The Davids
of Ecommerce by
David Shook, Businessweek
(Reprinted by Permission)
APRIL 23, 2001
NEWS ANALYSIS
Forget Amazon,
Priceline, and the other giants. These days, cybersales are becoming
dominated by tiny shops -- that turn a profit
By the time
the dot-com investing backlash started to peak last fall, my cynicism
toward e-commerce stocks had reached the stratosphere. One afternoon
I typed such generic words into my browser as buy, toys, furniture,
and pets, and found that by simply adding ".com" suffix
I had reached a financially struggling e-tailer that had sold stock
before figuring out how to make a profit.
But nobody
paid much attention to the thousands of tiny Web sites that started
modestly, without the help of venture capital, and now are doing
fine. These no-frills Web businesses are focused on selling stuff
that people will come searching for without being goaded by expensive
marketing and promotion.
Do a search
for something you need, and you're likely to find at least a couple
of sites that sell it. They're small businesses selling fancy bathroom
products, educational services, auto parts, even lingerie. And they're
not looking to corner a market or spend millions building a brand.
They're mom-and-pop operations thinking small.
MIGHTY MINIS.
And they're a big reason why e-commerce continues to thrive despite
the Internet meltdown. Says Catherine Skelly, Internet analyst for
Gruntal & Co.: "I don't even think of these sites as dot-coms.
They're small businesses that just use the Web as another form of
communication with their customers."
BusinessWeek's
Arlene Weintraub has dubbed these companies "mighty mini-dots."
The Wall Street Journal's Kara Swisher has called them "ants"
weathering the economic winter. They're niche players with a handful
of employees selling such goods as software or garden tools, and
they're everywhere.
Take Justballs.com,
which sells any kind of sports ball you want. It expects to be profitable
on revenues of $35 million in 2001. Or Quickbrowse.com, which combines
your favorite sites into a single Web page for easy viewing. Or
Underneath.com, an underwear Web retailer that claims to be in the
black selling sports bras, briefs, and panties for any size person.
MONEY FROM
A FIRE HOSE. So much for the idea that success on the Net depends
on getting huge at any cost. These little gems of the Web are a
thousand points of light for e-commerce. "We're seeing traffic
filtering more and more to these smaller sites -- thousands of specialized
boutiques," says Tim Miller, president of Webmergers.com, a
hub for buyers and sellers of Internet companies. Miller views last
year's demise of dot-com stocks as the sad result of venture capitalists
wanting IPOs too fast from too many companies that lacked focus.
"VCs were only dispensing money through fire hoses," says
Miller. "There were no modest alternatives."
Mini-dots are
proving that profits can be made without much investment. "Because
we didn't get venture capital, we didn't get the opportunity to
waste a ton of money," says Jeffrey Johnson, owner of Underneath.com,
which is now looking for investors. Johnson works with about 15
employees in a small warehouse in downtown Atlanta. At Underneath.com,
inventory control doesn't involve a costly back-end software system.
It entails him eyeing a half-empty pallet of Champion sports bras
resting in the rafters outside his office.
He doesn't have
an army of customer-service reps answering e-mails and fielding
calls, either. Johnson is his own customer-service department. The
company also does very little marketing or advertising anymore.
Johnson felt it never made an impact.
INFANCY.
Underneath.com stands out in another respect: It earned $30,000
last year on sales of more than $620,000 -- its first profit in
three years in business. "We've always had the attitude that
the Internet remains in the infant stage," Johnson says. "I
ask friends and family all the time if they shop online. Most say
they don't. To be honest, I don't shop online very much. [Selling
underwear online] isn't glamorous. But it's just one of those products
that makes sense for the Internet."
Even mini-dots
have to start with something, though. And today's financing for
Web startups comes in large part from so-called angel investors
-- individuals or parent companies that invest $1 million or maybe
$5 million rather than $50 million, Miller says. The result has
been a proliferation of mini-dots that remain in private hands.
And many of them grow very fast.
Here's an example.
Before a ski trip to Vermont last month, I ordered "high-performance"
long underwear designed for skiers and runners at Craft-USA.com,
a niche online catalog outfit owned by the Swedish company Craft
Skandanavia. It makes clothing for cold-weather outdoor sports,
and before the Web site was started, the Craft line was sold exclusively
in specialty ski and cycling magazines. The Craft Web site is clunky
and its offerings are thin, but the customer service is fine and
the clothing is top-notch.
WHO NEEDS
ADS? I had a technical question and e-mailed it to the company.
The owner responded in a few hours. Two days later, the merchandise
arrived. Piece of cake. "For me, it's just another avenue to
sell products," says Huub Valkenburg, Craft's owner. He says
he spent a measly $20,000 last year building and maintaining the
Web site -- a tiny outlay compared to the dozens of failed "e-tailers"
that spent $20 million on marketing alone.
"The funny
thing is, I'm spending less on advertising this year. and my Web
sales are going up," says Johnson. Last year, the site accounted
for 8% of the company's sales while this year it's 15% so far, he
says.
Certainly,
many mini-dots are experiencing growing pains. And many go out of
business before you even hear about them. But just as with a non-Web
company still learning the ropes, managers of mini-dots are forced
to make tough decisions on spending and grow slowly from there.
It lowers the risk of failure. In some cases, mini-dots are held
together by a patchwork of outdated technologies, such as a lousy
search engine or customer-transaction software that's full of glitches.
LESS RISK.
Nonetheless, traffic and transactions grow steadily. The customers
keep coming even though investors don't. "There will always
be a place for the little guys. The same thing is happening online
that has happened outside the Web for hundreds of years," says
Martin McClanan, CEO of RedEnvelope.com, an upscale gift Web site
that also sells through print catalogs. "[The mini-dots] have
a lower risk profile than the many dot-coms that took part in the
great bubble of venture-capital funding that let so many companies
accelerate so quickly."
The trend is
starting to show up in Web traffic numbers. A recent study from
Alexa Research suggests that Internet traffic is gradually diffusing
from the biggest sites toward the smaller ones. That's contrary
to the conventional wisdom that activity is concentrating at the
biggest e-tailers. But Alexa says the largest sites saw their share
of Web traffic shrink 12% from June, 2000, to January, 2001. While
the top 100 sites accounted for 34% of total traffic last June,
that figure fell to 30% in January, Alexa says.
The inevitable
conclusion seems to be that rinky-dink retailers and service providers
are destined to play an important role in e-commerce growth. "You
can either be really big...or tiny," says McClanan, whose privately
owned, VC-financed company is aiming to be very big. The smaller
sites may not have the same name recognition, but search the Web
for that George Foreman Grill you've always wanted, and you're liable
to stumble on several sites that sell them.
Think of them
as the polar opposites of bigger-is-better Internet players like
Amazon.com. Instead of making big waves, these sites are actually
making money.
By David Shook in New York
Edited by Thane Peterson
By David
Shook in New York
Edited by Thane Peterson
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