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The Dot.Coms Falling To Earth


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The Dot.coms Falling to Earth

Holiday sales were way up--but some e-tailers are way down

In the end, Christmas '99 lived up to its billing as America's first e-Christmas. Consumers tripled online purchases, to more than $10 billion. But even before Christmas trees hit the curb, investors were asking pointed questions about who did--and didn't--rake in their share of the online blitz.

Some didn't even make it to Christmas eve: CookExpress.com, which didn't get enough business for its gourmet-food-delivery service and said on Dec. 23 that it will suspend operations. Cook Express Inc. says it is reviewing its options and may reemerge--if investors go along. Then on Dec. 29, Value America Inc., which specializes in consumer-electronics gear, announced that despite massive spending on print ads, quarterly revenue would fall as much as 9% below projections. It's laying off 47% of its staff and cutting back offerings to a few promising categories. Expect more casualties by the time fourth-quarter earnings are tallied. "There's going to be 50 to 100 companies that will hit a wall," says Steve Westly, vice-president for marketing and business development at eBay Inc.

So, after helping lead the Nasdaq exchange to record highs, e-tail startups are leading the retreat. By Jan. 5, e-commerce shares had plunged 35% from December highs, according to Thomas Weisel Partners. Weaker private companies, meantime, will see funding dry up, forcing them to go out of business or seek a buyer, say analysts and venture capitalists.

The most likely victims? Pet supplies, gifts, and beauty products, all crowded categories, are ripe for a shakeout. The most brutal paring, though, will come in the hotly contested toys and consumer-electronics markets, says Alec Ellison, managing director at Broadview International LLC, a mergers-and-acquisitions investment bank. Roxy.com Inc., an electronics site that is 40% owned by Federated Department Stores Inc., says it's already on the lookout for cash-strapped dot.coms to acquire.BATTLE STATIONS. Another way to separate winners from losers is to check the traffic reports compiled by outfits such as Nielsen//NetRatings and Media Metrix. These stats show that despite an estimated $1.7 billion of advertising thrown around by Web startups, traditional bricks-and-mortar brands, such as Best Buy and Toys `R' Us Inc., broke through online. Their sites make up nearly half of the names of the 50 most popular sites compiled by Media Metrix. MotherNature.com Inc., an e-tailer that spent an estimated $15 million in fourth-quarter marketing, didn't make the list.

These results will only encourage the big brands to throw more money into Web sales--and make life even harder for Amazon.com wannabes. "Year 2000 is shaping up to be a major battle between the offline retailer and the pure dot.coms," says Jim Breyer, managing partner at Accel Partners, a Silicon Valley venture-capital firm.

As the year unfolds, dot.coms will review their gaffes and rethink strategies. One thing seems clear: Massive spending on traditional media did not create instant household names. Already, startup Angeltips.com dropped its ad from the greatest marketing event of them all: the Super Bowl. Now, dot.coms are more likely to seek less pricey alternatives to tap consumers, including direct e-mail or co-branding with other sites or retailers. But some companies won't live long enough to make these efforts pay off. Warns Dick Byrne of ad firm Hanft Byrne Raboy & Partners Inc.: "Branding and loyalty don't happen overnight."

And more companies will focus on the basics--like distribution and customer service, which helped keep Amazon.com on top. But even mighty Amazon did not escape the Christmas hangover. On Jan. 5, the company's shares plunged 15% after it disclosed that its fourth-quarter sales will come in below some analysts' expectations despite tripling its ad budgets and that losses would widen because of higher inventory costs. Next victim?By Heather Green in New York and Catherine Yang in Washington, with Paul Judge in BostonReturn to top


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