Like Garden.com, More E-Tailers Dying on the Vine

SAN FRANCISCO —  Garden.com sold its last trowel last week. The 5-year-old garden supply Web site based in Austin, Texas, drew more than half a million visitors a month, won dozens of awards from researchers and the press, and consistently beat analysts’ predictions of its financial performance.

But Garden.com still couldn’t survive in the bruising world of online sales.

“We were on track every quarter,” said Cliff Sharples, 37, the company’s chief executive, who defended the decisions that rapidly burned through $50 million raised a year ago in a public stock offering. “If we had known then that we’d never be able to raise another dollar for Garden.com until we achieved profitability, would we have made different decisions? Of course.”

Although analysts predict that about 35 million online shoppers will spend more than $10 billion this holiday season--doubling last year’s volume--e-tailers still account for a paltry 2.2% of overall retail sales.

Anything less than a stellar holiday season could place scores of other e-tailers on a death watch, experts say.

Anthony Noto, an analyst with the investment bank Goldman Sachs, recently predicted that of the remaining 21 publicly traded, “pure-play” e-tailers--all of whose business is generated online--only 12 to 14 will survive until July. Among the most vulnerable, he suggested: Los Angeles-based Etoys, technology vendor Egghead.com, drugstore PlanetRx and Vitaminshoppe.com. Other analysts suggested that the diversified discount stores Bluefly and Aliso Viejo-based Buy.com should be added to that danger list. And on Tuesday, another e-tailer, Babygear.com, filed for bankruptcy, leaving consumers and credit card companies holding the bag.

Most e-tailers faced the same problems: Higher-than-anticipated start-up costs and too many players led to vicious price competition--often at below cost--and an inevitable winnowing of the field.

As a result, few, if any, major e-tailers have earned a single dollar in profit. That list includes industry leader Amazon.com, which has not turned a profit since it opened in 1995, and is expected to lose about $600 million in 2000.

“Anybody who didn’t expect this massive natural-selection process wasn’t paying attention,” said Barry Parr, an e-tail expert with the market researcher International Data Corp.

About 63 online merchants have suffered Garden.com’s fate this year, according to the research firm Webmergers.com. In the last few weeks, failures have included diet and nutrition store MotherNature.com, online grocer Streamline.com and Pets.com--which didn’t sell enough dog food but made a canine sock puppet famous through massive advertising.

The daunting challenge of the impending holiday shopping season may have prompted some recent shutdowns. “These people weren’t ready to climb Everest and didn’t want to die on the slopes,” said Tim Miller, an analyst with Webmergers.

Another 93 e-tailers merged with competitors or have been acquired for about $2.8 billion since January. That trend will likely accelerate, given the dramatic drop in venture funding for e-tail start-ups--about a third of what it was a year ago, according to researcher VentureOne Corp.

Only a year ago, Internet retailers faced the holiday shopping season with a sense of invincibility. Eager investors had pumped up the stock of publicly traded e-tailers overnight, creating paper-wealth giants whose multibillion-dollar stock valuations dwarfed bricks-and-mortar retailers such as JC Penney and Kmart. As consumers sought convenience, bargains and novelty shopping surged online, and commercial success seemed certain.

Experts had long advised dot-coms to build a big customer base before the market became saturated. So entrepreneurs spent billions on marketing and paid little attention to the bottom line.

In the last year, Wall Street’s confidence crumbled as e-tailing losses piled up, and former high fliers watched their stock values plunge to less than 5% of their peak.

“As we sit here today, it seems so obvious--of course people are going to expect you to make money,” said Kel Kelly, former marketing chief for Toysmart.com, a Waltham, Mass.-based online seller of educational toys that failed last May. “But nobody did.”

Kelly placed some of the blame for her company’s demise on Walt Disney Co., ironically viewed as Toysmart’s savior last year. Disney took a majority stake in the company, then pushed ill-fated strategies, Kelly said. For example, Toysmart spent freely for TV ads on Disney-owned ABC. Soon after those ads proved ineffective, Disney pulled the plug.

“It was like the death of a family member,” Kelly said.

The clock on insolvency also had been ticking for SmarterKids.com, a Needham, Mass., vendor of educational products to parents. It recently announced that it would merge with Monterey, Calif.-based Earlychildhood.com, which sells similar goods to schools.

With no prospect of raising additional funds, “a merger was almost inevitable for us,” said Al Noyes, SmarterKids’ chief operating officer.

E-tailers were supposed to be different from other risky Internet ventures because they sell tangible goods but are not saddled with the massive expense of physical stores. And as much as any new business can be, the online sales concept was already validated by long-thriving mail-order businesses.

But e-tail proved more complex and costly, consumers more fickle and demanding than anyone anticipated.

“[E-tail] revenue is increasing at tremendous rates,” said Jim Williamson of International Data Corp. “But business models are set up so that until [companies] reach a break-even point, they have to spend massively on marketing,” and some companies spend $3 for every dollar of sales.

He added: “It’s a race against time.”

E-tailers also have been slowed by customer impatience with unreliable technology and inept customer service--factors that leave nearly four in five online transactions abandoned midstream, according to the research group Datamonitor. Privacy-conscious consumers also have been spooked by reports that personal data used to verify credit information is widely sold by e-tailers.

Industry insiders are beginning to acknowledge that not every product is well-suited to online sales. For example, two online furniture stores, Furniture.com and Living.com, recently filed for bankruptcy; despite sparkling Web graphics, most people insist on sitting on a couch or chair before they buy.

Even so, experts predict that e-tail will ultimately become profitable. But the winners might not be the Web pioneers.

Mail-order firms such as Land’s End and L.L. Bean have recently become top e-tailers on the strength of their solid catalog-sales models. JC Penney has found that customers who buy both online and in its retail department stores spend far more than those who choose one sales channel.

Forrester Research predicts that by 2005, e-tailers will influence $500 billion in sales--but mostly by serving as research tools for consumers who later make a purchase off-line.

Paradoxically, despite the convenience of online ordering, e-tail eliminates the immediate gratification that many shoppers crave. Erik Gordon, director of the Center for Retailing at the University of Florida, predicts that national chains such as Wal-Mart will soon address that problem by linking online ordering with real-world pickup, perhaps at drive-through windows.

“Twelve months ago . . . anybody who owned a physical store was considered to be an idiot, a Luddite,” he said. “[But] evolution works very fast.”

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Times staff writer Abigail Goldman in Los Angeles contributed to this report.

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The Times’ recent report on e-tailing and online shopping sites is available at http://161.35.110.226/etailing.