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E-BUSINESS: Surviving the carnage

E-BUSINESS: Surviving the carnage

The latest victims of the dot-com carnage are Mail.com and Stamps.com, both of which recently announced plans to lay off workers. Add these to the growing list of e-business upstarts - including Priceline.com, Drugstore.com, and Eve.com - that have also been recent victims of the downturn.

What's behind the seemingly never-ending fallout, and how can your e-business avoid a similar fate?

The first problem was easy access to capital, followed by a belief that the venture capital markets would remain liquid regardless of earnings performance. Tough competition for market attention led Internet startups to spend money - and lose it - at a much higher rate than traditional bricks-and-mortar startups. (Remember all those pricey television ads the dot-coms were running about a year ago?) Indeed, most dot-com woes can be traced to cash burn rates that far exceed their capability to generate sales.

Now capital is scarcer. At Gartner we predict that as many as 60 per cent of business-to-consumer (B2C) dot-com companies formed between 1997 and 2000 will dissolve by 2005 - a 50 per cent increase over the historical dissolution rate.

Clearly, some B2C dot-coms will rebound with strong business strategies. For example, consumer aggregators such as Priceline, auctions such as eBay, virtual malls like DealZ.com, and vertical and general portals will continue to build value and partner with traditional companies, which will bring brand equity to their sites. B2C pure-play virtual shopping malls, auctions, reverse auctions, and consumer aggregators - especially those that partner with traditional companies with strong brands - will most likely survive the dot-com shakeout. Those pure-play companies will likely be targets for distribution partnerships with traditional companies, but will not suffer much softness in their valuations, thereby becoming less likely takeover targets of traditional companies.

The next few years will be rocky for the dot-coms. To survive, they must focus on profitability and partnerships with bricks-and-mortar companies with significant brands and a solid customer service and distribution infrastructure.

Traditional companies can capitalise on their customer bases with inventive marketing programs to drive online traffic to dot-com partners. That strategy will enable those dot-coms to spend less on capturing market attention and more on developing their infrastructures.

To ensure continued investments, dot-coms must focus on smooth, efficient business operations and a strategy for profitability. Underfunded dot-com companies with significant traffic and quality infrastructure will become investment or acquisition targets of traditional companies. One way or another, the current crop of unprofitable dot-com companies will thin out.e-tailers are again paying attention to some of the old-fashioned business rules that had been forgotten in the heat of venture-backed millions and dot-com fever. Low overhead, good margins, and an efficient fulfilment centre can help a retail business succeed.

To thrive in the new e-business market, traditional retailers need a savvy, sophisticated Internet store. At the same time, e-tailers need a brand, community, good customer relationships, and a solid physical distribution and fulfilment centre that will not raise overhead unduly. As dot-com companies find themselves limited by inadequate infrastructure backing their Web stores, more virtual companies will seek partnerships or mergers with branded bricks-and-mortar retailers.

A number of other virtual retailers, such as Amazon and Drugstore.com, exploited an early foothold and strong marketing to establish themselves on the Web. However, that approach will increasingly pose a greater challenge because the number of B2C Web sites has grown to more than one million.

By co-branding with traditional merchants, virtual retailers without brand names can gain a stake in the market, service an infrastructure, gain credibility and trust, and drive traffic. Moreover, traditional retailers get a jump-start in cyberspace with more advanced technologies than they can develop themselves.

Barb Gomolski is a research director at industry analyst Gartner. e-mail her at BarbaraGomolski@earthlink.net


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