<<April 18, 2000
Hope Springs Anew for Web Retailers:
Study Shows Many Are Making Money
By REBECCA QUICK
Staff Reporter of THE WALL STREET JOURNAL
Don't sound the death knell for online retailers just yet.
Despite the stock market's recent trashing of Internet retail stocks, a new study shows 38% of Web retailers are actually making money. And a surprising 72% of catalog companies that have moved onto the Internet have Web operations that are now in the black.
Those are robust numbers for such a nascent industry -- especially one with a reputation for producing ever-increasing losses.
"The issue around a lack of profitability and the number of online retailers that will die has been grossly overstated," says James Vogtle, research director at Boston Consulting Group, which conducted the study in conjunction with shop.org, an online retail trade group with more than 400 members.
Still, the sentiment is hardly comforting for Web retailers caught in the stock-market turmoil. EToys Inc., for instance, has lost more than 90% of its market capitalization since October. Other Web retailers -- such as gloss.com -- are being bought up by more-established players.
And just last week, Forrester Research Inc., Cambridge, Mass., released a study projecting that most dot-com retailers would be driven out of business by 2001. That dire report predicts three waves of consolidation. The first will come this fall, when slowing sales growth forces a shakeout among companies selling commodity products like books, software and flowers. Next, Forrester predicts, will be the collapse of "the plethora of merchants selling undifferentiated products at razor-thin margins --including pet supplies, toys, and consumer electronics." Lastly, Forrester expects online merchants selling heavily branded, high-style products such as clothing and furniture to "remain stable until 2002."
The Forrester and BCG studies aren't as contradictory as they appear at first glance, and both could be helpful in handicapping which types of companies might make it.
'Scale, Service and Speed'
Forrester doesn't believe online retailing will become a dinosaur. But it does say that contenders will need to attain "scale, service and speed," and they will have to keep costs down. The firm expects that bricks-and-mortar retailers will be able to successfully leverage their skills and customer base, and that catalog hybrids will also survive. The Forrester study was based on a survey of 50 leading Internet retailers.
Read a summary of key findings from the study on Internet retailing
Time Warner Reports Earnings Loss, Columbia House's Weakness Is Blamed (April 13)
Inside the Airline Industry's Plan to Dominate Online Reservations (April 11)
Once-Welcomed Women's Sports E-Tailer Now Finds Venture Funds Drying Up (April 4)
Gap Web Site Begins Selling Pregnant Women's Apparel (March 27)
Adapting to Online Competition Hasn't Been Fun at Toys 'R' Us (March 26)
On the flip side, BCG puts a positive spin on its report, but believes that a shakeout among the online retailers -- albeit not a drastic one -- is already in progress. BCG believes the shakeout simply means the survivors will be healthier, says David Pecaut, a senior vice president at BCG. "It's washing away a lot of the people who had no sustainable business model and just had me-too concepts."
But even BCG was surprised at the number of online retailers who are already turning a profit.
Among Web retailers that have been around for at least a year, 79% of catalog companies, 50% of traditional bricks-and-mortar stores, and 36% of Internet pure plays now have profitable Web operations. The BCG/shop.org study is based on information from 412 of the leading online retailers, 221 of which agreed to answer a detailed questionnaire.
"Given the investment they're all making to build their businesses, that's pretty significant," says Mr. Vogtle.
The BCG/shop.org study sheds light on an industry for which there are few reliable statistics. The government just began measuring online sales late last year, and released only a bare-bones analysis of the industry. By BCG's estimate, online shopping will grow 85% this year to $61.1 billion. That is strong growth, but still less forceful than the 120% growth the industry saw in 1999.
Slew of Statistics
While data about online retailers' profitability -- or lack of it -- are often hard to come by, BCG appears to have had a surprisingly large number of retailers that cooperated with its survey. It asked for a slew of financial information -- from cost of goods sold to marketing expenses to customer services costs -- and then combed through the information to make sure it jibed with its own expectations.
BCG then followed up with phone calls to double-check any questionable data. Those who cooperate are rewarded: BCG provides free performance benchmarks that show how a retailer stacks up against a group of its peers. BCG keeps individual companies' data secret, however.
BCG's study notes that traditional bricks-and-mortar companies -- somewhat as expected -- tend to turn a profit more quickly than their Internet-only brethren. Because they already have established brand names-and plenty of customers they don't have to spend nearly as much money on marketing to bring in shoppers. In fact, the BCG study found, while upstart Internet-only retailers spent $82 last year to acquire a new customer, traditional retailers spent just $12 for every customer that shopped at its Web site.
Catalog companies appear to have had the easiest time of all making the transition onto the Internet -- not surprising, since they are the only ones with experience delivering goods directly to consumers.
Still, given the heady valuations assigned to Internet retailers, some sort of a shakeout was unavoidable, many analysts agree.
"Dot-com retailing and traditional brick-and-mortar retailing are difficult, low-margin businesses," says David Cooperstein, an analyst at Forrester Research. "Dot-com retailers got caught up in the tech craze, but they're not technology companies.">>
|
