IQ News: Analysis – Stayin’ Alive




Industry analysts give their take on the latest dot-com shutdowns, and what can be done to prevent future casualties.
After a tumultuous month that dealt fatal blows to e-commerce shops boo.com, toysmart.com, CraftShop.com and Foofoo.com, among a bevy of others, surviving online retailers now must search for the magic pills that will save them from similar fates.
To survive the dot-com bloodbath, industry analysts suggest that e-tailers need to swallow a healthy dose of offline realism–as well as rein in their formerly high-flying dot-com pride. This process of self examination, says Elaine Rubin of Internet retailing trade association Shop.org, means that dot-coms can no longer ignore fiscal bottom lines, since the notion that e-tailers are exempt from viable business models has proven false. The reality check for dot-coms? The same business principles found in the offline world apply in cyberspace.

Too Much, Too Soon
In their zeal to gain footholds in particular e-commerce categories, too many e-tail contenders opened up shop prematurely, says Rubin, who chairs the Silver Spring, Md.-based Shop.org. With pockets flush with VC cash, some e-tail entrepreneurs blazed onto the scene with much ballyhoo–launching multimillion-dollar ad campaigns and spreading marketing hype to match–only to crash and burn a short time later. Some startups failed to consider the tedious details involved in building an e-business, particularly customer service, merchandising and fulfillment, Rubin explains. “Investor euphoria fueled the excitement and some online retailers were leaping off before they were ready,” she says.
The highest profile debacle of the year, boo.com, boasted big-name investors–such as French luxury goods magnate Bernard Arnault, the Benetton family, Goldman Sachs and J.P. Morgan–that poured millions into the site from its conception, only to flee when the international e-tailer was on its deathbed. The fashion retailer sought bankruptcy in late May and was acquired last week by Fashionmall.com for an undisclosed amount. With the sale, New York-based Fashionmall.com gains possession of the boo.com brand, Web address, advertising materials and online content. The deal does not include boo.com’s back-end technology and associated intellectual rights, which sold a week earlier to British Internet company Bright Station P.L.C. for a paltry $372,500, a fraction of the reported development cost.
Launched in November 1999, boo.com burned through its cash at a dizzying rate, even by dot-com standards. According to Cambridge, Mass.-based Forrester Research, boo.com exhausted an exorbitant amount on communications, shelling out close to $38 million in offline advertising through TV, radio and fashion magazines like Elle. The site’s notoriety also gained momentum online with banner buys and e-mail and viral marketing.
But, nothing fueled the boo.com fire more so than the media, which embraced the two 29-year-old Swedish founders, Ernst Malmsten and ex-Elite model Kajsa Leander, and hailed the idea before it was even live. With its fancy investors and ambitious plan to be the international e-tailer for high-end fashion, boo.com soon became the darling of the press, receiving favorable editorial coverage in fashion magazines like Vogue and Harper’s Bazaar.

Speed Kills
Like boo.com, Waltham, Mass.-based toysmart.com flamed out after unsuccessful attempts to secure additional funding from investors, namely its majority owner The Walt Disney Co. “It is very sad, but I saw it coming given Disney’s lack of commitment to the company,” wrote Patrick Rafter, former director of communications at toysmart.com, in an e-mail reply. “We erroneously thought that Disney would have the patience of other funding sources [VCs] to know that profitability doesn’t come in the first year of a company’s operation. Thus, my assessment is that toysmart.com had everything going for it save sufficient time, cash and a loyal partner who was as committed to the business as we were.”
The one-and-a-half-year-old online toy seller expended much of its funds on marketing, spending roughly $21 million on a series of TV, radio and print ads touting its “good toys”–the ones that inspire, enlighten and endure in a child’s mind. Developed by Boston-based Arnold Communications, the effort celebrated the joys of childhood and carried the tagline “Click on your child’s potential.” The e-tailer also funded a year’s worth of Sesame Street programs on PBS in exchange for 15 seconds of sponsorship time before and after each episode. In addition, the 60 percent purchase by Disney last August brought the e-tailer ad time on Disney’s entertainment properties and products. Despite the advertising push, along with an aggressive guerrilla marketing campaign, the site failed to post traffic and sales numbers anywhere near those of online competitors eToys and Toysrus.com.
“The business premise that in one short shot you can create a brand and brand equity is a fallacy,” says Rick Milenthal, CEO of Columbus, Ohio-based HMS Partners, an integrated marketing company. “All of the same fundamentals of the traditional world apply to the Internet. The recent demise of some dot-coms underscores the importance of building a brand the right way–building a relationship over a period of time. It takes time, patience, focus and planning. Simply being on the Internet is not enough to build an e-commerce brand.” But, most of these business basics learned at Harvard and the other elite MBA schools that spit out dozens of dot-com CEOs were abandoned in the first-time mover frenzy. “Speed was driving a lot of people,” says Rubin.

Front-End Folly
When boo.com entered cyberspace, the high-brow site boasted “the most sophisticated virtual shopping technology,” which included 3-D and 360¡ product previews and virtual assistant Miss Boo. However, its founders didn’t anticipate that the very bells and whistles they promoted during their six-month public relations blitz would contribute to the site’s demise. Admittedly, instead of focusing on front-end technology, problem-plagued boo.com concentrated initial efforts on fulfillment–not an easy feat considering that the e-tailer opened globally in seven languages and multiple currencies. Boo.com was surprised when slow download times and lack of accessibility shut out most of its target audience, especially during the critical e-holiday season, which accounts for up to 60 percent of sales in the offline world for most retailers. According to Forrester, 99 percent of European and 98 percent of U.S. homes lack the high bandwidth necessary to easily access boo.com’s bleeding-edge animations. “In November, we were getting heartburn over the front end,” former boo.com North American president Jay Herrati said earlier this year.
To remedy the situation, boo.com unveiled a low-tech alternative to the site in early February. But, by then, the damage was already done. “Most online shoppers have no retailer loyalty,” writes Forrester analyst Dr. Theresa Torris in her report, “Boo.com’s Demise: A Good Wake-Up Call.” “Dissatisfied [consumers]–like boo.com users hindered by a bad user interface and slow-to-download pages–leave a site unhappy and don’t return.” Repeatedly, the site failed to meet its sales targets, which prompted key executives to leave and forced the company to scale back its inflated employee base, which at its height ballooned to close to 400 worldwide.
“If you don’t have all the pieces of the puzzle, if you don’t have all the stars aligned, you’re not going to be successful,” says Shop.org’s Rubin, who is also an e-commerce consultant. In the case of boo.com, she speculates that the boo crew was “very ambitious, overly publicized and had huge expectations” that could not be fulfilled.

You Go, Girlshop
As much as boo.com was reckless from the get-go, success story Girlshop.com was thoughtful, practicing a philosophy of incremental and sustainable growth. Compared to other e-tailers’ millions, the niche site that peddles street-savvy clothing and accessories from up-and-coming designers started with a mere $15,000 and no VC backing. “When you start with that much money [millions], it’s just a different story,” says Laura Eisman, founder of New York-based Girlshop, referring to boo.com. “Their expenses were outrageous. We’re just normal.” Modesty aside, Girlshop.com is anything but normal. In 1999, the site only allotted itself a marketing budget of $100,000, which paid for local TV ads, a few national print executions and postcard campaigns. Thus far in 2000, they’ve spent about the same. Despite the meager ad spend, the site continues to record about 8 million hits a month. And Eisman reports that Girlshop posted $900,000 in revenues in 1999. It is only now–nearly two years after Girlshop’s birth–that Eisman approaches the investment community with her proven product. She plans to use the funding to increase marketing efforts and hire more employees–but, again, only when the need arises.

Proceed With Caution
As the e-commerce body count continues to add up, Shop.org’s Rubin suggests e-tailers take a more subtle approach, much like Girlshop. “Baby steps are the best way to build a business and then go out with a bang,” she says. In terms of how dot-coms should spend their marketing dollars, Rubin says, “You have to look at it on a case-by-case basis. There were huge marketing spends where the brand was not viable.” But, she continues, “There were others that spent and gained the brand recognition that was needed–the Amazons, the eBays–usually the first-time movers.” However, she cautions that this doesn’t mean what it once did.
According to a survey of 1,000 participants conducted by Wilton, Conn.-based Internet research firm Greenfield Online, no consistent correlation exists between ad spending and “top-of-mind” brand awareness for Internet companies. Conducted on behalf of HMS Partners, the study revealed that some Internet brands achieve similar or greater levels of brand awareness despite significantly smaller ad budgets than several of their big-spending dot-com brethren. For instance, 22 percent of the sample population recognized San Jose, Calif.-based trading community eBay, despite its slim ad budget of $5.5 million. In contrast, Norwalk, Conn.-based “Name-Your-Own-Price” auction site Priceline.com, which spent $49.6 million in advertising, only scored 5 percent brand recognition.
So, what does this mean for e-commerce companies that must shave their budgets without sacrificing brand-building efforts? “It’s not how much you spend, but how you spend it,” advises HMS Partners’ Milenthal. “Dot-coms know branding is crucial for success–and most seem both willing and able to put considerable resources into supporting their brands. The winners are going to be the ones that find the most effective ways and places to allocate those resources.” n
Here, There and Everywhere
The e-commerce gods have spoken: The “e” in e-retailing doesn’t stand for “electronic.” It stands for “everywhere.” Given the current plight of the dot-com retailer, more and more pure plays are realizing that they can’t put all their eggs in the vulnerable virtual basket. Instead of existing in cyberspace alone, most will have to adopt a multichannel approach, extending their efforts offline to reach as many consumers in as many ways as possible, advises Elaine Rubin, chairman of Internet retailing trade association Shop.org, Silver Spring, Md. Conversely, she continues, brick-and-mortar retailers will have to establish an online presence.
A marriage between a pure play and brick-and-mortar seems to present a tidy solution, some industry analysts say. When New York-based Estƒe Lauder acquired gloss.com in April, the deal united the venerable cosmetics giant to an online beauty pure play. By buying the San Francisco-based startup, Estƒe Lauder snatched up a team of beauty industry experts equipped with Internet smarts–a tough find in a tight job market. In return, gloss.com profited from being tied to the formidable brand, almost guaranteeing that, unlike most startups, it would not have to build a brand from scratch.
In February, another online/offline deal was struck when Seattle-based coffee giant Starbucks entered into a partnership with on-demand, Internet-to-door delivery service Kozmo.com. The deal represented the first time Starbucks invited another company to live inside its doors. The fact that the company was a dot-com added to the groundbreaking news. “This alliance defines the benefits of a truly integrated click-and-mortar strategy for our customers,” said Howard Schultz, Starbucks chairman and CEO, about the alliance earlier this year. Under the five-year agreement, Starbucks is expected to receive $150 million from New York-based Kozmo.com for in-store exposure and co-marketing opportunities. Kozmo.com will locate “drop boxes” for the return of videos and other items in Starbucks stores throughout the cities where Kozmo operates.
Sarah Kugelman, co-founder and president of gloss.com, says she expects to see several more of these brick-and-mortar/dot-com alliances. “It’s going to be very hard for the pure plays to survive [alone],” says Kugelman. “The market is splintering, with companies realigning, diversifying and repositioning.”
In addition to partnering with brick-and-mortar companies, online retail shops are branching offline by creating catalogs, such as Lyndhurst, N.J.-based trophy and promotional products provider Awards.com and New York-based online women’s specialty store Indulge.com. “You’re seeing the middle ground with pure plays developing catalogs,” says Rick Milenthal, CEO of Columbus, Ohio-based integrated marketing company HMS Partners. “Their online presence is not enough to grab the attention or the brand awareness.”
While dot-coms embrace the paper-based medium, BMG Music Service, known best for its 12 CDs-for-one, catalog-based business model, welcomes the Internet. Launched in 1996, BMG’s interactive arm BMGMusicService.com doesn’t plan to replace the mailbox filler. Instead, it hopes to offer consumers yet another vehicle to reach the company. BMG Direct president and CEO George McMillan boasts that the site posts a profit year after year.
According to Shop.org’s “State of Online Retailing 3.0” report, catalog-based multichannel retailers were the most profitable online group in 1999, with no less than 72 percent achieving profits at the operating level. The trade association attributes these e-tailers’ success to their existing assets. First of all, the report says, these retailers already possess developed fulfillment and customer-service infrastructures. Secondly, they have an established customer base that can be steered online. And finally, their marketing campaigns can be used to promote the business at little or no incremental cost, the report explains (i.e. BMG Direct can simply add its URL to its catalog).
And now with the proliferation of everything mobile, retailers are shifting focus from e-commerce to m-commerce. In the end, Rubin predicts the multichannel e-tailers or retailers will win out, by existing everywhere the consumer wants them to be. “It’s not an Internet world,” she explains. “It’s a multichannel, mixed-media world.”–AM