E-tailors Pricing, Costs, and Accounting Gimmicks 201
June 24, 2000
"Bargains on Web Fade as Retailers Push for Profits"
By LESLIE KAUFMAN
Shoppers browsing the Internet last
Christmas could find models of
popular Tag Heuer watches for $325 to
$1,000, or roughly 35 percent below their
suggested retail price, at Ashford.com.
Since then, the site has raised prices by
more than 20 percent, boasts Kenny
Kurtzman, Ashford's chief executive.
Bragging about price increases may seem
crazy, but Mr. Kurtzman, like so many of
his Internet brethren, is desperate to
reassure worried investors that Ashford,
which lost $72 million on $42 million in
sales for the fiscal year ended March 31, is on track for a more
sustainable future. And their desperation appears to be bringing an end to
the Internet bargains beloved of many consumers.
Internet retailers are in big trouble. Stock prices have skidded, venture
capital has dried up and the public markets have closed their doors to
those who cannot demonstrate how they will be profitable soon. Small
companies like Toysmart.com and Boo.com have been sold or gone out
of business.
Even the industry giant Amazon.com appears increasingly fragile. Lehman
Brothers released a scathing report Friday that called Amazon's situation
"weak and deteriorating" and advised investors to avoid its bonds. The
critique sent the retailer's stock plunging 19 percent, wiping out the last of
its gains since December 1998 and punishing other Internet stocks as
well.
To please testy investors, dot-coms are trying numerous tactics --
including employee layoffs, reconceptualizing their businesses and raising
advertising and association fees -- to show they can eventually move into
the black. But because many Internet product prices were once set
beneath cost to lure new customers, the easiest and most obvious step
has been to bring those prices back to the real world.
"The artificial pricing of 1999 is history," said Mark Goldstein, chief
executive of Bluelight.com, the Web arm of Kmart.
Merchants in cyberspace have also been encouraged to raise prices
because customers so far have shown a willingness to pay somewhat
more, providing they get service to match.
"Our research shows that people are clicking at the higher price range,
because they will pay a premium for convenience -- like being in stock
now, or excellent customer service," said Daniel Ciporin, president and
chief executive of Deal Time.com Inc., whose online service allows
customers to compare Web merchants' prices.
There is no official entity that tracks past Web prices, but there is plenty
of evidence that online bargains are on the wane. Consumers looking for
the popular Sony S550D DVD player in May, for example, would have
found a bottom range price of $309 to $323, according to data collected
by DealTime. Shoppers doing the same search last week would have
found the lowest options ranging from $316 to $338.
At Buy.com, an online superstore, the "American Pie" DVD cost $14.99
at Christmas, but now retails at $17.99, as does the DVD of "Austin
Powers: The Spy Who Shagged Me," up from $13.99 over the holidays.
Since prices in earthbound consumer electronics stores have never been
so heavily discounted -- Circuit City, for example, sells the Sony S550D
for $449.99 -- they are not rising much, if at all.
Even cyberspace retailers whose product prices have not jumped are
raising costs indirectly by increasing shipping and handling fees or
reducing special offers. Drugstore.com, for example, has raised its
standard shipping fee from $3.49 a package in December to $3.95
today, an increase that Peter Neupert, its chief executive, said was meant
to bolster profits rather than cover new costs.
Online retailers are also cutting back on discount coupons and free extras
while adding limits on who gets them: new shoppers only, and just one
per household.
There are, of course, plenty of bargains still to be had on the Web. There
are also e-merchants who say they are resisting the pressure to raise
prices. Amazon.com, for example, while still profitless because of its
continued expansion, has $1 billion in cash on hand and makes money on
its average sale, and it insists its pricing structure will not change. "For our
business model to work, we do not need to change our pricing," said a
company spokesman, Bill Curry.
Still, if the Lehman report is right, Amazon will burn through that billion
by December of this year and will again need to go to the capital markets
or find some other way to raise cash. Mr. Curry dismissed the Lehman
report as "hogwash," but Amazon appears to be looking for ways to
increase cash flow. Starting July 1, for example, Amazon will raise the
monthly fee it charges small businesses that sell through its zShops and
Amazon auctions from $9.99 to $39.99. Amazon would not say how
much additional revenue the increase in fees would bring, but David
Schappell, group product manager at Amazon auctions, said the increase
occurred because "the old pricing was so far beneath market standards."
Less financially blessed Internet companies, meanwhile, are getting the
chance to compete on a more realistic playing field right now, a fact that
delights brick-and-mortar merchants whose capital structures never did
allow them to support below-market prices and the associated losses.
Many cackle that as the market returns to a more normal state, their
much larger size will give them a natural price advantage.
"Ultimately, it's going to be hard to compete on price if the
bricks-and-clicks are doing a competitive job," exulted Jonathan Foster,
chief financial officer and chief operating officer of Toysrus.com, the
online arm of the goliath chain. Toys "R" Us had $13 billion in sales last
year, or 86 times that of its biggest Web competitor, eToys Inc., a heft
that should give it great influence in negotiating lower prices from its
suppliers.
Luckily for the e-tailers, Web shoppers are showing themselves to be a
bit less the dogged bargain hounds than originally thought. In a May
survey, Jupiter Communications Inc., the Internet consulting firm, found
that Internet customers were slowly growing less price sensitive. Though
73 percent of the 1,500 people who responded to the survey rated price
as the most important factor in their decisions to buy a product, that was
down from 80 percent two years earlier.
Consider, too, that the cheapest price range for the best-selling Nikon
Coolpix 990 camera was $819 to $824 in May, according to DealTime,
and some 59 percent of consumers using the company's search engine
purchased at that price. In June, the price range was the same, DealTime
found, but the number of buyers at the cheapest level had slipped to 50
percent, largely because the more expensive cameras were in stock while
the less expensive ones had waiting lists.
"Ultimately, convenience and saving time, which have always been the
real advantage of the Internet, will be the most valuable" assets of the
online business model, said Marcia H. Flicker, a professor of marketing
at Fordham University.
The price pressures are also forcing online retailers to figure out more
quickly how to recognize their repeat -- and therefore more valuable --
customers and reward them, while avoiding the use of scarce resources
on customers who buy only when given money-losing incentives. "There
are people out there that just want to take advantage of deals," Mr.
Neupert said, explaining Drugstore.com's decision to offer fewer
coupons. "Those are not the customers we want to attract."
All of this does not, of course, mean that consumers are becoming
completely indifferent to the impact on their wallets and that Internet
companies can ignore price concerns. Online sites that have made serving
up bargains their sole purpose for being are particularly vulnerable. For
the last six months, Renana Myers, of White Plains has bid for goods like
yogurt, diapers and paper products on Priceline.com -- a service that
allows consumers to negotiate prices with a diverse array of retailers --
before she goes to the supermarket, which has a deal with the online
retailer.
Lately, she has noticed the savings are not so great. "They have shifted
the cost of things like wipes and yogurt upwards," she said. "You have to
be very savvy and know the costs in the supermarket if you are going to
get a good deal." She has been disappointed enough lately that she has
considered not bothering to visit Priceline any longer.
Web retailers are all too aware that there is a limit to how high they can
push prices, but profit pressures, already intense, are likely to get rougher
soon. Next month, the Financial Accounting Standards Board, an
independent agency whose rulings are incorporated into generally
accepted accounting principles, is expected to debate and possibly even
vote on a recently proposed rule concerning how all retailers calculate
"gross profits."
The board is trying to standardize how retail companies account for
shipping and handling costs. Although there is great variation across the
industry, many of the biggest merchants that operate exclusively online,
like Amazon.com and eToys, list such costs under their marketing
budgets, a practice that inflates gross margins. The accounting board is
likely to call for an end to this practice and instead require businesses to
deduct such so-called fulfillment outlays from the costs of goods.
While many catalog merchants also count shipping by this method, the
proposed measure would be of much greater significance to virtual
retailers because they do not have any positive earnings and gross
margins are the main way investors have found to measure the e-tailers'
health.
Such a rule could cause gross margins to drop to 10 percent from 20
percent at Amazon, and to negative percentages for eToys, PlanetRx and
Drugstore.com, according to Holly Becker, an Internet analyst at
Lehman Brothers. That could further dismay investors, leading to
additional pressure on prices, she said.
"In the absence of bottom-line earnings, we have been using gross
margins to gauge the health of the business," Ms. Becker said.
"Companies will do what they can to get margins higher again. That
means raising prices or lowering fulfillment costs -- and raising prices is
certainly a shorter-term solution."
nytimes.com
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