December 26, 2000, 9:55 AM

How now cash cow? E-retail meets e-wholesale

What began as a trickle of large orders last fall has become a hoped-for revenue stream at MotherNature.com: supplying vitamins and supplements to mom-and-pop stores that specialize in natural products. Like other Web companies similarly branching out, observers say MotherNature isn’t fooling around. E-wholesale could be the pipeline to profits that will put e-retail back in good stead with investors.

From troubled Web companies such as Beyond.com and Value America to stronger catalog converts like Lands’ End, various Internet businesses are making the business-to-business crossover. A few, such as Beyond.com, have left e-retail entirely. “There are all sorts of avenues to investors and venture capitalists with B2B,” says Gina Paglucia Morrison, senior analyst at Mainspring Communications, a consulting firm in Cambridge, Mass. “There was no sign that business-to-consumer companies would ever make money, and investors were not going to fund them anymore. With B2B, the revenue numbers go into the trillions. Some consumer sites would be happy just to see a 5% return.” Like many e-retailers, MotherNature has paid the price for this turn of events, seeing its stock tumble from a high of more than $14 at its IPO in December to about $3 in early April. The site’s financial woes have landed it on two lists of endangered dot-coms recently compiled by financial analysts.

That’s one reason why Morrison is skeptical about the B2B stampede, wondering whether MotherNature is committed to the new business line or just hitching a ride aboard a new gravy train. “A lot of people are questioning whether they’re doing it for the money.” MotherNature insists otherwise, calling B2B a clear extension of its e-retail site and its recently added channel for health care professionals and HMOs. “This is the next logical step,” says Jeffrey Steinberg, the site’s chief marketing officer, “and it doesn’t require a lot of modification to our site.”

MotherNature needs an edge. In the health and beauty category, the site runs behind Drugstore.com and PlanetRx.com. Yet unlike its rivals, MotherNature doesn’t sell prescription drugs. Morrison predicts the sector’s survivors will offer a full range of goods, along with links to doctors, insurers and content providers. “Eventually everyone will do that,” agrees Pam Stubing, retail analyst at Ernst & Young, New York. “There’s not going to be any differentiating.”

But the year ahead promises a lot of differentiating, as droves of e-retailers close shop, says a new report by Forrester Research. The firm, which earlier this year predicted heavy consolidation of sites selling toys, pet supplies, software, electronics, sporting goods and beauty products, sees the shakeout occurring in three waves. The first will crest by this fall, as weaker sites selling commodity goods fail to achieve growth of 50% or more. The second will occur after the holidays, as second-tier sites in growing categories like electronics and toys collapse due to razor-thin margins, while the final wave will wash out the weakest high-margin e-retailers in 2002.

Retailers should not look to B2B for a life raft, the Forrester report says. It bruskly admonishes Lands’ End, Beautyjungle and VarsityBooks to “stop aping their more highly valued B2B peers by touting sales to corporate clients as proof of a business model makeover.” There’s more to it than that, the report adds: “Servicing companies will consume more time, money and energy than these firms anticipate.”

A major difference between busi-ness and consumer sales is staffing. Sites aimed at consumers focus on advertising and branding, while business sales require a strong sales force. “Consumers see a commercial and flock to a site,” says Leah Knight, principal analyst for Gartner’s e-business intelligence services. “But with B2B it’s more personalized, you need a sales staff.”

Warnings aside, Morrison and others anticipate a rush into B2B, even as some quarters see that arena also cooling off among investors. The rush was bound to happen, with Gartner last fall declaring that the B2B market would represent revenues of $7 trillion by 2004. “I’m sure some people are just posing,” says Morrison. “On some level, you can get an investor to listen, but it can’t last.”

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