May 31, 2001, 12:00 AM

Shakeout in a Healthy Market

Don’t confuse a market shakeout with a market debacle. In any industry, market revolutionaries don’t always survive to take advantage of the new landscape. Dot-com retailing is no different.

 

When I tell people I publish a magazine about the Internet retailing industry, they sometimes wonder whether such an industry still exists-given the demise of so many dot-com merchants in the last year. My response is straightforward: Do not confuse a market shakeout with a market debacle. The demise of legions of dot-coms, I am quick to add, is simply the result of too many competitors chasing a market that is growing fast, but not fast enough to support the number of players trying to gain a foothold in it.

 

Look at the history of any major new market, and you see the same trend repeating itself. At the on-set of the “revolution” that creates the market, there is a flood of new companies to exploit it. That is followed by a classical industry shakeout where the weaker players are eliminated and the more efficient players grow and prosper, until ultimately only a handful of giants remain in the field. So it was with oil, steel, railroads, and automobiles during the American industrial revolution. The same trend occurred in the service economy of the second half of the American century. The fast-food phenomenon of the 1950s and 1960s created a rush to the consumer and stock markets that was not unlike the dot-com gold rush. It was followed in the 1970s by a shakeout that cleared the fast-food landscape. Remember Burger Queen, Burger Chef, Lums, Red Barn, Minnie Pearl’s Fried Chicken, and Arthur Treacher’s Fish & Chips? They and dozens of other weak operators failed, while McDonald’s and other stronger chains survived-and created a dine-out industry that has made home cooking a lost art.

 

The point is that truly revolutionary markets survive the shakeouts that they inevitably create. Is Internet retailing a revolutionary market? The new “State of Online Retailing” study from the Boston Consulting Group sheds a high-beam light on that question. It reports that in 2000, the year of the so-called dot-com bust, the web-based retail industry in the United States witnessed the following:

 

- Online sales to consumers grew 66% to $44 billion in 2000 and

are expected to grow another 46% this year to $65 billion.

 

- Operating losses for the industry dropped to 13% of sales from

19% the year before, as e-retailers reduced unit operating and

customer acquisition costs.

 

- Fully 68 million Americans made a purchase online last year.

 

- The big-name store chains took Internet market share from

lesser-known pure-plays.

 

- On-line buying of computers, software, books and travel exceeded 10% of total sales in those markets, “jeopardizing the economic viability” of physical outlets. On-line purchases of music and video will approach this 10% penetration level in 2001.

 

So, is what we witnessed in the last year a shakeout in a revolutionary market or a slumping marketing craze? Answer that one, and Regis will give you $100.

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