Sorting through the dot bomb rubble: how did the high-profile e-tailers fail?

International Journal of Information Management 23 (2003) 121–138

Sorting through the dot bomb rubble: how did the high-profile e-tailers fail? Jennifer Thorntona, Sunny Marcheb,* b

a ATCO I-Tek, 1100, 909-11 Ave SW, Calgary AB T2R 1L8, Canada School of Business Administration, Dalhousie University, 6152 Coburg Road, Halifax, NS B3H 3J5, Canada

Abstract During the late 1990s and early into the year 2000, we witnessed the launch, rapid rise and sudden fall of a relatively new industryye-commerce. With the widespread use of the Internet, exciting business to consumer (B2C) e-tail opportunities emerged. Sites began selling online directly to consumers, everything from books, to pet supplies, to clothing. This created a frenzy of companies trying to get online, to stake their claim, and to get a piece of the action. The hype did not last. In April 2000, a stock market correction sent prices in the high-tech sector tumbling, and prompted investors to re-evaluate, pull back funding and demand profitability. Many e-tail ventures were unable to survive in this new, harsher environment, and hundreds began to close their virtual doors. Analysts generalized that the business owners were just too young, or too inexperienced. Business models were criticized. Other theories maintained the people running the business were so intent on breaking all the rules that they failed to consider some of the traditional business success factors. Fingers pointed in all directions, to venture capitalists, to investors, and to the entrepreneurs themselves. The following research summarizes literature that seeks to explore the success and failure of traditional businesses, and applies those factors to some high profile failed e-tail businesses. The paper uses five e-tail companies, pets.com, boo.com, streamline.com, garden.com and eToys.com as examples of the hundreds of dot com businesses that failed. Each was a pure-play Internet business with no bricks and mortar presence. These five failures all occurred on a large scale, with the businesses burning through hundreds of millions of dollars in just a few years. Comparison against known factors of success and failure demonstrates that the e-tail businesses were victims of timing and natural industry evolution to some extent, but they also made fundamental mistakes in their attempts to grow quickly. r 2003 Elsevier Science Ltd. All rights reserved.

*Corresponding author. Tel.: +44-902-494-1813; fax: +44-902-494-1107. E-mail address: [email protected] (S. Marche). 0268-4012/03/$ - see front matter r 2003 Elsevier Science Ltd. All rights reserved. doi:10.1016/S0268-4012(02)00104-4

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1. Introduction During the late 1990s and early into the year 2000, North America witnessed the rapid rise and sudden falling out of a relatively new industryye-commerce. With the wide spread uptake of the Internet by ordinary households, business to consumer (B2C) e-tailing seemed an obvious opportunity. Sites began online selling directly to consumers, everything from books, to pet supplies, to clothing. This created a frenzy of companies staking their online claim to get a piece of the action. The hype did not last. In April 2000, an adjustment in the stock market sent prices in the hightech sector tumbling, and prompted investors to re-evaluate and demand profitability. Many e-tail ventures were unable to survive in this new environment; hundreds began to close their virtual doors. People generalized that the entrepreneurs were just too young, or too inexperienced. Business models were scrutinized. Other theories maintained the people running the new economy businesses ignored traditional success factors. Fingers pointed in all directions, to venture capitalists, to investors, and to the entrepreneurs themselves. The focus of this paper will be on e-tail businesses. These are defined as pure Internet businesses, existing only online, with no affiliation to any traditional, or bricks and mortar businesses. An examination is presented of the factors that led to the demise of specific high profile e-tailers, drawing comparisons to traditional retail businesses. Five companies were selected as examples of the hundreds of failed dotcom businesses: pets.com, boo.com, streamline.com, garden.com and eToys.com. These failures all occurred on a large scale, with the businesses burning through hundreds of millions of dollars in just a few years. Given the nature of the products, the timing of their entrance to the e-agora (i.e., the digital marketplace), the scale of their ambitions, and the attention they attracted during and after their life spans, they represent the archetypical Internet retail narrative. This paper addresses the questions of whether these e-tail companies failed because they ignored tried and true business rules, or whether the businesses were viable enough that they could have made it, given more time and different conditions. This paper outlines the background to the study and reviews the literature used to identify factors related to retail and small business success. Taking the examples of five high-profile pure e-commerce retail failures, we compare the publicly available data on each of the companies against factors in the literature as a way to explore how e-tailers satisfied these variables. We conclude with some thoughts on further required research.

2. Background One event that catapulted the Internet into the consciousness of the investment community was the Initial Public Offering (IPO) of Netscape Communications on August 9, 1995. Although Netscape had made no profit through the release of its Navigator browser, on the day of its IPO, the stock soared more than 100% over its official opening price, ending the day with a market cap of $2.7 billion (Spector, 2000). Stock in Internet-based companies could not be valued on past performance since there appeared to be no precedent, and investors became entranced with a compelling future promise.

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During the holiday season of 1998, companies such as Amazon.com and eToys.com pulled in millions in revenue, prompting many people to take notice. This new Internet market place, or ‘‘Net economy’’ grew 174.5% from 1995 to 1998, and 68% from 1998 to 1999 (Konrad, 2000). Predictions of sharply rising Internet sales were common. The number of companies entering the game skyrocketed and investors were eager to participate. Many of these companies were in for a rude awakening in April 2000 when the NASDAQ fell more than 10%. This correction was prompted by many factors. Investors were growing wary and weary of losing ventures. They were also concerned about Microsoft antitrust issues and rising consumer prices (CNet, 2000). Companies were suddenly expected to present demonstrably viable business models and predictions for profitability. In the months after April 2000, there were hundreds of ‘‘dot com deaths.’’ By the end of 2000, Webmergers.com estimated that 234 dot com companies had crashed, including some of the most promising and recognizable ventures. Webmergers.com placed the number of dot com deaths in the first two quarters of 2001 at 330. Of these total 564 ventures that failed between January 2000 and June 2001, 59% were B2C sites. Venture capital funding saw a 32% decline in the second quarter of 2000 compared to the first, as investors became more selective (Macaluso, 2000). Despite a search for appropriate data, we were not able to study contrasting failure or success rates of traditional and pure-play Internet retailers. Nataraj and Lee (2002) review three sources (accenture.com, Essex E-commerce Center at www.ibestpractice.org.uk, and webmerger.com) and report that fewer than 25% of dot com companies last longer than 2 years. No data was presented on how this compares with traditional new companies. The accenture.com reference compares catalogers, retailers, and e-tailers, concluding that an e-tailer is significantly more likely to be an underachiever, and is significantly less likely to be an overachiever. A survey of the literature about the factors associated with business success and failure produced a wide variety of studies. Fifteen of these studies were used in creating a summary of the factors, as presented in Table 1. The sequencing of the factors in Table 1 within major category is on the basis of the frequency in which the studies attended to that factor. We made no judgment about the quality of the studies and therefore have made no weighting of their respective results. Blank cells indicate that the factor to the left was not a consideration in the study cited. A check mark denotes that the study found a positive connection to the factor; an ‘  ’ mark denotes no connection to the factor. The overall question of this study was: ‘‘which of the factors identified in the literature played a role in the collapse of selected e-tailing enterprises?’’ This study compared the data from the selected e-tailers against the dimensions in Table 1. Table 2a outlines the case companies studied. A number of sources were used to gather information regarding these companies, including SEC S-1 (initial) filings, 10Q (quarterly) reports and 10K (annual) reports. In addition, other articles and information about the companies were gathered from online sources. Table 2b summarizes the final disposition of the case companies.

3. Management characteristics A common theory about dot com companies is that they were all being run by a bunch of ‘‘twenty-somethings’’ with no previous management experience. In the five companies profiled,

Environmental characteristics Competition Dynamic market Economic timing Product/service timing

Organizational characteristics Planning/strategy Record keeping/financial control Staffing/HRM Clear value proposition Professional advisors Advertising/marketing strategies Capital Expansion/growth Market position Customer service/ experience Target market Inventory/channel management Start up size

Management characteristics Management experience Age Education Industry experience Personal characteristics Marketing skills/ experience Parents

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Cragg and King (1988)



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Bruderl, Peter and Ziegler (1992)

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Arthur Chain Andersen Store (1997) Age (1995)

Table 1 Criteria and studies used



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Gadenne Gaskill, (1998) Howard and Manning (1993)

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Haswell and Holmes (1989)

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Lumpkin Lussier and (1996) Ireland (1988)

 



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Lussier (1995)

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Miller Monk and (2000) Merrilees (2000)

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Sommers Stevenson Thomas and et al. (1994) Koc (1999) (1987)

4 4 1 1

1

2 1

4 4 4 2

7 6 6 5

9 7

1

9 3 2 2 2 1

0 0 2 1

1

1 0

3 1 1 0

2 0 0 0

1 1

2

2 2 2 3 1 3

4 4 1 0

0

1 1

1 3 3 2

5 6 6 5

8 6

1

7 1 0 1 1 2

Total | Total  Net (|– )

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Table 2

(a) Case companies Description

Pets.com

Streamline.com

Boo.com

Garden.com

Online pet product retailer offering pet products and petspecific information

Consumer direct company delivering groceries, other consumer products and services ordered via the Internet 1993 1996 June 1999 November 2000

Online clothing etailer for a hip, trendy shopping experience using 3D models and innovative technology

Online toy and Online site for gardeners offering children’s product plants, gardening retailer supplies, as well as regionalized gardening information

November 1998 November 1999 n/a May 2000

September 1995 March 1996 September 1999 November 2000

Start date Web site launch IPO date Death date

October 1998 February 1999 February 2000 November 2000

Name

Final disposition

eToys.com

1997 September 1997 May 1999 April 2001

(b) Final disposition of case companies Pets.com The name pets.com was sold to petsmart.com on December 5, 2000 not including rights to the pets.com mascot. (Patterson Grenier, 2000). Streamline.com In September 2000, Peapod acquired Streamline’s Washington, DC and Chicago assets for $12 million. Boo.com Assets of boo.com were sold to two companies for a fraction of book value. June 2000, backend technology, distribution and fulfillment systems, physical assets were sold to Bright Station for $400,000 vs. $200 million spent developing the infrastructure (Pickering, 2000). Content, customer email list, URLs, trademark, domain name were sold to fashionmall.com (Pickering, 2000). Garden.com January 2001, garden.com sold its major assets to Walmart.com and the parent firm of gardening company W. Atlee Burpee Co. for a total of $4.43 million. Walmart.com acquired all of the garden.com content assets, including editorial, interactive and film content. Burpee Holding bought garden.com’s brand assets including the URL and other assets relating to customer information (Saliba, 2001). eToys.com January 2001, eToys shut down its European operations. Shortly after, it fired 700 workers and shut down its warehouses in California and North Carolina. March, the company filed Chapter 11 bankruptcy protection (Regan, 2001). April 2001, clicks and mortar toy store KB Toys (which operates the web site KBKids.com) acquired ‘‘substantially all’’ of eToys inventory for $5.4 million. Inventory had a retail value of approximately $40 million (Enos, 2001). In May, KB Toys announced that it had purchased the Web site, name and logo of eToys for approximately $3.35 million (Enos, 2001).

age was a major factor in only one case, boo.com. The two founding individuals were under 30 and had experience with only one other venture. In the other four companies, the management teams were comprised of individuals with extensive education (many had graduate degrees, most notably MBAs), and vast experience coming from widely recognized companies such as Procter and Gamble, Office Depot and the Walt Disney Corporation. The average age of the management team for these companies ranged from 37 to 42.

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One notable characteristic was that most management teams had no previous experience in the specific industry. Some members of the pets.com management team came from Petco, a bricks and mortar pet store chain and some had come from other dot com ventures. The managers of the other four companies did not have experience in the specific industry they entered. In the case of boo.com, the clothing e-tailer, the managers had previously been involved in a Swedish online bookstore called Bokus, but neither one had experience in the retail clothing industry. The management of streamline.com had no previous experience in the grocery or consumer services industries. The founders of garden.com spent extensive effort researching the gardening industry, but until they began with the online venture, the management team was neither involved in the gardening industry nor interested in gardening as a hobby. The founder of eToys previously worked for the Walt Disney Corporation, but had no experience with the retail toy industry. In traditional retail environments, general management experience is considered to be one of the most important contributing factors to success or failure. Without previous experience, a business is more likely to fail. In the case of these online retailers, even though there was a wide range of experience among the leaders, it may have been the lack of specific industry knowledge that contributed to the failure.

4. Organizational characteristics The following section addresses the organizational characteristics of success and failure identified in the literature summary in Table 1. For ease of reference each of those factors in the following paragraphs is presented in italic font. For most businesses, creating and successfully executing a specific plan is a fundamental task. The difficulty in this analysis is in the subjective nature of determining what constitutes a successful plan. The word ‘‘plan’’ can be used in a very general sense of strategic intent. In more focused circumstances, a plan must satisfy the fundamental six criteria of articulating objective(s), tasks, resources, responsibility, schedule and deliverables (Marche, 2002). Judging the outcome of the planning process is particularly problematic in this situation since the data used in the analysis is inferred from publicly available documents. In our assessment, SEC filings of the companies (e.g., the prospectuses) did reveal common flaws in their business strategies such as lack of detail, poor contingency planning and identification of risk, and lack of financial controls and accountability. Another significant criterion from the traditional studies was record keeping and financial control. This encompasses elements of maintaining accurate records, as well as making effective use of available resources. Since these companies were public, they had to produce complete and accurate financial statements. But spending control among these companies was questionable. For example, the percentage of revenue spent by each of the companies on marketing and sales was greatly disproportionate to the revenue, as set out in Table 3. Since boo.com was never a publicly traded company, we do not know exactly what amount was spent on sales and marketing. We do know that they spent approximately $600,000 on public relations and $42 million on a campaign for the launch, which included $25 million worth of advertising in magazines, newspapers, and billboards (Sorkin, 2000). This money was essentially thrown away, since the site launch was

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Table 3 % of Revenue spent on marketing and sales

Pets.com Streamline.com Garden.com eToys.com

2000

1999

1998

1997

235% 40% 172% 70%

734% 32% 247% 80%

n/a 22% 180% 70%

n/a 54% 293% n/a

2000

1999

1998

1997

329% 134% 250% 108%

1067% 127% 353% 126%

n/a 165% 350% 95%

n/a 319% 772% n/a

Table 4 Net loss as % of revenue

Pets.com Streamline.com Garden.com eToys.com

delayed by 5 months. The campaign generated interest in a site that was not even set up for business. The net loss for these companies was substantial during the few years they were in operation, as noted in Table 4. In 2000, the net loss ranged from 108% of revenue for eToys.com, to 329% of revenue for pets.com. In addition, in the case of pets.com, the cost of goods sold was 232% of revenue in 1999 and 127% in 2000. This was largely due to the nature of products that the company was shipping. For example, products such as kitty litter and dog food are low margin products at the outset. When the company sent them across the country and charged only $2 per pound for anything over 11 pounds (Hellweg, 2000), this created money-losing transactions. Such fundamental flaws in business planning made it very difficult for pets.com to become profitable. Without a clear marketing focus, a business may not be able to generate the awareness and sales necessary. This is true of traditional businesses, and in our assessment of the publicly available literature and behavior of the firms under study, this proved to be true with the failed e-tailer. Pets.com was after pet owners; streamline.com wanted to sell groceries and services to two income families with at least one child at home; boo.com focused on the young, hip, trendy shopper looking for the latest in clothing and shoes; garden.com identified women aged 30–50, college educated with a household income of $60,000 and over as its desired customers; and the eToys.com market was seen to be mainly mothers, in the belief that they were the ones buying toys. Many companies missed the mark. For example, boo.com’s market of hip, trendy young shoppers views shopping as a pleasurable social experience, and would rather go to a store than buy items online. In some cases, marketing strategies were incomplete. Instead of focusing on all of the elements of the marketing mix (product, price, place, and promotion), these online companies focused most of their resources only on promotion. By contrast, a study of a traditional retailer that was successful for a very long period (over 130 years) reports that the maximum the company ever spent in their entire history on advertising was 4% of sales (Miller &

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Merrilees, 2000). We calculate from the Amazon.com financial statement (10K ending December 31, 2001) that marketing costs have dropped in the 3 years of 1999, 2000, and 2001 as a ratio to net sales—10.7%, 6.5% and 4.4% respectively. Huge amounts of money were spent on high profile marketing activities such as ads on the Super Bowl. Pets.com and eToys.com, in addition to numerous other dot coms, were advertisers on the 2000 Super Bowl, at a cost of $2.4 million per spot. Even with pets.com’s huge budget for advertising in 2000 ($27 million), the company’s sales grew from $600,000 in Q3 1999, at campaign start, to $5.2 million in the last quarter (Thomas, 2000). Although significant, this increase in sales was not in proportion with the large amount spent. While an ad on the Super Bowl generates widespread exposure, this is more of a ‘‘spray and pray’’ approach to marketing. Clearly, some of the people watching the broadcast would have been pet owners, but the amount spent on this ad could have been more effectively spent using targeted media. One of the main goals behind many advertising and promotion activities including Super Bowl ads was to build brand awareness. The idea is that once consumers identify with a brand name, they gain trust in it and want to buy from that company. One might expect the first company attracting a large number of customers would have a huge competitive advantage because of the power of brand loyalty and customer awareness. A recent study disputed this idea (Aaker & Jacobson, 2001). The study interviewed consumers about their perceptions of dot com brands, to determine if brand awareness affected loyalty. The study revealed that the attitude toward the brand matters more than brand awareness itself. Brand attitude drove both web traffic and purchase behavior. But, if a firm spends large amounts of money to develop a brand only to have consumers associate it with something negative, it can be worse than not having the recognition in the first place. An example of this is Prodigy, the online content and service provider, which in spite of its 84% awareness, had more negative perceptions than positive ones (Aaker & Jacobson, 2001). Brand building on the Web is also different from building a brand for a tangible product. Online companies were selling a concept and an experience. There was nothing ‘‘hands on’’ for the consumer. Some companies were trying to establish a brand around a generic name. It was generally accepted to be a good idea to register a ‘‘noun’’ domain name (e.g., pets.com, garden.com, etc.), as users would be able to type in the product they were looking for, and it would bring them to the site. A brand needs to be about uniqueness and differentiation. It is difficult to get consumers to identify on an emotional level with one of these meaningless generic names. In some cases, the attempts to build brand identity backfired after being centered too strongly around one idea. For eToys.com, the site was effectively branded as a toy store. When it added other products such as baby products, party supplies and specialty toys, consumers were not conditioned to go to the site for them. Pets.com built massive recognition for its sock puppet mascot. It became one of the most recognized brand symbols, and pets.com subsequently began selling toys featuring the icon. Unfortunately, people were coming to the site to buy the puppet, and not other products. So, even with all of the attention given to building brand equity, a strong brand identity is not enough to sustain a weak business model or overcome poor planning. While a brand might be important to a customer, so is a clear value proposition. This meant more than having the ‘‘first mover advantage’’. The case studies demonstrate that a business must define its position in the market as more than just the ‘‘first one out of the gate’’. If first mover

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advantage was truly all it took to make a success, then garden.com, eToys, and pets.com should all have been successful. Businesses had to do more than get consumers to recognize them. Once consumers identify a product or service provider, they must also be confident once they visit the site. Having a value proposition in place is essential for any business. As mentioned in Stevenson, Shlesinger and Pearce’s 1999 study of traditional ‘‘Power Retailers’’, the most successful businesses were characterized by having consumers who understood the reasons why they wanted to shop there, whether price, convenience, experience or product selection. Of the five companies in this study, four of them chose to differentiate themselves based on customer experience of the service received. Only one, streamline.com, was focusing on convenience as its value proposition. From the perspective of market positioning, there was little to distinguish one competitor from the next. In the case of pets.com, its experience proposition was that it would combine the convenience of running to the local supermarket to purchase pet products with the knowledge and advice offered by a visit to the local vet. The company failed to differentiate itself in any substantial way from the other online pet retailers. All of the online pet retailers offered similar products, similar services and similar sounding names (pets.com, petstore.com, petsmart.com). Consumers had difficulty telling them apart and thus did not develop any sense of loyalty. They could search for the better price, or just go with a familiar, trusted company such as PETsMART, which already had an established bricks and mortar presence. eToys.com depended on the idea that it was providing not only a greater selection of products than could be found in a traditional toy store, but also offered a superior shopping experience. Again, it was competing with companies such as Toys R’ Us that had not only an online presence, but also the perceived stable infrastructure of bricks and mortar. This meant online consumers bought on price, timing, or factors other than customer experience. In the literature on traditional retail businesses, only two of the 15 studies mentioned customer service/experience as being an important success factor. In the dot com environment, it seemed to be a huge consideration. It is easy for consumers to click to another site and find the lowest price. So, unless the experience compelled them to stay, consumers could come to a site and leave without the business realizing the customer has gone to another site to make a purchase instead. Some major mistakes in the area of customer service can be noted in the companies studied. For example, in the case of eToys.com, for the 1999 Christmas season, it decided to use a third party, Fingerhut, to fulfill orders. eToys.com described the outcome as a disaster. Seeing the disappointment on a child’s face only once was enough for a parent to never buy from that company again. The sites did offer toll free lines for customer service and attempted to have representatives in place for consumers contact, but this was not enough to create a feeling of trust and service. There were some attempts at personalizing the shopping experience. For example, garden.com tried to replicate the experience of talking to the local greenhouse manager by offering personal advice such as tips specific to the customer’s geographic area. With the still relatively new personalization technology, and with a certain amount of concern over Web site privacy protection, garden.com was among many sites that did not do this well enough to create a truly remarkable experience. Unfortunately, technical problems, missed orders, general dissatisfaction with a site’s product offerings, and difficult or confusing navigation discouraged consumers. Security fears were also a major consideration. Most of these problems, it could be argued, were a result of the immaturity

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of the industry, the speed at which the companies entered the environment, and the lack of proper infrastructure. They were still major considerations for many people deciding whether or not to purchase online. The speed of growth played a huge role in the failure of these businesses as well. The literature used to create Table 1 suggests that if a business grows too quickly, it is more likely to fail. Management has to cope with high degrees of change, having to adjust too quickly to new ideas or strategies. Often, even experienced managers have trouble dealing with this type of pressure. In all the cases studied, rapid expansion was a factor. Pets.com grew to 320 employees in just 25 months; streamline.com had approximately 189 full and part time employees when it went public in March 1999, and had grown to 350 just a year later. Staff of boo.com ballooned from only 5 people when it began in 1998 to 420 by the following year. When garden.com went public in May 1999, it employed 149 people, and this had grown to 267 full time positions by the end of June 2000. Finally, eToys.com grew from 13 to 235 full time employees in its first 2 years; then in the 7 months after its IPO, staff increased to 940 employees. Granted, the companies were experiencing growing revenues, so the staff increases were necessary. In fact, the businesses were growing so quickly that it may not have been possible for management to make effective decisions on how to manage in the dynamic environment. Channel management was an important issue in the dot com world. When many of the businesses started, they did not give adequate thought to things such as shipping or inventory control. For example, in the case of pets.com, shipping costs were huge in comparison to the value of the goods being shipped. As mentioned, eToys.com ran into issues getting orders out on time because it was forced to rely on a third party for fulfillment. These types of issues were common, which again affected the quality of the customer’s experience. In traditional retail environments, adequate capitalization is an issue. Businesses that start undercapitalized have proven to experience a greater chance of failure. Perhaps the opposite can be said for the e-tail players who may have had too much capital. At their IPOs, these businesses were able to attract huge amounts of financing. Pets.com raised $82.5 million. During its IPO in June 1999, Streamline.com was able to raise $45 million. This was after founder Tim DeMello had raised $1.7 million from 92 investors in 1994 and another $500,000 through the sale of information on the home-shopping phenomenon to companies such as Gillette and Procter and Gamble. Boo.com had phenomenal success in raising capital, reportedly attracting investments in the neighborhood of $100 million without ever having gone public. Garden.com raised $49 million for its IPO, in addition to the $51.5 million it had already raised privately. Because of this seemingly unlimited supply of money, the businesses had the ability to spend lavishly on things such as television advertising and large-scale promotions. Perhaps with less money, they would have had to be more cautious with their spending, and when the bottom fell out of the market, they might have been able to weather the storm better. Because they had become so accustomed to spending heavily, they were in many cases unable to make the cut backs necessary to sustain operations once there were no more investors banging down their doors. Certain other factors were identified in the traditional retail studies that we were not able to assess in this paper. Staffing/HRM, professional advisors and start up size were all considered important in a traditional environment, but it was too difficult to find information confirming or

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denying that they had impact on the dot com businesses in the context of this study. One conclusion we have reached from this study is that significantly more research is required into the distinctions to be made between traditional retailers and e-tailers. From these cases we tentatively conclude, there are a few differences between organizational characteristics considered important in traditional and e-tail environments. Traditional studies suggested the common factors for retail businesses are planning/strategy, record keeping/financial control, staffing/HRM, clear value proposition, professional advisors, advertising/marketing strategies, and capital. For dot coms, these characteristics are also considered important, yet rapid growth, market position and customer service may be major considerations too.

5. Environmental characteristics Although each business acquired a major injection of capital to get started, the barriers to entry for pure play dot com companies were actually quite minimal. For example, the businesses did not need bricks and mortar stores, reducing the time and money required to build or lease locations. Because of the ease in which new players could enter the market, competition was a major factor as was the case with pets.com. Not only were there new businesses to contend with constantly, in this new environment, consumers were in a position of power, jumping from one store to another with the click of a mouse. Therefore, a once brand-loyal shopper might instead go to a competitor’s location because of a better price or better shipping options. In addition to the new pure Internet businesses entering the market, companies also had to contend with clicks and mortar (Internet plus bricks and mortar presence) as well as traditional companies competing in the same market. The competition helped to reveal cracks in business plans, as it became obvious which companies were unable to meet customers’ expectations for service and quality. Those that were late with deliveries such as Fingerhut and eToys, or those that led consumers to believe their personal information was not safe, were unable to regain consumer trust. Of course, consideration must be given to timing. The flurry of activity in the Internet and e-commerce (from approximately 1995–2000) occurred in a period of economic growth. While this would seem like it would be good for the companies, it was dangerous too. The economy was healthy, so venture capitalists invested more money into Internet ventures, and the Internet ventures helped to fuel the economy. If the economy weakened, were these companies robust enough to survive? Finally, there is debate whether consumers were interested in the products and services offered. For example, consider the case of streamline.com’s home delivery service. True, the number of two income, time-pressured families is growing in North America. But, the fact remains that for many items (such as produce), consumers do not always trust a third party to deliver goods that are up to their own standards. Also, streamline.com used a delivery method whereby the goods were left in specialized containers inside the consumers’ garage, forcing them to trust the company to enter their home while they were away. In the case of boo.com, consumers were not ready for the demands of data delivery. Consumers required high-speed access to view the site with its 3D graphics and flash technology. At the time of the site’s launch, 99% of European homes and 98% of US homes did not have the highbandwidth access necessary to even view the site (SB Depot, 2000).

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6. Other considerations Table 5 shows how the dot com companies compared based on the criteria established for traditional retail stores. In the new economy, there are new factors that have never been major considerations before. For example, technology has been a major factor. Boo.com failed partly because it used technology not used by the majority of its consumers. In other cases, the inherent instability of the Internet in general was a factor in causing consumers to distrust it. In February 2000, a hacker managed to attack a number of high profile sites, including Yahoo!, Amazon, and eBay. These attacks in effect shut down the sites for hours, and caused increased consumers wariness. What role did venture capitalists, investors and the media play in creating false hype? Venture capitalists were eager to invest, and in some cases they pulled support and even asked for the return of unused capital as soon as the markets turned (Buckman, 2001). Investors, of course, were also eager to get in on the initial action, after seeing the thousands of ‘‘dot com millionaires’’ created in a short period of time. Finally, the media fuelled the fire, prompting investors and VCs to keep investing. These artificially inflated company valuations were enough to attract numerous entrepreneurs. Eager investors did not seem to care that many of the people wanting to start the businesses neither had a reasonable business model, nor the experience to run a business. So money was invested prematurely in many of the businesses. Note that most of the businesses in question predicted they would not be profitable for 5 or 6 years. Having said this, there came a point at which there were few companies where investors would continue to add capital pending some future profitable day, Amazon.com being an obvious and notable exception. Investors began to demand profitability, and this outcome just was not attainable with the existing business models in the available timetables. Perhaps we are witnessing the natural evolution of an industry. If we look back at other emerging technologies such as the telegraph industry in the 1840s, automobiles in the early 1900s, and the railroad industry in the late 1800s and early 1900s, we see similar patterns of mass entrants to the market followed by a shakeout, eventually leaving a few dominant players. In the late 1840s, the US telegraph industry experienced a development nearly identical to e-commerce. The new telegraph technology promised to ‘‘erase the boundaries of communication, enabling new enterprises and enhancing the market potential for existing ‘offline’ firms.’’ Many of the startups formed to capitalize on this technology had poorly thought out business plans. In addition, managers with little experience squandered much of the money invested by eager funders (Patterson Grenier, 2000). In the early 1900s there was a similar pattern with the automobile industry. Records indicate that as many as 2600 vehicle making companies have been started in the United States since 1896 (Patterson Grenier, 2000). There are now about 40 worldwide (Konrad, 2000). Many of these companies never got off the ground, or only made one car. Some were wiped out during the Great Depression, while others were bought out by larger competitors (Patterson Grenier, 2000). The railroad industry suffered a similar fate. In 1827, the Baltimore & Ohio Railroad (B&O) became the primary railroad in the US to carry freight and passengers for revenue. By the 1840s and 1850s there were hundreds of railroad startups. By 1935, B&O had absorbed more than 100 other lines. Similar consolidations happened all over the US, as other railroad companies acquired weaker rivals (Patterson Grenier, 2000).

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Table 5 Study findings Criteria

Hypothesis based on traditional research

Management characteristics Management Managers without prior experience management experience have greater risk of failure Age Younger people (o30) who start a business have greater risk Education People without a postsecondary education starting a business have greater risk Industry Businesses managed by experience people without prior experience in the specific industry have greater risk Marketing skills/ Business owners without experience marketing skills have greater risk Organizational characteristics Planning/strategy Businesses that do not execute specific business plans have greater risk Start up size Smaller firms have greater risk Capital Businesses that start undercapitalized have greater risk Expansion/ Businesses that grow quickly growth have greater risk Professional Businesses that do no use advisors professional advisors have greater risk Record-keeping/ Businesses without updated financial control and accurate records and do not use adequate financial controls have greater risk Inventory/ Businesses that do not channel manage inventory and management distribution channels effectively have greater risk Staffing/HRM Businesses that cannot attract and retain quality employees have greater risk Businesses without a clear, Advertising/ targeted marketing strategy marketing market have greater risk strategies

A contributing factor to business failure, per traditional retail research? Pets

Streamline Boo

Garden

eToys

No

No

Yes

No

No

No

No

Yes

No

No

No

No

N/A

No

No

No

Yes

Yes

Yes

Yes

No

N/A

Yes

No

No

Yes

No

Yes

No

Yes

N/A

N/A

N/A

N/A

N/A

No

No

No

No

No

Yes

Yes

Yes

Yes

Yes

N/A

N/A

No

N/A

N/A

Yes

Yes

Yes

Yes

Yes

Yes

No

N/A

No

Yes

N/A

N/A

N/A

N/A

N/A

Yes

No

Yes

No

Yes

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Table 5 (continued) Criteria

Market position

Hypothesis based on traditional research

Newcomers to the market have greater risk Target market Businesses without a clearly defined target market have greater risk Customer service/ Businesses that do not focus experience on providing a pleasurable experience for the customer have greater risk Clear value Businesses that do not create proposition a value proposition and differentiate themselves based on price, selection, customer experience, product or convenience are more likely to fail Environmental characteristics Competition Businesses operating in an environment with low barriers to entry and increased competition have greater risk Dynamic market Businesses operating in an environment that is constantly changing have greater risk Economic timing Businesses that start during a recession have greater risk Product/service Businesses selecting products/ timing services that are too new or too old have greater risk

A contributing factor to business failure, per traditional retail research? Pets

Streamline Boo

Garden

eToys

Yes

Yes

Yes

Yes

Yes

No

No

No

No

No

Yes

No

Yes

No

Yes

Yes

No

Yes

No

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

No

No

No

No

No

No

Yes

Yes

No

No

In all of these situations, people became excited about a new technology that was set to revolutionize the way business was done. The market was unable to sustain so many little companies trying to get their piece of the action. What makes the Internet evolution unique is the speed at which the cycle occurred. As a proxy for measuring the enthusiasm for this business revolution, consider the IPO performance over the period 1975–2001 (Ritter, 2002). The 10 biggest first-day percentage increases in the stock price were all technology stocks, and all happened in the period 1998–1999. By 2001 no IPO doubled on the first day. The average annual number of IPOs in 1991–1995 was 342 compared to an average annual number of IPOs in 1996– 1997 of 402. More telling was the amount of money raised in these 5-year periods—$11.69 billion versus $77.55 billion, respectively. By 2001 the number of IPOs had dropped to 79 (see Ritter,

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2001). The Internet start-up boom and its access to capital had risen and fallen in a very short period, speaking historically.

7. Conclusion This study shows that the management teams of the businesses under study made some fundamental mistakes beginning with business models that were impossible to sustain, especially when economic conditions changed significantly. In spite of these mistakes, of these five case studies, at least one, garden.com, might have been successful. Garden.com had a unique business model that may have been sustainable given more time. They used the premise of a three C’s site (content, community, and commerce) whereby targeted content would draw ready to buy audiences that advertisers would flock to. This did not happen (Mullaney, 2001). Perhaps given more time, more people would have become aware of the site and what it had to offer, and the company may have been able to survive. The other companies had fatal flaws that, even if economic conditions had been more favorable, would likely have resulted in failure. Pets.com was offering products for sale that, for the most part, were not really viable over the Internet. Boo.com used the technology not commonly available to its clientele, and the online shopping experience was at odds with the preferences of the target community. Spending was out of control and the business model unsustainable. For years, traditional companies have been trying to make a success of home delivery businesses. Without a proven business model for success, home delivery businesses such as streamline.com will continue to struggle, whether offered online or not. EToys.com strategy to offer more diverse products conflicted with the strong ‘‘toy store’’ branding they had created. There are certain limitations in this study. The literature chosen to provide the theoretical basis for the paper includes some studies which may be less resonant for the dot com environment. All of the information was gathered from third party sources such as SEC reports and other articles written about the companies. With greater resources, we would have found direct interviews with participants very valuable. It was impossible to assess the Web sites for usability and customer service. This would have been useful in evaluating the customer experience. Another limitation is that only five dot com businesses were analyzed. While they were among the most notable and high profile dot com disasters, they may not be entirely representative of all failing e-tail companies. These companies provide a comparison from which to look at other companies and their struggles. Further work should examine whether large volumes of venture capital available increased the risk of business failure. One final area for consideration may be to parallel five successful businesses with five failures and determine where the differences occurred. Now that the environment has become somewhat more realistic, what will the future hold? There are numerous theories about what will become of e-tailing, since the potential of Internet businesses and e-commerce remains. Businesses will have to show plans capable of real profitability, or investors will not be interested. As a result, periods of ‘‘hyper growth’’ as seen in the late 1990s will be replaced with slower growth and better planning. Stock market valuations for these businesses will become more appropriate, prompting only those with savvy and genuinely good ideas to enter the market. Without the prospect of a ‘‘get rich quick’’ scheme,

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many of the potential players may be warned. Marketing will no longer focus on strictly high profile approaches. Campaigns will become targeted and focused, using information gathering tools and personalization techniques inherently available with Internet technology. Finally, we will likely see more mergers and acquisitions, creating fewer, more dominant sites instead of the hundreds, or even thousands of smaller businesses. Many of these companies will also likely be associated with traditional bricks and mortar companies, offering a ‘‘clicks and mortar’’ solution. This will give the user the convenience and ease of a purchase on the Internet, combined with the security of knowing that if there is a problem, there is a physical location to resolve it. In time, we may look back on this period in the life of the e-commerce industry in the same way we now look at the histories of the automobile, railroad, and telegraph industries. At inception, these industries promising to create wealth and prosperity for thousands of companies now have few major players with greater barriers to entry. This too will happen with retailing and e-tailing. At some point we will no longer be making a distinction between the two. E-tailing will be an accepted tool of retailing. When a new enterprise is launched without enough planning or structure, fuelled only by hopes and dreams and inflated expectations, the reality will be a mighty crash. But, the rubble that remains holds many lessons for the future.

Acknowledgements The authors gratefully acknowledge the interesting and valuable recommendations of two anonymous reviewers whose thoughts have improved this work.

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Sunny Marche, Ph.D., CMC, is an Associate Professor of MIS in the Faculty of Management at Dalhousie University. He holds a Ph.D. in information systems from the London School of Economics. His areas of research interest are the knowledge management practices of large organizations, and the relationship of language to the design and use of information technologies. He teaches in the MBA and Master of Electronic Commerce programs.