Shareholders of Chapters Online,Canada's Amazon.com wannabe, didn't stampede for the exits during yesterday's near-panic selloff. That happened long ago.
The saga of Chapters Online is the story of Internet mania in miniature. It began with a dream -- building the dominant Internet retail portal in Canada, starting with books -- and is turning into a nightmare, and the time-span between the two extremes is only a matter of months. The underwriters got rich; investors did not. The shares, which reached a peak of $25 in December, only two months after its $13.50 initial public offering, are now close to $5. Trading volumes have vanished, indicating that the stock has fallen off investors' radar screen, and short-sellers are still circling like sharks.
It wasn't supposed to be this way. The greater question is whether the business model doesn't work -- that selling books and other goodies on the Internet can never be profitable -- or that it doesn't work in Canada. There is ample evidence that both scenarios are true, though the management of Chapters Online argues that things are not as bad as they look. True, Chapters Online is burning through $8-million of cash a quarter, but at least it still has cash to burn through, and sales are booming. But losses are going in the same direction and investors are convinced that the only way out, in the absence of a rebound in enthusiasm for e-tailers, is selling Chapters Online or merging it with a big-name partner.
You can see why Larry Stevenson, the boss of both Chapters and Chapters Online, was so keen last year to start an on-line venture. At the time, Amazon.com was the hottest Internet phenom on the planet. The shares, worth a couple of bucks in 1997, had soared to almost $98 (U.S.) two years later, giving the company a market value of about $35-billion. Here was proof the New Economy had arrived. Any retailer laden down with bricks and mortar was not just doomed, but uncool, the equivalent of the 1974 Buick your fat uncle drove.
But the soaring shares masked the hard reality that the business model was far kinder to consumers than it was to the business itself. The bigger Amazon got, the more money it lost. Remarkably, this didn't deter investors, who believed (or were led to believe) that profits were a sign of weakness: It meant you weren't gobbling up market share. To keep the buzz buzzing, a flurry of new product lines were announced. First there was books, then music, videotapes, toys and other products and services, including on-line auctions.
Traditionally, expansion into non-core areas is considered the last resort for the desperate (see Seagram's failing foray into Hollywood). Combine this with the continuing losses and, now, the collapse of the Nasdaq Stock Market, and you've got a lot of skittish Amazon investors. Amazon stock reached a 52-week low of $40 and change yesterday, for a one-year loss of more than 40 per cent. Will Amazon survive? Probably -- it has the benefit of a strong brand and an address in the world's largest market -- but it may have to retreat to its core book-selling business.
Now we come to Canada. It's only natural that someone would want to clone Amazon's success in Canada, especially because it was a pain to have to pay import duties on books bought on Amazon. Chapters was already the country's largest book seller and adding an on-line business seemed sensible. With Heather Reisman's rival Indigo book chain threatening to do the same, Chapters moved quickly. Last autumn, Chapters Online raised $51-million through a sizzling IPO and another $15-million from an American venture capital fund. So far, so good.
But you wonder if anyone asked this question: If Amazon can't make money in the world's biggest market, how can an Amazon clone make money in one of the world's smallest markets? Canada is one-tenth the size of the United States. Its e-commerce industry is generally thought to lag the Americans' by 18 months and Canadians have shown nowhere near the same interest as Americans in buying things on-line.
Like Amazon, Chapters Online is now adding products, including video games and electronics, and a sister company is flogging plants and gardening apparel in cyberspace. Meanwhile, the cash horde is dwindling and will be skimpy by the end of the year. It's not over, but the outlook is not rosy. A rescue plan in the form of a sale or partnership seems likely.
Eric Reguly