E-Commerce Gets a Dose of Reality

Ominous auditor reports brought the plight of several e-commerce companies into stark focus last week, sending their share prices toward the cellar amid a Nasdaq slide of nearly 200 points.

Though not usually headline grabbers, the auditing firms shared the spotlight with the beleaguered companies who were forced to publicly face the reality of closing their virtual doors.

Arthur Andersen issued a “going concern” notice for Internet music retailer CDNow, stating that the company did not have sufficient cash on hand to make it through the year.

The assessment for the nation’s largest online grocer, Peapod, Inc., was even bleaker.

“These conditions raise substantial doubt about the company’s ability to continue as a going concern,” said a report from KPMG LLP, filed Thursday with the Security and Exchange Commission (SEC).

One industry analyst predicted that Peapod would be out of cash “in a week or two.”

Humpty Dumpy Had a Great Fall

The auditor’s statement came just two weeks after Peapod said it might have to put itself up for sale after four venture firms canceled a much needed $120 million (US$) cash infusion. The withdrawal of funding came in response to the online grocer’s announcement earlier this month that its chief executive, William Malloy, was resigning for health reasons.

Amazingly, even though Peapod has a market capitalization of $57 million, it now admits it only has about $3 million left to cover operating costs.

Last week’s auditor report on CDNow sparked such a wave of negative publicity for the music e-tailer that its stock price plummeted 30 percent Wednesday to an all-time low of $3.50.

The company’s troubles began after a planned merger with Columbia House crashed and burned. CDNow scrambled to soothe investor concerns with a statement that sketched plans for solving the cash problem and asserted that its future prospects are still bright.

Bottom Feeders’ Paradise

Still, the adage that one company’s misfortune is often another company’s opportunity became quite evident when both United Parcel Service of America, Inc. and European grocery chain operator Royal Ahold NV paid Peapod a visit.

Additionally, published accounts say HomeGrocer.com, a chief rival of Peapod, is also talking to the ailing company about a possible takeover.

The reason for this flurry of interest is that while Peapod may be cash poor, its database contains the names, addresses and grocery preferences of 100,000 customers in eight major markets.

This information would certainly be a prize for any brick-and-mortar grocery chain that wants to quickly expand into cyberspace. It could also give HomeGrocer.com an edge over its chief online rival, Webvan, Inc.

A Domino Effect?

Last week, Templeton Fund’s Mark Mobius issued a warning about the inflated valuations of Internet companies. Goldman Sachs’ Abby Joseph Cohen followed suit, cautioning clients to reduce their exposure to such stocks.

Some industry analysts predict that last week’s string of announcements is the beginning of a dot-com roll call. They warn that a recent article in Barron’s naming 51 Net companies that are likely to run out of cash by the end of the year may actually be too conservative, and they fear that a domino effect could be triggered if investors begin to panic and sell off all of their dot-com holdings.

Back to Old Paradigm

While none of these developments should come as a surprise to anyone who regularly reads this column, it is still disturbing to see how many investors and CEOs are still clinging to the “new paradigm” that says revenues — not profits — are all that really matter.

Companies with impressive revenues cannot absorb massive costs and withstand astronomical losses indefinitely. It seems to me that the day of reckoning is here — the old paradigm that says businesses cannot exist unless they turn profits just strongly reasserted itself.