The future of e-tailing

Will all web surfers spend their money on the web?

By BBC News Online's Tim Weber

The collapse of online fashion retailer boo.com is probably the most high-profile internet business failure so far, but does it signal the beginning of a massive shake-out among e-commerce companies?

The signs are not good. One of the top names on the web, US-based music retailer CD Now came close to bankruptcy and was saved only when Mexico's richest man stepped in with generous funding.

We are seeing the growing pains of doing business on the internet

Bill Cooper, Cap Gemini

In the UK, the situation is dire too. According to accounting firm PricewaterhouseCoopers (PwC), a quarter of all 28 internet firms listed on the London Stock Exchange will run out of cash within six months.

Their rate of spending is so high that all but three of them could fail within 15 months. Only injections of "fresh money" can save them.

PwC's John Soden warns: "Many of these companies have very little time left in which to start increasing revenue or to raise new cash ... with investors becoming much more selective about which internet stocks they will back."

Gold rush

But for now, the world of e-commerce still has a gold rush feeling about it. A lot of people - investors and entrepreneurs - are trying to get very rich, although only a few will actually make it.

To Bill Cooper, senior manager at Cap Gemini's e-business unit, the troubles of web firms are signs of the "growing pains" of the internet.

Miss Boo did not attract enough buyers

Boo's collapse, says Mr Cooper, will actually be "beneficial" as it "cuts through the hype" and forces investors to look at the business fundamentals.

"Soon internet firms will not be assessed in the light of whether they are on the web, but whether they meet the performance criteria of the sector in which they are operating," he says.

Old-economy bricks-and-mortars firms will have to prove that they can successfully open up another channel through which to reach old and new customers, and integrate the web with their traditional business.

New "pure-play" internet ventures, meanwhile, must demonstrate that they have a robust business plan and an e-commerce model that adds genuine value beyond what offline firms can offer their customers.

The internet High Street

Bill Cooper points out that it would be wrong to compare boo.com with all other tech or internet firms like Psion, Nokia or Amazon.

Trouble at one e-tailer does not spell doom for other e-commerce firms, says Steve Bennett, founder of online electronics, music and video retailer jungle.com.

He likens the web to the High Street. Just because one shop goes bust, it does not mean that the whole High Street will disappear.

It all comes down to old-fashioned business fundamentals. Selling on the web, says Mr Bennett, is not that much different from doing business 20 years ago.

Companies - and their investors - have to focus on customer service, staff retention and good marketing.

But the most important factor is scale. It is not important whether a web firm is "first to market", but whether it can keep up with growing customer demand.

A recent study by Boston Consulting Group suggests that during the past year 28% of all attempted online purchases failed.

Firms that cannot deliver - either because their web site is poorly designed or because their distribution system is not up to scratch - are bound to fail.

Making money

Fully half the companies that have been selling online for at least a year are now operating in the black

Boston Consulting Group

A good web site and a nifty business model are no guarantee for success, though. Even online retailers boosted by turbo-charged stock prices have to make money at some point.

The common assumption is that hardly any e-tailers make money.

But that is not true, according to a study by US industry association shop.org and Boston Consulting Group.

More than a third of all US e-commerce sites are actually making an operating profit, and "fully half the companies that have been selling online for at least a year are now operating in the black".

Slim pickings

Web firms have to get the proportions right. Jungle.com's Steve Bennett claims he could turn on the profit tap at any time, but warns that this could prevent his company from growing.

"Small losses are good if they help a company to grow and grab marketshare," he says.

"It's only if the losses don't have any resemblance to turnover that the situation is getting critical."

Boo.com, for example, was reportedly burning through about $1m a week, and sales were poor.

This may be the exception.

Nonetheless, the web pickings are slim. After all, the main selling point of shopping on the internet is the promise that it will be cheap and convenient.

As a result the profit margins of dot.com companies are "desperately slim", warns Jeremy Batstone of Natwest Stockbrokers. He says that many e-tailers are "under extreme pressure and will go to the wall".

The failure of boo.com is likely to be just the first of many casualties in a vicious shake-out of the online market place.