SECTOR SCOPE by Louise Witt November 22, 1999

Xmas E-tailers, "Execution Is What Wins the Day"
This year, only cyberstores that provide great service and delivery are likely to cash in on the holiday shopping spree. Here's a look at some possible winners and losers

Ken Sieff anxiously awaits the holiday rush. That's when the founder and chief executive of Bluefly (BFLY), an online retailer, will discover if the improvements he has made in his 13-month-old business will pay off. "This a critical season for us to prove that our business model works," Sieff says.

Over the past few months, the New York-based cyberstore has added a customer-service staff, boosted its capacity for taking orders over Web, gained the ability to do real-time credit-card authorization, doubled its inventory, and expanded its fulfillment center to handle the expected surge in business this shopping season. For last year's holiday quarter, Bluefly shipped $320,000 worth of merchandise. This year, it hopes to sell 10 times that amount.

"The idea of having a flashy Web site and great marketing presentation is no longer enough," Sieff says. "Customers now expect great selection, full service, and reliable delivery on top of price and convenience. The long-term winners in the e-commerce sector will be the companies that deliver successfully on all these expectations."

Assuming that Sieff is right -- which sounds likely -- the current quarter will be a make-or-break test for Internet merchants, who increasingly find themselves trying to win market share in a crowded field. In 1998, some 18 million people shopped online. This year, an estimated 35 million are expected to do point-and-click purchasing. And they're spending more -- a projected average of $350 online this year, vs. $275 in 1998, says Chris Vroom, an analyst at Thomas Weisel Partners.

PROBLEMS FOR BUY.COM? "Execution is what wins the day," says Lauren Cooks Levitan, an analyst at BancBoston Robertson Stephens, whose firm surveys consumers to find out how they rate competing e-tailers. So far, says Cooks Levitan, her surveys show that 75% of respondents would make purchases again at Web sites they've patronized in the past. However, 25% said they would be "highly unlikely" or "somewhat unlikely" to go back to a particular merchant. Cooks Levitan says e-tailers have to change that negative perception if they are going to be successful.

Forget about looking for profits to figure out which e-merchants will be winners. Most are too busy trying to gain market share to produce earnings right now. Instead, Vroom examines the guts of the e-business, focusing on three things: How well the Web site works, the quality of its customer service, and the reliability of its distribution. "There are a million tiny little things that retailers have to pay attention to and many aren't paying attention," he says. "The casualties will be the Internet retailers who don't have strong distribution and customer service in place."

On that score,, a privately held company that recently filed to go public, may run into problems, Vroom says. It may be able to generate impressive sales in the quarter, but its distribution system has been creaky in the past.

By contrast, analysts expect that (AMZN) and (ETYS) will be standouts this season. Both provide good customer service, then deliver the goods. Vroom says he expects both to exceed Wall Street's estimates for revenue growth this quarter. He's projecting that's revenue will reach $550 million and that its net loss will be $110 million. He estimates that will have revenue of $80 million in the fourth quarter and lose $45 million. (BNBN) is another e-tailers to watch, says Daniel Ries, an analyst at C.E. Unterberg Towbin. Vroom estimates that barnesandnoble's sales will be $65 million this quarter, up from $20 million in last year's fourth quarter. Tiny Bluefly says that because of high marketing and advertising costs, it will probably lose about $6.3 million for the quarter, nearly double its $3.5 million in sales.

"SCARY TIME." A few analysts aren't going easy on e-tailers likely to rack up such losses. For instance, Scott Ehrens at Goldman Sachs doesn't want any part of the bloodbath. "It's a scary time to be a second-tier retailer" on the Internet, he says. And as far as Ehrens is concerned, a second-tier retailer is any company that isn't (AMZN). "It's such a cluttered field with so many clamoring for the attention of the consumer," he says. "In the long term there will be winners, but in the short term there will be losers -- with a lot of money to lose. They are well capitalized, and they can operate at a loss for a while." Even Ehrens doesn't recommend as a buy because it isn't close to turning a profit.

Instead, Ehrens recommends e-businesses that will reap the benefits of the holiday shopping spree without incurring heavy expenses. He thinks Yahoo! (YHOO) and America Online (AOL) are positioned to take advantage of the increase in cyber shopping because of the cut they'll get from e-tailers' fees. "It doesn't matter how long doesn't make money. Yahoo! will still make money off of them," he says.

Ehrens expects AOL to have revenue of $1.58 billion for the quarter, up from $1.15 billion (adjusted to include Netscape's revenue) in the year-ago period. And he estimates that AOL will deliver a net profit of 16 cents a share. He expects Yahoo! to deliver $184.3 million in revenue for the quarter, more than double last year's $91.3 million, and to earn 15 cents a share.

ROOM IN TOYS. Unterberg Towbin's Ries thinks that toys will be the hottest product category this season. Research by Jupiter Communications shows that 20% of online shoppers have plans to buy toys online this year, vs. 10% last year. Jupiter credits this rise to Internet toy merchants such as eToys and Toys 'R' Us (TOY), which has a new Web site. Other players include, (a majority of which is owned by Disney), and Amazon's toy division. Despite the crowded market, Ries thinks there's plenty of room for everyone in toys. He estimates that the Internet toy market will be $200 million to $300 million this year, which leaves a lot of room for growth given that the overall toy market is $28 billion.

Analysts are also watching niche e-tailers. Cooks Levitan thinks (ALOY), which sells clothing and accessories for teens, will do well this season. She expects its sales to reach $9.4 million for the quarter, up from $3.5 million a year ago. Cooks Levitan and Vroom both like (GDEN). Vroom expects the green thumb site's revenue to exceed $3.2 million this quarter, three times last year's figure.

That's the kind of holiday it will be for e-tailers: Quite a few will get the gift of higher sales. The trick will be turning those revenues into a positive bottom line.

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