The inevitable holiday parking lot horrors, pushy salespeople and crowded stores at shopping malls are enough to put any shopper in the online mood for the holidays,at least that’s what Internet retailers are hoping, some desperately.
This year’s holiday season is shaping up as critical to Internet firms struggling for profitability in a landscape where venture capital is drying up and stock prices are fading faster than the old expression “information superhighway.”
But over the past year, more big name brick-and-mortar retailers have elbowed into the marketplace and even to its forefront, offering consumers names they know and trust, existing inventories and the availability of stores for making returns.
“This is definitely going to be a make-or-break season for the second- or third-tier online retail companies because they don’t have cash available any more and investors are looking for short-term profits,” said Christopher Kelley, an analyst at Forrester Research Inc. in Cambridge, Mass.
According to research conducted by New York-based Jupiter Research, an estimated 35 million people in the U.S. will purchase gifts online this holiday season, compared with 20 million online shoppers last year. The increase is expected to boost online spending this season to $11.6 billion in November and December, up from $7 billion during the same period last year. However, New York-based Media Metrix reports that most of these new online consumers are visiting the Web sites of brick-and-mortar stores rather than those of pure Internet companies.
“It’s going to be a tough season,” Forrester’s Kelley said. “MotherNature.com, Pets.com and Furniture.com all decided they are not going to make it through the holidays and decided to end it gracefully by disassembling their companies.”
Some of the biggest Internet retailers have seen their stock prices crash this year. EToys Inc., Los Angeles, slid from its 52-week high of around 70 to the 1 1/2 level last week. Seattle-based Amazon.com Inc., which hit a high of 113 last December, saw its shares fall to the 25 level last week amid analysts’ concerns about its cash position and sales growth potential.
Some dot-com companies have failed already this year, and most of the others have been narrowing their focus and streamlining their systems to achieve profitability.
“The push for profitability has resulted in higher prices and more rational advertising that has in turn reduced the rate of growth of many companies,” Tom Courtney, an analyst who covers Internet companies, said in his Nov. 17 report for Banc of America Securities. “The evidence: nearly every company in the sector missed their original second quarter revenue estimates and reduced guidance for holiday 2000 and calendar 2001 to more moderate levels.”
A key to many firms’ hopes is the holiday season, but it brings a quandry, too: how much to spend on marketing. Some of the electronic retailers are launching holiday marketing campaigns, while some have curtailed advertising as part of their cost-cutting.
Aliso Viejo-based buy.com Inc. doesn’t want to sacrifice sales growth. The company launched an advertising campaign last week that pitches the pitfalls of shopping at malls and the pleasures of shopping online. And, like last year, the company is offering free shipping on some orders.
The holiday push comes as buy.com announced it will discontinue its underperforming Australian operation, and follows a year in which the online retailer raised its prices to reach for profitability.
Nevertheless, the 3-year-old company, which calls itself “the Internet superstore,” reported a net loss of $30.5 million on sales of $190.1 million for the third quarter ended Sept. 30, compared with a net loss of $33.1 million on sales of $158.9 million for the same period a year ago.
Buy.com’s stock was trading last week near its 52-week low of 7/8, with its February initial public offering day high of 35 7/16 a distant memory.
Traditional retailers with Internet sites are playing both sides of the fence, to their advantage.
Big brick-and-mortar names such as Wal-Mart Stores Inc. have revamped their Web sites for the holiday season, and more Middle America consumers are now shopping online and tapping into these resources, Kelley said.
Locally, Pacific Sunwear of California Inc. of Anaheim expects to reach $3 million in online sales this year, while Foothill Ranch-based Oakley Inc. reported online sales of nearly $5.4 million for the past four quarters.
“We are looking forward to a great holiday season,” said Ron Ehlers, vice president of information services at Pacific Sunwear. “We started out with sales representing a fraction of an average store and we eased into it with last year’s holiday season tracking about 1.3 times an average store in volume. Now we are running four times an average store so the ramp-up has been really nice. We expect another ramp-up to occur with the holiday, to as much as five times an average store’s volume.”
The retailer has expanded its online offerings from its initial 100 styles to 340 styles last December and 800 styles during back-to-school season. There now are 1,000 styles available on the Web site, as well as gift items and the option to buy gift certificates online, he said.
Internet retailers with a brick-and-mortar component also are positioned more strongly.
Fred Lerner, president of Irvine-based Phobo.com Inc. said his company is about to kick off an advertising campaign worth several million dollars to promote its Web sites, Ritzcamera.com, BoatersWorld.com and Photography.com. The company’s offline partner, Ritz Camera, also is including the Web site in its advertising.
“I know there’s a lot of doom and gloom in the online business segment, but our sales are growing 78% quarter-over-quarter, and we are hiring people and not laying any off,” he said.
Lerner estimates sales to be up 200% in December, the year-old company’s first month with prior-year figures to compare. The company is expecting growth in part after signing partnership agreements with America Online Inc. and Yahoo Inc. to become permanent anchors on their shopping mall sites.
“Even with the shakeout this year and during the holidays, consumers are still going to spend as much money online as they did before,” Forrester’s Kelley said. “It shows the resiliency of the channel as being more important than the survival of individual retailers.” n
