FINANCING: Investors cool on pure-plays

Will lagging Web stocks affect catalog financing?

Once the darling of the investment community, pure-play e-commerce companies just aren’t as hot as they used to be. Some Web start-ups are reportedly quickly running out of capital, such as online music cataloger CDNow, and others, such as, are generating lackluster response to their IPOs.

In fact, many Internet stocks have depreciated significantly of late. As of press time, for instance, shares were down to 6 1/4 from a 52-week high of 24 1/8, compared to cataloger/retailer Sharper Image, whose shares were at 14 1/4, down only 9 1/4 from its 52-week high of 23 1/2. Moreover, an April report by Forrester Research, a Cambridge, MA-based Internet research firm, predicts that the combination of weak financials, increasing competitive pressures, and investor flight will drive most of today’s dot-com retailers out of business by 2001.

>From an investment standpoint, many believe that the fate of pure-play >dot-comers is bleak if they keep burning up cash and continue to fail to >produce profits. But industry observers also say that the pure-play >capital bonfire isn’t likely to hurt traditional catalogers seeking >financing.

“There’s no question that many pure-plays will have to raise additional capital, but the question is can they raise additional capital,” says Rob Martin, senior Internet analyst at Arlington, VA-based investment research firm Friedman, Billings, Ramsey. “Their chances of getting financing lessen every day that their stock decreases,” he says. “Pure-plays are trading at significant discounts from where they IPO’d, and they’re rapidly burning up their capital.”

Burning up capital indeed. According to a report by New York-based investment firm Goldman Sachs, CDNow reported a fourth quarter 1999 loss of $23.9 million and had only $4.1 million left in capital. Similarly, online grocer had a first quarter 2000 loss of $5.4 million, and only $1.6 million left in capital.

That many Web pure-plays will be looking for additional capital also does not bode well for other ‘Net merchants seeking financing. “The fact that many of these companies are quickly draining their capital without a return definitely makes it more difficult for online catalogers to raise money,” says Joe Popolo, president/ CEO of Hardware, a Reno, NV-based online merchant of tools and hardware, which launched in 1997. “Investors are going to be less inclined to invest money in us when so many other Internet start-ups aren’t showing any kind of return.”

The catalog advantage

But Martin says print catalogers are not experiencing the same cash burn and should not be tainted by Web startups. “Multichannel marketers have a different cost structure than pure-plays,” he says. “The single biggest expense on the Web for pure-plays is brand-building, and many traditional catalogers with a Web presence already have established brands.”

Indeed, “multichannel marketers usually have the brand awareness and customer base such that the top priority is not spending marketing money,” says Jonathan Plotzker, director of catalog and Web operations for San Francisco-based cataloger/retailer Restoration Hardware. “We’re already operating in an atmosphere where ROI is the utmost goal and where we’re leveraging an existing infrastructure and systems to get the job done, fulfill orders, and track data,” he says.

Multiple means of tracking data is another advantage that print catalogers have over pure-plays, says Dave Pimper, president/CEO of Rome, GA-based cataloger Wall Street Creations, which launched its e-commerce site in 1997. “Multichannel marketers like us can look at the response to our paper catalogs, where the majority of our sales come from,” he says. “We can assess who we’re mailing to, what our customers are buying, and then the Web sales are an added value.”

HardwareStreet’s Popolo agrees that catalogers can apply their mailing experience to finding new customers. “People in the direct mail business know the importance and cost of acquiring a customer, while many pure-plays are just throwing money at advertising,” he says. “But you have to do more than advertise in order to acquire customers. We’ve been mailing flyers to customers, and we’ve linked with over 60 affinity Websites.” is also now merging with Minneapolis-based e-commerce provider Net Direct Corp. And Friedman, Billings, Ramsey’s Martin says the trend toward mergers and acquisitions in the online arena is likely to continue. “We’re absolutely going to see an increased rate of acquisitions in this industry,” he says. “A few consolidators that prove their models will survive, and the industry leaders will emerge.”

In fact, Web start-ups’ losses may prove to be catalogers’ gain, according to Restoration Hardware’s Plotzker. “There may be a lot of money – both venture capital and public trading – that would have gone to smaller ‘Net start-ups, but will eventually be freed up to invest in more reasonable business models, including those multichannel brands that are leveraging their assets,” he says.

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