Amazon And Yahoo: All That Glitters...

Holiday sales seem strong--until you take a closer look

Despite once-lofty sales expectations, this Christmas brought a bad case of the blahs to online retailers. Internet spending between Nov. 20 and Dec. 24 grew to $5.8 billion, an increase of only 53% over last year, according to For most e-tailers, that wasn't good enough to end questions about their financial viability. Goldman, Sachs & Co. says half of the 22 remaining public e-tailers are likely to run out of cash by next holiday season. "No one has proven the economics of e-tailing," says Jeetil J. Patel, senior analyst at Deutsche Banc Alex. Brown.

REAL-WORLD COMPETITION. So amid the carnage, how are things going at two of the Net's remaining bellwethers, Yahoo! and Inc.? Each boasts a very different model for online retailing: Amazon is determined to solidify its role as the Net's biggest online-only purveyor of brand-name products. Portal Yahoo instead focuses on feeding online shoppers to a mall of 100 big-name retailers including the likes of Compaq Computer, Gap, and eToys.

For Amazon, a big part of the challenge this season was simply keeping up the growth as competition from real-world rivals sharpened. At that, it succeeded. The number of units shipped rose 50% over last holiday season, to 31 million. As a result, most analysts expect Amazon to finally hit a quarterly sales mark of $1 billion--a major benchmark that management has long cited as key to achieving profitability.

Nevertheless, the strong sales have not eliminated questions about Amazon's underlying strength. For starters, a big part of those gains don't come from its own product lines. Lehman Brothers Inc. bond analyst Ravi Suria says pc Data figures show that up to one-third of Amazon's holiday traffic actually came from partner Toys `R' Us. Indeed, an analysis of Nielsen/NetRatings data for the week of Dec. 17 shows that if Toys `R' Us were cut from Amazon's total traffic, Amazon would have been virtually flat compared with 1999 despite a big buildup in product offerings and inventory.

Amazon claims success in its expansion beyond cds and books. Three of its Top 10 sellers, for instance, are George Foreman grills. "We've seen a broad acceptance of diverse product lines," says spokesman Bill Curry. Still, on Dec. 28, Amazon launched a clearance Web site. That could be a sign of poor inventory management--or that customers aren't buying newer product lines.

More important, doubts remain about the costs Amazon is incurring to get sales. To attract customers, Amazon extended its offer of free shipping for anyone spending more than $100 from Nov. 22 to Dec. 10. Its new wireless-phone store is also giving $50 credits for any purchase above $100. And a Chase H&Q study found that the price of some popular electronics gifts on the site had been cut by 6% during November. The discounting "is definitely taking its toll on earnings," says Chase H&Q's Bonnie K. Tonneson, who estimates the company will still lose 25 cents per share this quarter.

And what of Yahoo? The company says it nearly doubled the season's sales it fed to retailers who are linked to the site. Much of the growth came from overseas, where sales rose sixfold. "Merchants want to be associated with a strong online brand like Yahoo," says Rob Solomon, the general manager for Yahoo shopping.

While the news cheered investors, Yahoo's retailing strength may not be enough to really fuel sales growth. Analysts estimate its Christmas take at between $20 million and $40 million, out of projected fourth-quarter sales of $316 million. Good, but hardly enough to lift the pall over the e-tailing sector.