If 1999 was the year that non-profitable e-commerce companies got a free ride from Wall Street, a new report from Forrester Research shows that 2000 is proving to be the end of the line.
“Financial markets exasperated with non-existent online profits will turn a deaf ear to persistent ‘investment mode’ rhetoric and soundly punish merchants who bleed red ink,” the report says. “Recent stock disasters like Value America and eToys — whose market caps as of January 11, 2000 are down $3.1 billion (US$) and $7.7 billion respectively from 1999 highs — serve as bad omens for online stores that lack unique approach or technology.”
The report concludes that Wall Street’s impatience will also force e-tailers to drastically transform their models.
“To please the Street, online merchants will balance marketing blitzes with a new focus on company fundamentals following their first-quarter earnings announcements,” the report says. “They will follow the lead of Priceline.com, which scaled back expansion plans last fall to grow margins and reduce operating costs.”
Thinning Profit Margins
One of the contributing factors to this day of reckoning for online merchants has been thinning profit margins, the report notes.
“Retailers already struggling to maintain margins in the face of price erosion will find additional customer growth a mixed blessing,” the report says. “As ONSALE confessed before its merger with egghead.com, it’s tough to scale back a business that sells products at or below cost.”
New Markets Require Huge Investment
Additionally, e-tailers have found that expansion carries a huge price tag.
For example, the report points out that even a single category U.S. Web site must spend at least $40.5 million to launch its site and another $48.8 million for annual maintenance to remain competitive.
The report adds that Europeans face the same problem. In order for an e-commerce site to be competitive in Europe, the report said the price tag is a minimum of $11.3 million, plus $5 million for each country in which it operates.
Year of Consolidation
As a result, Forrester contends that 2000 will also be a year of widespread e-tailer consolidation, as startups huddle together for competitive leverage while brick-and-mortar giants “buy the talent, technologies and processes” needed to put them in the online arena.
Revenge of the Brick-And-Clicks
Finally, the report concludes that 2000 will usher in a new era that is characterized by a few large brick-and-click players that will be able to successfully exploit deep customer relationships and a presence across multiple channels to entrench themselves.
“These firms will ditch new economy platitudes in favor of unfashionable old metrics like margins, profits and customer retention costs,” the report says.