Stayin Alive

Brandweek, June 12, 2000 by Ann M. Mack

Industry analysts give their take on the latest dot-com shutdowns, and what can be done to prevent future casualties.

After a tumultuous month that dealt fatal blows to e-commerce shops boo.com, toysmart.com, CraftShop.com and Foofoo.com, among a bevy of others, surviving online retailers now must search for the magic pills that will save them from similar fates.

To survive the dot-coin bloodbath, industry analysts suggest that e-tailers need to swallow a healthy dose of offline realism--as well as rein in their formerly high-flying dot-coin pride. This process of self examination, says Elaine Rubin of Internet retailing trade association Shop.org, means that dot-coins can no longer ignore fiscal bottom lines, since the notion that e-tailers are exempt from viable business models has proven false. The reality check for dot-coms? The same business principles found in the offline world apply in cyberspace.

TOO MUCH, TOO SOON

In their zeal to gain footholds in particular e-commerce categories, coo many e-tail contenders opened up shop prematurely, says Rubin, who chairs the Silver Spring, Md.-based Shop.org. With pockets flush with VC cash, some e-tail entrepreneurs blazed onto the scene with much ballyhoo--launching multimillion-dollar ad campaigns and spreading marketing hype to match--only to crash and burn a short time later. Some startups failed to consider the tedious details involved in building an e-business, particularly customer service, merchandising and fulfillment, Rubin explains. "Investor euphoria fueled the excitement and some online retailers were leaping off before they were ready," she says.

The highest profile debacle of the year, boo.com, boasted big-name investors--such as French luxury goods magnate Bernard Arnault, the Benetton family, Goldman Sachs and J.P. Morgan--that poured millions into the site from its conception, only to flee when the international e-tailer was on its deathbed. The fashion retailer sought bankruptcy in late May and was acquired last week by Fashionmall.com for an undisclosed amount. With the sale, New York-based Fashionmall.com gains possession of the boo.com brand, Web address, advertising materials and online content. The deal does not include boo.com's back-end technology and associated intellectual rights, which sold a week earlier to British Internet company Bright Station P.L.C. for a paltry $372,500, a fraction of the reported development cost.

Launched in November 1999, boo.com burned through its cash at a dizzying rate, even by dot-coin standards. According to Cambridge, Mass.-based Forrester Research, boo.com exhausted an exorbitant amount on communications, shelling out close to $38 million in offline advertising through TV, radio and fashion magazines like Elle. The site's notoriety also gained momentum online with banner buys and e-mail and viral marketing.

But, nothing fueled the boo.com fire more so than the media, which embraced the two 29-year-old Swedish founders, Ernst Malmsten and ex-Elite model Kajsa Leander, and hailed the idea before it was even live. With its fancy investors and ambitious plan to be the international e-tailer for high-end fashion, boo.com soon became the darling of the press, receiving favorable editorial coverage in fashion magazines like Vogue and Harper's Bazaar.

SPEED KILLS

Like boo.com, Waltham, Mass.-based toysmart.com flamed out after unsuccessful attempts to secure additional funding from investors, namely its majority owner The Walt Disney Co. "It is very sad, but I saw it coming given Disney's lack of commitment to the company," wrote Patrick Rafter, former director of communications at toysmart.com, in an e-mail reply. "We erroneously thought that Disney would have the patience of other funding sources [VCs] to know that profitability doesn't come in the first year of a company's operation. Thus, my assessment is that toysmart.com had everything going for it save sufficient time, cash and a loyal partner who was as committed to the business as we were."

The one-and-a-half-year-old online toy seller expended much of its funds on marketing, spending roughly $21 million on a series of TV, radio and print ads touting its "good toys"--the ones that inspire, enlighten and endure in a child's mind. Developed by Boston-based Arnold Communications, the effort celebrated the joys of childhood and carried the tagline "Click on your child's potential." The e-tailer also funded a year's worth of Sesame Street programs on PBS in exchange for 15 seconds of sponsorship time before and after each episode. In addition, the 60 percent purchase by Disney last August brought the e-tailer ad time on Disney's entertainment properties and products. Despite the advertising push, along with an aggressive guerrilla marketing campaign, the site failed to post traffic and sales numbers anywhere near those of online competitors eToys and Toysrus.com.

"The business premise that in one short shot you can create a brand and brand equity is a fallacy," says Rick Milenthal, CEO of Columbus, Ohio-based HMS Partners, an integrated marketing company. "All of the same fundamentals of the traditional world apply to the Internet. The recent demise of some dot-coms underscores the importance of building a brand the right way--building a relationship over a period of time. It takes time, patience, focus and planning. Simply being on the Internet is not enough to build an e-commerce brand." But, most of these business basics learned at Harvard and the other elite MBA schools that spit out dozens of dot-com CEOs were abandoned in the first--time mover frenzy. "Speed was driving a lot of people," says Rubin.