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FYI. The beginning of the end for net stocks?
JW
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http://www.investorguide.com/investingnews.html?content=http://www.mercu
rycenter.com/svtech/news/breaking/merc/docs/071675.htm
Posted at 10:00 a.m. PST Thursday, March 2, 2000
Internet retailers face tough times
PALO ALTO, Calif. (Reuters) - It was barely a year ago that investors
could not get enough of Internet retail stocks, and new online stores
that mimicked Amazon.com were appearing on a daily basis.
While few people expected that level of euphoria to last, the industry
is, nonetheless, alarmed by how swiftly and severely fortunes have
reversed.
"E-tailing" has become something of a dirty word among even the most
enthusiastic Internet investors, with many venture capitalists say they
will back anything but an Internet store.
Most of the e-tailing stocks that have recently gone public -- like
Pets.com Inc., Buy.com Inc. and VarsityBooks Inc. -- are trading near or
below their IPO prices. Shares of the online pet supply store Pets.com,
for instance, hover around $7 a share -- more than 30 percent below the
$11 a share where it debuted less than a month ago.
Even more stunning is that some of the e-tailing pioneers -- including
Drugstore.com Inc., eToys Inc. and the software store Beyond.com
Corp. -- are trading at a fraction of their highs for the year. Some are
running out of cash and retooling to focus less on retailing, which
increasingly is seen as a questionable business.
For all the double-digit, single-day gains that initially made these
Internet retailing stocks famous, it seems that their subsequent drops
to the downside were almost as large.
Abhishek Gami, an analyst with William Blair in Chicago, says the 48
e-commerce stocks his firm tracks have risen an average of just 7.8
percent since June of 1996.
"They've way underperformed the overall market," he says.
Bob Walberg, with Briefing.com in Chicago, says "investors are finally
beginning to question these business models."
Analysts are hard-pressed to find a single pure-play online retailer has
turned a profit to date.
While the famously unprofitable Amazon.com continues to win some support
for its strategy of delaying profits in order to build its operation,
investors are not so willing to make this leap of faith for lesser
online retailers that do not have nearly the customer base or brand
recognition of Amazon.
The question now being posed to most e-tailers is not when, but if, they
will ever make money.
How did a business that seemed to define the booming tech-driven
economy, find itself in so much trouble?
Many critics now say there was a gross miscalculation built into the
assumption that retailers could slash overhead costs merely by doing
away with the lumbering ``brick-and-mortar'' stores and setting up
virtual shops online.
"There are a lot of parts you need to build before you can make money
online," Gami notes. "Amazon is spending billions of dollars to build
out its distribution facilities".
"I still think (Internet retailing) will be huge ... but the key point
is that you really don't make a lot more online than offline. E-tailers
don't have stores, but they still have to build warehouses and
infrastructure, and they still have to hire people to deal with
returns."
Not all e-tailers think their expenses will rise as high as they are for
their offline counterparts, but most now admit there are costs that were
overlooked initially. In an industry packed with like-sounding
businesses, hefty spending on advertising has been imperative to
building a strong brand.
Even Amazon found it needed to increase advertising spending beyond what
was planned for the last holiday season to spread the word that it was
no longer just a book retailer. And many smaller online merchants spent
upwards of $3 million for a 30-second slot during the Super Bowl in
January.
If these companies thought they could build a brand with a few
well-placed ads, it now appears aggressive marketing will have to be a
big part of their business plans going forward. Aside from Amazon, there
are not many strong e-tail brands, industry analysts agree -- except for
the online auction site eBay Inc. and Priceline.com Inc., which lets
consumers set their prices for a range of goods from airline tickets to
gasoline.
Most consumers still do not know the difference between a Cyberian
Outpost and a CyberStores.com, or Pets.com and Petstore.com. So now, on
top of exorbitant ad spending, many of these stores are trying to
attract customers by slashing margins to razor thin or nonexistent
levels.
In the midst of so much confusion, one thing that appears to be certain,
is the continued growth in overall e-tailing sales. Forrester Research
projects online retail sales will grow to $184.5 billion in 2004 from
$20.3 billion in 1999.
Yet some retailers appear less willing to bet on even a modest slice of
that pie. Online drug store PlanetRx.com Inc , for example, recently
said it expected to derive 15 percent of its future annual revenues from
corporate sponsorships, often with drug companies that will sponsor
disease-specific areas on the site.
Newly public VarsityBooks, which last year was touting the profit
potential of selling text books to college students, now says it is
supplementing that business with other, non-retail, revenue streams. The
plan is to use its on-campus presence to do direct marketing for other
businesses.
"In contrast to e-tailing," direct marketing "has a significantly higher
profit margin, which is an important element of our strategy going
forward," says VarsityBooks Vice President Jonathan Kaplan.
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