Meanwhile, at a recent meeting to discuss the future of e-commerce, the chief executives of Drugstore, travel site Expedia (EXPE) and luxury-goods retailer Blue Nile, insisted that their companies will survive. They all forecast continued growth, pinning their hopes on their strong relationships with existing customers, broadband technologies and overseas expansions. But even roundtable participant John Doerr, a partner at Kleiner Perkins Caufield & Byers (dossier) who remains upbeat about e-commerce, predicted that only one in 20 companies in the sector would survive.
The reasons for the slowdown at online stores are abundant. The economic chill is partly to blame, as is the increased competition from brick-and-mortar stores. Companies such as Best Buy, Target and Wal-Mart, which for the first time this year have credible online efforts, have seen their traffic soar. Still, traffic is not always a good indicator of sales, and final holiday sales figures will not be known until January. In addition, online retailers have been forced to cut back on the lavish advertising and promotions that drove growth in years past.
Many experts also note that online shopping, while no longer a fringe phenomenon, is simply not ready for prime time. According to Kirthi Kalyanam, associate professor and director of e-commerce initiatives at Santa Clara University, an increasingly large number of early adopters is buying online and deepening the scope and size of online purchases. But online shopping needs to become easier before it can reach a truly mass audience. "For the mainstream shopper it is still not there," says Kalyanam.
The shortcomings of online commerce were all too apparent to shoppers who browsed through shelves stocked with Barbies, Play-Doh and stuffed animals at a Toys "R" Us in San Francisco the week before Christmas. For Bob Farese, on a mission to buy gifts for his three sons and two daughters, browsing online is too hard. "The choices are overwhelming," he says. "If you want pants from L.L. Bean (dossier), there are about 10 choices. If you want an action figure, there are about a hundred. It's a lot easier to scan this with your eye," he adds, waving at a wall packed with action models.
In the Westwood Village district of Los Angeles, Jackie Bailes says some of the novelty of online shopping had worn off. Bailes had made numerous Web purchases last year, but didn't expect to make any this holiday season. "I had good experiences, but I have more control if I go to the store," she explains. "I can comparison-shop and ask questions." This was more important now, adds Bailes, since she is trying to watch her spending this Christmas.
These price-worries seem to echo the concerns of many who did shop on the Internet. A survey of 3,200 online shoppers by Robertson Stephens (dossier) showed that more than half abandoned their shopping carts this holiday season because of shipping costs. What's more, 71 percent said they made purchases because of shipping promotions, which were prominent at stores such as Amazon and Best Buy.
"[Online] retailers are not making people happy on pricing," says Lauren Cooks Levitan, the Robertson Stephens analyst who conducted the survey. To compensate, online stores will have to focus on convenience. "That means you might end up with a smaller target market because there are more price shoppers than convenience shoppers," she says.
The most significant exception to all this bleakness seems to be Amazon, which continues to draw customers with its combination of selection, product reviews and reliability. Most analysts agree that Amazon is on track to meet, or even top, its $1 billion forecast for holiday sales. The company's Delight-O-Meter, which counts units sold since Nov. 2, surpassed 31 million last week, as the company continues to hold the top spot for shopping traffic. Its branded Toys "R" Us store alone is the second most-visited online shopping destination. "We certainly see significant growth in this business," says John Barbour, CEO of Toysrus.com, brushing aside any concerns of a slowdown.
Yet even some longtime Amazon bulls note there is reason to worry. Merrill Lynch (MER) analyst Henry Blodget says Amazon grew by nabbing market share from weaker rivals, such as eToys - not because of overall market growth. "What happens in six months to a year when there is no more market share to gain?" Blodget says.
To a large extent, Net retailing is suffering from its unrealized promise. So far, the vast majority of online stores have done little more than put up catalogs on a screen, forgoing features such as intelligent recommendations and personalization, according to Erik Brynjolfsson, a professor at MIT's Sloan School of Management who remains optimistic about the long-term prospects of e-commerce. For the short term, however, Brynjolfsson says he is less sanguine: "We are going to see a little accelerated Darwinism over the next few months."
Jennifer Couzin, Keith Perine and Kevin Roderick contributed to this story.
