The Dot.Coms Falling To Earth

Holiday sales were way up--but some e-tailers are way down

In the end, Christmas '99 lived up to its billing as America's first e-Christmas. Consumers tripled online purchases, to more than $10 billion. But even before Christmas trees hit the curb, investors were asking pointed questions about who did--and didn't--rake in their share of the online blitz.

Some didn't even make it to Christmas eve:, which didn't get enough business for its gourmet-food-delivery service and said on Dec. 23 that it will suspend operations. Cook Express Inc. says it is reviewing its options and may reemerge--if investors go along. Then on Dec. 29, Value America Inc., which specializes in consumer-electronics gear, announced that despite massive spending on print ads, quarterly revenue would fall as much as 9% below projections. It's laying off 47% of its staff and cutting back offerings to a few promising categories. Expect more casualties by the time fourth-quarter earnings are tallied. "There's going to be 50 to 100 companies that will hit a wall," says Steve Westly, vice-president for marketing and business development at eBay Inc.

So, after helping lead the Nasdaq exchange to record highs, e-tail startups are leading the retreat. By Jan. 5, e-commerce shares had plunged 35% from December highs, according to Thomas Weisel Partners. Weaker private companies, meantime, will see funding dry up, forcing them to go out of business or seek a buyer, say analysts and venture capitalists.

The most likely victims? Pet supplies, gifts, and beauty products, all crowded categories, are ripe for a shakeout. The most brutal paring, though, will come in the hotly contested toys and consumer-electronics markets, says Alec Ellison, managing director at Broadview International LLC, a mergers-and-acquisitions investment bank. Inc., an electronics site that is 40% owned by Federated Department Stores Inc., says it's already on the lookout for cash-strapped dot.coms to acquire.

BATTLE STATIONS. Another way to separate winners from losers is to check the traffic reports compiled by outfits such as Nielsen//NetRatings and Media Metrix. These stats show that despite an estimated $1.7 billion of advertising thrown around by Web startups, traditional bricks-and-mortar brands, such as Best Buy and Toys `R' Us Inc., broke through online. Their sites make up nearly half of the names of the 50 most popular sites compiled by Media Metrix. Inc., an e-tailer that spent an estimated $15 million in fourth-quarter marketing, didn't make the list.

These results will only encourage the big brands to throw more money into Web sales--and make life even harder for wannabes. "Year 2000 is shaping up to be a major battle between the offline retailer and the pure dot.coms," says Jim Breyer, managing partner at Accel Partners, a Silicon Valley venture-capital firm.

As the year unfolds, dot.coms will review their gaffes and rethink strategies. One thing seems clear: Massive spending on traditional media did not create instant household names. Already, startup dropped its ad from the greatest marketing event of them all: the Super Bowl. Now, dot.coms are more likely to seek less pricey alternatives to tap consumers, including direct e-mail or co-branding with other sites or retailers. But some companies won't live long enough to make these efforts pay off. Warns Dick Byrne of ad firm Hanft Byrne Raboy & Partners Inc.: "Branding and loyalty don't happen overnight."

And more companies will focus on the basics--like distribution and customer service, which helped keep on top. But even mighty Amazon did not escape the Christmas hangover. On Jan. 5, the company's shares plunged 15% after it disclosed that its fourth-quarter sales will come in below some analysts' expectations despite tripling its ad budgets and that losses would widen because of higher inventory costs. Next victim?

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