From: Linda (joelinda1@home.com)
Date: Mon Sep 11 2000 - 09:39:27 PDT
[This may be of interest to those here wondering about a certain
e-retailing IPO.
Linda]
http://www2.briefing.com/Scripts/PowerAnchor.asp?varArticleID=SB20000911014225rvgreen
The Real Lesson of the eTailers
11-Sep-00 01:42 ET
[BRIEFING.COM - Robert V. Green] The collapse of the internet retailers
has been written about a lot, but most people attribute the debacle
to the bursting of a speculative bubble. While that was also true, the
real lesson of the etailers seems to have been lost on most people.
Not A Revolution
When retail shopping first became available on the internet, it was
viewed as a revolution. Amazon.com was the first big name, and its
early revenue growth curve had everyone amazed. Stunned, actually.
Amazon.com became a billion dollar company faster than any other
company before.
The public market's reception to any kind of internet based e-retailer
was enthusiastic. For a while during 1999, nearly every internet retail
company that came to market did well (as a stock).
At first, the belief was that the internet would eventually become the
dominant form of how we buy things. That belief drove stock valuations
of internet stocks to atmospheric heights.
But as the companies grew, it turned out that many of the models
simply weren't scalable. We wrote about our doubts about the
scalability of ecommerce companies numerous times (a recent example
being June 26, The Amazon Stops Flowing.)
Much of the collapse of internet ecommerce stocks in April was
attributed in the press to a speculative bubble bursting. This
certainly was true.
But if the problem had simply been overvaluation, the stocks would
have settled to "correct" valuations. With so many ecommerce stocks
now trading around $1 (seriously dangerous territory no matter how
many shares exist), the only real conclusion is this:
The market no longer believes that e-retailing is fundamentally
different than offline retailing.
That's bad news of course, because retailers just don't get high market
valuations. Price/Sales ratios of 0.5 are common.
A Cheaper Catalog-Phone Center
In the final analysis, when you sell tangible items, those that are
physically delivered to the buyer, the net is really just a cheaper
catalog and phone center combined.
It is just an ordering system. And companies that sell only on the net
are just retailers with an efficient order taking device. But the
retailer still needs a warehouse, needs to market traditionally to
build brand, and needs to develop loyal customers.
If you take an "industry standard" business model for a retailer, the
only real alteration the internet made was on the sales and marketing
line. Gross margins didn't change. (Unless you sold below cost, like
Buy.com (BUYX) and Priceline.com (PCLN) both did to get started.)
But if a major public mail order company, like Land's End (LE) for
example, had four years ago, come out and said, "we have cut our order
processing costs by 80%," would the stock have risen ten times in a
single year?
Certainly not. The order taking process is only a small percentage of
the overall operating costs for any retailer.
Yet, that is what internet retailers really offered. An efficiency in
the order taking process.
Ironically, for many etailers, that efficiency is lost in the
marketing expenses necessary to build a brand.
True Net Companies
The real lesson from the collapse of the internet stock market in
spring of this year is simple:
The internet is best used where both the order and the product are
delivered online.
This is where you find scalable models. (A scalable model is one where
the operating margin increases as revenues get larger.) Scalable
models are the ones which the market rewards most highly, especially
if accompanied by a high revenue curve.
After all, when the product is delivered electronically, there is
virtually no cost-of-goods-sold.
E-retailers offered an improvement in order processing costs, but no
real improvement at the gross margin level. True internet companies
offer an improvement at the gross margin level, particularly those
that have almost no cost-of-goods-sold.
This observation seems obvious looking back. Yet the market totally
overlooked it in 1998 and 1999.
So what kind of company uses the internet for both order and delivery
at the same time? These types of internet companies are more likely to
deliver on the scalable model promise of the internet.
At the application level, online delivery of data, whether video or
text, for a fee, is the most obvious example. On demand video is
probably the most dramatic example. Delivery of informational content,
provided there is value that users are willing to pay for, is another.
A third, in which companies are only now in the venture stage, are
financial applications.
Search engines and portals, supported by advertising, also deliver
product online. But the portal concept faces a new threat, which will
be the topic of tomorrow's Stock Brief.
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