The combination of weak financials, increasing competitive pressures, and investor flight will drive most of today’s Dot Com retailers out of business by 2001. According to a new Report from Forrester Research, Inc. (Nasdaq: FORR), to survive in the online retail battleground, firms will need to redirect extravagant branding investments into three categories of hard assets, defined by scale, service, and speed.

Last year, enthusiasm about the increasingly mainstream Net population expanded online retail beyond early entrants selling books, music, computers, and travel. Dot Com entrepreneurs tapped eager investors for millions, planted flags in new categories from pets to perfume, and blew their budgets on marketing chatter. But, the tide is turning against Dot Coms, and consolidation will soon steamroll across the weak ones.

Forrester believes that consolidation will occur in three waves. First, firms selling commodity products that have been successful since the Net’s early days — such as books, software, and flowers — will consolidate by the fall of 2000 amid slowing annual growth rates. Second, the plethora of merchants selling undifferentiated products at razor-thin margins — including pet supplies, toys, and consumer electronics — will collapse before marketing expenditures ramp up for the next holiday season. Finally, online merchants selling heavily branded, high-style products like apparel and furniture will remain stable until 2002.

To survive consolidation, online retailers must anchor themselves by building sustainable assets that will attain scale, service, and speed. Leaders will need to focus on hard assets that support high sales volumes and lower costs per transaction: a large, loyal customer base; in-house fulfillment capabilities; and a rock-solid internal organization. Online retailers must strike back at brand confusion and product duplication by distinguishing themselves through customer service. Presence across multiple channels and platforms, exclusive manufacturer deals to carry specific products, and a range of delivery options will help to build lifetime relationships. Speed will keep retailers ahead of rivals, but it will also require a flexible business foundation. Retailers should adopt technologies and strategies that adjust to unforeseen competitive forays and customer demands.

Several leaders will prevail following the wave of retail consolidation. Brick-and-mortar retailers will regain their footing, leveraging assets like customer history, product selection, fulfillment, and strong manufacturer relationships. Catalog hybrids will also survive, given their large customer base, proprietary product lines, and solid fulfillment.

For the Report “The Demise Of Dot Com Retailers,” Forrester surveyed 50 leading retailers representing a mix of product categories and backgrounds. Eight-six percent of respondents identified growth as their No. 1 strategic priority in 2000, followed by improved site design, increased brand recognition, and raised customer satisfaction.

Get more in-depth research from Forrester on the [CURL /ER/Baseline/Detail 117 “online retail industry”].