- The Washington Times - Thursday, April 13, 2000

Many on-line retailers will pull the plug by the end of next year because of financial problems and fierce competition, according to a new report by electronic commerce research firm Forrester Research Inc.
Traditional retailers who have joined the on-line market will have a better chance of survival on the strength of brand recognition and customer loyalty, the report said, and on-line sites for established catalog retailers will also come out on top.
But the Internet-only retailers will be faced with a market targeted for consolidation, according to the report.
"The challenge for Internet-only retailers is to build a brand and a customer base," said Scott Silverman, vice president of Internet retailing at the National Retail Federation. "The retailers that offer the best possible service will enjoy growth on line."
Elaborate marketing budgets have not been as successful as on-line merchants would have liked. For example, Value America spent heavily on advertising last year, but that didn't pay off. The Charlottesville, Va., on-line department store decided in late December to cut half of its 600 jobs and reduce its product line. Its shares, which peaked at about $50 in April, closed yesterday at $3 on the Nasdaq Composite Index.
On-line merchants made out well this past holiday season with more than $7 billion in sales, more than doubling sales from the previous year. Despite that success, on-line retailers are not turning a profit.
However, merchants don't seem worried, according to the Forrester report. Less than 40 percent of queried retailers expect to be in the black before 2002.
On-line retailers will be able to continue with that kind of thinking if they can prove to investors that they are generating new shoppers and old customers are returning, Mr. Silverman said.
"If those indicators look good, then investors will be more willing to be patient with them," he said.
But Wall Street has started to lose some of its confidence in the dot-com rage, and many on-line retailers have lost substantial value in their stocks even over the past six months.
CDNow Inc. has been unable to turn a profit because of competition and high operational and marketing costs. The discount music store, which trades on the Nasdaq, closed yesterday at $4.13 compared with $15.31 on Oct. 12.
EToys has experienced one of the biggest losses, dropping 92 percent from its six-month high of $80.75. It closed at $6.34 yesterday.
But not all on-line merchants that have seen their stock tumble are expected to be out of the game. Forrester Research said that book and music retailer Amazon.com will remain a leader in the industry. Its stock peaked at $106.69 on Dec. 10 but has dropped 47 percent to close yesterday at $56.38 on the Nasdaq.
"There's room for many successful companies on line," said Amazon.com spokeswoman Kay Dangaard. "Those who survive and succeed will be those that like us are specifically focused on customer service."
Consolidation will play a big part in the already too-cluttered market, eliminating weaker retailers.
By this fall on-line retailers selling software, books and music are expected to consolidate due to a slow growth rate, while pet supplies, toys and consumer electronic sites are seen hanging on until the holidays. The reason, Forrester Research says, is there are too many sites selling undifferentiated products at very low operating profits.
However, there is a good outlook for on-line retailers that sell apparel, furniture and shoes. Because their product lines are differentiated more easily, they will have at least another two years to build their brands.
In order to survive, on-line retailers will need to maintain a large, loyal customer base, in-house fulfillment capabilities, and a solid staff. On-line retailers will need to broaden their accessibility, even initiating pilot programs by next year that offer transactions over mobile phones and other wireless devices.
They will need to expand delivery options past the United Parcel Service and federal express and cater to customers whether they want to receive the product the next day or the next hour, according to the report.

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