The Dot-Com Sky is Falling

Some of the biggest names in market research are predicting that most of the dot-com retailers that rule the PC screen, the airwaves, and the billboards will cease to exist in the next two years.

According to the report “The Demise of Dot Com Retailers” by Forrester Research, the combination of weak financials, increasing competitive pressures, and investor flight will drive most of today’s dot-com retailers out of business by 2001.

“It’s time to face facts: Online retail’s honeymoon is over,” said Joe Sawyer, senior analyst at Forrester. “The difficulties that firms like CDnow and Peapod now face will only become more widespread. Financial turbulence and new competition will dry up venture funding and accelerate the dot-com shakeout as the year progresses.”

The report found that in order to survive in the online retail battleground, firms will need to redirect extravagant branding investments into three categories of hard assets, defined by scale, service, and speed.

Joining Forrester in predicting a colossal change to the e-commerce landscape is Michael Fleisher, president and CEO of the GartnerGroup, who predicted that 95 to 98 percent of all dot-com companies will fail over the next 24 months. Fleisher, who made the remarks at GartnerGroup’s Spring Symposium/ITxpo, also predicted a resurgence to focus on “old economy concepts” like market share, brand equity, distribution channels, financial control, and operational integrity.

The consolidation of online retailers will occur in waves, according to Forrester. First, firms selling commodity products that have been successful since the Net’s early days — such as books, software, and flowers — will consolidate by the fall of 2000 amid slowing growth rates. Second, the plethora of merchants selling undifferentiated products at razor-thin margins — including pet supplies, toys, and consumer electronics — will collapse before marketing expenditures ramp up for the next holiday season. Finally, online merchants selling heavily branded, high-style products like apparel and furniture will remain stable until 2002.

Forrester’s report also gave Internet retailers a survival guide. In order to survive consolidation, online retailers must anchor themselves by building sustainable assets that will attain scale, service, and speed. Leaders will need to focus on hard assets that support high sales volumes and lower costs per transaction: a large, loyal customer base; in-house fulfillment capabilities; and a rock-solid internal organization. Online retailers must strike back at brand confusion and product duplication by distinguishing themselves through customer service. Presence across multiple channels and platforms, exclusive manufacturer deals to carry specific products, and a range of delivery options will help to build lifetime relationships. Speed will keep retailers ahead of rivals, but it will also require a flexible business foundation. Retailers should adopt technologies and strategies that adjust to unforeseen competitive forays and customer demands.

After consolidation, several leaders will prevail following the wave of retail consolidation. Brick-and-mortar retailers will regain their footing, leveraging assets like customer history, product selection, fulfillment, and strong manufacturer relationships. Catalog hybrids will also survive, given their large customer base, proprietary product lines, and solid fulfillment.

“Among all the online-retail pioneers, only Amazon can claim a balanced set of assets that guarantees its leadership,” Sawyer said. “Pure plays with few hard assets beyond solid, full-function sites will fall by the wayside, unable to keep up with their multichannel peers.”

For its report, Forrester surveyed 50 leading retailers representing a mix of product categories and backgrounds. Eighty-six percent of respondents identified growth as their No. 1 strategic priority in 2000, followed by improved site design, increased brand recognition, and raised customer satisfaction.

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