Online retailing has come a long way since the go-go years of the 1990s: it generated $90 billion in revenues for US retailers in 2004, compared with just $8 billion in 1998. To study how the online strategies of today's successful retailers reflect this maturation, McKinsey analyzed the 100 largest direct retailers in North America.¹ We found that direct retailers with physical stores captured 52 percent of Internet sales in 2003, while those without stores garnered just 31 percent.² For each group, two broad strategies appear to be most successful. Together, the four models we identified (exhibit) have lessons for all retailers.

Retailers without stores do well as either "efficiency machines" or "niche leaders." The first approach is best for sellers of relatively low-margin products like CDs, books, or computers, because the Web provides the global reach these companies need to gain scale. Efficiency machines—such as Amazon and Dell—invest heavily in brand marketing, innovative Web sites, and highly efficient sourcing and fulfillment processes. These investments create massive fixed costs, often running into the hundreds of millions of dollars, so efficiency machines must generate annual...