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Buy.com seeks next level: high-ticket items

By Kimberly Pfaff

When Buy.com, the self-proclaimed Internet superstore, burst on the e-tailing scene in 1997, it proposed an unusual business model that took even the most savvy industry watchers by surprise: Sell computers, electronics and software at bargain-basement prices, drive up incredible levels of traffic and make up the difference in advertising revenue.

But things haven't quite worked out the way the company originally planned.

What began solely with computer products has quickly evolved to encompass CDs, books, video games, a clearance area and even golf equipment — more than 850,000 products in all. Customers are offered shipping via UPS with online order-tracking capability, and a convenient 30-day return policy on most goods. Aliso Viejo, Calif.-based Buy.com even bolsters its low-price leader claims with a 24-hour, low-price guarantee.

"We have built a company that enables the customer to simply buy better," said CEO Greg Hawkins in a statement provided to SCT. "That includes great prices, selection, service, top brands and an overall positive shopping experience for individuals and businesses."

It might sound a bit like Amazon.com, but there's one basic difference: Unlike Amazon, Buy.com has no warehouses or distribution centers. Instead, it has partnered with distributors to use their brick-and-mortar resources.

"We outsource the fulfillment and shipping functions to the best in their class," he said.

"No inventory risk, overall lower capital expenditures and better efficiency all help us provide consumers with a better shopping experience."

But they don't necessarily get the lowest prices any more.

"Buy.com appeals to deal-seekers," said Evie Dykema, an online retailing analyst with Forrester Research, Cambridge, Mass. "But the problem with trying to be the low-price leader is that consumers using shopping bots [short for robots that retrieve and index information from the Internet] are likely to find a better price online.

"Bots can check a broad range of online retailers selling a given product online, any of which may be less," Dykema said. "The odds that Buy.com will be able to win the majority of those deals are low. There's always going to be someone offering it for less."

And there also is a problem with Buy.com's advertising strategy, too, some analysts argue: Consumers hunting for bargains are not likely to be the big spenders that advertisers typically target.

"Advertising alone doesn't pay the bills," said Dykema. "Already, we're seeing Buy.com moving into higher-margin goods."

Buy.com's CEO confirmed that. "We've shifted our approach from the lowest price on all products to an everyday low-price strategy, while continuing to significantly grow our customer base," said Hawkins. Buy.com says its customer demographic is adults ages 25 to 49.

Last month, the firm made its first foray from product sales into consumer services, partnering with United Airlines to launch a new travel feature on its home-page shopping portal, as well as a new consumer travel site, Buytravel.com.

And Buy.com, while not divulging details, doesn't plan to stop there.

"We will change and grow to fit our business strategy," explained Hawkins. "We foresee adding additional categories, both in consumer goods and services, as well as global expansion."

Has the Buy.com model worked?

That all depends on how you look at it, particularly given the intricacies of the Internet economy, where dotcoms can be worth millions on paper without ever realizing a profit. With more than 1.9 million customers — and adding more at the rate of about 200,000 a month, according to the company — Buy.com already ranks as one of the top five e-commerce sites. Forbes magazine named it one of the Best of the Web retailers for computers and consumer electronics in its spring 2000 issue.

Yet in 1999, the company lost $130.2 million on revenues of $596.8 million. To compare, the firm's 1999 losses rose 631% over 1998's $17.8 million, while its revenues grew 376% over 1998's $125.3 million.

Now Buy.com executives say they are gearing up to take the company to the next level.

"While our focus to date has been largely on gaining the critical mass to leverage our virtual operating model, we are now concentrated on developing our revenue mix to include more attractive, higher-margin items that will ultimately drive profitability," according to CEO Hawkins.

And some analysts believe they will get there.

"Are they going to knock someone out of the box? I'm not sure," said Ed Lubieniecki, a partner with Ernst & Young's e-tailing unit. "Will they take some sales away? Absolutely; it's a successful model."

But price is only one consideration when it comes to competition with brick-and-mortar stores.

"Consumers at the end of the day want service, and they measure value as more than price — they see it as service, quality, and what happens when something goes wrong," Lubieniecki said.

While books and CDs might sell well over the Internet, other merchandise is better suited for conventional stores, mall executives point out.

"People still want to be able to try on the clothing, taste the foods and be part of a social environment," said Roger Burghdorf, executive vice president of Los Angeles-based Westfield America.

Shopping center executives remain convinced that whatever Buy.com's potential for success, the best retail model is some combination of clicks and mortar.

"If 1998 and 1999 were the years of clicks, then 2000 will be the year of clicks and bricks," said John Bucksbaum, CEO of Chicago-based General Growth Properties.

"I think there'll be tremendous convergence between the pure Internet retailer and the land-based retailer. We think that will provide a great opportunity."

At the moment, however, it's doubtful that Buy.com will pursue any clicks-and-bricks partnerships, outside of its distribution needs.

"We believe the virtual model will best deliver what consumers want," according to Hawkins.

"The virtual operating model is what was envisioned for the Internet retailing space, and we won't give that up."