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How to Reach John Q. Public


Mark Apr. 3 on the calendar. That's "Back the Net Day," when people are being urged to support the Web by scorning traditional retail stores to shop online--for a CD, shares in a Net company, donating to a charity, anything. Without this '60s-style love-in, warns Michael Tchong, the event's organizer and president of market researcher Iconocast Inc., some of the Web's most popular sites could be lost forever.

Groovy. But it's a little late for a grassroots Save the Whales campaign for endangered dot-coms. Once teeming with thousands of vibrant new ideas, the consumer Net is beginning to look like the mall at midnight. A crisis of confidence is in full swing, and the prognosis for the last of the major pure-play Internet companies is increasingly gloomy. On Jan. 30, Amazon.com Inc. cut its sales-growth forecast for the year significantly, to 20% to 30%. On Mar. 7, eToys Inc. (ETYS) closed shop. That same day, Yahoo! Inc. (YHOO), the Web's most popular site, slashed first-quarter revenue estimates by 25%. When the dust settles, auctioneer eBay Inc. (EBAY) could be one of the few dot-coms left standing. And that could trigger a further domino effect: Without heated competition from Net upstarts, established companies will feel less pressured to innovate online. That could dampen the enthusiasm of Web shoppers--which in turn could beget more e-tailing disappointments.

NET CURRENCY. It's bad, yes. But it's not over. With five years of Web road beneath us and the silly, overpriced TV ad campaigns and dubious ideas behind us, we've learned that branding and buzz are very different things. Now, some paths to profitability are emerging. BusinessWeek has pinpointed four business models that not only work, but work well. "E-tailing's problems have been a cost issue, not a market-demand issue," says James W. Breyer, a managing partner at venture-capital firm Accel Partners. "Consumers love buying on the Internet. Three years from now, you will have three or four dominant companies in Internet consumer e-commerce."

Who will they be? Strong contenders are those that take advantage of the No. 1 thing people seek online: information. This is the currency of the Net. Some companies, notably eBay, have figured out how to cash in by being information brokers with no need for costly warehouses or distribution systems. Consider job-listing site Monster.com, which has shown a profit for 11 straight quarters. It rakes in the dough by charging employers to post jobs or search its database of 8.9 million resumes. In the fourth quarter alone, Monster, with more than a 50% share of the online-recruitment market, pulled in sales of $117.2 million, while its net profit margin continued to climb, to 24% from 14% a year ago.

That's not to say every merchant selling the hard stuff-- from DVD players to Razor scooters--can't make a go of the Net. It's just that they can't be strictly virtual. A growing number of them are straddling the fence, taking the best of traditional and online businesses. In their rush to cater to people online, Net upstarts underestimated the cost of marketing when you don't have a known brand or can't leverage your physical assets. Sure, the hybrids struggle with the Web's special headaches: mastering the shipment of products in small volumes, balancing the costs of good customer service, and figuring out which products can be sold profitably online. But they at least start out with some building blocks.

The big advantages? Any company can spend $25,000 to put up a retail site, but then they have to spend $150 million building distribution outlets and customer-service centers, not to mention marketing. Fence-straddlers have the pieces in place to extend their businesses online without shelling out piles of cash. These companies leverage their existing assets of stores, catalogs, magazines, or TV networks, along with their powerful brands, to reach consumers. J.C. Penney Co. (JCP) uses its catalogs, stores, 14 call centers, and 5 warehouses to promote the success of its online operations. The company expects to be profitable online this year, as sales jump 36%, to $400 million.

The Net is littered with mistakes to learn from. One big one: For too long, dot-coms depended on a single revenue source. In Yahoo's case, the problem was compounded: Not only did 90% of its revenues come from ad sales, but too much depended on deals with other dot-coms. When funding dried up for pure Net plays, Yahoo got hit hard.

The lesson: Companies that figure out how to successfully market all of their skills will be sitting pretty. The best bet is to diversify and make sure you have enough a la carte offerings to keep customers happy and revenues streaming in. Homestore.com Inc. (HOMS) offers lists of 1.3 million homes and 6 million rental apartments for free. Much of the Thousand Oaks (Calif.) company's revenue comes from traditional sources such as advertising and listing fees charged to real estate agents. But Homestore offers more: software that helps realtors keep track of clients and programs for sending out brochures. About 60% of revenues come from software and listings, with ad sales making up the balance. The mix pays. Homestore is expected to be profitable this year on sales of $440 million.

PET PROJECTS. Niche consumer companies can prosper online as well. The Web helps companies reach shoppers who would never have known they existed before. By remaining small, watching marketing costs like hawks, and keeping a laser-focus on high-margin niches, companies are producing profits. Pet-supply merchant Waggin' Tails makes money by specializing in items, such as hard-to-find vitamins and high-end dog food, that sport 30% net profit margins. The company turns a small profit on less than $5 million in sales. That's a far cry from now-defunct Pets.com, which sold bags of inexpensive pet food with skimpy 10% gross margins.

Sure, the first dot-coms built the consumer Web with flash and swagger--and not enough common sense. But shoppers haven't forsaken e-commerce. Forget love-ins. What's needed are a few good business models. By Heather Green in New York, with Rochelle Sharpe in Boston and Arlene Weintraub in Los Angeles


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