JD.com and Alibaba create indexes to identify Chinese shoppers’ spending trends, which help retailers gain insight.
When the NASDAQ goes down, sales of Evan Schwartz’s book go up. It could be the title, “Digital Darwinism”, which captures both the current mood on Wall Street and the corresponding unease among Internet retailers as an industry shakeout gathers steam.
“Stocks have been beaten to the ground and dot-coms are running out of money,” says Schwartz, a former Business Week editor and author of two top-rated books on e-commerce. “It’s getting brutal and there’s a struggle for survival.”
The scenario facing many e-retailers has by now acquired the reliability of a mathematical formula: sizzling cashburn rate + low customer numbers - needed financing round = dot-com start-up in trouble. Analysts forecast the failure rate for b2c e-retailers at 50-90% this year. A new study by turnaround specialists Getzler & Co offers yet another in a series of dismal snapshots from the e-retail landscape. Of 150 Internet companies tracked by the New York-based firm, 119 b2c companies have laid off staff or shut down altogether. Leading the industry-sector pack at 52 in number were e-retailers.
Being cautious has so far had all the panache of a Nehru jacket among retail’s pioneers in the go-for-it Internet economy. “The mantra has been, ‘First to market wins,’” says Andrew Bartels, vice president of Giga Information Group, Cambridge, Mass. “The feeling is if you’re not first, you lose. There’s been a whole lot less interest in being second-even if you’re better.”
The result has been crash-and-burns at speed that makes business development in the offline world look like life in the slow lane. But what’s apparent as the smoke clears is that being second can have unique benefits. There’s value for surviving e-retailers in failures that litter the landscape in the form of lessons learned, like the perils of overspending, and the risks of fuzzy value propositions-even the danger of sticking with entry-stage tactics as the market matures. Consider the well-publicized TV ad blitz during the Super Bowl, on which some newly hatched dot-coms spent millions. The mass media distribution reached multiple-millions of viewers who might never become customers, but companies wanted campaigns that got attention and created buzz. “That worked for one year,” says Schwartz. “Now there’s so much clutter you can’t stand above it.”
Bricks-and-mortar retailers just now moving online will not only get to leverage their existing physical world advantages but may also sidestep mistakes made by pure-plays who got there first. Shaken but still standing e-retailers have a chance to change course as newly acquired knowledge dictates. And as the market starts to reveal patterns in who’s making it and who isn’t, new rules for success are emerging in an industry that, more and more, is buttressing enthusiasm with experience.
Too many players
Given the frantic pace of dot-com retail launches, shakeout in the marketplace was built in. In fact, analysts have said forecasting it has been as easy as shooting fish in a barrel. Reason number one? The sheer number of b2c players on the field. “There just isn’t enough mind share and wallet share among consumers to spread out over the huge proliferation of sites,” says Rebecca Nidositko, Yankee Group analyst. “Venture capitalists who fund start-ups generally expect only 10-30% of their investments to succeed. From their perspective, it’s a given that the landscape would shake out. But some people forgot that rule. They thought that maybe everyone was going to be a winner.”
But in retail categories such as toys, pets and furniture, “a lot of category killers came out at the same time,” observes Heather Dougherty, digital commerce analyst at Jupiter Communications. Stronger players muscled out others where space was limited, pummeling a fair number of them into the ground or causing them to seek shelter in consolidation. Among the recently shuttered in the lifestyle and home furnishings sector are Foofoo.com, an online aggregator of luxury goods including home furnishings; furniture store Living.com and high-end home decor seller PuertaBella.com. Toysmart.com and Redrocket.com were toy sector casualties, while in the pet space, RIPs include Petstore.com, which was swallowed up by the larger Pets.com. And they won’t be the last to disappear. “The shakeout’s only a few months old at this point,” says Brian Mittman, vice president of Getzler & Company, New York. “A lot of companies have money to survive for a few more months. But we’ll see a lot more of them closing their doors in the next six months.”
Over-the-top spending fed into failures as start-up hopefuls tried to stand out in a cluttered landscape. The Super Bowl ads were just the tip of the iceberg. Internet companies including e-retailers spent $3.5 billion on advertising in 1999, about 16% of total sales, according to an Ernst & Young study. By contrast, Wal-Mart’s 1998 ad budget was less than 0.5% of sales, while Sears spent about 4%.
That kind of spending runs counter to most of the conventional wisdom in business development. But then, the Internet makes its own rules. “The Internet is a big-bang phenomenon,” says Bartels. “If you’re a brick-and-mortar store, you can launch in one market and replicate the model in the next market. Each time you do, you’re managing your marketing costs. But when you go on the web, you’re not confined to one city. You have customers everywhere.”
Or not, as some e-retailers who’ve invested big-time in advertising have found. “E-retailers have realized that they’re competing with click-and-mortar retailers and catalogers, whose customer acquisition costs were in the $10 to $20 range, while they were spending millions on broad TV ads, and their customer acquisition costs were $75 to $100. Right there you can see how much more value, transactions, and activity you need to get out of those customers,” says Barrett Ladd, an analyst with Cambridge, Mass.-based Gomez Advisors.