E-tailers face grim prospects

April 13, 2000

BY HOWARD WOLINSKY AND SANDRA GUY BUSINESS REPORTERS

Most online retailers are heading for kingdom-dot-come, a consulting firm predicts.

Intense competition combined with an ongoing sell-off in dot-com stocks will result in a rapid rise in buyouts and bankruptcies in the coming months, according to Forrester Research Inc. The Cambridge, Mass., consulting firm researches emerging technologies and their impact on consumers, businesses and public policy. "There are just too many companies out there that don't have what it takes to last, and they won't last," said Seema Williams, senior analyst at Forrester.

Most companies won't be able to cope as competition intensifies and money evaporates just as merchants need to ramp up marketing for the Christmas season, Forrester said in its report, which was based on surveys of 50 leading online retailers.

"One-third of the 50 surveyed won't say, or don't know, when they're going to be profitable," Williams said Wednesday. "They're not too worried about their finances, and we've let them get away with it. Now it's time to ante up."

Chicago attorneys and consultants confirm the fallout has begun.

When Internet shopping first started to gain momentum a few years ago, many believed cyberspace would be big enough for anyone to do business, whether you were Wal-Mart or an entrepreneur selling jelly out of your kitchen. Steve Kaplan, professor of entrepreneurship at the University of Chicago Graduate School of Business and a financial adviser to e-commerce companies, said the extinction of many online shops is not unexpected.

"You can lose money for a while, but there has to be a light at the end of the tunnel," he said. "At some point, you have to make money. The good ones, the more efficient ones and ones that have branded themselves will survive."

Too many sites--selling everything from pet supplies to toys to books to software--offer similar products and content.

The largest and best-known--including Amazon.com--are outpacing the pack in terms of growth in customers and sales, and the smaller players have little chance to get noticed.

There also are new threats from traditional chains, such as Wal-Mart and Hoffman Estates-based Sears, Roebuck and Co., that are stepping up their online presence with reputable and recognizable brand names.

"I think they're starting to hear the footsteps of the master retailer of the world, Wal-Mart, getting into the business," said Paul Kasriel, chief U.S. economist for Northern Trust Corp. "Wal-Mart actually has a culture of earning money, and they manage their inventories better than anybody."

Indeed, established brick-and-mortar stores have seen in-store sales climb after they start selling online, Williams said.

The shakeout among the online retailers could be a bloodbath over the next year.

"There are 30,000 e-tailers out there, and probably 25,000 will have to go away," said Mark Doll, a consultant for startup companies at Ernst & Young. "But that will end up helping the biggest and best players who can ride the tide and then will fare better because they'll have less competition in their markets."

A wake-up call rang in mid-March, when Barron's business newsweekly published a study showing how quickly Internet companies are burning through their cash on hand.

Skokie-based Peapod, the online grocer, saw investors withdraw a promised $120 million infusion after former CEO Bill Malloy resigned for health reasons on March 16. It started seeking takeover offers on March 30 because it had only $3 million to cover operating debts, and obtained a bridge loan on April 4.

There is no doubt that investors have tightened their purse strings. The flood of money from venture capitalists and initial public offerings of stock has dried up, and dot-com shares have been on a downward spiral.

"Dot-coms are being much more careful about their dollars," said Rishad Tobaccowala, president of Starcom IP, a dot-com oriented media company of Chicago-based Leo Burnett. Unlike the old days, they'll no longer ride out tactics that don't work, he said.

Harold Nations, chairman of the Emerging Business Practice Group at Holleb & Coff, the Chicago law firm, said some of his dot-com clients are skittish about funding, considering the questionable profits of online business-to-consumer Web sites and the downturn in the stock market.

"What we're really seeing right now is a heightened sense of urgency among companies that currently are trying to raise money," he said. "There is a huge fear that the window is closing."

Ming Tsai, senior vice president at Mainspring Inc., an Internet strategic consulting firm in Cambridge, Mass., said funds for the online stores have dried up.

"Some will be forced to go out of business completely. Others will merge or be bought up by someone who sees something worthwhile in their assets . . . like the technology that runs its site," he said.

Already, some cybershops have bottomed out. A few merchants, including cooking site Cook Express, have filed for bankruptcy, while dozens of others, such as CDNow, are quickly running out of money. Some, including Cybershop and Beyond.com, got out of retailing entirely and now cater to businesses.

Forrester said others are close behind, especially second-tier sites that are overshadowed by their larger rivals.

Gloss.com, for instance, has been fighting for attention in the crowded online beauty market. On Wednesday, it was bought by Estee Lauder Cos. as part of the cosmetics giant's efforts to step up its online presence.

Realizing that their future is in question, some online retailers are trying to figure out what their next step should be. Law firm Luce, Forward, Hamilton & Scripps gets 10 to 15 calls a week, up from one or two just three months ago, from troubled Web retailers as well as vendors, venture capital firms and lenders who want to be represented if these businesses crumble.

Fred Lowinger, head of the corporate group at Chicago law firm Sidley & Austin, said his firm has shied away from online retail sites as clients. "Everybody and his brother, sister and kid seems to have a business-to-consumer start-up," he said.

As a result, his practice has focused on business-to-business Internet companies.

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-- Carl Jenkins (Somewherepress@aol.com), April 13, 2000