E-tailing loses its shine in 2000

Investors' sudden appreciation for the bottom line took many e-tailers by surprise this spring. And once the impossibly high Web valuations were questioned, there was a rush to the exits, leaving Web companies to either go belly-up or take dire measures to try to survive. Months later, there are still daily notices of shutdowns, staff cuts and radical restructures in an effort to survive.

And don't look now, but 2001 is right around the corner.

"I fear that we have yet to see the worst," said Vernon Keenan, an analyst with Keenan Vision. "Many struggling dot-coms have set up their finances so that they will require new capital in (the first quarter of) 2001, and I don't see the funding coming. The markets are still scared of dot-coms."

The stock market started its downturn in the spring, dragging down scores of Web companies with it, from well-funded leaders to countless small sites.

One of the first signs of trouble came right after last Christmas, when e-tailer Value America announced that it was cutting half its staff and scaling back on the types of products it sold, and that its two co-founders were leaving. One month later, Amazon.com announced its first layoffs ever, cutting 150 jobs. Many other companies would soon follow.

After a preholiday run-up sent stocks like Amazon and eToys to their highest-ever share prices, by the end of January 2000, shares of more than a dozen e-commerce companies had fallen below their initial public offering prices.

Back to basics

It was becoming clear: Investors wanted a return to fundamentals. Companies that tried to play by the old Internet rules were punished with IPOs that fell flat or stock prices that kept dropping.

Take Pets.com, which went public in February even as it was awash in red ink and losing money on every item sold. The stock closed its first day of trading at the $11 initial price offering and would later sink to less than $1 per share. Last month, after blowing through millions of dollars and still losing money on every sale, Pets.com closed its doors and laid off 80 percent of its staff.

Scores of other companies have seen their stocks shrink to penny-stock status, risking delisting on the Nasdaq. Analysts say the shifting tide will continue to swamp those teetering companies in the new year, even the ones that might have succeeded under different economic circumstances.

"Next year will be just as tough as the past six months have been--tougher," said Carrie Johnson, an e-commerce analyst at Forrester Research.

"The people that lasted this long had some sort of value in the retail market or for consumers," she said. "The problem is the money has run out before they had the time to make them self-sustaining."

Hitting the wall

The extended downturn has some people speculating that e-commerce, or certain segments of e-commerce, may be hitting a ceiling.

"There is much to suggest that the e-commerce opportunity, at least in toys, will ultimately be smaller than the 10 percent to 15 percent of retail sales that we and others had expected," Merrill Lynch analyst Henry Blodget wrote in a research note earlier this month.

The famously bullish analyst was reacting to eToys' announcement that its sales were way off and that holiday sales had grown just 12 percent to 22 percent. While that's hardly anemic, eToys showed 366 percent growth last year and was expected to more than double sales this year.

The implication of eToys' shortfall could be that the entire e-commerce sector will be much smaller than previously thought, Blodget said.

"At this stage of the game (three years into the category's development), it is almost inconceivable to us that, if e-commerce is to account for 10 percent to 15 percent of sales, a leader in the category would grow only 15 percent to 20 percent, recession or no."

Winners

Among the winners in 2000 and going into next year are the traditional retail and offline companies. After coming online in fits and starts over the last several years, many offline players started to gain traction this year. By the end of the year, Jcpenney.com, Walmart.com and Kmart's BlueLight.com regularly ranked among the top retail Web sites.

This year was the "comeback of brick-and-mortar," Forrester's Johnson said.

The status of the brick-and-mortar companies figures to only improve in 2001, if only by default. In many sectors, traditional e-tailers are the only ones left standing after the shakeout.

One example is online pet supplies: The year started with four well-financed pet supply e-tailers, three of which filed for public offerings early in the year. But by the end of the year, only Pets.com had managed to go public, and it was already dead, joining pure-play rival Petstore.com. Meanwhile, offline giant Petco had purchased the assets of its Petopia.com affiliate, and PetsMart had become the majority stakeholder of its e-commerce namesake.

Likewise in the furniture sector, the two major pure plays--Living.com and Furniture.com--both crashed, leaving the industry open for such offline giants as Wal-Mart, JC Penney and Eddie Bauer.

It was the same in the toys sector, with eToys struggling to survive and fellow pure plays Toysmart.com and Toytime.com shuttered. Meanwhile, KB Toys has taken greater control of the operations of its KBkids.com offshoot, and Amazon decided it couldn't go it alone, choosing to team up with offline giant Toys "R" Us.

"What's most interesting is finally they are not just scrambling to catch up; they are making the Internet part of their everyday business," Johnson said.