Forrester Predicts Massive Shakeout in Dot-Com Retailers

The electronic retailing industry will undergo the first phase of a three-part shakeout before the year is over, according to a new report from Forrester Research. The Cambridge, MA-based analyst sees additional companies closing during the next two years, resulting in only a few strong leaders in each category by the end of 2002.

In a new report, “The Demise of the Dot-Com Retailers,” interviews with executives from 50 online retailers reveal an over-emphasis on securing market share, a lack of focus on generating net income, and the tendency to view their future through rose-colored blinders.

Representatives from 86% of all online retailers said their business priorities centered around growth, with little regard for improving their margins. Only 40% said they expected to show a profit before 2002, while nearly one-third refused to commit to a date.

Respondents were similarly noncommittal when discussing mezzanine funding: All told, companies are seeking an average of $43 million in additional investments, although 32% did not provide any indication, even in generic terms, of where the money would come from.

According to the report, e-tailers will struggle throughout the year as financial pressures increase, competition escalates, and investors do not come across with additional financing. Companies that survive will do so because they are able to:

* Scale to achieve profitability from a large base of transaction.

* Provide service that engenders customer loyalty, thereby circumventing comparison shopping sites and other price-sensitive mechanisms.

* Quickly adjust to unexpected changes in the industry.

Having studied other retail consolidation instances, Forrester anticipates that brick-and-mortar retailers will have a leg up on their online counterparts, based on the traditional retailers’ ability to leverage their customer history, product selection, fulfillment, and manufacturer relationships. Catalog retailers should “emerge unscathed,” and niche dot-coms will stay alive by focusing on otherwise unavailable goods, or by dealing in high-affinity branded merchandise.

According to the study, many of the rest will fall by the wayside, with sites selling traditionally successful commodities such as books, software or flowers consolidating by midyear, merchants selling undifferentiated products like toys, pet supplies or electronic goods collapsing before incurring marketing expenditures for the next holiday season. The majority of the branded merchandise sites, aside from the few in each category that survive, should “remain stable,” as the report puts it, until 2002.

What will this mean for media outlets industries that have come to rely on dot-com dollars? Compilers Joe Sawyer, David M. Cooperstein and Jennifer C. Lee write that “consumers will note a sudden profusion of public service announcements replacing the dot-com din during their favorite radio shows.”