Private equity firm Apollo Global Management will take Rackspace private in the all-cash deal.
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Internet-only sellers don’t have the option of stores. Their web sites are their only path to profits, and when Q4 numbers failed to reverse wrong-way trends, it underscored anew the problems of a sales strategy that depends exclusively on the web. Drugstore.com, for example, posted a net loss for the quarter of $43.2 million on net sales of $36.2 million, and rocked some investors with the announcement that it didn’t expect to break even until at least 2004, even with the January layoff of 20% of its work force. EToys posted a fourth quarter operating loss of $74.5 million on net sales of $131.2 million, well below its own projections of only three months earlier, said it would run out of cash by March 31, and in February told its remaining employees to prepare for pink slips.
Buy.com reported a Q4 pro forma loss of $27.4 million, bigger than analysts’ expectations, on revenues of $196.7 million. In January, the self-styled “low-price leader” in online sales of categories ranging from books to electronics cut 10% of its staff, said it would focus on only higher-margin products going forward, and announced plans to raise prices.
“It’s very unlikely that there will be many long-term winners that are entirely pure-plays,” says Yankee’s Ritter. “Companies that have the ability to maintain margins because they offer a unique product will have a chance, but it’s unlikely they’ll achieve the mass of visitors or sales that so many companies were expecting. Very few pure-plays are going to survive at $100 million-plus.”
Category leaders such as Amazon got the message. To prepare for Q4, they strengthened their presence in the physical world with warehouses and developed partnerships with retail chains and manufacturers. Amazon’s strategic alliance with toy retailer ToysRUs, for example, brought in supplier relationships and in-depth toy industry expertise that helped make this Christmas a bleak one for competitor eToys. Toysrus.com saw holiday sales triple to $124 million from 1999, helping the company grab market share from both eToys and Wal-Mart. Amazon.com, meanwhile, posted a net loss of $545 million or $1.53 per share on net sales of $972 million (proforma operating loss was $60 million) but inched toward the black, slightly beating expectations and nearly doubling its sales from the year-ago quarter.
Traditional retailers got the message too. They began to see web sites as a complement more than competition to their traditional way of doing business, and set about making their web sites better. They spent millions to buff up the customer interface on their web sites and the infrastructure to support it in time for the holidays, and e-retailing made big strides as a result.
A study by Accenture (formerly Andersen Consulting) found that 92% of attempted online purchases during the holidays were successful-a big gain from the 75% of 1999, when many shoppers thought they’d completed online purchases only to find out they hadn’t registered. Download times speeded up for the holidays dropping to an average maximum of 4 seconds or less, according to Keystone Systems. More e-retailers posted cut-off dates after which delivery could no longer be guaranteed by Christmas, and in fact Accenture found that 88% of orders placed online did arrive on time.
For some, the improvements had an immediate effect. Walmart.com took down its web site for a major overhaul during October-and was rewarded with a 500% increase in traffic by the end of November, according to Alexa Research. Barnes & Noble offered shoppers the chance to return or exchange merchandise purchased online at its stores, added Internet kiosks to help customers research online while in-store, offered same day delivery in Manhattan for purchases made online by 11:00 a.m., and saw sales rise 33% from October to December. Similarly, 1-800-Flowers.com shelled out big bucks on technology to expand its order management systems, and saw online sales for the quarter rise 69% to $47.7 million, or 36% of sales, from Q4 1999.
The Sharper Image spent Q4 cashing in on its strategy of making its web site look as much as possible like its familiar catalog and stores. At a time when other retailers were blaming a softening economy for a disappointing season, The Sharper Image reported that sales across all channels rose 20% from the previous year to $98 million in December alone. Total sales for The Sharper Image’s fiscal year (which ended Jan. 31) rose 39% to $405.9 million. While each channel grew, Internet sales grew fastest, rising 50% to $14.5 million to kick in 15% of December sales and growing 111% to $60.2 million or 15% of the year’s sales. “Sharper Image places great emphasis on presenting a cohesive experience to the customer across all channels,” Ritter says. “They take it to a high level, using the same graphic designers to develop the catalog and the web, so whether you go to the web site, look in the catalog or walk into the stores you see the same products and product images presented in the same way.”
The lessons of Q4 2001 are a year away-but they’ll be packing a punch. “For two years to come, we’re still going to see some significant weeding out,” Ritter says. “There are a whole range of factors that drive success. There’s no one magic formula.” Maybe so, but holiday season 2000 suggests it’s a safe bet that when the time comes, the web sites of traditional retailers with long-standing brand equity won’t be among the dot-coms gone. “These are the companies that will be competing with the online superstores as the destination for one-stop shopping,” Engel says.
Stagnant construction and more shopping online:
Malls must fight to hold their piece of the retailing pie
By Andrea McKenna Findlay
There’s no doubt that shoppers are taking to the Internet. Online holiday sales last year were double what they were the previous year. And all evidence points to continued growth of Internet shopping.
So what’s that mean for the real-world shopping malls? Probably that the low growth of malls that the market experienced throughout the 1990s will continue. And that mall operators will have to continually find new ways to attract tenants and consumers to malls. “Just because there are more shopping options out there doesn’t mean that consumers will spend more money,” says Christopher Merritt, principal at Kurt Salmon Associates in Atlanta. “Malls need to keep their share of the pie.”