Publish date:

Take Up Arms Dealers, Not the Fighters

Staples proves that bricks-and-mortar companies can't win the war on the Web.
Author:

Trying to figure out whether to back the arms merchants or the belligerents themselves? Let me steer you in the right direction. Take a look at

Staples

(SPLS)

today.

PaineWebber

just downgraded the stock because of accelerating losses at

Staples.com

, despite massive revenue growth there.

I think the downgrade makes sense. The Stapleses and

Office Depots

(ODP) - Get Report

and

OfficeMaxes

(OMX)

will now all have to duke it out on the Web. They will all have to spend and spend and spend to stay in the game. In the end, what game?

Amazon

(AMZN) - Get Report

TST Recommends

moves in and it might be game over. And I don't even like Amazon.

It is expensive to complete a buildout and promotion on the Web. It is expensive and nonlucrative and a little nuts, frankly. But it has to be done because rational consumers will demand it.

I remember when Staples first announced this initiative. I thought it was done as an afterthought, just something to juice the stock. I didn't think they had thought it through. There was that wild period where everyone who said he was opening a dot-com got a 10-point jump in his stock. We went through this with the banks, the retailers, the mail order guys and the parts companies (

Grainger

(GWW) - Get Report

).

Now we are discovering the downside, the hard part. You need real cash to build and subsidize these things. But only Net companies are given that cash. Bricks-and-mortar companies aren't. They have to spend real dollars, not venture capital dollars. And nobody wants to stick around while they do.

Another reason

not

to own retail. Another reason not to own those who are waging war on the Net. Another reason to own those who supply the arms.

Random musings:

Letdown after

Palm

(PALM)

was bound to happen. We are waiting for things to sink a bit before we buy.

James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund had no positions in any stocks mentioned. His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column at

jjcletters@thestreet.com.