Web merchants face a make-or-break Christmas season

Associated Press

SAN JOSE, Calif. — A year ago, Al Noyes of SmarterKids.com Inc. was forced into the trenches — a company executive working 14-hour days alongside assembly line workers to package customers’ Christmas gift orders.

This year, the online toy retailer’s chief operating officer has his sleeves rolled up again — not at the warehouse but at the corporate office, tightening expenses and completing a merger that the company says will accelerate its path to profitability and keep it alive.

Like many other e-tailers, SmarterKids.com is embroiled in what some analysts consider a make-or-break season.

E-tailers, having moved beyond the debate of whether online commerce will survive, are now under mounting pressure to demonstrate they have the know-how and the customer base to achieve profits.

"Christmas is the big time to prove yourself," said Jeetil Patel, an e-commerce analyst with Deutsche Banc Alex. Brown. "If companies don’t hit the revenue targets this year, then it would imply they did not have as many customer transactions and customer acquisitions, which implies how many repeat customers they’ll have for next year."

Web merchants also face increasingly fierce competition from deep-pocketed and well-established brick-and-mortar businesses. Stores such as Wal-Mart and Kmart have aggressively entered the cyber arena and are rapidly gaining sales.

Industry analysts are predicting a continuation of a shakeout that in recent weeks claimed Toysmart.com, Garden.com and Pets.com.

"At least half will not survive in the current state that they’re in, as a stand-alone pure play," Laurie Windham, an e-commerce consultant, of online businesses.

Many e-tailers are in financial intensive care, running low on cash and facing a limited amount of capital options and Grinchlike scrutiny from investors.

Compared to the 1999 holiday season, the name of the game for most online retailers today is less about gaining new customers than retaining existing ones.

"Last year, people were enamored with the Internet — it was a sexy thing to shop online," said Windham. "But now it’s part of our lives. Now they expect to get good deals and they expect to have a lot of choices and they expect it to be a whole lot more convenient."

SmarterKids.com has watched its stock plummet along with other Internet companies — it closed at $1 Friday, down from its 12-month peak of more than $14 — despite the robust 1999 Christmas season that sent fledgling online retailers like itself scrambling to handle orders.

"Last year, we looked like a duck — things looked calm on the surface but we were paddling furiously underneath," said Noyes. "But we’ve learned a lot since. Our (Web) site has evolved. Our merchandise mix has evolved."

Anthony Noto of Goldman, Sachs &amp Co. estimated in a Nov. 27 investment report that as many as 10 of the 22 publicly traded e-commerce companies he monitors will no longer be alive by mid-2001.

"The Better Business Bureau says that seven out of 10 businesses don’t survive — why should that be any different with the Internet?" said Robert Labatt, research director and Internet market analyst for the Gartner Group. "It’s all in the course of the Darwinian evolution of business."

Labbett acknowledged that his company, an online retailer and auction site for computer equipment, and its dotcom compatriots face a tough investing environment.

"It’s crazy that a company with a half-billion dollars in sales and a clear plan to profitability is worth $1 a share," Labbett said. "Our goal is to wait that overswing out."

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