Technology

A "Behind-the-Scenes" E-Commerce Power


Michael Rubin was a serial entrepreneur before the term was in vogue -- or perhaps even invented. In 1985, at the age of 13, he opened his first business, a ski-tuning shop, in his parents' basement. Within a year, he had pocketed $25,000, which he used to rent space in a suburban mall near his home outside Philadelphia. The store sounded like a 14-year-old's business -- he named it Mike's Ski Shop -- but it performed as well or better than some established retailers. By its first anniversary, it had rung up $125,000 in sales.

Since then, Rubin has owned and sold a chain of sporting-goods shops, a distributor that bought and sold excess sports inventory, and a 40% stake in Ryka, a women's footwear manufacturer that publicly traded at that time. "Mike always had a business acumen that was further advanced than his age," says Dennis Waseleski, who financed Rubin's early businesses -- and remembers Rubin calling him from his car to cut deals between classes.

Rubin's astonishing drive continues to win him success, this time in the challenging world of e-commerce. His latest venture, GSI Commerce (GSIC), in King of Prussia, Pa., handles e-commerce operations for a variety of retailers including Sports Authority (TSA), Modells, Reebok (RBK), NASCAR, Estee Lauder (EL), Palm (PSRC), Ace Hardware, and Linens 'n Things (LIN).

Though the outfit isn't yet consistently profitable, its revenues are growing steadily. GSI expects sales of between $228 million and $234 million this year, up from $172 million last year. Rubin projects a net profit for this year's fourth quarter and for all of 2004.

MUTUAL BENEFITS. For GSI's customers, outsourcing their commerce Web sites is an attractive proposition for two reasons: It relieves them of the burden of building and maintaining costly infrastructure. And because GSI bears all the costs, a client's e-commerce operations can be profitable from day one. GSI, in turn, avoids spending a penny on advertising and marketing. The retailers take care of that.

Being in the e-commerce big leagues means taking on the toughest competitors, namely Amazon (AMZN). Characteristically, Rubin isn't cowed. In fact, at 31, he's as brash and relentlessly optimistic as ever. Maybe he couldn't sell ice to Eskimos, but no doubt he'd try. On Nov. 18, BusinessWeek Online technology reporter Jane Black spoke to Rubin about why he believes outsourcing is the future of e-commerce, and how GSI can beat Amazon at its own game. Here are edited excerpts of that conversation:

Q: Is outsourcing the future? As online sales become a growing part of doing business, why would companies want to cede control?

A: For most businesses today, only 2% to 3% of sales are online. So strategically, it's important -- but it's clearly a secondary initiative. You can't focus 90% of your time on 2% or 3% of your business.

We try to put the types of things [customers] need to have control of in their hands. Some clients do the [Web site] design on their own, others use us to do it. But when it comes to investment in technology, we take the lead. We've invested $100 million and continue to invest. None of our partners could make that kind of investment. Outsourcing lets them leverage our investment.

Q: How is your service different than that of Amazon, the e-commerce 800 pound gorilla? What do you offer that they can't?

A: The difference is vision. Our business was built around outsourcing. Amazon, on the other hand, has had to transition to an outsourcing model, which is difficult. If you go to the Toys 'R' Us (TOY) site, it looks like Amazon. If you go to our partners' sites, they reflect their brand, look, and feel.

It's not only the interface. When you order something from Toys 'R' Us, it comes in an Amazon box. When you get a box from Linens 'n Things, it comes in a Linens 'n Things package.

For Amazon, there's always tension between its consumer business and the customer's business. We consciously don't want to build our brand. We're a B2B player. We're happy to be behind the scenes when it comes to consumers. In the e-commerce space, people know GSI. The more than 10 companies we've signed up over the last year have chosen us over Amazon because they want to work with a company whose priority is making their business the most successful -- not someone else's.

Q: What's your business model?

A: Traditionally, outsourcers charge per box shipped or per phone call answered. But that structure leads to bad service -- if you get paid per phone call, it's in your interest to make sure people call back more than once. We get paid on commission -- which grows as gross sales rise. The key is to have a vested interest in our partners' success.

We also don't work with smaller businesses. Our platform is too customized for their needs. Take Linens 'n Things. We launched their Web site, which includes an integrated bridal registry, so the database of what has been purchased is up to date in the store and online; an instant ordering system, so that if an item is out of stock in the store, it can be automatically ordered online; a private-label credit card; and gift cards.

We also integrate with offline marketing. So for example, in the sporting-goods business, advertising circulars [that come in Sunday papers] are important. When an ad runs, we make sure that we have all the products they're selling and that the offers are consistent. We also help customers such as NASCAR support their catalog business by providing highly trained call-center specialists.

Compare that to Amazon, where it's hard to even find a phone number. For a retailer that wants a multichannel offering, having someone who can do it all for them is very important.

Q: Still, you're not profitable -- yet.

A: We will be in fourth quarter of this year and for the full year next year. We could have been sooner, but we made a strategic choice to invest heavily in the business. We have $50 million in cash. We own all our infrastructure and our fulfillment centers. Last year, we bought a fulfillment center, expanded it by 50%, and now it's reaching capacity.

We're also expanding the categories we serve. In 2001, fully 100% of our clients were sporting-goods companies. Today, they're roughly 40% of sales -- even though we announced a 49% increase in sports revenues for PERIODTK, year-over-year. Sports is growing, but as a part of the total business, it's dropping.

The categories I like today include fitness, beauty, home, electronics, and entertainment. The reason I like them is that they offer higher average orders [than books and music], which translate to a higher profit margin. Our average order is between $90 and $100. Amazon's is probably $35 to $40. For Amazon, that's great because they have scale. Ours is a different business.


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