Online retailers expected to be less merry in 2000

Companies working to wrap up their holiday preparations are finding a different online retailing world than the one they found a year ago.

The investment community’s chill toward dot-coms has forced many online-only retailers to plot more creative and cost-effective ways to brace for the December rush. Scores of them have been slashing their mass-market advertising budgets, while some struggling companies are also scrambling to partner with or acquire companies that can help them meet their technology and fulfillment needs.

“I think the key is to spend smarter as opposed to spending less,” said John Williams, vice-president of merchandising and store development at Inc. The Bellevue, Wash., retailer, which recently raised US$62.7 million via private placement of stock, is adding functionality and gift assortments for the holidays.

Meanwhile, traditional retailers that once envied and bemoaned their dot-com rivals’ seemingly bottomless pits of cash are now seeing the tables turn a bit in their favor. Analysts noted that the traditional retailers can piggyback advertising efforts among their multiple channels and more readily invest in and leverage their infrastructure and fulfillment operations to handle increasing levels of online shoppers.

However, even many traditional retailers are watching their steps as they delve deeper into online this holiday season.

“We’re definitely seeing more conservative investment in the technology and a lot more evaluation relative to a vendor’s credibility and vision. [Retailers] are more frequently putting vendors through the paces around ROI, which we weren’t seeing last year,” said Carol Ferrara, an analyst at Stamford, Conn.-based Gartner Group Inc.

Most of the online-only retailers “that matter have managed to find money,” said Forrester Research Inc. analyst Seema Williams.

Cash-starved dot-coms with life and death at stake, on the other hand, are continuing to try to creatively beef up their sites and shore up fulfillment so they don’t fall victim to Federal Trade Commission fines for late deliveries, as seven online retailers recently did.

“There’s a big shakeout that’s looming. It’s going to show the strong retailers from the weak ones, who really shouldn’t be in business to begin with,” said Heather Dougherty, an analyst at Jupiter Communications Inc.

David Fry, president and CEO of Fry Multimedia Inc. in Ann Arbor, Mich., said that this summer he has noted an increase in dot-coms offering equity stakes rather than cash for his firm’s design and development services. Fry said one dot-com offered equity in exchange for his firm providing and hosting servers needed to get through the holiday season.

“These companies have their backs to the wall. They have to do this to stay in business, and it’s harder to get cash than it was six months ago. They’re looking for whatever opportunity they can to avoid spending cash,” said Fry.

Deloitte & Touche LLP senior manager Lindsay Parker said her company is working with one primarily pure-play online retailer that wants to acquire a company that would bring the infrastructure pieces it needs for long-term survival. “They’ve got another six to nine months” before they burn through their cash, Parker said.

“They’re trying to pick [acquisition] targets that have some incremental positive revenue that will offset the [acquisition] expense and have a net zero impact on their burn rate,” Parker added, noting that she’s heard buzz from other firms with similar aims.

Ratcheting down advertising is one way for online retailers to try to hang on or reach profitability sooner. Inc. CEO Michael Soenen said his company expects to spend $17 million to $20 million this year on advertising, compared with $42.9 million last year. The bulk of the cuts, he said, will be in television and print. Downers Grove, Ill.-based does plan, however, to continue its more productive portal deals and various direct marketing initiatives. Of course, the online operation benefits from any advertising its 90-year-old parent does. won’t be doing any TV or broad-scale advertising the rest of the year “because it didn’t deliver the results we were looking for or would expect from that type of expenditure,” said Williams. Instead, it will “focus on things we know work better,” such as direct advertising with affiliates and associates such as Inc., he said.

To better target its marketing efforts, Fogdog Inc. plans to do more extensive customer data analysis, supported by its new fully redundant Network Appliance Inc. storage system, said Robert Chea, the Redwood City, Calif., retailer’s chief technical officer.

“We spent this whole year building up the infrastructure that will support the holiday season. We haven’t had to scale back anything, because we made the purchases a while back,” said Chea, noting that the company also upgraded its switching infrastructure and added more servers and still has $50 million in its coffers.