E-Commerce 2002: Where Will the Axe Fall?

"Most of the weakest firms are already gone," David Kathman, a stock analyst with Morningstar.com, told the E-Commerce Times. "But I think some more may still fall in 2002."

But predicting where the bulk of the shakeout will occur over the next 12 months is a bit more tricky.

For one thing, the economy is a wild card in any prediction. A faster recovery may mean more survivors left standing at year's end, while a prolonged recession -- especially one that keeps stock prices from rebounding too far -- could mean more bankruptcies and fire sales in the e-commerce sector.

Milestone Year

The year 2002 will be a milestone of sorts, Kathman said, because many e-commerce firms long ago pegged the year as the deadline to record their first profits. While many will reach the goal, and some may get there faster than predicted, others may find themselves searching for strategic or takeover partners to help them survive.

One factor that could slow any further shakeout is the relatively warm reception investors gave Internet firms in late 2001. Shares of companies across the sector, from Yahoo! (Nasdaq: YHOO) to Drugstore.com (Nasdaq: DSCM), all recorded gains late in the year.

Those gains, Kathman noted, will provide a cushion against the domino effect that saw firms lose their Nasdaq listings, and then were left with few options for raising additional working capital.

Sector Watch

Since a wave of consolidation has already swept across it, mainstream e-commerce may survive 2002 with few new casualties, analysts say.

"We're seeing the growth concentrated among fewer remaining players," Christopher Kelley of Forrester Research told the E-Commerce Times. "The strong are getting stronger."

In fact, just days after the Christmas holiday, sites such as Yahoo! and Amazon.com (Nasdaq: AMZN) reported strong sales seasons, even though overall sales were expected to be nearly flat.

Rough Time

Some areas bear close watching, however, analysts say. The e-commerce software industry had a rough time of it late in 2001, for instance. PurchasePro (Nasdaq: PPRO) and CommerceOne (Nasdaq: CMRC) were among a handful of firms to announce sweeping layoffs in the fourth quarter.

In fact, PurchasePro was forced to postpone its annual shareholder meeting, scheduled for early December, after its auditing firm quit.

"The spending slowdown is affecting every vendor right now," David Alschuler, senior vice president of the e-business and enterprise applications division at Aberdeen Group, told the E-Commerce Times. "The way things are looking now, the ones with smaller market share and less liquidity are going to have trouble surviving 2002."

Always on the List

In fact, even some of the firms that have been on analysts' dot-com death watch lists over the past year are entering 2002 in the strongest positions they have enjoyed for a while.

Autobytel (Nasdaq: ABTL), which has battled consumer reluctance to move the entire car-buying process online, got a boost recently when it announced a partnership with Yahoo. The company's stock broke the $2 level for the first time since March 1st on the news.

Drugstore.com is still bidding to be one of the last remaining pure-play online drugstores as well. The company said traffic and sales were up over 2000 levels during the holiday season, though it has yet to move up its 2004 deadline for reaching a profit.

'Pleasant Surprises'

Still, companies that have targeted difficult niches, such as vehicle sales or high-end gift buying, may be among those to watch in 2002, analysts say.

"Some companies have been pleasant surprises," Kelley said. "But for others, there is a sense that the inevitable is being delayed."