Retail Rebound?

By eweek  |  Posted 2000-11-13

Retail Rebound?

Call it capitalism, darwinism, reality. Whatever term you use to describe what happened to dot-com start-ups this year, the bottom line is that it wasnt a good year for many e-tailers.

The problem can be boiled down to the "P" word: profit. In the case of e-tailers, it would be the lack of profit.

For the most part, the Webs leading e-tailers - from to to eToys to to - share one major trait: They continue to operate in the red. The problem is that investors have remembered that their favorite color is green, prompting many to forsake the dot-com stocks that over the past three years have made up a substantial part of their portfolios.

But despite investors disenchantment with the growth-first, profit-later strategy that characterizes dot-coms trying to build a brand and business in the New Economy, executives on the front lines say not all business-to-consumer (B2C) businesses are created equal, and they shouldnt be lumped together. Nor should they be equally dismissed.

"The B2C scare started over cash burn rate - the fact that companies would run out of cash before they reached profitability," says Ramesh Punwani, chief financial officer at travel site Travelocity, which boasts more than 23.4 million members. "While has losses, its demonstrated that its losses are narrowing. We have a revenue model that works."

For its most recent quarter, the company reported a cash loss from operations of $7 million on revenue of $53.4 million. But the companys revenue model will see Travelocity become profitable by the fourth quarter of 2001, Punwani predicts. And unlike many less fortunate e-commerce companies, Travelocity believes it has the cash it needs - $71 million at the close of its third quarter, ended Sept. 30 - to see it through the year ahead.

Dot-Com Crash

Other retailers have not been so fortunate. The year was punctuated by layoffs, shutdowns and e-tailers desperately seeking a bailout of some kind as they ran out of the capital needed to continue funding operations and found that once open-checkbooks had been slammed closed by impatient investors. Online consumers bid farewell to a bevy of e-tailers, including,,, college textbook provider Big Words, beauty site, a duo of pet products providers - and - and such seemingly well-endorsed companies as Disney-backed and licensee WebHouse Club.

"There were a lot of investments in shaky and uncertain business models," says Elaine Rubin, chairman at, a 4-year-old trade association representing more than 400 online retailers. "Because of that, those businesses werent as hard on themselves as to how they should spend the money and what their business model should be. It was Spend now, acquire now and well figure it out later. Most businesses dont do that - they need to have a plan, have some sense of where theyre going and need to show growth."

But the fledgling start-ups were not the only ones that felt the markets displeasure.

While Amazon celebrated its fifth anniversary and crowed over its more than 25 million customers, investors couldnt help but note the top e-tailer on the Interactive 500 list with $2.1 billion in revenue for the four quarters ended June 30, posted a loss for that 12-month period of more than $1 billion.

Financial analysts criticism of Amazons continued expansion plans in the face of such losses prompted Chief Executive Jeff Bezos to defend the company. In an interview with Reuters in early October, Bezos emphasized that a "long-term" view was needed to understand "that the volatility is appropriate for a new industry like this."

"Its like a pendulum," says Cliff Sharples, CEO of first-mover, of the dot-com crashing heard round the Web. His 5-year-old gardening company was forced to cut about 40 percent of its staff in September in an effort to lower its cash burn rate. It also hired investment bank Robertson Stephens to help it explore financing alternatives.

"It swings in both directions. It was too far swung in the positive, euphoric direction one to two years ago. Now its swung the other way - now investors dont want to touch any B2C companies. Like life, the answer is somewhere in the middle," Sharples says.

First-movers eToys and CDnow Online, meanwhile, also were forced to face some unpleasant business realities this year. Toyseller eToys saw its stock lose more than 90 percent in value over the past year. In June, it was forced to raise $100 million through a sale of stocks and warrants - money it says it needed to stay afloat. Analysts say the Santa Monica, Calif., company needs to raise another $100 million or so to continue operating before it becomes profitable.

Cash-strapped music retailer CDnow, meanwhile, was rescued this summer by German media conglomerate Bertelsmann, which agreed to buy the company for $117 million and make it a wholly owned subsidiary under its e-commerce group.

Back to the Backslide

Though many say the b2c backlash started with the April stock market "correction" that saw investors dump their shares of profitless dot-coms by the barrelful, the signs of an impending market shakeup could be traced to the 1999 holiday season. Many e-tailers showed themselves ill-prepared to handle the demands of virtual shopping, leaving a swath of disgruntled - and vocal - online shoppers in their wake.

In July, the Federal Trade Commission slapped seven prominent retailers with a combined $1.5 million in fines for failing to tell online consumers during the 1999 holiday season that they would face shipping delays or that the retailer would be unable to deliver orders as promised. Among those cited as part of the FTCs investigation, which was called, and, which were each fined $350,000.

Jodie Bernstein, director of the FTCs Bureau of Consumer Protection, says many online retailers last year ended up "looking more like Scrooge than Santa." She called the FTCs action an "early gift for Internet shoppers" because it will likely force online retailers to rethink their procedures to avoid similar problems this year.

Lets hope it works. Jupiter Research is predicting a banner quarter for online consumer spending. The research firm estimates online shoppers will spend more than $12 billion during the holiday season, which it says runs from Nov. 1 through Dec. 31. That spending represents a 66 percent jump over the $7 billion online retailers rang up during 1999. Jupiter attributes the boost, in part, to the fact that 6 million new consumers will make their first online purchase during the 2000 holiday season.

"You can get caught up in all the downturns of all these companies that are in bad shape right now," Shop.orgs Rubin says. "But the truth is that the New Economy is growing, and more customers are shopping online. There are a lot of good companies with great business models."

Certainly, the B2C companies that top this years Interactive 500 list - Amazon, America Online, Charles Schwab & Co., Delta Air Lines, E*Trade Group, Priceline and TD Waterhouse Investor Services - are banking on their brands and e-commerce savvy to carry them through as consumers move more of their business into the online world.

"The online market for travel will grow 30 [percent] to 40 percent in 2001," Punwani says, noting that Travelocity this year will claim just a 1 percent share of the total $220 billion-plus travel services market. "Theres plenty of room for growth."

Priceline Bids On The

Future"> Priceline Bids On The Future

If he had to pick a song to describe whats been going on at this year, William Shatner might consider crooning The Long and Winding Road.

Though the name-your-own-price service earned a place among the top 10 business-to-consumer (B2C) revenue generators on this years Interactive 500 list, Priceline has had to contend with a few unpleasant turns this year: lower than expected revenue for its third quarter; a high-profile investigation by Connecticuts attorney general into consumer complaints about buying airline tickets and gasoline through Priceline; and the closure of WebHouse Club - Pricelines first licensee - after less than a years operation.

Oh, and Shatner, the companys high-profile singing pitchman, admitted on national television he had never used Priceline to bid on low-priced airlines tickets, telling the TV newsmagazine show 48 Hours: "I think of myself as having to fly first-class."

But the company says that despite these turns, things are looking up for the service that allows consumers to bid on everything from airline tickets to hotel accommodations to cars and trucks and home mortgages. While other B2C players may be experiencing a reversal of fortune amid the investor shakeout that has seen many e-tailers shut down, Priceline shouldnt be lumped among them, says company spokesman Brian Ek.

"Several of the models in the e-commerce sector are, in fact, demonstrating that they work. I certainly put Priceline.coms model in that category," Ek says. " In two-and-a-half years, weve attracted 7 million new customers, sold 5 million airline tickets. So in the travel sector, weve done quite well. Weve got a customer repeat rate of 39 percent in calendar 2000. Weve made steady progress in reducing losses."

As for the shutdown of WebHouse Club, which was set up as a separate company to protect Priceline investors, Ek says it wasnt the lack of consumer endorsement that led to the decision to shut down the service. "They were in business less than 10 months and attracted 2 million customers," Ek says. "WebHouse had everything to do with the capital markets and nothing to do with customer response. Unfortunately, the capital markets were such that they couldnt get their second financing."

Its a familiar tune to many e-tailers. But even without Shatner in its customer base, Priceline says it has no plans to join in the chorus. "The company," Ek says, "has demonstrated a commitment to building a business for the long term."

Top B2C Sites

Top B2C Sites

RankCompanyOnline Revenue (000)
1America Online$6,484,000
2Charles Schwab & Co.*$2,270,000$2,183,000
4E*Trade Group$1,170,000
5TD Waterhouse Group$1,000,000
6Southwest Airlines*$1,000,000$987,000
9Delta Air Lines$850,000$760,500
11Fidelity Investments*$750,000
12Mary Kay$660,000
14Ameritrade $572,000
16The Principal Financial Group$500,000$454,100
18Datek Online Holding*$400,000
21United Airlines$357,000
22Cheap Tickets$329,900
25Dow Jones$311,900
27Wheels $286,000
29CDW Computer Centers$268,900
30Prodigy Communications$267,600
33Hotel Reservations Network*$226,000
35Cyberian Outpost$221,300
36Ruesch International$210,000
37eMerge Interactive$198,900
39First Midwest SecurIties $175,000
40Ticketmaster Online-CitySearch$171,700
41PC Connection$169,200
42Getty Images$169,100
44CNet Networks$163,300
45CDNow Online$162,500
46Northwest Airlines$150,000
47Starwood Hotels & Resorts*$150,000
48Pegasus Systems$146,700
50Lands End*$140,000

All financial figures are for the four fiscal quarters ended on or close to June 30, 2000.

* Interactive Week estimate

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