Report: 75 Percent Of E-Businesses Destined To Fail

Lost amid the hoopla and hyperbole of the e-commerce explosion is the nagging reality that few e-businesspeople seem to know how and when they are going to make a profit.

The worry is valid, particularly in light of recent research from GartnerGroup showing that 75 percent of all e-business startups will fail.

Even the one business that promises to become a universal model in e-commerce, Amazon.com, has yet to make any money. With a more than respectable $610 million (US$) in net sales in 1998, the mega-site recorded a net loss of $124.5 million.

One of Amazon’s closest competitors, CDNow, Inc., sold $56.4 million worth of goods with a negative bottom line of $43.8 million.

Traditional business would not look kindly upon these numbers, but somehow everyone seems to be giving e-commerce a break — at least for now. Attribute the free ride to heavy start-up costs, some say. Others point to the need to nurture the consumer and slowly bring buyers into the electronic fold. Still others point to the potential of astronomical profits down the road.

Still, how far can a business travel without fortifying itself with a profit?

Profit On Demand

“Amazon is one of the few select e-tailers that could achieve profitability today if the investment community demanded it,” said Goldman Sachs analyst Anthony Noto in a research report. “We believe Christmas and new additional strategic initiatives are near-term catalysts for the shares of Amazon.”

According to Goldman Sachs, Amazon is going to make it big in the long run because of a key strategy, diversification. Due to its variety of product lines and generous selection of goods, it does not have to achieve a number one market position in each of its businesses.

Specifically, if the company reaches a standing in the top four in each business it enters in the next five years, it can earn revenue in excess of $10 billion in that period.

That does not say much for this year, however, with Goldman Sachs projecting a $1.12 per share loss for Amazon.

Climbing Up To The Bottom Line

Unfortunately, most companies are not Amazon.com. Others with heavy investments in their online ventures may not be able to “will” a profit like the major players. So how are they to prosper?

A recent survey by GartnerGroup’s Dataquest found that 20 percent of people who bought products online reported problems with the purchasing experience. Half of those polled said they had ordered products that were not delivered, while a quarter could not reach the vendor’s customer service department.

Learning The Hard Way

The GartnerGroup report points to two main e-business pitfalls. First, online shoppers are frustrated, and with our cultural short attention span, frustration in online consumerism could mean that shoppers continue to frequent brick-and-mortar businesses.

Second, companies are having problems following through on their online sales with prompt and efficient delivery. Industry analysts point to fulfillment — an e-tailer’s ability to fill and ship orders quickly — as a key to e-commerce success.

The weak link, to date, seems to be getting the merchandise to the customer. The problem often has much to do with drop-shipping, the process of forwarding the customer’s order to the manufacturer, and depending on that third party to deliver. On paper, drop-shipping is a plus for startup e-tailers, since it allows them to operate without inventory, warehousing or shipping responsibilities. However, when the manufacturer fails to follow through with delivery, it is the e-tailer whose reputation is sullied.

So far, the two issues that seem to be impediments to profit for e-businesses are the over-eager rush to get up and running, and the lack of infrastructure for fulfillment.