An article from the New York Times on the B2C space that seems to confirm my earlier remarks:
nytimes.com
Investors Start to Take a Harder Look at Dot-Coms' Performance
By LESLIE KAUFMAN
The stock of Mothernature.com, an Internet retailer specializing in natural health products, has lost nearly half its value since the company went public in mid-December. No wonder that its chief executive, Michael Barach, recently announced plans to try something new.
Last year, he spent $30 million on marketing but attracted fewer than 250,000 customers. This year, he plans to link up with health maintenance organizations, seeking promotion by the HMOs in return for discounts to their members -- a move he hopes will shave 10 percent off his advertising budget while providing a steep jump in shoppers.
Though Barach is loath to acknowledge that investors forced his hand, he readily acknowledges that the time for Web retailers to throw money around first and justify it later is coming to an end. "The year 2000," he said, "is the year that e-commerce companies have to prove their business models work."
For almost a year, Internet companies have had a sweet ride from investors, public and private, willing to accept enormous losses on promises of great future returns. But signs indicate that the climate of unlimited forgiveness is changing, that imagined future earnings may not justify sky-high stock prices.
Though the buzz this week about America Online's plan to acquire Time Warner can make everything electronic seem ascendant, AOL is a relatively old Internet company with steady profits. As inspiring as the triumph by AOL's leader, Steve Case, may be to them, many executives of younger Internet companies find themselves under a microscope.
Dot-coms, particularly those that serve consumer markets, are suddenly feeling the pressure to account much better for how they spend dollars. Tighter capital flow is already affecting everything from advertising strategies to the supply chain, and it even means that e-commerce companies will start developing short-term game plans aimed at turning a profit.
The financial markets have signaled a tougher stance in the last two weeks. The Nasdaq has been depressed since the beginning of the year, in part because investors have been selling off e-commerce stocks. Amazon.com, the Web's mightiest and highest-profile player, delivered strong sales growth over the holidays, but its share price was hammered when it announced that fourth-quarter losses would not shrink. Value America, once a $2 billion stock market darling, announced last week that it would dismiss half its staff to stop cash hemorrhaging.
"The market is becoming less and less willing to fund third- and fourth-tier players in sectors where first-tier players have been established," said Henry Blodget, an analyst with Merrill Lynch who made his reputation by being outrageously (and correctly) bullish about Amazon's stock. "It will make capital much more difficult to get, where it has been virtually free before."
Most investor scorn is being focused on virtual stores that sell products directly to consumers; Bluefly.com, a clothing retailer, and Drugstore.com are among such companies that are down for the year. Analysts say that that market is overcrowded and that the explosive growth in new Internet users is slowing.
"Once it was a green pasture, and now there are 150 cows all competing for five blades of grass," Blodget said.
In addition, disappointments were plentiful this holiday season as dot-coms spent cash by the bucketloads but did not produce proportional customers or revenue. And merchandise returns, which can eat up 10 to 15 percent of such sales, are still being processed.
Even companies that delivered the requisite exponential growth in sales are being punished for falling short in areas that have long been the bane of traditional merchants. Among the factors that angered investors at Amazon, for example, was its overstocked inventories for Christmas; much of that extra merchandise will now have to be sold at steep markdowns, which could compound losses.
"This holiday period has marked a very important transition for how Wall Street views e-commerce companies," said David Readerman, director of Internet strategy at Thomas Weisel Partners. Web site traffic growth used to be the only measurement that mattered for the virtual retailers, Readerman said, "but now they are going to be held accountable to the same level of service and planning as traditional retailers."
It is not just the public markets that are beginning to watch the bottom line. In Silicon Valley, e-commerce companies that sell directly to consumers are suddenly finding that they have lost luster as venture capital firms madly chase the next hottest thing -- like companies that solve Web infrastructure problems and e-commerce companies that sell primarily to other businesses.
"It is 50 to 100 percent harder to get backing" for sites that sell to consumers than it was six months ago, said Fred Grauer, general partner of Angel Investors, a premier venture capital firm. He says venture capital is shifting away from the business-to-consumer market because start-ups have to spend so much on advertising just to make their names known.
Some fallout is already apparent. Cookexpress.com, a fancy food delivery site, has suspended operations until new financing is available. And in recent weeks the crowded online-beauty market saw a major contraction, as better-financed sites gobbled up weaker players. Jasmin.com, a new fragrance site, for example, was bought by Ashford.com, a luxury goods site. Beauty.com was snapped up by Drugstore.com.
Of course, with more venture capital than ever chasing business opportunities, the well will not run completely dry. But even those consumer Internet merchants who are getting financing are finding that they must hand over a larger stake for the same amount of cash. "In absolute terms it is not hard to get money, but you have to give away more of the company to get the $20 million," said David Cowan of Bessemer Venture Partners, a firm based in Menlo Park, Calif., that has backed players like eToys and Bluenile.com.
And as the e-commerce companies come back from Christmas looking for new infusions of cash, they are finding that venture capitalists are asking hard questions about issues previously reserved for paleolithic retailers -- issues like gross margins, inventory control and the efficacy of an advertising dollar.
"If they spent $30 million on advertising on the national TV networks," said Jim Breyer, managing partner of Accel Partners, "instead of proven measures for getting customers like cross-branding and cross-promoting, we would be highly concerned."
Advertising companies say they are sensing a shift in the wind. "It seemed crazy all the way through December," said Brian Hurley, a principal at Grant, Scott & Hurley, a San Francisco-based ad firm, which gets a majority of its revenue from dot-coms. "Then, like a clear day after a storm, in January people were saying, 'Hey, we spent a tremendous amount of money but what did we get?' We don't get the sense they will cut their budget in half, but they will be looking for the return that much sooner.
"One client has said we are not as interested in a national presence, but want to concentrate on five or six markets, which follows a more traditional retail route," he said.
It is unclear what the market disenchantment with e-retailers portends for other areas of the Web that are hot. Virtual merchants that sell products and services exclusively to other businesses are now favored by investors who see that model as underserved and potentially more safely lucrative. But many analysts say that this relatively young group of companies will inevitably face more scrutiny. "In six months to a year from now," Readerman said, "something will happen in business-to-business that will disillusion investors there, too."
Another sign of the changes in Silicon Valley's thinking about consumer e-commerce companies is the red-hot popularity of partnerships with big-name traditional retailers. "Before, it was enough to be smart going after an attractive niche," said Mark Goldstein, chief executive of Bluelight.com, a joint venture by Kmart and Yahoo. "Now everyone wants a multibillion-dollar strategic partner throwing their heft behind the deal."
The advantages to such a pairing, once shunned as prehistoric thinking, are now obvious. Since big retailers are already household names, joint operations can attract customers at a fraction of the cost of a start-up. In addition, big retailers can buy in volume and have sophisticated supply chains that enable them to purchase inventory at much less than tiny stand-alone dot-coms can.
Breyer, whose firm, Accel, signed a deal to help run Wal-Mart's site, praised his new partners for having "very significant buying capabilities, very strong distribution and warehousing expertise, and a phenomenal worldwide brand."
He added, in what might be a neat summation of the new current of thinking for the industry: "The goal for Wal-Mart.com is to build a profitable leading business. It is not a money-losing proposition." |
