Cash-strapped Buy.com to Close Australian Operation

After braking international expansion and seeing the company's share price plunge to the below-US$1 level, Buy.com Inc. Chief Executive Officer Greg Hawkins is banking on the company's virtual fulfillment and distribution model to pull it into profitability and survive the dot-com shakeout.

"Logistics don't make for sexy reading," Hawkins said Wednesday in a keynote address here at the eBusiness Conference and Expo. But Buy.com's supply chain and distribution model -- in which it owns no inventory -- will be the key to not only its survival but to its rise as a leading electronic-commerce site, he said.

Hawkins remains optimistic despite the fact that company share prices have been devastated, trading Wednesday morning at below US$1, down from a 52-week high of $35.45. The disruption in capital markets has also forced Buy.com to reduce the amount of money it will spend on marketing and building a brand name, close its Australian operations, and put a halt to plans to expand beyond the U.K. in Europe, Hawkins said.

One glimmer of hope -- Buy.com surpassed Amazon.com Inc., Best Buy Co. Inc. and Egghead.com Inc. as the most popular online destination among buyers of electronics on the Web, according to the November PowerRankings from Forrester Research Inc. in Cambridge, Massachusetts.

The company has built up its yearly revenue run rate to US$800 million. For the third quarter ending Sept. 30, pro forma net loss per share decreased 11 percent to 16 cents from 18 cents in the second quarter. Overall gross margin improved to 6.7 percent from 6.1 percent in the second quarter (the company went public in February).

However, the company, in the current market climate, is under great pressure to step up its drive toward profitability, Hawkins acknowledged. This is tough to do when the company is hampered in its ability to spend ad dollars, Hawkins also conceded. Other dot-coms are in the same boat.

"You'll be seeing a lot less advertising (for dot-coms) on TV this holiday," Hawkins said.

But brand recognition alone can't guarantee longevity, Hawkins said. Pointing to the failure of Pets.com, Hawkins noted that its "cute" sock puppet dog had become recognizable by consumers but "here we learned that brand alone is not enough to afford a sustainable business model."

Pet.com's gross margins were not enough to maintain a tough investor market when it had to handle large distribution costs for heavy pet food bags, he said. When capital ran out and profitability was nowhere in sight, it had to sell out its brand name.

Buy.com itself owns no warehouses, no trucks and no product inventory, relying instead on partnerships with premier manufacturers, distributors and third-party merchandisers for Web order fulfillment. Ingram Micro Inc., for example, is a Buy.com channel partner.

"Why build it if you can tap into it," Hawkins said. By linking its Web-based retail front end tightly to distributors and manufacturers, sharing purchase information with them to help them improve their own forecasting, Buy.com has created a virtual retail organization with half the fulfillment costs of its competitors, Hawkins said.

However, simply because Buy.com does not own the fulfilment infrastructure doesn't mean it can't worry about it.

"Just 'cause you don't own an asset doesn't mean you don't have to manage it as if you did," he said. "Integration and collaborative tools, when used in real-time environment, can fundamentally change how business is conducted."

He calls this way of doing business "zero drag commerce."

"Taking orders over the Web is no longer a differentiator," he said. "It's one thing to take an order and another to coordinate real-time information on that order, across a company's supply chain," in order to let business partners adjust distribution, logistics and inventory accordingly.

This tight linking of retail front end to fulfillment will separate the survivors from the also-rans, Hawkins said, adding that in a similar time in the evolution of the auto industry, from 1912 to 1916, the number of car makers dropped from 130 to 18.

The traditional supply chain cannot support retailers in the age of the Web, "in a culture characterized by immediate gratification," Hawkins said.

Customers want to see multiple products, compare them, compare prices, order and receive their order almost instantly, he said. A company that has aging inventory sitting in warehouses cannot compete in this environment.

Hawkins said (without citing the source) that companies in the U.S. had US$1.37 trillion in inventory in 1998, and 40 percent of the carrying costs of the stocks were involved in the obsolescence of the products as they sat in inventory, resulting in distribution and sale of the products at less than optimal prices.

The bottom line for Hawkins is that he is having to accelerate his business model, in terms of achieving gross margin goals and profitability, by 18 months, ahead of schedule in the company's original plan in February.

"How do we do that? Good question," he said, laughing as he spoke to the IDG News Service after his keynote. With less money to spend, marketing and sales will suffer, but Hawkins hopes to make it up on back-end efficiencies.

"We'll have to sacrifice a bit of top line (revenue), and achieve margin goals," he said. "It's also a matter of fine tuning, twisting dials here and there, putting pressure on some areas without squeezing too much," he said.

Showgoers in the audience offered cautious optimism in response to Hawkins' message.

"I like what he's trying to do, it makes sense," said Kenneth Estridge, president of Enterprise Development Group Inc., a consultancy in Newton, Massachusetts. "But you have to make sure you work with world-class partners, because you're depending on them."http://www.buy.com

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