To offset my longs, I started looking for offsetting hedges, and one conclusion that seems to be ringing louder is that the business-to-consumer (B2C) sector is losing its wind as investors begin to tire of non-stop losses, fierce price-cutting, and an overwhelming number of competitors.
To review briefly some of the most important tenets of Competitive Strategy, we look at the five key structural points that determine the success of an industry:
1. Buyer Power
2. Supplier Power (no comment here)
3. Threat of substitution
4. Barriers to entry
5. Intensity of rivalry
Looking at the B2C sector from these points, aside from the massive Amazon.coms of the world, I would judge that the recent flood of small players would tend to have only marginal buying power, meaning that they will have almost little power to leverage for themselves a more attractive purchase price for their supplies.
As for the threat of substitution, if the recent 'dot-com Bowl' (i.e. Super Bowl) didn't make you aware, there are far too many players in the field selling the same things, and each of them at this stage can only compete on price due to their undifferentiated nature. No brand-name loyalty, no premium price, and building a brand entails a considerable amount of marketing expenses. Just take a look at Amazon.com. Not many companies at this stage of the Internet boom, especially for the B2C field, can weather such a massive drain of cash for a marketing blitz. The market just doesn't have the patience for them anymore.
And regarding the intensity of rivalry, how much more intense can it get when Buy.com sells some of their merchandise at cost?. The company for a while had only 1% margins. That 1% is the room you have to make your company profitable, and that's before selling, administrative, and other general expenses and taxes. It can't be done.
The consumer will win out, but the dot-com B2C business will either have to raise prices to survive, or go out of business as they cannibalize themselves into bankruptcy.
The game can only go on for as long as their stock prices remain high and healthy, because if they're not getting profits from their customers, then they have to get more cash from the capital markets. So in this case, my theory of "Price affects price" comes into play; the lower the stock price, the fewer the options the company has of raising cash, and the tighter the noose gets, the more averse investors become, which causes yet another decline in stock prices. It's not a virtuous cycle--it's a death spiral.
On barriers to entry, there are almost none. Some entrepreneur in China (is that an oxymoron?) can set up shop and compete side by side with an internet retailer based here in the US. The internet virtue of instant, worldwide market exposure is also a two-edged sword, as you also get instant, worldwide competition in your space.
So that's B2C in a nutshell. If history repeats itself, almost 80% of the internet companies we know today will have either gone out of business (bankrupt), or get bought out. Just as there were hundreds of aviation companies at the birth of aviation and similarly hundreds of automobile companies after the car became invented, so too will the number of internet companies narrow.
For my personal portfolio, I would select companies from the B2C space where competition is most fierce, sentiment most weary, and excitement non-existent. I would seek the technically and fundamentally weak issue with stock prices breaking new lows or those that have just fallen off a base. Search the message boards for poor sentiment; that'll help control for the hype factor that can often get your head ripped off when shorting net stocks.
At this stage of the market, if they're not moving higher with the crowd, then they'll probably get even more burned in the event of a market decline.
Rainier |
