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The Perfect Internet Business

Garden.com is one of the hottest Internet companies around, but what's so special about it is how basic it is. Here's what you can learn from the secrets of this flowering Internet phenomenon.
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The secrets behind the flowering phenomenon of Garden.com

It wasn't the brainchild of a high-tech guru looking to build the Next Big Thing. It wasn't funded by Paul Allen, mentored by Steve Jobs, or midwifed by a big-name venture-capital firm fielding a management team with all the right stuff.

Yet in the world of E-commerce, where buzz can mean the difference between flight or failure, between busted initial-public-offering dreams or billion-dollar market capitalizations, Garden.com is the sexiest Web-based business on the virtual block. As this story went to press, Garden.com was readying an IPO estimated to raise about $57 million--on top of $51.5 million already raised privately. In fact, investors are pounding down the door, coughing up more money than the company knows what to do with. Last May alone, $22.5 million gushed in. "I kept arguing we didn't need more than $12 million," says Steven Dietz, a partner at Global Retail Partners, based in Los Angeles, and a member of Garden.com's board. "But there were a lot of good, quality people who wanted in on the deal."

Even after raising another $10.5 million, Dietz says, "there were a lot of people we had to say no to."

Four years ago few would have imagined how many investors would eventually say yes to Garden.com. That's when Lisa Sharples and her husband, Cliff, and their good friend Jamie O'Neill all upped and quit their jobs at Trilogy Software Inc., in Austin, where the three had worked for only 10 weeks. Cliff and Lisa, newly married, had just bought their first house. "The first thing we did was get really drunk," recalls Lisa.

On the morning after, the new partners gathered around a whiteboard in the Sharpleses' garage and began brainstorming a design for the perfect Internet business. For months they lived off O'Neill's Visa card and peanut-butter-and-jelly sandwiches. On Friday nights they would treat themselves to dinner at a local restaurant, the Iguana Grill, where margaritas salved the week's wounds. The founders' memories of that first summer are elemental. "It was hot, and we had no money," says Lisa.

But today what's hot is Garden.com--hotter than Austin in August--which is another way of saying that money's no longer a problem.

Why are people flinging so much capital at what appears to be yet one more cash-sucking E-commerce black hole? Maybe it's because the company stands out in a more-than-virtual way. It boasts more than 550,000 members, a figure that's growing by 300% a year. And Garden.com is the first Internet company to address America's most popular hobby: gardening, a $46.8-billion-a-year industry. That's more than twice the size of the book industry, which Internet sensation Amazon.com dominates.

What exactly have the creators of Garden.com wrought? Have they pulled off the stunt so many others are hungry to achieve: crafting the perfect Internet business? Is this the multibillion-dollar sure thing?

Behind the veil
On a sunny day in early spring, Garden.com's offices seem all but hidden from the world. The company is headquartered in a one-story brick building in downtown Austin, in a neighborhood of bungalows and gas stations. Inside the cramped and near-windowless space the light is pool-hall dim, optimal conditions for gazing at the computer screens to which Garden.com's employees seem tethered most every hour of the day. Jammed into one corner is Cliff, the company's CEO and president. In khakis rumpled just so, and with his golden retriever, Hamachi, camped beneath his desk, the open-faced Sharples is a walking Gap ad. He exudes the confidence required for anyone staking his fortunes to the maelstrom of the Net. Cyberspace, after all, is the great leveler. Just as it diminishes wisdom and elevates cant, the Internet turns most every product and service it touches into a commodity. It is the ultimate margin crusher.

Like most of its E-commerce brethren, Garden.com is nowhere near breakeven --and its founders coyly resist predicting when that day might arrive. "Breakeven will be when the market values break even," says Lisa Sharples.

Another business might not be able to get away with an answer like that--but it's a different world on the Internet. And building the perfect Internet business is what the founders of Garden.com have set out to do.

What united the three beyond an idolatrous worship of the new medium was a seminal course they had all taken at Northwestern University's Kellogg Graduate School of Management, in Evanston, Ill. Taught by professor Louis W. Stern, the course was called "The Policies in Marketing Channels." "There is no question that that was the most impactful course for me--by far," recalls Cliff (in true M.B.A.-speak).

What Stern taught his students was to distinguish the supply chain from the marketing channel. Supply chain refers to how a product moves from producer to end user, but marketing channel includes how the product is conceived by its maker and received by its user. As O'Neill puts it, the marketing channel amounts to "a distribution chain based around the customer's needs."

Stern preached that the most successful companies are those determined and talented enough that they dominate their marketing channels in a way that effectively blocks out all serious competition. Such companies become superbrands in and of themselves. When you shop at Wal-Mart, you don't just get great prices and good service, for instance; you also get the warm feeling that Sam is behind it.

Stern himself believes his course teaches a unique lesson. "It very much has a customer-focused, market-driven approach to establishing distribution channels," he says. "It's very rare when someone sits back and asks, 'How do consumers want to shop for the products and services they buy?" He adds that most companies are egotistical enough to think they know what the customer wants. They end up distracted by lesser concerns like logistics and benchmarking. "The notion of figuring out how to go to market through new channels that conflict or compete with existing ones sends people into cataclysmic states," says Stern. "There's an enormous push toward the status quo in business."

What excited the Sharpleses and O'Neill was their conviction that the Internet represented a potent new channel--exactly what Stern was talking about. In 1995 few people had grasped its potential. "We said, 'This is a medium that can provide a whole new set of services to the consumer," recalls O'Neill. "It was not just a way to distribute information more widely."

They had the strategy. Now all they needed was the right business.

The perfect industry
The three founders were looking for a fragmented market that they could consolidate before drawing the attention of another consolidator or category killer. "The idea was to find an industry where no one company had channel power," says Lisa. They had to be able to source quality products and get them to customers quickly and reliably. They had to build a brand name. To guarantee repeat business they had to build a community, which meant producing an unending flow of content for their Web site. Customers would flock to the site like coffee drinkers drawn to the familiar environs of the neighborhood Starbucks.

They had to hit a grand slam by creating the category and building the brand at the same time. And they had to do it quickly and with limited funds before a larger competitor took note and threw 10 times as much money into the niche.

While the founders searched for an appropriately fragmented industry, they also knew it could not be a commodity business. "We did not want to end up in a price war," recalls Lisa. The surest way to protect margins was to provide an abundance of useful information, which, they hoped, would build trust and a sense of community and create a willingness on the part of buyers to pay a premium. Finally, they needed a business with strong repeat-purchasing patterns. "We needed to be able to remarket to the consumer," says Lisa.

Throughout the long, hot summer, the names of various industries went up on the whiteboard, only to be erased once the partners started asking questions. One model they studied was that of Peapod, the Internet grocer, but they decided not to follow it, because food is a commodity business. They also looked at apparel but reasoned, "How much information do people really need when they buy a sweater?" according to Lisa.

One day, Lisa, who was interested in crafts, volunteered, "What about beads on-line?"

"No," came the reply.

Then, free-associating, she asked, "What about seeds on-line?"

"No."

"Wait a minute," she said. None of the three was an avid gardener, but Lisa had relatives who gardened. The idea felt right to her. She announced she was taking off for the University of Texas business-school library, where she embarked on three days of research on the gardening industry. She returned with enough information to combat the skepticism of the other two partners. Gardening, she reported, was at least a $40-billion-a-year business. It was highly fragmented; no player accounted for more than 1% of the market. There were few national brands--for good reason: you can't warehouse live plants. Gardening is a regional, if not local, phenomenon, tied to climate and soils. And yet gardeners are affluent and willing to pay widely varying prices for the same item, based on their perception of quality and the amount of expert advice being delivered.

Cliff and Jamie started to come around. They set up focus groups made up of family and friends. They found there was no one-stop shop for gardeners and no single reliable body of advice or information. Moreover, as Cliff puts it, "the supply chain was broken." Baby boomers had commandeered the hobby with a vengeance, but the industry had failed to change with the times. Most suppliers still operated as if gardening meant seeds arriving sometime in the spring and tomatoes being canned for winter. Yet gardening had become the new extreme sport for a graying generation. It was now about ordering ornamental fruit trees by mail and having them arrive, without fail, on Tuesday, because you were leaving on Wednesday on a three-day business trip.

Cliff refers to that cohort of high-octane, competitive gardeners as "the Pottery Barn generation"--people who are short on time, yet hungry for knowledge about how to do things in an artful way. "The interest is now about fashion, collection, and decoration," he says. "It's about designing your exterior space the way you would think about your interior space."

At the heart of the category

On a recent afternoon, in yet another grubby and windowless room, Garden.com's customer-service group is meeting. It's a motley yet earnest crew of 30 people. In peak season they collectively receive as many as 1,500 E-mail messages a day, and they respond to them all. "We stay away from the automatic response," says the group's manager, Kristen Herron.

The work, on the other hand, they cannot stay away from. The Customer Solutions Group is on-line and on the phones seven days a week from 7 a.m. to midnight. The Internet, if nothing else, has remade the workday into a thing without surcease.

Herron formerly worked at Nike as a logistics manager. She found her new job via the Internet. She listens as a staffer lectures about the care of roses. There follows a brief discussion of regulations concerning the shipping of plants from Texas sprayed with a certain pesticide. But the heart of the meeting--more basic to the gestalt of E-commerce--involves a fresh survey of newly registered customers. "It's got better demographic information and better source information," Herron tells the group, noting that one of the survey's purposes is to gauge the impact of a recent $10-million marketing effort.

If the company has one indispensable employee, it is probably Andy Martin, Garden.com's fourth partner after its three founders. In the early days he would have had trouble telling a daisy from a daylily, but he was not recruited for his horticultural expertise. Martin is Garden.com's chief technology officer, the true holder of the keys to the kingdom and the architect of the company's customer-service software. That software is so good at sifting information that a number of other E-commerce companies have sought to license it. Thus far, Garden.com has declined all bids.

Martin, tall and brainy, cuts an anomalous figure: an Englishman in Texan regalia of jeans and cowboy boots. Over lunch at a deli down the street from Garden.com's modest storefront, he turns the conversation to software issues, quickly ascending to an esoteric level. Yet the thrust of what he is saying is clear. "E-commerce is all about data mining," he says matter-of-factly. "With each click we retrieve 100 different pieces of information about you."

What Martin alludes to is the shadowy side of E-commerce--the loss of privacy for customers. Even a company as warm and fuzzy as Garden.com wields tremendous power, thanks to all the proprietary information it collects about each customer. In E-commerce the privacy issue is so delicate that it now carries its own happy-face label: personalization, the term for how Internet retailers are able to custom design their sites for each customer according to past buying patterns. As Lisa Sharples points out: "We now know what plants people have in their gardens. So we can tell them when to prune, when to divide them, when to fertilize them, and when to cover them." And with each of those advisories comes the chance to make another sale--and to find out just a little more about the buyer.

Because gardeners are so passionate about their hobby, Garden.com enjoys an advantage that an Internet giant like Amazon.com would envy. "I'd argue that one of [Amazon.com founder] Jeff Bezos's biggest challenges is how to make Amazon more of an emotional brand and less of a utility brand over time," says Internet retail consultant Kelly Mooney of Resource Marketing Inc. in Columbus, Ohio.

Because Garden.com hosts an information-rich Web site that also happens to sell 16,000 different items, the average visitor lingers at the site for half an hour at a time, says Mooney. That forges a strong "emotional connection" between customers and the company. "Garden.com has been very adept at pioneering emotion through the language and imagery they use," she says.

The emotional connection
Garden.com's ability to cozy up to its customers despite the cool barriers of cyberspace reflects the deliberate care and feeding of its brand. In fact, the company began with a gentler name, "Garden Escape," but the founders sought to change that to something more connotative of the Web. Still, they fretted about such a move, wondering if the techier "Garden.com" would put off gardeners.

The average visitor to Garden.com lingers because the site not only has visual appeal but also offers an array of features. Garden.com also produces a print magazine to complement its on-line magazine; both include columns by eight regional gardening writers. Editor-in-chief Doug Jimerson previously spent 18 years as an editor and writer at Better Homes and Gardens. Garden.com also has on-staff horticulturalists, as well as a landscape architect, who designs templates that customers can download free of charge. It claims to have one of the most extensive horticultural databases in the world, and it has a garden "doctor" and other experts hosting chat groups. Board member Steven Dietz of Global Retail Partners (which owns 12.5% of Garden.com) says, "People need a reason to go to a site beyond just buying something. With their content, there is a reason."

Mark Anderson, president of Strategic News Service, is an Internet-business analyst. "I worry that not enough scrutiny has been given to the basic question of how you create competitive barriers," he says. "In this economic landscape things get brutal fast. Companies selling things on the Net find themselves in downward price spirals which are frightening."

He says the only salvation is for a company to have "a strong brand and a good proprietary product" buttressed by information. "Anything which is information heavy does better on the Net," says Anderson. So far, Garden.com's strategy is exactly in tune with that view.

Best in class
Mark McGarrah, who runs the Austin ad agency McGarrah/Jessee Inc., is responsible for positioning--and polishing--the Garden.com brand. "We go out and experience the product with people. We want to see how gardening fits into their lives," he says. "Our strategic and creative teams actually get their hands in the dirt with them." McGarrah has found that gardeners are a passionate lot, deriving a lot of meaning from the creative outlet provided by their avocation.

In the founders of Garden.com, McGarrah discovered a passion of equal intensity--even if it is not for gardening per se. "I admire them for the zero-based approach they've taken," he says. "They sat down and defined the business parameters first: 'How can we build a national brand relatively quickly?' It's not from a love of gardening that they came to this."

Garden.com's founders are top-tier M.B.A.'s and technologists. Their passion is for marketing channels and the transformative power of the Internet. And they speak in the cool, value-neutral jargon of M.B.A.-dom, their conversation laced with references to "metrics," "the value proposition," and the need to be the industry's "first mover."

Cliff Sharples began college at a liberal-arts institution in Maine: Colby. But as the son of an electrical engineer, he soon discovered that he wanted something more technical. After first spending a semester at the National Outdoor Leadership School, he chose Carnegie Mellon University. It was there, in the mid 1980s, that Sharples first saw--and was captivated by--an early version of what would evolve into the Internet.

Jamie O'Neill had worked at gritty W.W. Grainger, a multibillion-dollar distributor of industrial products. He helped to develop a proprietary company network designed to tie together the suppliers and distributors of more than 5 million different industrial products. "That's very powerful in the customer's eyes when it's done right," says O'Neill.

Replicating what Grainger had done, but with gardening suppliers, was perhaps the key concept in the 80-page business plan that the founders dropped on the desk of venture capitalist John Thornton, general partner at Austin Ventures, in the late summer of 1995. What the plan articulated was this: Gardening was a highly fragmented industry. No distributor had ever sought to tie suppliers together nationwide--as had been done in so many other industries--because the industry mind-set resisted it. Besides, the technology to do so had theretofore not existed. But O'Neill reasoned that with the Internet established, the technology hurdle had been cleared. So if you could distribute drill bits and drywall sourced from a national supplier base, then why not asters and azaleas? After all, 10% of all plants sold were already purchased by mail order.

Garden.com's strategy was simple but very ambitious: find the best suppliers in each gardening category and sign them to exclusives. All of a supplier's on-line sales would go through Garden.com. In return, the company would not sign up any direct competitors of that supplier. The company and its suppliers would be tied together by a proprietary "extranet" integrated with the muscle of Federal Express.

O'Neill says the idea was to make it seem to the consumer as though everything came out of a warehouse in Texas, when, in fact, it was being drop-shipped from multiple locations around the country. "The power is in the idea of tying all these niche growers together into a virtual store," says O'Neill. "I got the Zen of that business model--and the customer reaction is awesome. A really well executed one-stop shop is an extremely powerful tool from the customer's standpoint."

And from the suppliers' as well, O'Neill adds. "Instead of going in and saying, 'You know, Mr. Grower, we demand x% gross margin,' we said, 'We'll spend all this money on marketing, on service calls, on finding new customers for you. Now, look at how much we save you by taking all this cost out, and we'll base gross margin on that. You can have an exclusive. In exchange, we are going to do a lot of work that needs to get done to make for a happy customer. We want a fair margin, but you will not spend a penny until we sell the first product."

Garden.com's kinder, gentler approach was a carrot to its suppliers. The company also brandished a stick. "They had to want to grow their business," says Lisa Sharples. "We have a high level of customer service the supplier has to adhere to."

The company also had, and still has, an offer-you-can't-refuse mind-set. "We have mutual exclusivity with our suppliers," says Sharples. "That means that if you don't talk to us, we will go to your competitor."

When Thornton first read the business plan, he was skeptical that the founders could pull it off. But he also saw the power of O'Neill's idea and was willing to make a preliminary bet on it. In October 1995 he gave the founders $20,000 to travel around and interview suppliers they had targeted. If they could sign up 5, he'd be happy. Cliff Sharples and O'Neill went out and talked to 12. Eleven signed up.

The one-to-one world
O'Neill and Sharples were their own best recruiters. "They are more than smart," says Gene Gage, the co-owner of Papa Geno's Herb Farm, near Lincoln, Nebr. "They have plenty of energy and a vision. They get the power of the Internet, which damn few people do."

The company has since signed up 75 such "strategic suppliers." Dietz labels this piece of the model a "tremendous" barrier to entry. "They have really created back-end distribution that's special," he says.

The strategy is really designed to pay off in multiple ways. It boosts the supplier's business, yet builds brand-name recognition for Garden.com as a one-stop shop for high-quality and good-value products. "We are not premium priced, we are quality priced," says O'Neill.

Garden.com's brand becomes a de facto seal of approval for all its suppliers' products. That's critical to the success of the company. A gardener who buys a bulb in October will pay a premium to ensure a healthy flower in the spring, O'Neill notes. "The quality of the plant material is incredibly important; most people don't realize that," he says. "It improves your chances of success. Otherwise, gardening can be a very frustrating hobby."

Meanwhile, by being able to tout its suppliers in all their regional and homespun quirkiness, Garden.com tones down its image as an Internet monolith. It passes as the agent for a constellation of hardworking small businesses with roots in their respective communities--which it is, but unlike those businesses it is a category killer in the making.

Gage says that he is routinely besieged by Internet entrepreneurs wanting to market his products on the Web. "Someone takes a shot at me nearly every day," he says. "Most of these guys don't know what they're talking about."

Garden.com, though, was different. After O'Neill visited him in Nebraska, Gage subsequently flew to Austin three times to ask hard questions of the partners, beginning with "How is this going to be different from all the other crap I've seen?"

The answer was clear and direct. "Number one, they were going after a new customer, the new American gardener," says Gage. "The person they described was pretty much my customer already--women 30 to 50, college educated, with no time to screw around going to every garden center on the weekend. She has four hours for gardening on Saturday and needs the stuff to arrive on Friday."

Gage adds that "the backroom stuff"--customer fulfillment--is the key to making his business hum. "Their ability to speed up and rationalize that process really helps." Garden.com has worked closely with Federal Express to develop a highly automated order-entry and fulfillment system that allows customers to track their own shipments. Gage boasts what he calls "the first greenhouse shipping operation designed around an Internet high-volume operation." And his business is on fire. He has just finished building a fifth new greenhouse. Garden.com will account for 60% of his total volume of sales this year and perhaps as much as 80% next year. "My own business is up 1,000% in the past two years, and the bulk of that is from Garden.com," he says.

That has put Gage, formerly a foundation executive and the CEO of two wholesale distribution companies in New York City, in a curious position. He is suddenly riding a bull of a business--like it or not. "I started this business so I wouldn't have to retire," he explains. "Now I'm working more than I ever have. I work 75-hour weeks, easy." His exclusive with Garden.com amounts to a two-year letter of intent from the company. The two parties have already discussed the ticklish situation of adding a second supplier--a would-be competitor--once Garden.com maxes out Gage. "My lawyer and accountant said I was nuts," he says, laughing.

In the meantime, "I've borrowed all the money I can in order to do this. I just spent $250,000 I wouldn't have ordinarily spent," Gage says. Asked if that money will improve his productivity, he replies: "It damn well better. If they slow down or peel off, I'm going to be struggling."

The price of success
Nobody at Garden.com plans to slow down. The prospects have always been too rosy. From the absolute beginning, "we were very confident, probably navely so," says O'Neill. "We felt that our convictions were really well based, and we put our minds to it. We were not scrounging around in the dark looking for cool ideas. We knew E-commerce was going to be huge. And when we hit on gardening, it felt so right."

"Cliff and Lisa are very optimistic. That optimism gives them confidence and allows them to succeed," echoes ad executive McGarrah. "This company has an incredible spirit of adventure. It's a place that seems very chaotic and feels very temporary. There's plastic lawn furniture in the conference room. Nothing is important to them except succeeding."

If confidence is the necessary seed of E-commerce success, then insight is the culture that allows the seed to grow. What Cliff Sharples saw was that Garden.com would belong to a second, and now just cresting, wave of Internet retailing, in which commodity-based transactions have given way to those that are more specialized and value added. Today, with the increased flexibility of the Net, buyers can know more about what they're purchasing than ever before. People now buy specialty items over the Net--and will do so increasingly more often.

Within that more nuanced universe, Garden.com's founders understood that they needed to capture a niche that others had overlooked: the archaic world of gardening. They had to not only reeducate the industry but also remake it. "It's a very interesting market without a ton of competition," says John Thornton.

Steven Dietz says that Garden.com's management "has been very creative in coming up with innovative solutions in an industry that really hasn't changed much in a long time. These guys did a great job getting the growers they work with to see the vision and change business practices."

In Austin one spring afternoon, Jamie O'Neill shows a visitor around the company's new headquarters under construction. Garden.com is expanding into a 24,000-square-foot space in a warehouse alongside a freeway. Walking through the empty space, O'Neill discusses the new features of the expanded corporate HQ. There is to be a garden out front, so employees can get their hands dirty at lunchtime. Conference rooms will be painted various hues and named after particular plants. But most of the space is still a blank slate, probably destined to become something out of "Dilbert"--a maze of cubicles and computers.

If there is one characteristic that the company's old and new offices share, it's that both discriminate against natural light. There are still no windows at Garden.com. The company will grow like a weed, serving a burgeoning community of devoted gardeners and outdoor enthusiasts, but it has chosen to do so without seeing the sun.

Edward O. Welles is a senior writer at Inc.

Last updated: Aug 1, 1999




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