No one needed cheer this holiday season more than online retailers. A slew of high-profile failures throughout the year tarnished the entire field; survivors needed a knockout holiday season to turn around investor sentiment and to help them assemble the funds they desperately need to stay in business.
But the season of hope turned into a season of gloom. With the notable exception of Amazon.com (AMZN), by Dec. 21 most online stores appeared to be falling short of their sales goals. In fact, the growth of online sales slowed even as many retailing giants made increasingly large commitments to the Web. On Dec. 15, the entire sector was stunned by news so dire it put into question the survival of one of e-retailing's brightest stars: Online toy seller eToys reported its holiday sales would be roughly half of what it had expected. The company, which will run out of cash by March 31, hired Goldman Sachs to find a buyer or merger partner.
Online stores are not the only ones suffering. Overall, America's retailers are expected to have one of their worst holiday seasons in a decade. To pick up sagging sales, Kmart (KM), for one, slashed prices and kept its stores open round the clock before Christmas. The economy's growth rate sputtered to 2.2 percent in the third quarter, its slowest pace in four years. And last week, not even Fed Chairman Alan Greenspan could put a stop to a seemingly endless stock market slide [see "The Market That Stole Christmas"] by suggesting that interest rate cuts might be in the offing. With uncertainty about the incoming administration's ability to steer the longest economic expansion in U.S. history toward a soft landing [see "Bush Builds a Team"], consumers are spending less and gravitating toward the myriad bargains lavished on them by anxious retailers.
Yet while traditional retailers have the staying power to weather tough times - as they have done before - that might not be true for much of what is left of the online retail sector.
Without a doubt, eToys (ETYS)' problems are uniquely its own. Once the leading online toy seller, it faced fierce competition this season from the recent and apparently successful partnership between Toys "R" Us and Amazon. Consumers were also frightened away after eToys famously failed to deliver some orders last year by Christmas. To make sure that didn't happen again this year, CEO Toby Lenk spent heavily to build two enormous warehouses to handle inventory and delivery; sales this season simply won't cover the outlay.
But eToys' shortfall is so severe - the company expects holiday sales to total between $120 million and $130 million, rather than the $210 million to $240 million it had forecast - that it calls into question the growth prospects for the entire sector. Already, research firm BizRate.com (dossier) has downgraded its holiday online-sales projections from $6.1 billion to $5.68 billion. Goldman Sachs says that sales growth will be at the low end of its projected range of 50 percent to 100 percent. That's bad news for any online retailer that needs to raise additional capital next year.
That includes companies with sluggish holiday traffic such as Buy.com and Cyberian Outpost (COOL), as well those whose business is not tied to the holidays, such as Webvan and Drugstore.com. "Of the companies that need cash, less than a handful will be able to raise it," says Anthony Noto, an analyst with Goldman Sachs. He adds that Egghead.com (EGGS), PlanetRx and a handful of others will need to raise money in 2001. Those that have managed to slash costs dramatically could survive on what they have; they are likely to reach profitability eventually, but in some cases their business will be so scaled back that they'll be comparatively insignificant.
Indeed, with the eToys flameout and the sluggish growth of the entire online retail sector, one basic assumption underlying the case for e-commerce optimism has been shattered. For Net retailers, dizzying growth was a given, as was the notion that Internet stores would increasingly steal market share from their offline counterparts. Investor skepticism focused on the retailers' ability to parlay that growth into profits.
Certainly retailing continues to grow faster online than offline. But most observers no longer expect Web stores to account for as much of total retailing - some estimates went as high as 20 percent - as they once did, at least not for the foreseeable future. And as of now, online retailing accounts for just 1 percent to 3 percent of all retailing.
Some dot-coms tried to distance themselves from the seasonal gloom, issuing press releases and conducting hastily arranged calls with investors to tout their performance.
In one such release Dec. 18, Drugstore.com said its November traffic was up 40 percent over the previous year, while sales during one recent week actually equaled sales for the entire holiday season last year. Cyberian Outpost said during a call with investors Thursday that its Outpost.com store recorded a 60 percent leap in sales during the first 19 days of December, compared with the same period a year earlier. The company added gross margin dollars had tripled during the same period. And designer apparel retailer Bluefly (BFLY) said its fourth-quarter sales were expected to surge about 90 percent; the growth, while impressive by this year's standards, is based on last season's modest total of $3 million.
