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Profitless prosperity

Profitless prosperity

It has taken only about two years for online shopping to morph from a geeky way to buy books and software into a business phenomenon that's shaking the structure of the entire retailing industry -- and changing the buying habits of millions of people.

Although online sales still account for well under 1 per cent of total retail spending, the possibility that they might soon account for a lot more has produced a veritable plethora of dot-com retailing ventures. Not only can most items now be bought online, they can be bought online at dozens of different places.

For the time being, Internet retailers have abandoned any short-term plans for profitability in favour of an all-out spendathon aimed at establishing position for the long term. A lot of the spending is on advertising. But as consumer options increase, retailers also face greater pressure to improve customer service, broaden product offerings and reduce prices. In established categories such as books, the competition from entrenched players is ferocious. In big-ticket areas like furniture, online retailers still face the task of convincing consumers that buying online is worthwhile.

Across the retailing landscape, traditional bricks-and-mortar stores are waking up to the Web challenge, sometimes even enlisting venture capitalists to help them vanquish the dot-com pretenders.

And there is little evidence of the viability of the Web retail model as it's constructed today. Consider that in the September quarter, Amazon.com, the very icon of Internet retailing, the envy of the industry, lost $US197.1 million. And the outlook for its fourth quarter suggests even greater losses.

Amazon produces red ink in the most impressive volume -- but almost every online retailer reports losses. In the June quarter, for instance, eToys lost more than $20 million. Drugstore.com lost almost $42 million in the quarter ending on October 3. Webvan, which just went public, reported in its IPO prospectus that it lost $35 million in the first six months of this year. Buy.com, which is now in registration for an IPO, lost $33.2 million in the third quarter.

Exceptions to the rule? They're hard to find. eBay actually makes a modest profit, and so does Yahoo, which, while it isn't a retailer, has been pushing hard to attract shoppers to its online mall. But for most of its short history, online retailing has an element of the old line about losing money on every transaction, and trying to make it up on volume.

Wall Street, though still willing to grant most Net companies a lot of room for error, has become a little more sceptical about offline companies slapping together a Web site and declaring themselves Web-savvy (think K-Tel).

It's silly to say there's no profit to be made in online retailing. At least theoretically, margins online should be higher than those offline. No doubt, some people (in addition to venture capitalists and Web site builders) will eventually find e-commerce to be immensely profitable.

Do not be surprised, though, if some of the winners in the end turn out be companies other than the industry pioneers. The real giants of online retailing may turn out to be the big offline retailers. They've got deeper pockets. Better established brands.

And at the end of the month, they've generally got a few bucks left over. Which is more than Amazon can say.


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