December 26, 2000, 9:55 AM

A shakeout you can`t take with a grain of salt

The consolidation in e-retailing is bound to shake out some good companies, but analysts say most great ideas stand to get the funding they need. At the same time, once-distant rumbles of a clash between the cash-burn rate of e-retailers and the availability of investment funding have grown louder. During the first quarter, for instance, venture capital flowing to business-to-business Internet firms pulled ahead of investments in business-to-consumer companies. As funding migrates away from B2C companies, e-retailers are beginning to seek safety in numbers.

While start-up money may be drying up for new B2C ventures, recent deals suggest there’s cash around for investments by brick-and-mortar leaders that have the resources to expand online. But the shopping list is short and specific. People? Probably not. “If a company is closing, people are going to leave anyway,” says David Cooperstein, senior retail analyst at Forrester Research. Customers? Not if the retailers have too much overlap. “Take Pets.com,” says Rob LeBatt, e-commerce analyst with the Gartner Group. “If you’re the industry leader, and you’ve got a great URL, and one of your competitors fails, you’re going to get those customers by default. Why bother purchasing them?”

But if two retailers complement each other more than they compete, that’s a reason for merging, says Cooperstein, citing the $400 million end-of-year stock swap involving Egghead.com and online auction house Onsale.

BestBuy.com, the Web subsidiary of the leading consumer electronics retailer, similarly found a complementary partner in etown.com. In December, it paid $10 million for an undisclosed stake in the online information and shopping destination for consumer electronics goods. “What that investment does is provide the content and expert tools etown has on its site for BestBuy to leverage on its Web site,” says Barrett Ladd, an analyst with Gomez Advisors, Lincoln, Mass. “Consumer electronics is an industry where it’s important to have lots of information before you buy.” Etown, meanwhile, gets better access to products and traffic from BestBuy shoppers to boost sales.

Consolidation also can be the fastest way to market-at least that’s the hope at Safeway Inc., Pleasanton, Calif. In April the supermarket chain bought a $30 million stake in Dallas-based GroceryWorks.com, an online delivery service that specializes in high-end foods. GroceryWorks plans an ambitious expansion into 16 major U.S. markets within the next 18 months; Safeway brings products, supply chain know-how and warehousing to the deal.

The deal puts Safeway online for the first time via a soon-to-be cobranded site. GroceryWorks gets the benefit of Safeway’s national brands as competition heats up among online grocers.

“Safeway is coming to realize that this is an important way of doing business,” says Cooperstein. “This was probably the easiest online company for them to pick up and learn the business from, as opposed to trying to buy Webvan or starting their own from scratch.”

In the ultra-crowded beauty category, Estee Lauder’s acquisition of Gloss.com represents a similar corporate acceleration-a “turning point” in the beauty market, says Heather Doughtery, a retail analyst with Jupiter Communications. “Lauder picked up Gloss.com for the technology,” she explains. “They’re using it as a strategy to create brand modules to put in online department stores.” Gloss also should help rev up Estee Lauder’s existing Clinique and Bobbi Brown sites, while Gloss gets access to premium Estee Lauder brands and a chance to apply its talents cross a broader platform.

But in beauty as well as other categories, analysts expect the number of players to shrink quickly. What will make the difference between third and fourth-tier e-retailers getting a shot at a merger or acquisition or simply fizzling out? It’s what they have to offer to the stronger players, analysts say.

And there’s something else at work, having more to do with human behavior than technology. “There are thousands of dot-coms out there, but only two or three strong ones per area,” says LaBatt. “If you wind up with 30 retailers of the same products, you’re going to start to default to the same ones. Natural selection creates its own search engine.”

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