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I Way Bumps


Business Week e.biz -- Special Report: E-Tailing

I-Way Bumps

Many e-tailers make glaringly similar mistakes

Pity the poor e-tailers. After two years as the darlings of Wall Street, it looks like their turbulent romance with investors is little more than puppy love. But don't cry too hard; the courtship's failure is due as much to the young dot-coms' mistakes as it is to the fickle flirtations of Wall Street wolves. Besides, there are lessons to be learned from those failures--not to mention the recoveries of e-tailers that came close to going under.

What's the difference between success and failure? Often, it's the skill with which entrepreneurs negotiate early obstacles, and how quickly they reconfigure their business plans. When hordes of competitors arrived, GetThere.com, which develops and hosts corporate travel sites, found that ignoring marketing in favor of technology cost it dearly. Low-price retailer buy.com Inc. got caught up in bargain fever, selling products so cheaply it couldn't find its way to profitability. And Cook Express Inc., which aimed to sell gourmet meals over the Net, got sucked up in an idea that--well, didn't have enough appeal to consumers. Each company encountered different obstacles. But the mistakes they made were remarkably similar.

If there was a solution, it often lay in management. GetThere hired experienced execs to engineer its shift from consumers to business customers. Buy.com brought in new leaders to overhaul its back-end operations and increase customer satisfaction. The importance of having experienced team members can't be overestimated. "You can have a great idea and business plan, but if you don't have the right management in place, VCs won't invest," says Peter McMillan, a private angel investor in Los Angeles.

Here are the lessons to be gleaned from three companies who hit speed bumps on the Information Highway.GetThere.com. After a few calculations on the back of a napkin in 1994, Dan Whaley and Bruce Yoxsimer decided to launch an online travel agency. They would let consumers compare airfares and hotel rates and make reservations, while travel agencies would handle ticket distribution. "We figured if we signed up 10% of the agencies and charged $5 a pop in commissions, we'd be gazillionaires," Whaley says. "We were pretty unsophisticated."

With $10,000 in savings and a pile of credit-card debt, they built the Internet Travel Network, now called GetThere.com. When it launched in 1995, ITN was the first travel-reservations site on the Web. Whaley and Yoxsimer poured their resources into technology and spent almost nothing on marketing. They were first, so customers had to come to them, right?

That calculation turned out to be even further off the mark than their napkin-back market projections. In 1996, two competitors hit the Web: Travelocity.com Inc. and Expedia Inc. Both spent heavily on ads, driving traffic away from ITN.

Almost by accident, Whaley and Yoxsimer found a way out--switching from consumers to businesses. They got the idea when Texas Instruments Inc. hired ITN to streamline its corporate travel planning. Suddenly, ITN had instant access to thousands of frequent travelers--no advertising necessary. "We could make one deal and get 100,000 customers," Whaley says. "It was a real eye-opener."

And profitable. The company earns $8 to $10 per transaction--roughly what the airlines pay consumer sites--but the difference is in the volume of customers and what it takes to keep them. Consumer sites don't garner much loyalty, so they have to buy lots of ads to keep a steady stream of customers clicking in.

Still, Whaley and Yoxsimer kept courting consumers while wooing corporate accounts. And neither partner was experienced enough to guide the company: Whaley was a computer programmer, and Yoxsimer a former travel-agency owner. They didn't hire new management until their financial backers insisted on it. "We came up with this idea and launched it in my living room," he says. "It's difficult to see that go away."

Finally, in late 1998, they hired a new CEO, Gadi Maier, who had put in 20 years at Cisco Systems Inc., Oracle Corp., and elsewhere. Within months, the company changed its name to GetThere.com, went public, and formed a partnership with American Express Co.--which acquired ITN and agreed to market GetThere to its corporate customers. "If we didn't have AmEx on board, they could be a powerful adversary," Maier says.

Today, GetThere hosts some 100 corporate travel sites, up from 20 a year ago. Travel transactions jumped 73%, to 1.4 million, last year. Revenues more than doubled, to $15.5 million, while GetThere's net loss grew by 82%, to $24.8 million, due to costs associated with the shift in strategy.

It's not exactly the scenario the founders sketched out six years ago. But booking business travel will likely prove more profitable than spending millions to court flaky leisure travelers in a crowded market.buy.com. The challenge Gregory J. Hawkins faced in turning around e-tailer buy.com was clear the moment the new CEO walked into his office. On his desk was a pile of angry letters from customers carping about everything from falsely priced products to unanswered e-mail. On his computer screen: links to more than a half-dozen buy.com hate sites. Hawkins' reaction? He invited unhappy consumers to a forum at buy's head office in Aliso Viejo, Calif., all expenses paid. "It was the best way for me to understand the problems," Hawkins says.

University of Washington student Rob Cole accepted--grudgingly. "I thought it would be a lot of corporate spin," says Cole, who built a complaint site after he was charged for a computer monitor that never shipped. Meeting Hawkins softened his skepticism. "He seemed to be making a decent effort," Cole says.

Cole doesn't know the half of it. In the year since buy.com's board brought Hawkins in to replace founder Scott Blum, the new CEO has launched a top-to-bottom cleanup. Not that buy.com--which started out selling computers and later expanded into electronics, books, videos, and more--lacked sales. The company racked up $125 million in revenues in its first year, thanks to a massive ad campaign that branded buy as a low-price leader. Problem was, Blum didn't have the infrastructure to support all the customers, and his rock-bottom pricing left little hope of profits. "The company was mature at the top line, and immature everywhere else," Hawkins says.

Hawkins has focused on buy.com's most prominent feature: prices. The company's original plan had been to charge the lowest prices on the Web and make it up by selling ads. It would keep costs down by outsourcing fulfillment and customer service. Gross margins for 1999 were negative 1.2%--far shy of the 10% to 20% Hawkins felt buy.com needed to stay afloat. So Hawkins began quietly raising prices. He still sells a handful of key products below cost, but hopes customers attracted by the bargains will toss a few higher-priced items into their baskets.

Is it working? The site now has 300 advertisers, up from 100 a year ago. Gross margins soared to 4.3% in the first quarter. Revenues in the quarter grew 92%, to $207.6 million, from a year earlier. Still, buy.com's loss widened by 70%, to $32.8 million, as Hawkins ramped up spending to build the infrastructure the company needs.

At least one customer is giving buy.com a second chance. After meeting with Hawkins, student Cole took down his site. And a few weeks ago he bought a DVD on buy.com. A green dot indicated it would ship in two days. It hasn't arrived. "Their customer service still needs some work," Cole says. Will customers--not to mention investors--hang in there while Hawkins completes his makeover? The site's survival depends on it.Cook Express. Imagine a home-cooked dinner of filet mignon deglazed with red wine and rosemary, garnished with roasted shallots and Kalamata olives. Now imagine the ingredients arriving at your doorstep, already seasoned and chopped, leaving you to simply assemble and saute away. "My wife and I always loved cooking together, but we never had time," says Darby Williams, former CEO of Cook Express Inc. "I thought if the hard part was done and all I had to do was the cooking and presentation, wouldn't that be cool?"

Apparently not that cool. Four years later, Williams is in bankruptcy court. San Francisco-based Cook Express--which delivered uncooked gourmet meals ordered over the Web--is in Chapter 7 liquidation, facing $2 million in debt. Williams' stumble can be traced to missteps in fund-raising, staffing, and marketing.

Williams launched Cook Express in 1997 after bootstrapping $700,000 in capital, mostly from angel investors. He poured the cash into developing and testing prototype meals. In the summer of 1998, he raised another $3 million and launched an early version of the site, delivering meals in the Bay Area. Today, Williams says he should have tried to raise more money, but he was blinded by a desire to hold onto all the equity he could. "What's most important is to maximize the probability of success, not your percentage of ownership," he says. "I found it hard to do."

That left him short when it came to building the business. He set aside just $600,000 for advertising, figuring word-of-mouth would drive hungry visitors to his site. Venture capitalists didn't bite--which became clear last fall on Williams' third quest for backing. By then, Cook Express had won about 7,000 customers in the Bay area, and Williams was ready for a national rollout.

More than a dozen VCs turned him down, all citing the same concern: It would take millions in advertising to convince customers to skip dinner at a restaurant and order from Cook Express instead. Another problem may have swayed investors: Williams had no background in food. It wasn't until November, 1998, that the company hired Meredith Taylor, a former executive at food-service chain operator American Restaurant Group Inc. In a final effort to increase the company's credibility last July, the board promoted Taylor to CEO and made Williams chairman. Too late.

In December, Cook Express ran out of money and shut its doors for good. For Williams, one lesson stands out: Just because a product or service can be provided on the Web doesn't mean it should be. "Instead of anchoring to [the Web], you have to anchor to the business you're in and make sure you understand the factors it takes to succeed," he says. "I didn't have that." With Cook Express behind him, Williams says he might open a consultancy to help other dot-coms avoid the pitfalls he experienced. But first he's taking a few months off to regroup--and take cooking lessons.By Arlene WeintraubReturn to top


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