CUTBACKS A DILEMMA FOR ‘NET SET
Byline: Valerie Seckler
NEW YORK — A virtual tug of war is gripping fashion-lifestyle players online.
With the Internet shaking out far faster than even the most pessimistic Web watchers expected back in January, numerous dot-coms in the business-to-consumer sector are currently in serious cutback mode.
And according to Internet observers, they are curtailing spending so sharply that the dot-coms may well be impeding their very efforts to leverage the medium’s potential. This scenario, analysts advised, ought to be of particular concern to the click-and-mortar crowd, which has the most to gain by capitalizing on their multichannel potential — or to lose by failing to do so.
At the same time, apparel is emerging as one of the hottest-selling categories among cybershoppers and is pulling at least a few fashion players, like Nordstrom, Neiman Marcus, Bloomingdale’s and Macy’s, in a different direction, making them more inclined to spend, even if prudently, on enhancing their online presence.
“What’s surprising is the speed at which the shakeout is happening and the rate at which new money for pure-plays has dried up, as have sources of funding within traditional click-and-mortar businesses,” noted Rob Leathern, analyst at Internet consultant Jupiter Media Metrix. “A lot of companies are scaling back more than they should be,” Leathern contended, “so they won’t be able to realize the Web’s potential to drive business offline, as well as online, over the next six months.”
Leathern was one of a half dozen ‘Net observers who told WWD that spending on B2C projects in the past six months was severely cut. This is based on evidence like the ripple effect tighter budgets have had on the Internet services sector, and the lengthening time it’s taking dot-com projects that are getting started to receive a green light — after being eyed by executives higher on the organizational chart, now typically a vice president. Online research giant Forrester Research, for example, said Thursday that it will lay off 15 percent of its workforce, or about 111 people — the first job cuts ever for the 18-year-old firm — and take a third-quarter charge of about $3.5 million. Forrester has plenty of company. Razorfish, for one, said this month, it has shut its office in Finland, and Jupiter has laid off roughly 25 percent of its workforce since it struck a merger deal during June 2000 with Web ratings agency Media Metrix.
“It’s amazing to see how quickly the Internet has matured” offered Carl Steidtmann, chief U.S. economist at PricewaterhouseCoopers. “I don’t know that companies not yet online will be. It comes down to getting Internet users to buy more online.
“The only thing that will drive down the number of dot-bombs will be a lack of companies to blow up,” said Steidtmann, who is anticipating a second-half slump in consumer spending that will hurt fashion e-businesses as well as traditional stores and media. “The [venture capitalists, or VCs] still aren’t investing in Internet ventures and I expect most of the remaining pure-plays to die or be bought.” Earlier this year, added Steidtmann, “I was expecting a lot more bankruptcies.”
Approximately 330 dot-coms flamed out during the first half of 2001, a nearly tenfold leap over the 36 sites that went dark during the first six months of 2000, according to a report released this month by Webmergers.com, a San Francisco-based service provider for buyers and sellers of Web properties. Among the fashion victims in the dot-com death count were three luxury players that went out this spring, BestSelections, LuxuryFinder and Luxlook, as well as off-pricer Iyou.com.
In addition, Walmart.com pulled its apparel assortment off the Web site in April after struggling with the low-priced offering; Kmart’s BlueLight online site also stopped selling apparel this spring, and luxury e-tailer saksfifthavenue.com has scaled back its effort due to lackluster sales.
To a great degree, it’s a Catch 22 for the Internet crowd: their funds are drying up, and as a result, they are forced to turn a profit that’s built on a smaller infrastructure. The danger, observers warned, is that a diminished offer — whether scaled-back assortments, fewer shopping services or less original content, for example , can produce the opposite effect, spurring Web surfers to move on to more compelling destinations.
“I was a little surprised at the extent of the current pessimism at a VC conference I spoke at [last] week,” admitted Ben Narasin, president and chief executive officer of Fashionmall.com. “Four VCs in a row said there’s a big stinky cloud out there and it’s not lifting. A lot of VCs have raised lots of money but aren’t ready to deploy it. They’re still doing triage on existing investments, rather than shopping for new deals. This, of course, has an effect on what dot-coms spend.
“Will investment capital and ad dollars go back into the B2C market in the second half?” Narasin asked rhetorically. “It’s too soon to know.”
The Fashionmall ceo’s cautious, but not entirely downbeat, view was echoed by Doug McCormick, chairman and ceo of iVillage.com, the women’s media network that on June 18 acquired its top rival, Women.com, in a $47 million deal with Hearst Corp., and subsequently has escaped the threat of a Nasdaq delisting. IVillage still expects to achieve profit on a cash-flow basis this year, said McCormick, who nonetheless cited a “murky” outlook for second-half ad spending online.
“I never expected there to be a plebiscite on whether or not dot-com ads work,” McCormick related. “I never thought the guy cutting my hair would have an opinion on [Viacom president] Mel Karmazin’s Web strategy. If I were a betting man, I’d bet the second half will be better than the first. But we’re still waiting for empirical evidence.”
The outlook among the fashion commerce set is more upbeat, if less than enthusiastic, with most of the dozen or so dot-coms contacted by WWD eyeing second-half growth for the B2C sector ranging from incremental single-digit gains to low-double-digit increases. At luxury e-tailer Ashford, for instance, recently named ceo David Gow sees the sector’s growth tallying 10 to 20 percent for the full year, compared with industry forecasts that have ranged widely from 20 to 80 percent.
“The decline in retail spending has affected consumers’ spending online as well,” Gow noted. “I think there will be more dot-bombs in the second half because most categories will have just one strong pure-play, and there are still many categories with more than one.”
As for Ashford’s survival strategy, Gow said, “we’re committed to spend less on marketing. I hope we can spend more. But the climate has forced us to change from fixed-rate [direct marketing] arrangements, to variable-payment deals.”
Dawn Robertson, president of Federated Direct — which comprises the Bloomingdale’s, Macy’s and Fingerhut Web sites and Macy’s and Bloomingdale’s catalogs — said the Internet businesses are expected to break even by 2003. This year, the Web sites’ sales are estimated to tally $250 million, the high end of the previously projected range, sparked by relaunches of macys.com, with 70,000 stockkeeping units, and bloomingdales.com, with 45,000.
By the end of the year, Forrester Research expects roughly 65 million U.S. households to have Internet access, up from 59 million last year and just 22 million in 1996; by 2006, Forrester sees 89 percent of the country’s households being connected. For 2001, Jupiter Media Metrix is forecasting B2C sales will hit $36 billion, up 38 percent from transactions that totaled $26 billion in 2000, according to the Commerce Department.
“This still strikes me as a reasonable forecast,” said Ken Cassar, a senior analyst at JMM. “We undoubtedly will see some pure-plays fail over the next few quarters, but I believe that rate will slow in the third and fourth quarters.
“What will define the channel,” Cassar added, “are the changes click-and-mortar retailers will make. Fashion B2C firms are at great risk of underestimating the Web’s impact. Apparel may be the fastest-growing category online today, [but] the problem is it still represents a small part of the business. Saks Fifth Avenue is an example of a company that’s scaled back dramatically, due to dissatisfaction with the site’s level of sales.”
“Companies doing well online have actively tested what does and doesn’t work,” said JMM’s Leathern, who listed Nordstrom.com; PotteryBarn.com, and Overstock.com as examples. “Nordstrom was smart to focus initially on shoes — something they’re experts at selling — and they’ve been smart to keep the site’s offer within their ability to fulfill what consumers expect of them.”
And with diminished sales expectations and no prospect of lucrative spinoffs anytime soon, the click-and-mortars are beginning to consolidate stand-alone ‘Net units into the corporate fold or increasingly running them from headquarters, like BlueLight’s Kmart site. “Our marketing VP moved to Kmart in April and he had the budget control,” said Mark Goldstein, former ceo of BlueLight, who departed the dot-com in May. “Marketing’s being run out of Troy [in Michigan, Kmart’s headquarters]. A lot of the merchandising functions are being run out of Troy. They’re keeping [BlueLight’s] San Francisco office open because of the hiring possibilities there,” since it is so close to Silicon Valley.
Acknowledging those moves prompted his exit from BlueLight, Goldstein predicted that most others will follow suit. “Any retailer that hasn’t already done so is forestalling the inevitable,” projected Goldstein, who has led four Internet startups, and now has another one, which he did not name, brewing for fall.