December 26, 2000, 9:55 AM

Wall Street ends dot-com block party

Profit or perish: A new report from Forrester Research sends that message to Internet retailers, predicting that Wall Street has heard enough “investment mode” rhetoric and
now wants to see results.

“The era of online invincibility is over,” says Joe Sawyer, a Forrester analyst who wrote the report. “The willingness to cut them slack just isn’t there anymore.” Among crowded online categories set for a shakeout: toys, pet supplies, software, consumer electronics, sporting goods and prestige beauty supplies.

According to Sawyer, the signs of a sobering outlook are already clear. One-time high-fliers like Value America and Beyond.com have laid off staff and revised their business plans. Mergers are up, too-witness Drugstore.com’s acquisition of Beauty.com and luxury gift retailer Ashford.com’s purchase of Jasmin.com.

Amazon, though still swimming in red ink, recently increased its ownership stakes in Drugstore.com, Living.com and online auctioneer Greg Manning Auctions in exchange for lucrative marketing deals that could net the superstore up to $100 million each. In a conference call with analysts in January, Amazon executives tempered reports of a widening fourth-quarter loss with talk about turning a profit by 2002. Wall Street liked the new fiscal focus, pushing up Amazon’s share price nearly 20% following the news.

But change won’t come without dot-com wreckage. EToys and discounter Value America have seen their market capitalization drop since the beginning of the year-”bad omens for online stores that lack a unique approach or technology,” says Sawyer.

You might expect such a decline at Value America, which dismissed half its staff following poor holiday sales. But eToys finished the Christmas season at the top of the Web’s toy category. The lesson is that Christmas is over and no business plan goes unscrutinized.

To prove themselves seaworthy, retail sites will reign in expansion plans and spending on TV advertising, the Forrester report predicts. Priceline, for example, has scaled back plans to move into new markets in order to reduce operating costs and focus on improving its margins.

As these shifts play out, get ready for the revenge of brick-and-mortar stores. Forrester says the year’s M&A activity won’t occur exclusively among dot-coms. “Brick-and-mortar stores are in the driver’s seat,” Sawyer contends. “They have the resources, the brands and the loyalty to go the distance. They will buy the talent, technologies and processes needed to put them back in the game.” Traditional merchants Best Buy, Wal-Mart and Kmart, for example, both plan major online expansions this year.

What Forrester doesn’t foresee is any slowdown in online spending. Competitive and economic issues are overtaking sheer growth potential. But in the market overall, growth is still the name of the game, with sales surging from $20.3 billion last year to $38.8 billion in 2000.

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