BUSINESSWEEK ONLINE : NOVEMBER 20, 2000 ISSUE
BUSINESS WEEK E.BIZ -- UPSTARTS

Keep the Excess Moving
TradeOut's online exchange deals in companies' surplus inventory

Photo by Robin G. Thomas
George Samenuk has TradeOut scooting ahead
The White Elephant retail stores in rural Virginia live and die on other companies' cast-offs. Started as a scrappy consignment shop eight years ago, the enterprise has expanded into a chain of four stores around historic Middleburg, Va., selling a wide array of used and surplus down comforters, luggage, jewelry, furniture, and clothing. But success put store owners Cynthia and Leslie Broockman on a buying treadmill, attending distant trade shows and constantly faxing and phoning middlemen--an exhausting process.

That's why an advertisement in a gift-dealer newsletter last fall piqued their interest in TradeOut Inc., an online exchange that deals in excess inventory. After two months of browsing the site, the Broockmans took the plunge, ordering sterling silver jewelry. Since then, they have bought about $90,000 in goods, including OshKosh B'Gosh Inc. ( GOSHA) boys' apparel and Nicole Miller women's clothing, and plan to buy about 20% of their products through TradeOut by year-end. Buying direct from manufacturers on TradeOut.com lets White Elephant cut out other middlemen, get prices to 60% below usual wholesale, and stock stores more efficiently. ''The traditional way of buying is tiresome,'' says Cynthia Broockman.

That's exactly how TradeOut hopes other buyers will feel. The trading exchange, launched 16 months ago, is trying to carve out a space for itself as the eBay Inc. ( EBAY) of business buying and selling. Instead of Pez dispensers and baseball cards, TradeOut gets companies, ranging from Stanley Works ( SWK) to General Electric Co. ( GE), to post listings for trucks, electric generators, and lathes. Indeed, eBay, which invested in TradeOut a year ago, provides an attractive model: By using the Net to bring together far-flung consumers and small businesses, eBay quickly became one of the very few profitable dot-coms. Boasts TradeOut Chief Executive George Samenuk: ''We have an exchange with the same characteristics as eBay.''

Except the opportunity is even bigger. At almost $400 billion in annual sales, the surplus-goods market is nearly five times the size of eBay's original collectibles market. By unloading old equipment from offices, warehouses, and factories, as well as inventory that didn't sell, companies ''avoid the disaster of excess capacity,'' says analyst Brett Tarr of researcher Jupiter Communications Inc.

And like eBay, TradeOut offers companies a way to dispose of their surplus much more efficiently. ''Every company has some idle assets, but they have to send out faxes to let liquidators or customers know,'' says Michael Petti, program manager for excess and obsolete sales at Stanley, a TradeOut investor that uses the service to sell everything from saws to storage containers. ''If we are going to be Internet-savvy, we don't want to be selling by faxes.''

Idle assets. TradeOut founder Brin McCagg wasn't thinking about crates of unsold saws when he set out in late 1997 to start another company. An avowed serial entrepreneur, the New York City native founded his first company, an industrial-waste recycling company, immediately after graduating from the University of Pennsylvania's Wharton School in 1990. He left in late 1997, and soon became intrigued by the notion of making supply chains and product returns more efficient.

Then, during the summer of 1998, he got a flash of inspiration from eBay's IPO prospectus--quickly realizing its model was perfect for the corporate market, too. ''eBay was providing a liquid marketplace for the junk that's in people's garages,'' says McCagg. ''But the junk that is in businesses' warehouses and offices in the form of surplus inventory or idle assets is much greater, and the market is even more inefficient.'' McCagg started noodling with a business plan and raised money that fall, founding the company in January 1999. TradeOut went live six months later and in early 2000 brought in more experienced managers from IBM as chief executive and chief financial officers.

Now, thanks to signing up partners like GE, Stanley, and Sara Lee Corp. ( SLE) this year, TradeOut is gaining traction. It currently sells seven types of products--from apparel to metalworking machinery, automotive gear, and commercial transportation. From a humble showing last year of $15 million in gross merchandise sales and net revenues of $830,000, TradeOut so far this year has conducted $100 million in sales, bringing its net revenues to about $5 million. Although it's still unprofitable, losing $18.8 million last year, more of its listings are turning into sales: In the third quarter, it sold about 19% of the items listed, up from 5% a year ago.

More visitors to the site, which now lists $1.1 billion worth of items, are turning into buyers, too. The number of purchasers has risen to 3,200 from 350 at the end of last year. That's likely to spike further thanks to a two-month-old cross-promotion program with eBay. By placing links to TradeOut on its site and and promoting the service through e-mails and newsletters, eBay aims to provide its ''Power Sellers''--about 100,000 individuals who run their businesses solely on eBay--with a way to buy in bulk and then sell the items on eBay. So far, about 7,000 eBay sellers have signed up on TradeOut, though Jupiter's Tarr wonders whether surplus suppliers will like their products being sold as excess.

Indeed, there's no telling just yet whether TradeOut can keep the momentum going. Some 175 other companies are piling into the surplus market with a bunch of approaches. Auctioneer DoveBid Inc. is matching TradeOut's focus on multiple industries. Others, such as RetailExchange.com Inc. in the apparel market, are going deep in single industries. Meanwhile, more established services such as industrial auctioneer FreeMarkets Inc. ( FMKT) are adding excess-inventory marts to their lineup. Says Len Prokopets, senior manager of business-to-business services at Deloitte Consulting: ''It's very difficult to predict which model will be the winner.''

Consolidation already has lurched into overdrive. Exchanges ranging from the automation-products auction house IndustrialVortex to the industrial-equipment mart Equipp.com are disappearing or selling out to other firms. Deloitte says the number of company launches plummeted to 15 in June, from 178 in January, while the number of failed or merged marketplaces has gone from 2 to 15 in the same time period.

Photo by Danuta Otfonowski
Leslie and Cynthia Brockman of White Elephant save time by purchasing surplus items from TradeOut
To avoid the shakeout, TradeOut has avoided betting too big at the outset. Instead, it's building out a few industry markets by courting key selling partners in each. In March, for instance, TradeOut signed up GE and created two new markets centered around the assets GE wanted to sell. That prompted GE Equity and six other GE units to invest $15 million in TradeOut. GE, which annually has billions in excess inventory, is selling off-lease vehicle inventory such as cars, trucks, and trailers through TradeOut.

Bringing on crucial partners like that takes a lot of time, though--and time is in short supply on the Internet. Take TradeOut's deal with Penske Corp., which has a fleet of 152,000 trucks. Before selling online, the company typically sold the 18,000 trucks it replaces annually through its own site, as well as through wholesalers and at its 500 locations nationwide. In April, teams from Penske and TradeOut met to plot out how the partnership would work. From a small pilot in the Northeast of 150 trucks in late June, the company launched nationwide in July and then began promoting more heavily in August. In mid-October, it finally posted all of its currently available inventory, or about 1,500 trucks.

That extensive up-front work has paid off. So far, Penske has sold 590 vehicles for about $6.5 million and cut 10 days out of a buying cycle of up to 45 days. Even more important, it has reached new buyers. When Jeff Lepak, owner of Louis V. Lepak Trucking in Oklahoma City, discovered in September that he could buy used Penske trucks on TradeOut, he made a quick decision to replace his whole fleet with 60 trucks. ''We had been looking for years to do this, and now we could because of the cost-effectiveness,'' Lepak says.

Even so, TradeOut can't afford to gloat. Expansion capital is now scarce, even in B2B e-commerce. TradeOut filed to go public in March but quickly shelved the plan after dot-com stocks tanked last April. It has raised some $80 million to date. Although it's spending $9 million a quarter, the company aims to turn profitable by the end of next year. Even so, it's in the process of raising more money as a cushion, says CFO James Mooney.

Even more important, TradeOut is pushing to broaden its revenue streams. It's considering expanding into sporting goods, consumer electronics, and toys, and it recently started building private exchanges for some corporations. For now, it's still relying largely on charging bimonthly listing fees and a 5% commission on sales.

Will that strategy be enough to make TradeOut a major player? It better, since there won't be many of them. ''There will be three or four major exchanges and then a lot of room for niche players,'' says Janet Suleski, a senior analyst at AMR Research Inc. Some rivals already look like winners: FreeMarkets has established relationships with more than 80 companies, including United Technologies Corp. ( UTX) and Visteon Corp. ( VC) Still, says Suleski, TradeOut has many of the key partnerships in place to join the major leagues. If it can keep those partners and their customers happy, it may avoid becoming yet another surplus dot-com.

By HEATHER GREEN

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EBIZ Contents for issue dated Nov. 20, 2000


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