Crucial Holiday Season For E-Tailers

Online retailers can't find much love on Wall Street, but they're working hard to prove they have the goods to deliver this holiday season and beyond.

Though Internet-based retailers are still valued well above their brick-and-mortar brethren in terms of price-to-sales multiples, Wall Street's fondness for these stocks has decreased dramatically in recent months as investors fret about low margins and increased competition.

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With Wall Street's confidence in online retailing near an all-time low, it's "crucial" that the commerce companies don't disappoint this holiday season, said Nicole Vanderbilt, director of Jupiter's digital commerce group, who projects at least 50 percent of all online consumer purchases this year will occur in the fourth quarter.

Making the Most Of the Holi-daze

The fourth quarter "could make or break some of these thinly capitalized e-tailer companies," Keenan said. "If anybody disappoints ... it could be game over."

All pure play e-tailers, including the segment's biggest star Amazon.com, are still losing money and most are a year or more away from getting in the black. While most analysts expect online commerce to explode in coming years - estimates for the year 202 range from around $300 billion to $500 billion - many people are concerned that most retailers are selling low-margin commodity items and that the battle for customers will result in an ugly price war.

Cyberian and numerous other e-tailers are pursuing various tactics to boost their sales and profits by attracting and keeping customers, including personalization and direct marketing initiatives, international ventures and product line expansion. "Everyone's in a race to see how to expand their revenue potential," said Vanderbilt. "[Internet retailers] are much more savvy about how to utilize the medium."

Meanwhile, some companies are seriously talking about alliances or mergers. And other e-commerce companies, both new and old, are trying to eliminate some of the margin-sapping channels involved in most online ventures with intriguing business models such as person-to-person auctions and direct-to-consumer selling.

Online retailers have already begun to try to personalize the shopping experience for their customers. CDnow recently launched its My CDnow service, which allows users to alter the store's set-up based on their own musical preferences, and N2K followed suit with a similar idea about a month later.

Cyberian Outpost plans on launching an even more comprehensive, yet subtler, personalized service.

Using technology from companies like Broadvision, Andromedia and CMG Information's (CMGI) Engage, Cyberian will track where people go when they visit the site and what they buy, then follow up with relevant ads or offers when they return. For instance, customers who spend a lot of time in the company's printer section but don't buy anything will see printer promotions next time they visit.

"You can make some good bets about what to offer somebody based on what you know about them," said Chris Evans, vice chairman of Engage Technologies.

The idea, according to Peck, is "to create a special retail experience for every single person that comes in the front door."

One potential drawback: Powerful personalization services require users to accept the fact their Web footsteps may be tracked, and that's hardly a given.

E-commerce companies are also getting very serious about the benefits of direct marketing, especially to attract repeat visitors. In particular, consumers can expect to see a lot more e-mail highlighting special offers. "E-mail marketing is definitely taking off," Vanderbilt said.

Direct marketing is perfectly suited to the Internet. Commerce-focused home page provider and IPO hopeful Xoom, for instance, is able to determine within a day whether a trial offer should be implemented on a widespread basis, while it can take weeks to evaluate results for a traditional phone or mail direct marketing test run.

Again, the major risk is that customers will resist direct marketing campaigns due to a perceived invasion f privacy.

Expect Internet retailers to continue to expand the number and scope of the products they offer. The trend is already happening. Amazon.com started with books, added music, will soon sell videos and eventually who knows what else. Preview Travel tacked on higher-margin vacation packages and cruises to its product list. Auctioneer Onsale expanded well beyond its original focus on last season's computer-related products to items like sporting goods and condo rentals. Peapod now offers special gift or food packages in addition to its traditional grocery business

"Everyone's moving quickly to cast their nets wider than they did in the beginning," Vanderbilt said.

E-tailers, however, can lose their focus or the power of their brand if they expand too fast, too far. For instance, most people who know the Amazon name consider it synonymous with book selling. Will they be able to accept the company as a Wal-Mart of the Web?

Put up a store on the Web and the whole world becomes a potential customer. This global reach is one of the e-tailers' biggest advantages, and nearly all of them have begun to get serious about their international strategies. Many, such as N2K and Barnes & Noble, are entering unfamiliar territory with the help of hometown partners. Amazon, however, decided to go it alone when it expanded into Europe by buying a couple of overseas operations.

In markets such as computer products where foreign distribution agreements are very expensive and difficult to police, the importance of Internet retailing will be even more obvious. "Over the next five years, there will be a very dramatic shift in international distribution," Peck said.

Concerns about the global economic situation may keep e-tailers from moving too fast overseas, especially in Asia, Vanderbilt said. In Europe, though, "the race for market share is on," she added.

On the Internet retailing front, there have been no fiercer competitors than CDnow and N2K, but now the two rivals are furiously trying to hammer out a merger agreement. And there's good reason for it: The bitter competition only resulted in unsustainable promotions and overly expensive distribution deals.

However, music was the most crowded field in Internet retailing. Most other sectors only have one or two major players, so consolidation may not occur as fast as some people may expect.

Instead, companies may be more apt to enter into alliances with one another. CDnow, Cyberian Outpost, Reel.com, eToys and recently announced that they will form a mall-like network in November and cross-promote each other's sites. Vanderbilt said additional similar arrangements are likely in the near future.

Part of the problem for e-tailers has been that most are still following the traditional reseller or middleman model - a low margin business despite the cost and global reach advantages that they have on the brick-and-mortar guys. Revenue must increase dramaticallfor most of them or profitability will remain a distant dream.

Some up-start e-commerce ventures, however, are succeeding by focusing on different models. For instance, Wall Street loved newly public eBay (EBAY), the pioneer in person-to-person auction retailing. The beauty of the person-to-person auction format, which allows people to buy and sell things with each other, is that eBay never has to handle the goods being sold. That means the fees and commissions eBay charges users for listing and selling items is primarily high-margin gravy.

Other early e-commerce success stories have come from manufacturers who have had luck selling items directly over the Web, such as Dell (DELL) and Cisco Systems (CSCO).

Chip Shot Golf, an Alameda, Calif.-based cloned golf club manufacturer that recently received a $3 million round of financing from Sequoia Capital, hopes to do the same thing by manufacturing its own customized clubs and selling them directly to the consumer.

"Calloway or [another club manufacturer] can't compete against us on the Web because they have to sell through their channel," said Chip Shot Golf CEO Amar Goel. "It's the whole kind of Compaq-Dell thing. Compaq is getting killed by Dell right now because Compaq is beholden to the channel."

Written By Darren Chervitz