E-Tail Shakeout Not Over Yet

"The shakeout is not over," Gartner Group research director Geri Spieler told the E-Commerce Times. "Unless pure-play e-tailers like Ashford.com, Gloss.com, and other single-line players get the attention of the consumer, they will have a difficult time surviving."

Effective marketing is indeed one of the challenges facing online retailers, along with channel integration and margin-driven product strategies, said analysts.

Most Internet retailers have addressed the most egregious mishaps that sank their competitors, such as faulty order-taking and shipping systems. But their success in the new year is far from guaranteed.

Money Mishaps

Hindsight reveals that mismanaged marketing budgets were a key culprit in the failure of many e-tailers.

"Companies got a lot of money and spent it on impractical and ineffective things like huge office space and Super Bowl advertisements," Gartner Group research director David Schehr told the E-Commerce Times.

"Today's pure plays have found small niches and are marketing with stealthy guerilla tactics that take few marketing dollars," he said.

Customer Costs

Looking ahead, retailers that overspend on marketing without significant customer conversion rates will struggle, according to Yankee Group analyst Paul Ritter.

"Most online retailers that spend in excess of US$20 to $40 for each paying customer, or that spend 50 percent or more of revenues on sales and marketing expenses, are likely to have a difficult time sustaining their business," Ritter wrote in a recent report.

By those metrics, VitaminShoppe.com and SmarterKids.com -- with per-customer acquisition costs of $67 and $111, respectively –- may be facing uncertain futures, Ritter suggested.

Channel Rut

Another fault of yesterday's e-tailers was a shortsighted devotion to the Internet as their solitary sales channel.

The companies that survived the initial rounds of the shakeout are those that took small incremental steps to build on existing businesses, rather than starting from scratch, said Schehr.

For example, the online arm of outdoor clothing retailer REI owes its survival, at least in part, to its integration with the company’s other sales channels -– catalog, in-store and telephone.

According to Schehr, Internet merchants looking to beat the odds must provide better coordination of sales channels. A combination of underlying technologies and customer service principles should make a customer's chosen sales channel a neutral factor.

Brick is Basic

Even retailers that began as purely online operations have realized that brick-and-mortar ties are critical for survival.

"The virtual world is fickle," said Spieler. "The consumer only thinks of what is in front of them, not what they can't see. Amazon (Nasdaq: AMZN) has made deals with brick-and-mortar companies to take advantage of their real-world presence."

Retailers that remain solely online, like Ashford.com and Gloss.com, will have to bank on creative marketing and carefully honed product strategies for their survival, added Spieler.

Marginal Success

Indeed, product strategies centered on negative or slim profit margins have undercut many e-tailers' hopes for endurance.

Pets.com met its end in 2000 largely because of its negative 3 percent gross margins, according to Ritter.

Amazon, Ashford, and Gloss have narrowed their product offerings and merchandizing strategies to categories that sell well online, said Spieler.

Remaining online retailers that do not work to improve their margins in 2002 face a rocky future, analysts agree.

"[A negative margin] is not a successful model for public firms that must report quarterly results that continue to meet or beat Wall Street's expectations," wrote Ritter.

Service or Sales?

The e-commerce aspect of Bloomingdales.com, run by Federated Department Stores (NYSE: FD), will not make it past the first month of 2002, thanks to a poorly planned online product strategy.

The downfall of Bloomingdales.com signals the beginning of a new trend among big chain retailers, suggested Spieler.

"[They] will look more critically at the cost versus return-on-investment that their Web channels offer," she said. "We will begin to see a large shift in terms of consolidation and movement toward more service-oriented retail Web sites, [rather] than sites designed strictly for merchandising and sales."

Other retailers should not necessarily follow Federated Department Stores' example, suggested Schehr, and should guard against overreacting to adversity.

"It is just as important to take small, careful steps in retrenching as it is in growing," added Schehr.