Stages of E-Tailing Business

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Let us elaborate the implication of stages in the e-tailing and retailing business.

Exploration Stage

E-tailing firms in this stage build strong teams, develop platform, and build up their market share by aggressively investing in partnerships and promotions (Rayport and Jaworski, 2000). Most e-tailers have started their business after 1995. In this stage, it is very difficult for the investors to distinguish who will become winners, although the overall expectation for the market potential is very high. Thus MarCap is very sensitive to the revenue growth. On the other hand, investors tolerate the negative net income due to the larger scale investment in advertisement, system development, and logistic infrastructure for the promising future (Kotler and Armstrong, 2000).

A good example of this stage is Amazon.com in 1998 which had grown rapidly (313% in 1998) and lost tens of millions of dollars a year (-20% of sales in 1998). An exceptional company is eBay which has been profitable from the beginning. However, the income on the average is negative in this stage.

Breakeven Stage

The shakeout occurs inevitably when a new innovative industry emerges such as e-tailing (Vigoroso, 2002). Similar phenomenon could be found in the history of the automobile industry in the early 20th century. There were more than 100 automobile makers in the exploration stage. Now it ended up with three in the U.S.A. The time span of this stage can vary from a few years to tens of years. In this stage, the successful performers begin to gain profit, but the poor performers are still losing money and investors cannot tolerate such a loss any longer. The winners continue to grow stably, but the losers close their sites, or are acquired or merged. At the breakeven stage, the average net income of these companies becomes the mixture of negative and positive values. According to the definition by the Firm Value Determinants Model, the average impact of net income on the firm value is near zero. So the state with near-zero net income impact on the average can be a distinction point from the exploration stage.

For example, Amazon showed decreasing revenue growth rate from 313% in 1998, to 169% in 1999, 68% in 2000 and 13% in 2001, while the negative 'net income'/revenue increased from -20% in 1998, to -44% in 1999, and -51 % in 2000, until it bounced to net income of $5million in the fourth quarter 2001 (Cox, 2002). For the recent happenings at Amazon, refer to Schaff (2001). On the contrary, eBay has shown positive net income for five consecutive years. For the fiscal year ending Dec. 2000, its revenue increased 92% to $431 million while net income increased 343% to $48 million. Like these examples, positive and negative income companies coexist and are balanced in the breakeven stage. According to Timmons (1999, p. 32), the average failure rate of a new business is 23.7% within two years, 51.7% within four years, and 62.7% within six years. Note that 15 out of 22 listed e-tailers in this study have disappeared during this study period.

Typical e-tailers shaken out are CDNow (acquired by Bertelsmann), Cybershop.com (closed in April 2000), FatBrain.com (acquired by Barnesandnoble.com in November 2000), Go2Net (acquired by InfoSpace in October 2000), i-Mall (merged with Excite@home in July 1999), OnSale (merged with Egghead.com in Nov 1999, but Egghead is also delisted from NASDAQ as of April 10, 2001), PCOrder.com (merged with Trilogy Software in October 2000), Preview Travel (merged with Travelocity.com in March 2000), VitaminShoppe.com (delisted from NASDAQ), and e-Toys (closed in April 2001). Peapod was acquired by the world's largest food retailer Royal Ahold in April 2000 (Regan and Macaluso, 2001) although the Peapod site remained.

Growth Stage

In the growth stage, the surviving companies continue to grow the revenue, gaining positive net income as well. In this stage, both revenue and net income have positive relationships with the market capitalization. The firms in this stage have the option of trading-off between high revenue growth and high net income. The investor's ultimate concern is high net income, but they may postpone a portion of high income in compensation for the high growth that may contribute to high future income.

The C&M retailers at starting stages of online business may belong to this stage. C&M retailers invest to cultivate its online channel, sacrificing some of its current income. We need to investigate whether the introduction of online channel contributed to revenue or income. The pattern may vary depending upon the time point. We hypothesized that the online channel contributed to revenue growth in the early stage, but gradually contributed more to income. But it turned out this hypothesis was not supported by the data in reality as we will see later.

Maturity Stage

In the maturity stage, the market is quite saturated and there is little room left for growth. In this stage, investors do not seriously care about the revenue growth since investors' main concern is the income. This implies that the income has a positive impact on market capitalization, while the revenue growth is nearly insensitive. We hypothesized that B&M belongs to this stage and continued to stay in this stage, but it was not true as described later.

The traditional retailing business turned out that they were not in the maturity stage. So it seems more appropriate to evaluate the traditional business as a fluctuation between revenue and income, instead of the view of stage theory. However, it deserves to contrast with the e-tailing business with the same measure.



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Advanced Topics in Global Information Management (Vol. 3)
Trust in Knowledge Management and Systems in Organizations
ISBN: 1591402204
EAN: 2147483647
Year: 2003
Pages: 207

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