Reality Bites Value America

Whatever the Internet will become, one of the things it’s been in the last couple of years is a consumer’s paradise, at least from a price perspective. In their hunger to acquire new customers, Net retailers have engaged in good old-fashioned price wars and have more generally made Net shoppers so accustomed to sizable discounts that paying anything close to retail feels like you’re being robbed.

The question, of course, has always been whether these retailers were actually ever going to be able to make money when their business often seemed, as venture capitalist Bill Gurley so smartly put it, to be the equivalent of giving consumers who visited their sites a dollar in exchange for 95 cents. In the past few weeks, we’re starting to see signs that, in fact, a lot of these Internet retailers are not only not going to be able to make money. They may not even be able to stay in business for much longer.

The most telling such sign was the announcement yesterday by Value America that it was going to slash its work force by 47 percent, slim down its product offerings, leave five of the 12 buildings it now occupies, and make meaningful cuts in its ad spending. Value America also announced that its revenue for the fourth quarter will fall 6 percent to 9 percent short of analysts’ estimates and that it will lose significantly more than analysts had expected in the quarter.

Value America has been this one-stop shopping site, where you could buy everything from food to printers to appliances to computers. (Computers like the one on which I’m writing this column, actually, bought this summer for a very nice price.) It now plans to focus on selling computers and consumer electronics, which on the one hand is a natural strategy for targeting Web users and, on the other hand, is a strategy that everyone else in America has already figured out and embraced. So the idea that the new approach is going to rescue the company seems rather dubious.

What’s interesting about the Value America story, though, is that it represents an unusual intrusion of the things we’ve gotten used to about offline business into the online world. Up to this point, with rare exceptions, business on the Internet has seemed to exist in this fairy-tale realm where no one ever gets fired, where expenses are irrelevant, and where all losses are tolerated as simply necessary investments in the future. By eliminating 280 jobs, cutting the number of suppliers it uses by 90 percent, and admitting that it’s running through its capital much faster than originally planned, Value America is essentially demonstrating what we all knew, but just weren’t sure when it would come true: Eventually, you have to earn a profit or else you’ll go under.

Now, there are limits to the value, so to speak, of Value America as a cautionary tale. In the first place, the site was never that popular, and even now is only the 90th most popular Web shopping site. More important, Value America’s everything-including-the-kitchen-sink strategy was ill-conceived, especially for a company that had no real brand name. For to branch out from books into CDs and then videos and then consumer electronics means one thing. For Value America to start by offering everything is another. And, finally, there are Net retailers–Amazon, most notably–who are not just running a business on hope, smoke, and mirrors; who have thought seriously about their cost structures; and understand things like return on invested capital. That doesn’t mean they will succeed, but it means they have a much better chance than most of the companies out there.

Even so, what’s happening to Value America does have implications for the Net as a whole, especially when so many Net retailers dumped tens of millions of dollars into pre-Christmas advertising with, by all accounts, very little payoff (relative to investment). And perhaps the most important thing to think about is that if Value America goes under, it increasingly looks like it will do just that: go under and disappear. In other words, no one is going to come along and acquire it, because ultimately there’s really nothing there to acquire. The conventional wisdom has been that eventually we’d see consolidation in Net retailing through mergers and acquisitions. It’s starting to seem more likely that we’ll see consolidation through failure.