Consider the case of Amazon.com.  Even this high profile e-tailer, with huge dollar sale volumes, tremendous name recognition, and aggressive marketing, finds its shares trading at less than one-fourth of its 52-week high right now. 

 

Yet, because Amazon.com's third quarter losses were only 25 cents, as opposed to analyst estimates of 33 cents, the financial world views this as a success.  Less loss than anticipated equals success in this world.

 

In just the last few weeks, the world has seen two of these high profile web e-tailers Pets.com and mothernature.com close their doors completely.  According to the Nov. 13, 2000 edition of Forbes.com, most dot-com shares are now selling at one-tenth of their March 2000 closings and many of those that are currently trading will soon be gone.

 

Yet some of Internet retailers, like Amazon.com and drugstore.com, have made in-roads into the markets of their traditional brick and mortar competition, forcing them to not only defend their own turf as well as look more closely at the Internet as a retailing channel.

 

When one looks at these contradictory facts, one feels compelled to wonder what the future of e-tailing will be.  There may be no simple answer to this question.  The whole business of e-tailing has gotten more complex since it began.  Yet, in that complexity may lay some of the answers of the future of e-tailing.

 

In this first of two articles we will look at what Internet retailing is, how it is performing, and what that performance portends for the future.  In our second article, we will offer a few modest suggestions for the future health of Internet retailing.

 

E-tailing Q&A
To get the answers to what Internet retailing is, how it is performing, and what that performance portends for the future, it is probably useful to ask and answer a few more specific questions:

 

What is e-tailing?
E-tailing is the wired world equivalent of the catalog businesses that began and flourished around the beginning of the 20th Century.  Those catalog businesses supported a geographically spread populace, with little or no access to brick and mortar stores which were located, by economic necessity, in large cities.  Today's e-tailers endeavor to support a busy consumer population that has limited time to shop, but also has wall-to-wall Internet access, and might find some appeal in the convenience of doing some transactions online.  Prospective E-Tailers look at the number of people who do online banking, bill paying, and stock transactions as support for their view of the value of their niche.

 

How is e-tailing different than the traditional catalog business?
Beyond the obvious difference of using the Internet as the vehicle for delivering both product information and transacting business, e-tailing is a concept that is less than a decade old.  It is still executed in relatively amateurish terms and with limited success with regard to the bottom line.  Catalog businesses, on the other hand, have been around for over a century and countless practitioners who know how to sell products without losing money have refined the concept.

 

Another difference is that catalog businesses maintained inventories of products, since most catalog businesses were traditionally extensions of brick and mortar retail store who were using catalogs to reach a market not physically connected to their stores. E-tailers have no on-hand inventory or physical presence beyond the staff that receives and processes their orders and even this can be farmed out to a company that specializes in order fulfillment.

 

Who are the e-tailers?
E-tailers fall into two categories:  Internet "pureplays" and brick and mortar vendors.  The difference between the two is a key component to gaining some insight into the limited prospects of E-tailing as its currently configured.

 

Internet pureplays are businesses whose retailing experience and presence exists solely on the Internet.  A generalization of a pureplay would be a startup business that identified a market that could be retailed over the Internet.  The startup identified some supply channels to provide them with inventory on an as-needed basis.

 

Brick and mortar businesses in Internet retailing are generally businesses that have felt an impact from their pureplay competition and decided that they need to address that impact by creating their own Internet presence.  In this regard they mirror the classic catalog business, acknowledging the presence of another market that they should compete in and competing in it. 

 

Because of their roots, brick and mortar vendors often execute e-tailing more effectively than their pureplay counterparts.  We'll discuss these differences in our next article, since they are germane to the future of Internet pureplays.

 

What are the advantages of an Internet pureplay business?
On paper, pureplay E-Tailing appears to be a concept that has low startup costs and low overhead.  The primary initial capital outlay of the startup E-tail business is in designing and creating the Internet presence, including the servers required to handle the volume of traffic the E-Tailer hopes to attract, creating the alliances with suppliers and delivery vendors, promoting the business, and hiring the staff.

 

While most of these expenses are substantially similar to those incurred by the brick and mortar competition, it is the expenses that are not listed that are the primary appeal of the Internet pureplay.  Unlike a brick and mortar business, a pureplay doesn't require its own warehousing space, retail floor space, or retail staff for that matter.  The warehousing is done by the suppliers with who they've created alliances (often on a dollar-free contingency basis), the website becomes the very low rent retail floor space and there is no sales staff to speak of, just some anonymous customer service staff who, by and large, are only reachable through e-mail.

 

What are the disadvantages of an Internet pureplay business?
The primary disadvantage of an Internet pureplay business is that it can become a victim of its own success.  Let me illustrate this with one of my own recent experiences with an Internet pureplay.

 

I ordered an item from one of these vendors on its release date.  The vendor characterized the item as one that could be shipped within 24 hours of the order being received.  However, the Internet pureplay had both underestimated the potential popularity of this item and arranged for too few of them with their suppliers, or their suppliers -- who also service the pureplay's brick and mortar competition -- were unwilling to commit more items to them on a contingency basis, when there were hard orders to be had from the brick and mortar point of sale vendors.

 

As a consequence of this, I found myself still waiting for my ordered item to ship a full week after its release, because the vendor's supply was inadequate to meet its orders.  While instant fulfillment isn't a necessary component of retailing, if it weren't very important, all business would be conducted by way of catalogs and the Internet.

 

What are the consequences of that success?
The price Internet pureplays pay for products can be a major issue.  Their suppliers may allot them inventory on the virtual equivalent of a "consignment" basis and, because of this arrangement, the pureplay's cost pay per unit may be higher than what their brick and mortar competition pays.

 

Yet, in order to compete with the brick and mortar competitors, they must offer those same products at a lower price than their competition.  In a best-case scenario, that combination of higher costs and lower prices will cut a profit margin if one actually exists which, for most Internet pureplays, it doesn't.  Most of them generate tremendous dollar volumes of sales and no profits at all.

 

This is a complex question.  Some of the defunct Internet pureplays are gone for a variety of reasons, ranging from the idea not being suited to Internet retailing, such as pet supplies sold online, to ill-conceived IPO's that could never hope to meet investor expectations, especially with a business model that offered them little chance of making any profits.

 

The survival of the ones that remain depends on them not being the business equivalent of the dinosaurs, unwilling or unable to adapt and evolve to meet their changing environment.  In our next article, we'll offer some observations about that changing environment and how the remaining e-tailers can adapt to it in order to survive and, perhaps, even to prosper.

 

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