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Shopping Centers Today -> August 2001
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DIGITAL DISCOUNTER
Taking the liquidation concept online has proven quite profitable for e-tailer Overstock.com
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| Overstock.com specializes in selling a broad range of brand-name goods at bargain-basement prices. |
By Kimberly Pfaff
Ever wonder what happens to all that merchandise from failed e-tailers like Jewelry.com, Gear.com and ToyTime.com?
If you’re Patrick Byrne, CEO of Overstock.com, you scoop up the goods at bargain-basement prices, then turn around and unload them online, for a hefty profit — but at prices that are still 40% to 70% below retail.
And you sweeten the offer for consumers even further with over-the-top customer service, a 30-day money-back guarantee and a low $3.95 shipping fee per order.
With brand-name merchandise ranging from home electronics and bed linens to diamond earrings and sporting goods, Overstock.com is a bargain-hunter’s dream. Founded in 1999, the Salt Lake City-based firm has been steadily averaging 37% monthly sales growth and nearly 24% gross margins. The firm’s sales, which numbered just $2 million two years ago, shot up to $40 million in 2000; projections for 2001 are for well over $100 million.
And in perhaps one of the best ironies to surface about the Internet economy, Overstock.com has been one of the few e-tailers to actually turn a profit, after investing only $27 million in capital. And it’s accomplished it all without advertising.
What Byrne and company have done is take the liquidation concept online. They’re part of a new breed of dotcoms (see below, Online Bargains) that emphasize savings over sizzle. And, as analysts see it, that’s a perfect model for the Web.
“It’s a very valid use of the Internet channel,” said Ed Lubieniecki, vice president of consulting firm Cap Gemini Ernst & Young, El Segundo, Calif. “It’s the age-old business of discount or closeout merchandise, very price-oriented, so it certainly works for the Internet, where people are buying on price.”
“Their business model really maps well to the Internet shopper, where price is always a huge concern, so by offering deep discount prices, it’s definitely going to get a lot of attention from online buyers,” affirmed Heather Dougherty, an online analyst with Jupiter Research, a unit of New York City-based Jupiter Media Metrix.
So, how does it feel to be perceived as an e-tail bottom feeder? Byrne has no complaints. “It doesn’t bother me at all,” he said. “We have a machine, and at one end we feed into it the misfortunes and the mistakes of retailers, and what spits out is fantastic consumer savings. In the past, these products have always been filtered to the consumer through so many layers, that consumers couldn’t see all the benefits. We’re connecting directly to the consumer.”
He also has little sympathy for the misfortunes of those caught up in the frenzy of a much-hyped, yet flawed, business model. “So much of the new economy was rubbish, and anyone with retail experience knew it,” Byrne related. “A year from now, people will be saying ‘How did we ever think the Internet was made for retail?’”
Still, while much has been made of Overstock.com’s success being built on the failure of dotcoms, that’s really only part of the story — and a fairly small one at that. In fact, dotcom inventory represents only about 20% of the firm’s business, while 80% represents closeout merchandise and deals with manufacturers. And that, say analysts, is a healthy ratio that’s likely to keep Byrne in business for some time to come.
“They would be crazy to bet the farm on only gaining access to failed dotcoms,” noted Dougherty. “So, they need to make sure they have a diversified number of suppliers, whether they’re going through distributors or manufacturers. Because it’s a great outlet for retailers and manufacturers to unload inventory, without putting it in their own store or on their own site, and possibly diluting their brand or seeming like an outlet store. It gives them a third party to turn to.”
Of course, for any liquidator, selection and availability are always issues. No consumer likes to be disappointed too often, even with the added lure of low prices. Said Dougherty, “People are going to these sites knowing that depth of selection is not the case; if they’re a TJ Maxx customer, they’re used to it. But if you’re out of inventory on a consistent basis, you’re going to turn people off.”
“It’s a fair point, but I view it as quid pro quo,” said Byrne. “If we put something out today at a fantastic price, it will be gone. So it’s a trade-off; it’s the nature of closeout buying.”
One way Overstock.com works around that problem is by keeping a certain number of desirable products, in limited models, in stock at all times. “For example, we always at all times have a couple of low, medium and high-end handheld video cameras,” noted Byrne. “We won’t be like Buy.com, where they have all models at all times, but we’ll always have something available.”
Free shipping, however, one of the firm’s initial hallmark perks, was a costly option that it had to change. Byrne said the policy has just evolved to a flat $3.95 fee for all orders. And while consumers might be disappointed at the change, analysts don’t expect them to stop shopping because of it.
“Clearly, you cannot ship all those big-screen TVs free all the time — that’s going to eat up the margins,” noted Dougherty. “And customers, although they love free shipping, are getting used to the fact that no one’s giving it away for free.”
Overstock.com’s customers are 75% female, age 35 to 50, highly educated, with an above average household income. “The typical Internet shopper has a $50,000 household income; ours has $80,000,” noted Byrne.
Most products on the site are sold at 10% below wholesale. “If a jeweler buys something for $100, they mark it up to $300,” related Byrne. “We buy the same stuff at maybe $70, and sell it at $95. You’re paying less than a jeweler pays.”
There are currently about 5,000 items on the site; about 150 to 200 are added each day. The average product is available for about 30 days; last year, products lasted about 100 days. The average ticket is $120, up from $40 over a year ago. The firm’s return rate averaged just 8% last year.
“If you get your order in by 3 p.m. today, it’s out by 4 p.m.,” said Byrne. “We’re fanatics about customer service. As a result, our customers become our marketing department.”
And the site keeps expanding into new areas. In December, Overstock.com partnered with GTC Telecom to offer low rates on long-distance and ISP services. Most recently, it ventured into travel with airline and hotel reservations. Future plans include expanding more heavily into brand-name apparel.
“This whole business of discount overstock selling is a fine art of intuition, luck and chutzpah,” said Lubieniecki. “You’ve got to have a little bit of all those things if you want to succeed.”
But Byrne believes the site’s success can be attributed to something more basic: remembering the customer. “At the end of the day,” he said, “the average Internet shopper makes a purchase and then tells 12 people about her experience, positive or negative. We just focus on getting it right.”
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