E-tailer industry faces fall-out

Forrester Research, a well-respected market research firm predicted this week
that a vast majority of online retail companies is on the verge of going
bankrupt or being acquired.

Forrester issued an alarming report warning investors to proceed with extreme
caution when it comes to companies who do almost all of their business online.
Forrester predicted that a large number of online retailers are facing
bankruptcy in the coming months as intense competition will eliminate those
that lack a solid revenue basis, resources, brandname recognition, or who are
unable to turn profitable after having invested heavily in marketing and
advertising.

According to the Forrester report, the consolidation of the online retail
industry has already begun behind the scenes as companies are hiring lawyers
and consultants to help them through the difficult times ahead. ''There are
just too many companies out there that don't have what it takes to last, and
they won't last,'' said Seema Williams, an analyst at Forrester. The report
confirms long-held suspicions that the online retail business model presents a
huge risk as competition has eroded profit margins on the products sold
online. In many instances, the small margins on high-volume shipments are
insufficient to cover even basic operating expenses. Companies like
Amazon.com, Barnes&Noble.com and others sell low-cost products, such as
books, videotapes, DVDs and audio CDs. They have to maintain adequate
inventory for a huge number of items, and the labor and other overhead costs
involved in processing large volumes of orders leave little or no profits. In
addition, intense competition is forcing online retailers to further lower
prices while increasing marketing and advertising expenses.

Already, some cybershops have already gone out of business, Cooking site Cook
Express, filed for bankruptcy. CDNow and Peapod are quickly running out of
money, and Cybershop and Beyond.com got out of retailing entirely and now
cater to businesses. Gloss.com, which sell beauty salon products was purchased
last week by Estee Lauder as part of the cosmetics giant's efforts to step up
its online presence.

Some companies have tried to add an even greater diversity of products. But
that has turned out to be a short term fix as the additional operating,
overhead and marketing expenses are making things worse in the long run.
Forrester did predict that some of the better-known online retailers,
especially Amazon.com ­ are expected to survive the shakeout, which will end
up working in their favor. But smaller players will have little chance to get
noticed, especially in the face of new competition from well-established
traditional retailers such as Wal-Mart and Sears, that are just now stepping
up their online presence by leveraging their resources and tremendous
brandname recognition.

''There are 30,000 e-tailers out there, and probably 25,000 will have to go
away,'' said Mark Doll, a consultant for startup companies at Ernst &
Young. ''But that will end up helping the biggest and best players who can
ride the tide and then will fare better because they'll have less competition
in their markets.'' Forrester said the situation at many e-tailers is reaching
critical stage. With their resources largely depleted, they are facing a new
end-of-year shopping season with little or no funds to promote the products
they are selling.