April 4^th 2000 

The market has shifted as investors begin to worry about seeing a return on investment.

The initial surge of optimism for Internet Retail is now being replaced by pragmatism. With so many companies competing for traffic, not everyone can generate the volume needed to build a profitable business model.

Not even Amazon.com has achieved that milestone yet, and it has far more traffic than any other online retailer.

Given the advantage traditional retailers have over pure play eRetailers, we predict  a big a shake out of the market this year.

Watch for many online retailers to be acquired as their stock prices fall, making them attractive to traditional retailers wanting to leverage the online traffic and enhance their own online offerings.

The online retail model is far from doomed. We are entering a phase in the US market that will result in consolidation of the market.

This is not unusual. The online retail market is following a traditional market life cycle. We have passed through the initial boom period and are entering the consolidation period.

Investors increasingly want to see a business model that yields a return on their investment. eRetailers need to adopt strategies that will build long term customer loyalty (see eRetailNews 2000-3 and Commerce Cubed).

Expect to see some eRetailers run out of funding this year, as investors require a return on existing investments. Investors will be very willing to sell budding eRetailers to traditional stores or larger competitors, if they see this as the best way to get a return on their investment.

This isn't necessarily a bad thing. It can give eRetail more strength, being able to leverage traditional store's merchandising skills and develop economies of scale through a consolidated supply chain.

Consolidation among pure play eRetailers will increase traffic, helping drive economies of scale.

The companies to watch will be the ones acquiring their less fortunate brethren.

Is there room for new online retailers?

There is still room for new entrants in this market.

To succeed, new entrants must have a sustainable competitive advantage, and they need to demonstrate fiscal responsibility from the outset.

Slow and steady may yet win the race. As many new start-up companies have discovered, cash-flow management is crucial to the survival of a new company.

Spending $50m on advertising may generate traffic, but what use is it if the company cannot generate the revenue to keep the doors open?

Given the unwillingness of venture capital companies to add more fuel to the fire, new start-ups will need to show a faster or more guaranteed return on investment.

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