Founder Rescues Foundering Buy.com

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Buy.com Inc., until last year the No. 2 Internet-only retailer after Amazon.com Inc., has managed for now to save itself by the skin of its teeth.


To avert going belly-up, the Aliso Viejo, CA, retailer has agreed to sell itself for $23 million to founder Scott Blum's SB Acquisition Inc. Blum will pay 17 cents for each share of the company he once ran, which last year posted revenue of $787.7 million. There are nearly 136 million shares outstanding.


In yet another lifeline, SB Acquisition has agreed to immediately loan buy.com $9 million in interim financing.


"The transaction is structured as a reverse merger and will be accounted for under the purchase method of accounting," a buy.com statement said. "The boards of both companies have unanimously approved the transaction and expect it to close prior to November 30, 2001."


Calls to the company were not returned by deadline.


Styling itself as "The Internet Superstore," buy.com claims to serve nearly 4 million customers. It offers 1 million items in categories like electronics, computer hardware and software, office supplies, books and wireless products and services.


Despite its customer base, offerings and $225 million in venture capital from Japan's Softbank, the 4-year-old buy.com has not turned a profit. Poor sales in the 2000 holiday season hit it hard.


Starting in February, product lines were trimmed to eliminate golf and sports items. This was done to move it away from its low-price model in order to raise margins, a move buy.com then acknowledged would cost it much business in the year ahead.


Around that time, international Web sites were shut as yet another measure of austerity. The British operations were sold to supermarket owner John Lewis, while the Canadian store and an Australian joint venture were folded.


Then, buy.com CEO Gregory Hawkins and chief financial officer Mitch Hill resigned Feb. 14. Two weeks later, it was announced that more than half the staff would be laid off. Last week, another 50 positions, or 40 percent of the work force, were eliminated.


The downward spiral continued. The company recorded an April-through-June net loss of $5.7 million on sales of $94.9 million. Net loss in the same second quarter of 2000 was $33.6 million on sales of $193.2 million.


The tech-heavy Nasdaq index Aug. 14 delisted its stock. It now expects to be quoted on the OTC Bulletin Board. This is the same company whose market value rose to $3 billion on Feb. 7, 2000, its first day of trading on the Nasdaq. That IPO raised $209 million. And its shares once traded for $35.


The retailer gained fame for its initial promise to sell products below cost, basically selling a dollar for 85 cents, as a media report once attributed to the company founder said. The low prices were meant to attract traffic and build a brand around that concept.


"What they did, which was smart, was the idea of building visitors so that you have multiple streams of revenue, both advertising and sales," said Angela Kapp, president of Angela Kapp Consulting, New York, and former head of Estee Lauder's online efforts. "However, they forgot the No. 1 business principle, which is, you've always got to have margin. And having negative gross margins is not a viable long-term model. It is not going to work. It doesn't matter how you slice."


But, as buy.com's and countless online retailers' difficulties showed, price alone is not a draw. Amazon does not offer the lowest price, but gains business through a model based on engendering loyalty through customer service. The Seattle retailer also invests in technology.


Consumers are value-conscious to the extent of the brands they are shopping, Kapp said. In cosmetics, they will pay $20 for a Chanel lipstick instead of $5 for a Covergirl product. This is called affordable luxury, she said, where if you cannot afford the $3,000 Chanel bag, you at least can afford the $20 lipstick. But consumer thinking varies when it comes to valuing commodity or functional goods.


"[Price] is not a 100 percent driver in almost any consumer segment," Kapp said. "However, it's a much more stronger driver in certain markets like electronics than in markets like apparel. What buy.com has to do is say, 'What is our real customer segment here?' "


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