If you thought the prices on the Internet were too good to be true, you
were right.  In the wake of the NASDAQ crash, dot com retailers are
raising prices in an attempt to at least break even, as the article below
explains.  Even with higher prices, at a certain pricepoint shipping
charges are less than many sales taxes.

kelly

The New York Times


June 24, 2000

Bargains on Web Fade as Retailers Push for Profits

By LESLIE KAUFMAN



     Shoppers browsing the Internet last Christmas could find models of
     popular Tag Heuer watches for $325 to $1,000, or roughly 35 percent
     below their suggested retail price, at Ashford.com.

     Since then, the site has raised prices by more than 20 percent,
     boasts Kenny Kurtzman, Ashford's chief executive.

     Bragging about price increases may seem crazy, but Mr. Kurtzman,
     like so many of his Internet brethren, is desperate to reassure
     worried investors that Ashford, which lost $72 million on $42
     million in sales for the fiscal year ended March 31, is on track
     for a more sustainable future. And their desperation appears to be
     bringing an end to the Internet bargains beloved of many consumers.

     Internet retailers are in big trouble. Stock prices have skidded,
     venture capital has dried up and the public markets have closed
     their doors to those who cannot demonstrate how they will be
     profitable soon. Small companies like Toysmart.com, Petsmart.com,
     and Boo.com have been sold or gone out of business.

     Even the industry giant Amazon.com appears increasingly fragile.
     Lehman Brothers released a scathing report Friday that called
     Amazon's situation "weak and deteriorating" and advised investors
     to avoid its bonds. The critique sent the retailer's stock plunging
     19 percent, wiping out the last of its gains since December 1998
     and punishing other Internet stocks as well.

     To please testy investors, dot-coms are trying numerous tactics --
     including employee layoffs, reconceptualizing their businesses and
     raising advertising and association fees -- to show they can
     eventually move into the black. But because many Internet product
     prices were once set beneath cost to lure new customers, the
     easiest and most obvious step has been to bring those prices back
     to the real world.

     "The artificial pricing of 1999 is history," said Mark Goldstein,
     chief executive of Bluelight.com, the Web arm of Kmart.

     Merchants in cyberspace have also been encouraged to raise prices
     because customers so far have shown a willingness to pay somewhat
     more, providing they get service to match.

     "Our research shows that people are clicking at the higher price
     range, because they will pay a premium for convenience -- like
     being in stock now, or excellent customer service," said Daniel
     Ciporin, president and chief executive of Deal Time.com Inc., whose
     online service allows customers to compare Web merchants' prices.

     There is no official entity that tracks past Web prices, but there
     is plenty of evidence that online bargains are on the wane.
     Consumers looking for the popular Sony S550D DVD player in May, for
     example, would have found a bottom range price of $309 to $323,
     according to data collected by DealTime. Shoppers doing the same
     search last week would have found the lowest options ranging from
     $316 to $338.

     At Buy.com, an online superstore, the "American Pie" DVD cost
     $14.99 at Christmas, but now retails at $17.99, as does the DVD of
     "Austin Powers: The Spy Who Shagged Me," up from $13.99 over the
     holidays.

     Since prices in earthbound consumer electronics stores have never
     been so heavily discounted -- Circuit City, for example, sells the
     Sony S550D for $449.99 -- they are not rising much, if at all.

     Even cyberspace retailers whose product prices have not jumped are
     raising costs indirectly by increasing shipping and handling fees
     or reducing special offers. Drugstore.com, for example, has raised
     its standard shipping fee from $3.49 a package in December to $3.95
     today, an increase that Peter Neupert, its chief executive, said
     was meant to bolster profits rather than cover new costs.

     Online retailers are also cutting back on discount coupons and free
     extras while adding limits on who gets them: new shoppers only, and
     just one per household.

     There are, of course, plenty of bargains still to be had on the
     Web. There are also e-merchants who say they are resisting the
     pressure to raise prices. Amazon.com, for example, while still
     profitless because of its continued expansion, has $1 billion in
     cash on hand and makes money on its average sale, and it insists
     its pricing structure will not change. "For our business model to
     work, we do not need to change our pricing," said a company
     spokesman, Bill Curry.

     Still, if the Lehman report is right, Amazon will burn through that
     billion by December of this year and will again need to go to the
     capital markets or find some other way to raise cash. Mr. Curry
     dismissed the Lehman report as "hogwash," but Amazon appears to be
     looking for ways to increase cash flow. Starting July 1, for
     example, Amazon will raise the monthly fee it charges small
     businesses that sell through its zShops and Amazon auctions from
     $9.99 to $39.99. Amazon would not say how much additional revenue
     the increase in fees would bring, but David Schappell, group
     product manager at Amazon auctions, said the increase occurred
     because "the old pricing was so far beneath market standards."

     Less financially blessed Internet companies, meanwhile, are getting
     the chance to compete on a more realistic playing field right now,
     a fact that delights brick-and-mortar merchants whose capital
     structures never did allow them to support below-market prices and
     the associated losses. Many cackle that as the market returns to a
     more normal state, their much larger size will give them a natural
     price advantage.

     "Ultimately, it's going to be hard to compete on price if the
     bricks-and-clicks are doing a competitive job," exulted Jonathan
     Foster, chief financial officer and chief operating officer of
     Toysrus.com, the online arm of the goliath chain. Toys "R" Us had
     $13 billion in sales last year, or 86 times that of its biggest Web
     competitor, eToys Inc., a heft that should give it great influence
     in negotiating lower prices from its suppliers.

     Luckily for the e-tailers, Web shoppers are showing themselves to
     be a bit less the dogged bargain hounds than originally thought. In
     a May survey, Jupiter Communications Inc., the Internet consulting
     firm, found that Internet customers were slowly growing less price
     sensitive. Though 73 percent of the 1,500 people who responded to
     the survey rated price as the most important factor in their
     decisions to buy a product, that was down from 80 percent two years
     earlier.

     Consider, too, that the cheapest price range for the best-selling
     Nikon Coolpix 990 camera was $819 to $824 in May, according to
     DealTime, and some 59 percent of consumers using the company's
     search engine purchased at that price. In June, the price range was
     the same, DealTime found, but the number of buyers at the cheapest
     level had slipped to 50 percent, largely because the more expensive
     cameras were in stock while the less expensive ones had waiting
     lists.

     "Ultimately, convenience and saving time, which have always been
     the real advantage of the Internet, will be the most valuable"
     assets of the online business model, said Marcia H. Flicker, a
     professor of marketing at Fordham University.

     The price pressures are also forcing online retailers to figure out
     more quickly how to recognize their repeat -- and therefore more
     valuable -- customers and reward them, while avoiding the use of
     scarce resources on customers who buy only when given money-losing
     incentives. "There are people out there that just want to take
     advantage of deals," Mr. Neupert said, explaining Drugstore.com's
     decision to offer fewer coupons. "Those are not the customers we
     want to attract."

     All of this does not, of course, mean that consumers are becoming
     completely indifferent to the impact on their wallets and that
     Internet companies can ignore price concerns. Online sites that
     have made serving up bargains their sole purpose for being are
     particularly vulnerable. For the last six months, Renana Myers, of
     White Plains has bid for goods like yogurt, diapers and paper
     products on Priceline.com -- a service that allows consumers to
     negotiate prices with a diverse array of retailers -- before she
     goes to the supermarket, which has a deal with the online retailer.

     Lately, she has noticed the savings are not so great. "They have
     shifted the cost of things like wipes and yogurt upwards," she
     said. "You have to be very savvy and know the costs in the
     supermarket if you are going to get a good deal." She has been
     disappointed enough lately that she has considered not bothering to
     visit Priceline any longer.

     Web retailers are all too aware that there is a limit to how high
     they can push prices, but profit pressures, already intense, are
     likely to get rougher soon. Next month, the Financial Accounting
     Standards Board, an independent agency whose rulings are
     incorporated into generally accepted accounting principles, is
     expected to debate and possibly even vote on a recently proposed
     rule concerning how all retailers calculate "gross profits."

     The board is trying to standardize how retail companies account for
     shipping and handling costs. Although there is great variation
     across the industry, many of the biggest merchants that operate
     exclusively online, like Amazon.com and eToys, list such costs
     under their marketing budgets, a practice that inflates gross
     margins. The accounting board is likely to call for an end to this
     practice and instead require businesses to deduct such so-called
     fulfillment outlays from the costs of goods.

     While many catalog merchants also count shipping by this method,
     the proposed measure would be of much greater significance to
     virtual retailers because they do not have any positive earnings
     and gross margins are the main way investors have found to measure
     the e-tailers' health.

     Such a rule could cause gross margins to drop to 10 percent from 20
     percent at Amazon, and to negative percentages for eToys, PlanetRx
     and Drugstore.com, according to Holly Becker, an Internet analyst
     at Lehman Brothers. That could further dismay investors, leading to
     additional pressure on prices, she said.

     "In the absence of bottom-line earnings, we have been using gross
     margins to gauge the health of the business," Ms. Becker said.
     "Companies will do what they can to get margins higher again. That
     means raising prices or lowering fulfillment costs -- and raising
     prices is certainly a shorter-term solution."


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