NEW YORK – While the Christmas selling season was always an important time for the retail industry, analysts say 1999’s was expected to be a make-it-or-break-it event for Internet retailers – especially for those wanting to go public.
With so many e-tailers having already secured late-stage financing, the stage has been set for a flood of IPOs in 2000.
The challenge, however, was grabbing enough market share from their brick-and-mortar counterparts: Analysts predicted that most of the $4 billion-plus consumers spent on holiday gifts went to established retailers.
“If you miss this season you pretty much have to wait for next Christmas,” cautioned Jonathan Goldstein, a principal at Boston-based TA Associates in highlighting the importance of fourth quarter results.
To be sure, Internet retailers are not the only ones banking on a green Christmas. In 1999, venture capitalists poured an estimated $5.3 billion into 162 late-stage (above $15 million) Internet retailers, according to Venture Economics Information Services, a sister company to VCJ.
But unlike Christmas in 1998, when retailers such as Amazon.com Inc., CDNow Inc. and Preview Travel were seen as category leaders, 1999 saw more competition within all categories.
Newcomer categories to the 1999 selling season included furniture/home furnishings, pet supplies, sporting goods, jewelry, cosmetics and consumer electronics. Search engines, comparative shopping sites and gift registries were other types of companies also expected to benefit from increased traffic.
“What’s happening is that venture financing is getting nichier,” Goldstein said.
Nowhere is the heightened competition more apparent than in the wars brewing between brick-and-mortar retailers and their online counterparts in the furniture/home furnishings and toy markets.
Retail giants Wal-Mart Stores Inc., J.C. Penney Co. Inc. and Sears Roebuck & Co. have all launched online initiatives to secure a share of the $192 billion home furnishing market. In addition to campaigns by specialty retailers Williams Sonoma Inc., Eddie Bauer Inc. and Crate & Barrel, there are perhaps as many as a dozen privately held Internet retailers also vying for consumer attention. Furniture.com Inc., which took in $35 million in a June Amerindo Investment Advisors-led placement, and Furniturefind.com appear on target for early 2000 IPOs. Although neither firm would confirm such speculation, both have long since surpassed the $1 million/month sales plateau. After passing the threshold in May and June, respectively, analysts point to exponential growth for the industry.
“People are becoming more accustomed to buying large-ticket items online,” said Jeff Quinn, senior analyst at Gomez Advisors. “Personally I’m not sure how far that level of comfort is going to extend.”
And while online furniture/home accessory sales were expected to total just $132 million in 1999, Gomez predicts the Internet component will climb to $295.4 million in 2000, $776 million in 2001, $1.35 billion in 2002 and $2.4 billion in 2003.
And, although the most bullish estimates place the online component at less than 1% of overall sales in the home furnishings category, there appears to be plenty of room for the industry’s newest entrants.
“The space is collectively over $150 billion – that’s a lot bigger than most categories,” noted Seema Williams, senior analyst at Boston-based Forrester Research. “It’s not that surprising. This is a very fragmented industry for both retailers and manufacturers.”
Not only are online furniture retailers able to aggregate information and product in a manner that is palatable to consumers, but many have also begun to incorporate techniques such as interactive design, design consultants and two-way chat.
Some other companies that could leverage Christmas sales into a 2000 IPO include: Austin, Texas-based Living.com, which has raised a total of $41.5 million through VCs led by Benchmark Capital and, in September, inked a marketing agreement with America Online Inc.; Pasadena, Calif.-based and idealab!-backed MyHome.com, HomePortfolio.com Inc., which secured $20 million in July through a group led by Oak Investment Partners; Greenville, S.C.-based HomePoint.com, which took in $15 million in August from VCs headed by Catterton Partners and GE Equity; GoodHome.com; and Qdecor.com.
“It’s a very big category with high margins,” noted Benjamin Burditt, senior vice president with Scripps Ventures, a financial backer of HomePortfolio.com.
Beyond the size of the market, however, the strength of the American economy bodes well for the sector.
“We are taking the position that the home furnishings market is going to be very strong,” said ING Barings retail analyst Maureen McGrath, pointing to sales of existing home sales. During 1999, about 5.2 million existing homes were expected to be sold, more than a 4% increase over 1998’s record total of 4.97 million units, according to the National Association of Realtors. “Within a year of moving into a new house, people generally remodel.”
Meanwhile in the toy industry, analysts say there are some important lessons to be learned from the ongoing battle between toy retailers for control of online sales. While eToys Inc. and Toys “R” Us Inc. have been attracting similar levels of traffic to their sites, eToys – an Internet-only concern – is expected to generate more sales.
“Brick-and-mortar retailers are able to attract consumer attention,” said Tom Courtney, an Internet analyst with Banc of America Securities. “Whether or not they’re able to execute is an entirely different consideration.”
eToys was the fourth-most-heavily-trafficked site during the week ended December 5, attracting an average of 384,000 visitors per day, according to Media Metrix. Over that same time period, Toys “R” Us’ Web site attracted 314,00 users per day.
Thus, despite comparable traffic levels, Courtney said a more nimble eToys is better able to not only attract, but to close.