Article applies to ZANY though not mentioned.
cbs.marketwatch.com
Infrastructure plays in e-commerce
Business-to-consumer stocks are faltering, analyst says
By Kristen Gerencher, CBS MarketWatch
Last Update: 12:09 PM ET Feb 10, 2000
MINNEAPOLIS (CBS.MW) -- Traditional retailers who contemplate going online find themselves in a precarious position: Join the e-commerce arena and risk cannibalizing their storefront businesses or delay a digital entry and risk losing market share.
"The market ... continues to move away from the consumer-related stocks and we're looking at more the infrastructure plays."
The seeming Catch-22 makes the so-called clicks-and-mortar strategy for retailers a "zero-sum game," according to Mitch Bartlett, e-commerce analyst at Dain Rauscher Wessels. Bartlett told CBS MarketWatch.com which business-to-consumer or B2C stocks are missing the mark and which look good for the long term.
CBS.MW: How have the stocks been moving?
Bartlett: The B2C stocks are not moving as much as I had expected. After Amazon (AMZN: news, msgs) reported, I thought there was a bit of a sentiment change back toward the B2C sector which had been beaten down so terribly, but we're not seeing that over the last couple of days. Amazon has run, but I don't think it's extending to some of the smaller stocks in that category.
In the world of direct marketing and advertising-related solutions, companies like Be Free (BFRE: news, msgs) are continuing to do exceptionally well. I think the market is very much focused on really high-margin, transaction-based businesses at this point. It continues to move away from the consumer-related stocks and we're looking at more the infrastructure plays.
CBS.MW: What other picks do you have in your universe?
Bartlett: We just picked up Netcentives (NCNT: news, msgs), which I think is an excellent company. Another company we like a lot is Exactus (XACT: news, msgs). Netcentives has a loyalty-based currency and is growing dramatically and has signed a number of new strategic relationships with the likes of American Express (AXP: news, msgs) and AOL (AOL: news, msgs).
Exactus is a company that does e-mail solutions, e-mail delivery of messages. It is now turning out a new service called target messaging, which has just received an important win here in the last week. Target messaging allows them to more closely target the recipients for a higher response rate and a more tailored message to the recipient.
CBS.MW: Which consumer plays are looking good right now?
Bartlett: Cheap Tickets (CTIX: news, msgs) just reported and they reported an OK number. The fourth quarter is a real tough period. But they also indicated that the first month of the first quarter was off to a huge start on the Internet site.
So Cheaptickets.com showed explosive growth in the first month of the first quarter, and I think that one looks pretty good. They have a market cap of about $400 million, but $150 million in cash and a real strong growth business.
CBS.MW: Any others look good for the next two to five years?
Bartlett: I'm a fan of Amazon, always have been. I think they're positioned really well here and I'm a real believer in their ability to produce a profit long term.
Other than that, I'm somewhat more cautious on EBay (EBAY: news, msgs) and EToys (ETYS: news, msgs) and Cyberian Outpost (COOL: news, msgs).
CBS.MW: Why the suspicion?
Bartlett: Not the suspicion. More ... just valuations right now. EToys had an OK fourth quarter, but I'm still looking for them to produce more revenues per customer added than they've shown so far, so I keep a "neutral" rating on those guys.
EBay, I think they are not showing the sequential growth necessary to support the market cap they have.
CBS.MW: Do you think we'll see a shakeout in the sector soon, perhaps more consolidation?
Bartlett: I think as we look at B2C companies the old adage is to buy them in January or February and sell them in November and don't take the Christmas risk. That's the sentiment I'm expecting to come back into these stocks. They were sold off during the holidays after a spectacular run going into the holidays.
As we go into the first and second quarters, I can see that there's going to be a lot of alliances and a lot of consolidation in the sector combining customer bases in non-competitive situations where people can get the leverage off of other people's customer bases.
As they do that I think you set the platform for these stocks to continue to do well over the next three to four months. They've been beaten up so much that I think they're really going to start to recover here in spring. Longer term, I'm a big believer in e-commerce.
CBS.MW: What's your impression of the hacking that's going on this week? What kind of investor confidence problems might come from it?
Bartlett: Any time you start a brand new business you're going to have some bumps in the road. I don't believe it's going to shake shopper confidence or investor confidence that greatly. They'll figure out a way to get around it.
CBS.MW: If that's not a risk, then what is?
Bartlett: The risk in any one of these stocks is just that there's a lot of competition that rushes in. You've got to be a leader, you've got to acquire your customers cost-effectively. You can't let that slip. Competition is the number one risk in each one of these categories.
CBS.MW: Is it the case that a lot of the brands that we're going to see have already been established? How effective is Super Bowl advertising, for example?
Bartlett: I think we've seen a large majority of the major brands already having taken root. I think it's very difficult for an Internet-only brand to come in at this point and unseat them.... We're going to see the emergence of a lot of bricks-and-mortar guys come to the Internet world with their brands and try to establish on that playing field but with already established brands.
How effective was Internet advertising? I think the B2C companies that we follow have always spent a lot of money for a customer. I believe this is early, this is the land-grab, they need to go out there and buy the customers and it's proving to be fairly expensive at this point.
CBS.MW: But effective?
Bartlett: Effective in growing the customer bases, yes. Expensive, yes.
CBS.MW: Are there any bricks and mortars lining up that you know of?
Bartlett: I think every brick and mortar is lining up. One of the things you hear so much these days is there's going to be a massive move toward clicks and mortar, and I'm somewhat suspect as every retailer in America moves toward an Internet strategy. Basically, retailing is a zero-sum game, and if everyone establishes an Internet site then I think that does a lot to cannibalize the sales from the existing customers from their store bases.
I'm not so sure clicks and mortars are going to be so great because I see the negative leverage associated with negative comps at the store level detracting as much as the positive jump that you might get from an Internet play.... In other words, all retailers jump in. They're basically just taking their storefront customers and making them Internet customers and the result is they have less sales out of the stores and the negative leverage associated with that is pretty disastrous.
CBS.MW: Have we seen any failures arise from clicks and mortar?
Bartlett: No, it's too early... I can't think of anybody struggling....
The thought process here is if you have 100 customers coming into your store and 10 of them only go to the Internet, then you only have 90 customers coming into your store and the negative leverage associated with those negative comps -- comp store sales declining on that bricks and mortar -- is I think proportionately higher than the positive benefit that you get from the 10 guys going to the Internet.
CBS.MW: Do you see any bricks and mortars holding out for this reason alone?
Bartlett: Nope. I think you have to play in the marketplace. If you don't come to the Internet I think you have an even more difficult time because there will be customers. I think we're going to see over the next five years a lot of rationalization about the retail space out there as more and more customers go to the Internet.
CBS.MW: Rationalization being?
Bartlett: Closures of square footage.
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