Buyer beware: Online retailers dropping like flies

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July 21, 2000
Web posted at: 11:21 a.m. EDT (1521 GMT)

by Carla Thornton

(IDG) -- As an online shopper, you probably started out small, buying a book here or a couple of CDs there. As you became more confident, you progressed to using the Web to send flowers, fill prescriptions, and order groceries. These days you shop with abandon and snap up PCs, furniture, and other high-priced items from online companies you've never heard of.

Now is a good time to reconsider your carefree ways. A predicted shakeout among Internet retailers means you could pay dearly for sloppy shopping. Already this year, high-profile sites such as Petstore.com, Disney-owned Toysmart, and fashion site Boo.com have gone out of business.

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The scariest part: The carnage may have only just begun. By the end of the year, analysts say, the investors backing some shopping sites could decide to cut their losses. "Amazon's getting beat up, and some people thought Buy.com was on the ropes," says IDC analyst Keith Wayras. But these electronic-commerce monoliths won't likely be the first to go. The businesses most likely to fail: small to medium-size online stores that sell common products, ranging from baby food and toys to sporting goods and travel tickets, for prices far below those of competitors. Moreover, an astounding three-quarters of online retail businesses in existence today will end up as worm food by 2002, according to Forrester Research.

Business-to-Business Can Also Go Under

Consumers aren't the only shoppers who need to be wary when buying online. Sites catering to businesses can also die, as Richard Middlebrook, an attorney in Bakersfield, California, found out.

This past January, Middlebrook hired PageRiver, a Web site design and hosting service in Nevada, to build a Web site for his law firm. Although initially put off by the company's request for a $500 payment up front, Middlebrook eventually signed on because the price was low. PageRiver delivered a crude template-based site, and Middlebrook asked for his money back. Four months later, the site and the company disappeared, and so did Middlebrook's investment. PC World was unable to reach PageRiver or its principals for comment.

Middlebrook says that he wasn't bothered by the loss of a few hundred dollars. "The thing that bothers me is that I've lost my faith in buying online. I thought I could trust a company online as well as I could a store down the street, but that's not true. I'll never buy again from anyone but a big name."

So What?

Soon, patronizing your favorite Web store could require nerves of steel. If you're lucky, a failed online store will do as CraftShop.com did, leaving the site up for a few days or weeks, giving you a chance to follow up on any outstanding orders. Even better, another company may take over operations and support the failed site's customers, as in the case of Petstore.com, purchased by Pets.com.

But you may just as likely plunk down $50 for flea collars and kibble at a bustling site one day, only to read the next day a polite note in the site's place directing you to an 800 number that doesn't work. No matter how noble its original intentions, when an online company croaks, you could lose your order, and possibly your money.

Brick-and-mortar stores can fail, too, but online customers face additional risk because sites often ask for payment in advance. The Web also exposes shoppers to hundreds more companies, many of them start-ups with lots of revenue but no profits whatsoever. You can maximize your chances of happy shopping on the Web in the coming months by following a few tips offered by industry analysts and consumer-protection experts. You've heard some before, but now is a good time to brush up on the basics.

Five Rules for Web Shoppers

Despite the problems, you can still shop on the Web without too much need for concern. Follow these five common-sense rules for all your online purchases and avoid headaches later on.

  • DON'T USE DEBIT CARDS. The number one safety rule still stands: Never pay by any method other than by credit card. Never use a debit card, an ATM card with a credit card company's logo on it that automatically deducts money from your checking account. If a store goes under without delivering your merchandise, and you paid with a credit card, you can just call your credit card company and have the charge removed. But if you use a debit card, you might wait months for the funds to make their way back to your bank account--if they ever get there at all.

  • TRY ESCROW OR C.O.D. If a company doesn't take credit, you'd best avoid doing any business with it, period. But if the product's unusual or hard to find, or you're buying from an auction site, use a licensed online escrow service. Escrow companies hold your money until you confirm receipt of the service or product, and then they pay the seller directly. You can also try to pay cash on delivery or make a partial payment, if either are an option, advises Susan Grant, director of the National Consumer League's Internet Fraud Watch division. Those choices are less frequently available on the Web, however. In any case, the best advice is to do anything "to avoid paying for a product until you get it," Grant advises. AVOID ANONYMOUS BUSINESSES. If a company does't provide a physical address, a phone number, or any other real-world contact information on its site, run--don't walk--the other way. The absence of such information could mean that the company can too easily vanish without a trace.

  • BEWARE OF TOO-GOOD-TO-BE-TRUE PRICES. Don't let rock-bottom prices cloud your better judgment, warns Keith Waryas, an e-commerce researcher for IDC. Dirt-cheap products or services tend to be the hallmark of fly-by-night companies, who set up Web sites on the cheap and rake in as much cash as possible before collapsing their tents and disappearing. Such companies know that few customers will chase them to recoup a relatively small loss.

  • STICK TO NAME BRANDS. IDC's Waryas also advises that shoppers stick with well-known brand names when buying computers from sites that offer a range of manufacturers. "The bigger vendors like Compaq have warranties, so you can always go back to the manufacturer for support. But if you buy a generic box with a 90-day warranty and that company goes under, you're left holding the bag."

For an unabridged version of this story, click here.

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