The Nightmare Before Christmas
By Katrina Brooker

(FORTUNE Magazine) – 'Twas the week before Christmas, and all across the land, Moms sat at computers with mice in their hands. They tried to buy gifts on eToys and Amazon, In hopes that the sites would deliver Pokemon. The children were nestled all snug in their beds, While visions of Pikachu danced in their heads. But as moms surfed the Net, for ten hours or 20, There were orders unfilled and hassles aplenty. So up from their seats, they flew like a flash, And off to the malls they went with their cash.

Last year, Web retailers could do no wrong. Their stocks soared, customers flocked, the press cooed. Time crowned e-poster boy Jeff Bezos Person of the Year, putting him in the company of Franklin D. Roosevelt and Albert Einstein.

Heading into the final weeks of 1999, it looked as though e-tailers would prove they were worthy of the lavish praise. On the surface, the postmortem looks great. In the five weeks between Thanksgiving and Christmas, 22 million shoppers spent more than $5 billion--three times the amount spent last year, according to Forrester Research in Cambridge, Mass. Traffic on sites like Yahoo and KBkids.com grew by 500%. Outpost.com, a computer and electronics retailer, sold $2 million of merchandise in one day.

But the spectacular numbers mask some spectacular problems. The golden aura--or whatever it was that e-tailers had going for them all last year--has disappeared. It looks as if 2000 is going to be a rough year.

On message boards all over the Internet, the former gushers have turned nasty. "eToys SUCKS!!!" one customer shouts on a thread dubbed "Online Shopping Hell." Another rants, "I doubt I will ever shop again online for Christmas. It is not worth the wait, lies, ill-informed customer service reps, and the hassle and stress." Disgruntled Net posters aren't the only ones grousing. On Wall Street, investors are giving e-tailers a drubbing. Amazon.com, which was trading at a high of $106 in early December, sank 28%, to $76, the week after Christmas. It dropped another 12% after it released earnings in early January; although revenues more than doubled, investors were scared off by mounting losses. eToys is down 58% from its December high. CDnow is off 40%. "The whole category is coming out of favor," says Cliff Sharples, CEO of garden.com, whose stock has dropped 40% since early December.

So what went wrong? "Reality caught up with the hype," says Lise Buyer, an e-tailing analyst at Credit Suisse First Boston. For her, online shopping lost its allure when she learned the TV she had planned to buy for her dad on Amazon.com cost an extra $100 for shipping. She ended up buying it at Stereo Advantage, her local real-world electronics store.

Turns out, of course, it takes much more than a logo and Website to run an e-tailing operation. Online retailers aren't so different from brick-and-mortar stores. They run out of stock, sell damaged merchandise, and hire rude sales help. Above all, they can get overwhelmed at Christmas. These pains were evident the week after the holiday when Net superstore Value America announced it was laying off half its work force. "Layoffs" has a terrible real-world ring.

Newcomers didn't fare much better. Hordes of companies flooded the market. Trouble is, many of them spent heavily to market and promote their brands (e-tailers dropped nearly $2.8 billion on advertising in 1999) but scrimped on infrastructure--the unglamorous side of the business, which focuses on delivering products to customers. The results were often disastrous. "It seems like everyone is putting up a Website and taking orders--I don't know who they are, but they are not very good at it," snaps Linda Tabach, a Maryland homemaker and the mother of two. Tabach tried ordering from LandsEnd.com, MotherNature.com, ibeauty.com, and Vitamins.com. At every shop she hit a snag: The order got lost or came late or was out of stock.

No brand did more to infuriate shoppers than toysrus.com. It kicked off the season with a big ad campaign that lured thousands to the site--traffic jumped more than 300%. But midway through the holidays, the company announced it could not guarantee delivery by Christmas day. Countless shoppers were left empty-handed. When Shaun Lawson learned his orders wouldn't arrive on time, he e-mailed the company to cancel. He received a form e-mail from toysrus.com telling him orders could only be canceled within 30 minutes of the time they were placed. After several more attempts and a slew of form e-mail responses, an apoplectic Lawson fired off an e-mail he was sure the company couldn't ignore: "Your form letter is grossly insulting. Cancel the f----ing order (yes, that means do not ship) and never bother me again." He posted his rant on a Website so "others have an opportunity to learn from my mistake." Toys "R" Us' response came a few days later: "Dear Shaun Lawson: Thank you for contacting toysrus.com. Our records indicate that your order was shipped...and is in route to you!"

Still, toysrus.com spokeswoman Leeann Lavin insists the Christmas season was "an unbridled success." After all, this was a luxurious problem--too many customers. At least for now.