B2C DOT-COMS: The Shakeout Continues

A year after the dot-com boom rocked the world, B2Cs
e-commerce companies are much sub-dued. Revenues are drying up, profits are
rare, marketing and advertising spends have been cut. Even share prices of the
few such dot-coms listed at the NYSE and Nasdaq are near all-time lows.

The B2C Slowdown

  • Retail sales on the Net are
    still growing, but slower

  • B2Cs that run on business
    basics will survive, especially established brick-and-mortar companies

  • B2C stocks are seeing a
    long-due correction.

Now the figures: Estimates of retail sales on the Internet in
2000 vary from Forrester Research’s $31.4 billion to Boston Consulting’s
$48.6 billion: an average growth of 84% over 1999. Also, Forrester projects Net
retail to be worth $185 billion in 2004.

Then, why have B2C dot-coms become such untouchables? Why are
they finding it hard to get investors? And why are B2C stocks on a constant
slide? Has suddenly the whole business model become unsustainable?

Blame the chaos on start-ups not following the simple
business basics. Start-ups made mistakes in running their businesses, like
entering markets that had too many competitors, bad investment and lack of
planning.

It is not that investors have suddenly lost interest in the
B2Cs. The stock slide has been happening for quite some time, starting March
2000. Says Anand Sudarshan, co-CEO, Planetasia.com, says, “B2C stocks had
been overvalued as a sector. What we are seeing is a steep correction.”
Sudarshan refers to the stocks listed on the Nasdaq–Amazon.com, Ebay.com,
Satyam Infoway and Rediff.com (India doesn’t have any of them listed) He says,
“Investors are looking for basics again–revenues, profits, a strong and
sustainable business model, differentiators. A B2C can certainly stop the slide
of its scrip value, if it is able to demonstrate basics.” VS Sudhakar, MD,
Fabmart, says, “While it is true that most B2C stock prices have crashed,
we should see if their valuation was right in the first place. When the B2C dot-coms
started, the method of valuation was based entirely on future lifetime values of
possible customer acquisitions. After a while, people realized that it made
sense to treat the valuations as you would for normal companies.” There are
B2Cs who have a good revenue model and are making profits, like Amazon.
Valuations of such companies are lower than their early highs but are still
good.

India has followed the global pattern. New dot-coms saw such
splashy launches as full-page ads in leading dailies, painting bus stands with
their trademarks and handing out free gifts. No more do we see such frenzied
promotions. Launches these days are as drab as hurriedly put-together press
conferences.

In India, many dot-coms followed the models adopted by the
US-based dot-coms. They did not reckon that the infrastructure-reach,
penetration levels and consumers’ buying culture in the US were far more
advanced than at home. That led to a path to closures.

What went wrong?

The dot-com shakeout has thrown a few lessons and one can
attribute many reasons for the failures. Ethan Harris, analyst, Lehman Brothers,
says, "Growth at all costs strategy makes no sense. For a couple of years
investors bought into this ‘first mover advantage’–that a company would
succeed by dominating a particular product category, pumping up sales, creating
consumer loyalty and blocking out new competitors." He adds, "The
problem with this approach was that it turned out to be easy for new competitors
to come into the market and steal customers. In addition, the dot-coms entered a
promotional spending race, which caused huge losses for every participant.
Eventually investors began to wonder when profitability would arrive and stopped
financing the least profitable companies." And under current buying habits,
not every product can be sold on the Web and in some sectors the Web can only
support a few sellers. In such a scenario, established brick-and-mortar
companies stand a better chance of surviving because they don’t need to spend
much on creating a brand name and are capable of serving customers better. And
they don’t have to build an inventory from scratch.

B2C Stocks: Sliding
All the Way

AOL Ebay Amazon.com Satyam Infoway Rediff.com
15-Nov-00 49.4 45.8 25.3 8.8 5.1
15-Jun-00 54.4 64.1 46.3 24.4 25.9
15-Mar-00 61 94.8 63.8 79.8

The stock slide shows investor indifference. Apart from
Ebay, all others are running financial losses. After the correction in the
stock prices, it is now the turn of a correct business model

Sudhakar says, "There is nothing wrong with a B2C model
as such. Most Web sites started without a model in place and were based on pure
content. Such sites will find the going tough." But if a B2C commerce site
shows continuous increase in actual customers, transactions and transaction
values, while still being conservative with spending, it is likely that a
crossover will happen.

The future belongs to…

The future is bright only for those B2Cs who rely on the
business basics to earn money. Sudarshan says, "In all the chaos, we should
not forget that the premise of the Internet and what it can mean to people,
industries and global economy has not gone away."

The B2C scene is crowded and only those with a clear value
proposition for the consumer will survive. As E Abraham Mathew, president, CIOL,
says, "B2C sites that have a brick-and-mortar backing will find it easier
to enter as for such companies it is just utilizing another channel for
sales."

The message to all the B2Cs in India hiding behind the veneer
of inflated revenues and site traffic is clear: you can’t succeed on ideas and
cash alone.

BIJESH KAMATH
in New Delhi

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