Clicks without bricks just doesn't pay the bills - Brief Article

Not long ago, the sentiment among the mass market retail community was that pure-play e-tailers were onto something that the rest of the retail industry was missing out on. Call it a sense of camaraderie among the pure-players that could be felt across the lines of IPOs, through-the-roof sales increases and an influx of investment capital from some seemingly bottomless pit of cash.

Well, guess what? The bottom of that cash pit is now falling out, and the pipe dream of instant retail success via the newest and most innovative media in a century is imploding, as e-tailer after e-tailer gets the plug pulled on that steady stream of "endless" cash.

And here's the greatest irony of them all: Whereas the prevailing belief among mass retailers once followed a gold rush train of logic that if you weren't in it early--emulating an Amazon, eToys or CDNow strategy--you'd surely be dead in the water, today there's been an about-face.

Now, there's almost a panic-button sense among the pure-players that long-term viability is grounded in traditional retailing--that's right, traditional retailing. Therefore alliances with bricks-and-mortar chains make for the quickest, most effective way of establishing credibility with both the investor community and the consumer base.

The best example of that is America Online hitching to Tim Warner. Sure, the sex appeal of AOL's stock dropped like a rock. But it's price didn't. And that's a lot more than can be said for the likes of e-tailers such as eToys or Amazon. In 1999 alone, the combined losses for eToys and Amazon amounted to more than $799 million, nearly six times their combined losses in 1998.

In fact, Amazon, which once stood as the infallible pure-player whose financial statement was on a perpetual course for benchmark profit potential, hit an all-time low late last month when analysts warned investors of the risks of Amazon's convertible bonds, the result of which saw Amazon's share price drop 19% in a single day of trading.

Peapod knows what that's like. By June 1998, the grocery fulfillment leader was the fifth largest e-tail revenue generator on the Internet, and there was seemingly no limit to where it could grow--that is, if you only looked at revenue. That same year, it lost $20 million. But instead of drying up and blowing away, Peapod is now the on-line component of Ahold USA, one of the healthiest grocery retailers in the country with more than 1,063 stores and annual sales in excess of $20 billion.

The potential for clicks-and-mortar synergy at Ahold USA is phenomenal, and now Peapod has a growth vehicle it could only have dreamed of as a pure-play independent.

So where does that leave the giants like Amazon? It doesn't take them any closer to attaining the elusive profit margin--and at that rate, many industry watchers, including more and more analysts--see such a business strategy as little more than stubbornness. To keep this mini stock slip from becoming a mega industry slide, Amazon would do well to follow the lead of some of the e-tailers before it and seek out a mortar component to its business.

Granted, the transition from a market revolutionary to just another run-of-the-mill Fortune 500 company will not sit well with Amazon's anti-establishment, risk-taking, new-breed executive--especially those who have traded away their early 20s for the promise of a seven-figure stock payoff. But it should sit just fine with investors. Remember them? The guys footing the bill, waiting patiently to see a return on their investment?

For all the hype surrounding Internet retailing, no company, not even Amazon, is making a fortune selling its wares over the Web. Just look at the e-tailers that have surpassed the $100 million sales mark and earned a spot on the DSN Annual Industry Report featured in this issue on page 37. If their earnings reports could bleed off the page, it would take a mountain of gauze pads to soak up the red.

In the final analysis, though, the debate isn't about bricks versus clicks. It's about making the channels work together.

COPYRIGHT 2000 Lebhar-Friedman, Inc.
COPYRIGHT 2000 Gale Group