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'98 Year In Review
December 17, 1998

Rise of the E-Tailers

by Rick Munarriz (TMF Edible)

Silent shoppers interact with equally quiet cash registers. A retail nightmare? Hardly. 1998 has fueled the prospects of e-commerce, short for electronic commerce. For the ever-growing list of online merchants, the Internet seems to be the ideal storefront. It is one that never closes. It is one where the trip is just a link away.

The "e-tail" phenomenon has given birth to some of the more engaging episodes of this past year. Otherwise sleepy companies like K-tel <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KTEL)") else Response.Write("(Nasdaq: KTEL)") end if %> and Big Entertainment <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BIGE)") else Response.Write("(Nasdaq: BIGE)") end if %> have soared overnight just on the news of a new website launch.

Amazon.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMZN)") else Response.Write("(Nasdaq: AMZN)") end if %> has definitely lived up to its massive moniker. Shares of the cyber bookseller have shot up 534% so far this year (through December 7). No profits. Yet. However, the company's stellar sales growth and continued dominance has drawn in new investors. On a fundamental basis it might be hard to justify the upstart's $10 billion market cap. Even revenues, which have grown 337% over the first nine months of the year, to $357.1 million, have not been able to keep pace with the rise in the stock. Yet Amazon.com has used its brand recognition to muscle into other related fields like pre-recorded music CDs and videos. The mind-boggling fact here is that in 1996 Amazon.com had sales of just $15.7 million. Today, it sold that much in just this past week.

America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %>, which acts as more of a gateway to e-commerce than a merchant itself, has become a happy landlord. Shares of the online service have logged on gains of 302% so far this year. With e-tailers large and small paying up for rent space on AOL's page banners, the company has been a definite beneficiary of Internet shopping's popularity.

This year it is estimated that $13 billion in online transactions have taken place. With that rate expected to triple annually over the next few years, we are talking about a trillion dollar industry come the year 2002.

That calls for some ambitious growth and it explains why investors have been not only smitten with the e-tailers but also other players who stand to benefit. After all, patrons will need to get online to place the orders and the parcel purveyors will need to deliver them.

The rich will get richer. The poor will get slaughtered. Music specialist CDNow <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CDNW)") else Response.Write("(Nasdaq: CDNW)") end if %> went public in March, before Amazon.com announced that it too would get amped up with music sales. Shares opened in the mid-$20s and the stock was an overnight hit sensation, peaking at $39 a month later. A few months later the stock, like the prized demographic group of music buyers, was in the teens. It wasn't an immediate fade out, though. On November 30 the stock had an intraday blip to $39 1/4. However, three days later the stock was trading in the teens again.

Fears of Amazon.com's entry drove CDNow to announce a merger with competitor N2K <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NTKI)") else Response.Write("(Nasdaq: NTKI)") end if %>. Between CDNow's namesake site and N2K's Music Boulevard, it seemed the only feasible way to compete against Amazon.com.

Peapod <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PPOD)") else Response.Write("(Nasdaq: PPOD)") end if %> is hoping to revolutionize the way we shop for groceries, yet this stock comes with a 50% off coupon. The online supermarket went public in the summer of 1997 at $16 and today trades for less than half its initial sticker price.

Going online is apparently not the easy recipe for success Wall Street may have led investors to believe as a universal truth. Earlier this month Lillian Vernon <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: LVC)") else Response.Write("(AMEX: LVC)") end if %> introduced an enhanced website with online shopping capability -- and the stock fell. As industry leaders like Wal-Mart <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WMT)") else Response.Write("(NYSE: WMT)") end if %>, Toys R Us <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TOY)") else Response.Write("(NYSE: TOY)") end if %>, and Costco <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COST)") else Response.Write("(Nasdaq: COST)") end if %> have launched online sites, the respective equities have let out a collective yawn.

There seems to be a distinction made by investors between not only what merchandise is acceptable as a growth vehicle (apparently Peapod's beefaroni or Lillian Vernon's crafty wares are not in vogue), but also which companies within the respective niches stand a chance.

Barnes & Noble <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BKS)") else Response.Write("(NYSE: BKS)") end if %> has a growing online presence to go with its popular brick and mortar bookstores, but the company commands one-fourth the market cap of Amazon.com. Volatile leaf-turner Books-a-Million <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BAMM)") else Response.Write("(Nasdaq: BAMM)") end if %> has traded as low as $2 3/4 and as high as $44 1/2 -- in November alone!

The wild price swings should be expected by now. Any sector whose bellwether, Amazon.com, has become a six-bagger over the course of the year will probably continue to have pronounced ups and downs. The uncertain future, which can find sentiment swinging from the unprofitable entity of today to the unlimited promise of tomorrow, will definitely continue to leave its mark on the sector in the year ahead.


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Amazon.com of All Things -- Breakfast With the Fool -- 11/17/98
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Amazon on My Mind -- Fool on the Hill -- 5/5/98
Barnes & Noble to Spin Out Online Biz -- Fool Plate Special -- 8/20/98
Books-A-Million Daily Trouble -- 12/18/98
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A Spin on K-tel -- Fool on the Hill -- 5/6/98
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