Even Successful Online Retailers Face Obstacles

The common wisdom among Internet investors is that most stand-alone
e-tailers, perhaps as many as three-quarters, will perish.

And I’m not just talking about the many smaller e-tailers that already have
passed on to that big Web site in the sky or find themselves on death row.
Even the “successful” online retailers – those companies that have achieved
the highest brand visibility and market share – still face formidable
obstacles to profitability.

Let’s look at the three biggest online retailers to see where they stand:

Amazon.com – The
undisputed 800-pound gorilla among virtual retailers, Amazon.com had nearly
twice the first-quarter revenue ($574 million) of its closest rival,
priceline.com ($314 million). AMZN has the ability to enter a market segment
and quickly dominate, as it did with videos and DVDs. Within a year after
entering that market, Amazon.com ran previous leader Reel.com out of
business.

The good news for Amazon.com investors is that the company’s flagship U.S.
book business finally is turning a profit. The bad news is that, overall,
the company continues to bleed heavily. In Q1, AMZN lost $308 million, or 90
cents per share. That’s down from $323 million, or 97 cents per share in Q4
’99, but more than four times the $62 million, or 20 cents per share, net
loss in the year-ago quarter.

With healthy cash reserves, Amazon.com is in no danger of running out of
money soon, a possibility facing many other e-tailers. But it’s also far
from profitability, and still has not provided adequate proof that it’s
business model will work in the long-term. Thus, any investment in the
company truly is an act of faith.

priceline.com – The
“name your price” e-tailer may be the first large e-tailer to turn a profit.
priceline.com showed a narrower-than-expected Q1 loss of $7.3 million, or 4
cents per share, while increasing revenues by more than 500 percent over the
year-ago quarter.

Like Amazon, priceline.com has moved aggressively into new markets, expanding beyond
the initial travel-oriented offerings to groceries and even cars. With a
still-unique business model and no immediate cash crunch, priceline.com
looms as a likely survivor, and could be the best bet for investors among
e-tailers.

Buy.com
The biggest problem facing Buy.com has been its policy of selling products
below cost. It’s now headed in the right direction, reporting Q4 gross
margins of 4.3 percent, compared to the negative 0.8 percent in the year-ago
quarter.

But the bottom line is getting worse. BUYC reported $208 million in Q4
revenues, nearly double sales in last year’s fourth quarter, but net loss
grew to $32.9 million, or 28 cents per share, versus $19.3 million, or 22
cents per share in the year-ago quarter.

Until it can reverse that trend, Buy.com is best avoided by investors.

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