E-commerce firms dogged by holiday headaches

I predicted total e-commerce sales during the holidays would total $10 billion to $12 billion--up 3 to 4 times last year's levels. Early indications show that these expectations were on target, and some early success stories give weight to the figures. America Online reported more than two-thirds of its membership made some type of online holiday purchase, while Ernst & Young estimated that 26 percent of all Internet users shopped online this holiday season.

There are, however, significant lessons to be learned by e-tailers and "click-and-mortar" merchants, despite the success and excitement of this holiday e-commerce season.

It wasn't all good cheer for e-commerce sites. Some e-tailers received coal in their stockings, in the form of late deliveries, dissatisfied customers and incorrect orders. For example, a recent Andersen Consulting study shows that some Web sites terminated 25 percent of online transactions during the ordering process!

Andersen's sample group attempted 480 purchases at 100 leading e-commerce sites, but succeeded in completing only 350 of those transactions. Causes pointed to merchants not being able to take orders, blocked sites or browser crashes during the process.

More importantly, these Web failures left a significant amount of unsold merchandise on the table.

E-commerce now is simply too big to ignore, but it needs to be supported by a solid infrastructure. Yet online merchants occupied with fixing their own problems may be stymied by the rush of new merchants moving online for the first time, I believe. This bottleneck presents ample opportunity for companies that provide hardware and software (such as e-commerce and security), as well as for firms involved in application services (ASPs), and Web hosting services.

High consumer demand also tested, and often stressed or broke down the back-end delivery and fulfillment infrastructure of many merchants. The same Anderson survey showed that only 20 percent of products ordered arrived on time. E-tailers fared better, but by no means perfectly, at 80 percent. Electronic gifts such as PCs or other devices took on average 3.9 days to arrive on a customer's doorstep, while music deliveries took 7.4 days.

Amazon announced that it not only saw robust sales, but also high associated costs. On Jan. 5, Amazon said that while 99 percent of its orders shipped on time, the cost of doing so was high--the company announced greater-than-expected inventory related charges and write-downs, particularly in toys and electronics.

PaineWebber retail analyst Aram Rubinson wrote in a Jan. 3 report entitled "Online Toy Survey--Holiday Wrap Up" that "Only a few days before Christmas, Toysrus.com announced orders placed as early as Dec. 9 would not arrive in time for Christmas. In addition, we have all learned of various mix-ups on other sites--including delivery of the wrong gifts, missing wrapping paper, late notification of out of stock items and in some cases, no delivery at all."

These problems and others plagued e-tailers during the peak of the holiday shopping season, especially in the online toy market. While studies showed that toys were the most frequently purchased products online, intense Web traffic and demand led to well-publicized site outages, such as those experienced by Toys "R" Us.

Both leading online toy stores (Toys "R" Us and eToys) have offered coupons to customers who didn't receive holiday orders on time. Toys "R" Us offered $100 coupons, while eToys gave $10 coupons to some unsatisfied customers.

In addition, eToys plans to boost its business by opening its first East Coast shipping center this year, adding approximately 500,000 square feet of inventory space to its existing 600,000 square feet split between sites in California, Utah and Minnesota. However, these additional shipping centers continue to add to its already high infrastructure costs.

While various delivery concerns can be partially addressed by building, buying or renting larger facilities, addressing customer service concerns is a thornier issue. Unsurprisingly, several surveys have shown that consumer satisfaction with e-commerce has sunk as demand on merchants has increased. This shows that customer service is another area where many merchants were ill prepared this season, but will surely be a focus for the next holiday season.

We haven't even unraveled the hairball of how these online merchants will handle e-commerce returns--but unless customer service questions are answered, dissatisfaction with returns and other issues can be expected to grow.

When an e-tailer's infrastructure is inadequate, the results can be painful. For example, Value America announced that its revenue expectations for the fourth quarter of 1999 would be approximately 6 to 9 percent below consensus estimates due "to product fulfillment delays and system transition issues that occurred during the implementation of its new IT infrastructure." In addition, Value America announced a restructuring that includes a workforce reduction of approximately 47 percent, facility consolidations, and other cost-saving measures.

To hammer the point, I purchased good totaling about $3,000 between October and December (early enough for shipments to arrive reasonably before the holidays). I chose a broad selection of merchants, including Amazon, Buy.com. CDnow, Macys.com, Starwars.com, VitaminShoppe.com, Yahoo Stores, Shop@AOL, 800.com, BigStar.com, Outpost.com, Beyond.com and others.

All in all, I personally experienced problems with approximately 70 percent of my orders, which I find totally unacceptable.

I hope I was just unlucky, and that these problems were not indicative of the overall consumer experience. Several of my orders arrived much later than initially expected. And I am still waiting for items that are apparently lost somewhere in cyberspace, such as a TV for my father (ordered Dec. 10), several CDs and some DVDs. I received out-of-stock notices on three items following one of my orders. I got three defective items that need to be returned. And finally, I received two incorrect deliveries and still have several unresolved service issues. In fact, two merchants have not yet responded to repeated customer service requests.

Since it is obvious that the e-commerce experience is less than perfect, e-tailers have many challenges to tackle over the New Year. The need for better infrastructure will grow as sites expand their services, and hopefully demands placed on merchants during the next holiday shopping season will result in better prepared merchants, higher sales and better consumer experiences.