Then came electronic commerce. Its emergence several years ago gave the retailing industry a jolt it hadn’t seen since Wal-Mart and Home Depot opened their doors. Suddenly, retail was hot, hot, hot. But not any retail, only online retail. From books to compact discs, from cars to consumer electronics, the Internet was going to change our shopping lives and put many bricks-and-mortar stores out of business in the process. Or so investors believed. So what happened?
Dozens of young online retail companies, such as eToys and Pets.com, have failed as sales lagged and cash burned in a quest to grab customers’ attention. Meanwhile, most online retailing survivors have been reduced to the status of penny stocks, trading at below $3 a share, including Buy.com and BarnesandNoble.com.
The Internet is a technology. Selling items in a retail format to consumers over the Internet represents one way to use the technology. True, there are advantages to selling online, including lower start-up costs and greater geographic exposure (exposure defined by computer-user demographics). But the Internet does not make retailing an easier proposition.
In the case of eToys, Pets.com and many others, the businesses didn’t raise enough capital to carry them to profitability, so when the money ran out, mainly due to high marketing costs, the businesses died. The companies hoped for more funds after their initial public offerings (IPOs) of stock, but when the stock market turned sour in April 2000, investor interest evaporated. Even with more money, however, success was far from guaranteed.
Many new online retailers launched into markets with questionable potential, and limited themselves with too few product categories. Will pet food online ever be a great retail business? Isn’t selling toys over the Web as difficult and as seasonal as selling toys offline? Take eToys, a respected operation run by smart people. It did everything right except choose an attractive business.
Domestic online-retail sales neared $12 billion in 2000, up as much as 66 percent from 1999, based on estimates by Jupiter Research in New York. That’s only a pittance of the $2.7 trillion that we spend on domestic retail sales. It is estimated that by the middle of this decade, 4 to 8 percent of all retail sales will take place online. That amounts to a sales opportunity of between $125 billion and $250 billion. Longer-term and worldwide, the opportunities are much larger. Compare that, however, with the opportunities in business-to-business e-commerce: a recent report by the Boston Consulting Group says B2B revenue might exceed $4 trillion by 2004.
Online retail has other advantages, too:
Of these advantages, the first may be the most important. If an online retailer is able to build a giant customer base with one fifth the investment base of an offline retail chain, its return on investment should be strong even if margins remain low. The holy grail of retail is very high inventory turnover through massive sales volume but with minimal capital expenditures (that’s why we see more and more giant sales warehouses being built–they’re cheaper and can support higher volumes). Online, this retailing ideal may be attainable to a degree never seen before.
Online commerce also provides many challenges and disadvantages:
Many potential shoppers continue to express credit-card-security concerns.
Given that retailing is such a difficult environment to begin with, investors should consider buying stock only in dominant retail companies, if they’re interested in retail at all.
Aside from these two leaders, investors interested in retail might be better served considering giants like Wal-Mart–com-panies that should continue to do well in the bricks-and-mortar world and also stand to do well online. Long term, these companies should be able to couple the best of both the online and offline shopping worlds into a hybrid shopping expe-rience that few competitors will be able to match.
Retail enjoyed a blast of enthusiasm in the late 1990s due to the Internet, but now we know: online retail is still retail. It’s a tough business.
