It's easy to get giddy about the limitless potential of e-business. Just look at the numbers: Forrester Research Inc. says that consumer e-commerce will grow from $7.8 billion last year to $108 billion in 2003. With growth like that, you can't blame online retailers for believing that a large chunk of their sales would not have happened if not for the Web's point-and-click ease.
Turns out that's a crock. What e-tailers forget is that, while the Web's shelf space may be unlimited, customers' bank accounts are anything but. It's now apparent that e-tailers are largely stealing sales from stores and catalogs. And we're talking one major heist. In an August report, Jupiter Communications estimates that just 6% of consumer e-commerce revenue is new spending--a figure that shocked even the study's author, analyst Ken Cassar. Face it, says Bradford C. Koenig, managing director in technology at investment banker Goldman, Sachs & Co., "ultimately, this is a zero-sum game."
Surprising as that sounds, I can't really argue with him. Sure, I've bought a few more CDs and books than I would have otherwise, plus an alarming number of old postcards on eBay Inc.'s auction site. But those are small shakes. I haven't yet bought computers, couches, or cars online. And if I do, that will replace buying them at stores. "There are only so many dollars to go around," says Cassar. "People aren't going to eat more because of the Internet."
POST-HOLIDAY BLOODBATH. In the e-commerce frenzy, few people have pondered the meaning of this simple fact. But here it is: We can expect a bloodbath among e-business upstarts right after the holidays. Yup, that soon. Think about it: In each market category, at least three or four major players and many more wild cards all hope to come out on top. They're pumping tens of millions of dollars this fall into portal deals and TV ads. "Probably 2,000 dot.com companies are spending down to dangerous levels," says Ken Orton, chief strategist for e-business at San Francisco consultant Cognitiative Inc.
And on the Web, the lack of physical and geographic constraints is likely to mean even greater concentration in each market segment than in the traditional world. The result: Only two, maybe three companies can win big in each sector. The rest? Roadkill, or perhaps targets for bricks-and-mortar laggards fearful of getting "Amazoned." "After this holiday season, the honeymoon period will be over," says James W. Breyer, managing partner with venture capitalist Accel Partners. "We are likely to see a brutal shakeout." You don't need a magnifying glass to read between those lines: If consumers don't buy, the moneymen say bye.
Traditional retailers shouldn't be relieved, however. They've been dragging their feet, hoping to avoid cannibalizing their stores by offering a relatively small number of their products online. That's a mistake that won't go unnoticed by savvy online consumers. Check out Kmart Corp.'s site: Selection is limited, and some items are even out of stock. It's a sure bet that sites like Kmart's won't cannibalize their stores--but online rivals such as Buy.com or Drugstore.com certainly will.
"NOT WORRIED." The post-holiday realization that e-commerce isn't limitless will almost certainly drive quick consolidation in a raft of online markets, from pet supplies to toys to health products. It has already started: Giant drugstore chain CVS Corp. snapped up online health site Soma.com in May, pet-supplies chain PETsMART combined with startup PetJungle.com in June, and in August, Walt Disney Co. bought a controlling stake in Toysmart.com. So when CEOs like Petstore.com's Josh Newman blithely declare, "We're not worried at all about the competition," I can't help but shake my head.
Consolidation is inevitable in any emerging industry. Think autos in the 1930s, computers in the 1980s. But hordes of e-commerce companies seem driven more by a chance to get rich quick than a passion to change the world. "Many of these companies have been financed on nothing more than an idea," says analyst Christopher E. Vroom of investment bank Thomas Weisel Partners. That's why the coming shakeout won't necessarily be such a bad thing: If consumer e-commerce really is a zero-sum game, we'll soon discover who are the mercenaries and who are the real revolutionaries.