Plaza that's right next door. "It's really a fantastic piece of real estate," says Sievert of his two-story, glass-front shop.

If E*Trade's Madison Avenue gambit proves to be a winner, expect to see a fair amount of copycatting. So says Hugh Kelly, a senior executive at the Staubach Co., who negotiated E*Trade's New York City lease. He predicts that retail will be the next big dot-com fad. "Super Bowl ads used to be the big thing, but they were forgotten by most people a few minutes later," Kelly says. "But a retail store is pretty permanent -- it gives you a position to fall back to."

Mike Hofman is a staff writer at Inc.

Please e-mail your comments to editors@inc.com.

To learn more about the Inc. 500, visit the Inc. 500 area.

Published on: Oct 15, 2000