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Get Four
|  | OCTOBER 25, 2004
By Sarah Lacy A Double Bind for E-Tailers As competition gets stiffer, growth rates for sales and new shoppers are slowing, leading Wall Street to exact a tough punishment For most retailers, Amazon.com's (AMZN ) third-quarter earnings, announced Oct. 21, would have been a reason to strike up the band. The Seattle e-tailer more than tripled profits, to $54 million. Sales hit $1.46 billion, up 29% from last year's $1.13 billion. This year's holiday season should also be strong, according to Amazon execs, who predict a fourth-quarter sales increase of as much as 31% from a year ago. Nonetheless, the rosy numbers weren't good enough for Wall Street, which doesn't consider Amazon to be just any old retailer. It's a bellwether stock for the entire $144 billion e-tailing industry. Amazon shares dropped 12%, to $34.60, in one day of trading after its earning call with Wall Street analysts -- a new 52-week low (see BW Online, 10/22/04, "Murky Waters for Amazon"). Why the drubbing? Like the rest of the online retailing industry, Amazon is struggling to meet lofty expectations as it enters its 10th holiday shopping season. Wall Street demands big-time growth from e-tailers. So when they come up short, they're severely punished. "They should be able to drive better revenue growth," says David Garrity, an analyst at Caris & Co. RELATIVELY SLACK. Doesn't seem quite fair to an industry that still possess growth rates that traditional retailers would kill for. By any measure, holiday shoppers are still flocking to the Web. This season's sales are expected to increase 20%, to $13 billion -- more than four times the growth rate of traditional retail, according to Forrester Research in Cambridge, Mass. Certainly, that's nothing to dismiss. But compared to last year's 31% increase, it looks downright lackadaisical. It makes some sense, then, that investors are worried that online retailing is showing its age, just as the Web itself is beginning to mature. Other Net retailers like eBay (EBAY ) and Buy.com also predict slower growth in the coming year. Another troubling sign: The volume of new online shoppers is dropping. In 2001 their numbers grew by 35%, to 66 million. This year should see a 14% increase, to 111 million, according to market research firm Jupiter Research in New York. PRICE IS KEY. With the growth in new customers slowing right along with sales, e-tailers are feeling some of the same forces of gravity that have hit their bricks-and-mortar counterparts. For one, e-tailers are now more vulnerable to the vicissitudes of the overall economy and the whims of consumers, says Carrie Johnson, a Forrester analyst. At the same time, the Internet continues to throw curve balls, even at the onetime upstarts like Amazon. Search sites such as Google (GOOG ); comparison-shopping sites such as Shopping.com, Nextag, and BizRate.com; and shopping malls like of Yahoo! (YHOO ) and America Online (TWX ) are all turning up the competitive heat by making it easier for bargain-hunting Net shoppers to do side-by-side comparisons. The upshot is that e-tailers increasingly must compete on price as much as on their traditional draws of convenience and selection. According to Forrester, 63% of online shoppers say they make purchases based on whatever site has the lowest price. It's no accident that Amazon has been cutting prices for more than two years and offering free shipping on more and more orders. DEEPER UNDERSTANDING. And it's not done yet. Amazon Chief Financial Officer Tom Szkutak told Wall Street last week: "We intend to further lower prices for customers during the holidays and beyond." Funny how investor sentiment comes full circle. When the dot-com bubble burst in March, 2000, Wall Street demanded profits from fast-growing but money-losing e-tailers. Now that companies like Amazon are improving profits, they're being pummeled for slowing growth. Consider Overstock.com (OSTK ), a Salt Lake City-based e-tailer that specializes in selling close-out items. It lost $3 million in the third quarter, but sales jumped 79%, to $103.4 million. Wall Street's reaction? Overstock shares increased 12%, to $52.63, on Oct. 22, the day after it announced its latest results. Nonetheless, most e-tailing experts believe investors need to relax and look at the real dollars behind the percentages. This year's $2.2 billion growth isn't too far behind last year's $2.6 billion increase. "There's no way an industry this old is going to keep growing at 30%," says Scott Blum, CEO of Buy.com. "Wall Street needs to understand that." Buy.com expects holiday sales to increase 20% to 25%. E-tail spending is hardly falling off a cliff. Jupiter expects at least 17% growth in each of the next five years. And the worldwide rollout of broadband connections could pump that up even further. After all, the longer a Web surfer stays online, the more likely she is to spend a few dollars.  Lacy is a reporter for BusinessWeek Online in the Silicon Valley bureau
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