Can Amazon Save Industry from Shakeout?

At the end of 1999, retail analyst Lehman Brothers Holdings predicted that holiday season failures would force many online merchants to fold or go up for sale at a rapid rate in 2000.

Despite a well-publicized tripling of e-commerce spending last year, many online merchants have found themselves falling far short of the shopping season revenues that they needed to keep their virtual storefronts open.

Just this past Wednesday, software e-tailer Beyond.com accelerated the shakeout by announcing that it is restructuring its business by focusing its marketing efforts on businesses rather than consumers.

The company also announced that it is cutting its work force by full 20 percent while it searches for a new CEO.

Another e-tailer that crashed this month is online superstore Value America, which announced a major corporate reorganization as its stock sunk to $5.75 (US$) per share from a high of $74.25 in April.

Stockholders Take Second Look

In fact, some industry observers contend that the lack of enthusiasm that stockholders are showing for such high-profile cyber-stars like eToys, the globe.com and iVillage represents yet more evidence that the shakeout has really begun in earnest. These companies’ shares have fallen 75 percent or more from their 52-week highs.

Consequently, some analysts predict that e-commerce startups can expect a cool reception when they approach venture capitalists and stockholders to finance them through 2000.

Should The Model Be Changed?

While it has certainly been easy to get caught up in the frenzy of optimism surrounding last year’s e-commerce holiday season, it is about time for e-tailers to face some rather unpleasant facts.

A recent report by Jupiter Communications concludes that online merchants that continue to base their sales strategies on price-driven discounts, deals and free offers will soon find themselves sinking deeper in the red.

Jupiter asserts that e-tailers must instead begin to focus on guarantees, dependability, security and brand building.

All Eyes on Amazon

Even giant e-tailer Amazon.com is being affected by the ongoing shakeout. For example, despite never showing a profit, Amazon’s stock has had a dozen rallies of 20 percent or more since mid-1997. Yet, since December 10th, Amazon.com’s shares have plummeted by 37 percent.

While Amazon’s consistent answer to its critics is that the company is re-investing in infrastructure expansion, it is not co-incidental that the tension surrounding each of its quarterly reports increases exponentially.

My belief is that the sooner Amazon.com shows that it is capable of turning a profit, the more breathing room smaller dot-coms will have. Moreover, by forging an alliance with a huge brick-and-mortar retailer sooner rather than later, Amazon.com could also slow down the accelerating shakeout.

What do you think? Let’s talk about it.