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.
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."
Write to Rebecca Quick at rebecca.quick@wsj.com |
