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Dot-coms' script has tragic elements
By Lamont Wood
Special to the Tribune
July 10, 2000
The curtain has gone down on Act I, and for a lot of electronic retailers there won't be an Act II.
E-tailers who have already exited the stage through mergers or plug-pulling include video vendor Reel.com, the inexplicably named Boo.com (sportswear) and Violet.com (a specialty boutique), and the rationally named Petstore.com, Toytime.com and Toysmart.com, whose Web site now includes guidelines for sending job offers to former employees.
Those still on stage are nearly drowned out by the noise of falling stock prices and cratering IPOs, and rumors of layoffs and cutbacks. It has been quite a show. And the audience is outraged.
Rarely have the economic gaffes of a few annoyed so many. Investors seeking reasons for the collapse don't have to look far. Industry analysts and market researchers have a list right on the tip of their tongues, and reasons fall into some startlingly simple categories:
Disdain for economics.
As a child, perhaps you put up a lemonade stand. Did you price the stuff so as to make a profit ? Then congratulations—you did better than a lot of dot-coms.
An April report from Forrester Research in Cambridge, Mass., noted that less than 40 percent of the dot-coms were aiming to be profitable before 2002, many would not commit to any timetable, and the concept of profit was widely seen as an impediment to the real business of establishing growth and market dominance. A third of them did not know or would not say where the necessary funding would come from, while others expressed a touching faith in the stock market or venture capitalists.
"Everyone thought that subsequent financing would not be a problem, and were shocked to find that the stock market would not support a secondary offering and that private investors had become skeptical," said Ken Cassar, analyst at Jupiter Communications, a research firm in New York.
"There are hollow dot-coms with highly promoted products they can never make money on," said Dave Sutton, vice president at the Atlanta office of Chicago's Inforte Corp., a management consulting firm. (Sutton has been involved in about a dozen dot-com start-ups—all still around, he noted.) "They are losing sight of the fact that strategy is about getting a sufficient return on investment, and if you don't make it, you are going out of business."
Nor is there any point in expanding a business when it loses money on each transaction, he added. "There is a lack of executive maturity [necessary] to create a balance and shut down non-productive sites," Sutton said.
Cassar spoke of dot-coms spending more on advertising than could have been made in profits from their market niche, and of multiple cases where a half-dozen start-up dot-coms are vying to dominate a segment that can logically barely support one such vendor.
"Hundreds of millions have been invested in the on-line grocery market, despite its small size, geographic dispersion and thin margins," he said.
Vendors who sold goods at or below cost often planned on making up the difference by selling banner ads on their sites, projecting that vast numbers of visitors—"eyeballs," in Web jargon—would be drawn there by the good deals.
"Banner ads turned out to be one of the most unsuccessful ways to advertise; people just see them as a distraction," Sutton said.
Fetish for brands.
Perhaps you can remember some of the 17 dot-com ads that ran during the Super Bowl. If you can remember what company the sock puppet represented, congratulations, you have brand awareness. Now, can you name any specific products that company was selling? No? Well, that's merchandising—or the lack of it.
"Merchandising still matters, as opposed to just building a random brand name," said David Cooperstein, analyst at Forrester Research. "A brand by itself is not an asset, until someone buys your company. Meanwhile, you have to tell people what you are selling."
Parading eyeballs.
The whole idea of focusing on getting people to come to the site, to have big numbers to show to advertisers, assumes there are an unlimited number of new users out there, said Qaalfa Dibeehi at Cyber Dialogue Inc., a customer relationship management firm in New York. Even if there were, the approach is based on the old passive-audience broadcast advertising model, which began dying when the TV remote controls first allowed channel surfing, he added. E-tailers should embrace the Web's ability to let the consumer talk back, and find ways to personalize their offerings, like any smart clerk in a clothing store, he said.
"When someone comes to my site, I should do everything in my power to establish a conversation with him," Dibeehi said, adding that, so far, only a handful of vendors do that well.
Misjudging the audience.
"Too many sites have focused on the early adopters as their customer base," said James Vogtle at the Boston Consulting Group in Toronto. "That was appropriate a year ago, but now the Web is a mass market, not a market of tech-savvy geeks."
The early adopters were forgiving of complicated sites and performance flaws, but mass-market consumers are not. Instructions need to be simple, and if the item is in stock when they click the order button, it better still be in stock when they check out, he said.
His firm found that 28 percent of on-line purchase attempts failed—the buyer could not complete the transaction.
"We don't know what the rate [of failed attempts] would be in face-to-face sales, but my gut feeling is that it is a lot less, since the clerk is there to help. But the impact of failed attempts is dramatic," Vogtle said. "After a failed attempt, 23 percent stopped buying at the site, 6 percent stopped buying at the vendor's off-line stores, and 10 percent gave up all on-line buying."
Drop shipping.
That's an arrangement where goods are shipped directly to the buyer from the manufacturer's warehouse, carrying the shipping label of the Web vendor, who thus doesn't need an inventory, a warehouse, or even a shipping department. He just takes orders. With drop shipping, sources complained, any clown can become a mass merchandiser—and sometimes has.
"With drop shipping, the retailer does not have full control over the customer experience that is necessary for long-term survival," Cassar said. "When there is a problem, there is confusion over who is responsible."
Digital segregation.
Even established retailers have been known to launch pure dot-coms, separate from their brick-and-mortar operations, in order to avoid having to collect sales taxes. But those who offer both channels experience increased revenue, since by doing so they are catering to people who like to shop, Vogtle said.
With two channels (stores and the Web) they spend twice as much, and when you add a third (catalog sales) they spend 2.8 times more—and that should outweigh sales tax considerations, he said.
Not paying the employees.
You can pay people a handsome salary to work 40 hours a week. Or you can offer them pieces of paper—stock options—and they'll work 80 hours a week in hopes of becoming millionaires. But falling stock prices have erased many of those hopes.
"They thought the employees were loyal to the company instead of to the IPO," Cooperstein said. "But now the employees are starting to leave in droves."
Looking back, it's all history to Sutton of Inforte.
"In the beginning, like in 1994, there was a lot of constrained and thoughtful learning," he recalled. "Then, in 1996 and 1997 things took off and there was a belief that the Web was free land that you could stake a claim on. But they found it was raw land, that needed improvements, and that cost money.
"Then there was a perception that the more people who came to your land the more value it would have down the road. In many cases, it was an artificial business model." |
