E-Tailing By The Numbers
What's the key to successful online sales? First you find a great niche. Then you set rigorous numerical standards and stick to them
Company: Shoebuy.com, in Boston
What it does: Sells shoes online
Number of employees: 8
Conventional wisdom: Everybody knows that E-tailing is dead. Just read the papers.
Unconventional wisdom: Executed well, the E-tailing model can yield healthy profits.
Revenue growth: $1.8 million in 2000; more than $30 million projected for 2001
Profit profile: Founded in April 1999, the company first turned a profit in January 2001.
Capital: Start-up investment of $200,000 in personal funds; $2.3 million from angel investors
Selling shoes online. It's the kind of business you'd expect to be the brainchild of a fashion maven with a closet full of Manolo Blahniks. But Scott Savitz and Craig Starble couldn't care less about shoes. What turned the two investment bankers on to peddling oxfords online was the opportunity to use their quantitative skills to test whether E-tailing could really work.
In early 1999, Savitz and Starble were working at BankBoston (now Fleet Bank). Starble, now 38, was managing global treasury funds, while Savitz, 32, specialized in individual investments. Investment bankers, says Savitz, take a "very formularized approach to recognizing value in any opportunity," adding that he himself was always conservative with his clients' funds. "We never went for home runs," he says. "We aimed more for singles."
As the pair witnessed all the start-up activity in E-tailing, they decided to take a shot at it themselves. But what exactly would they sell? At the time it seemed as if almost everything that you could conceivably sell online was already being sold there. But no one appeared to be selling shoes over the Internet, at least not in any major way. Which, of course, made them wonder why. Would consumers buy shoes without trying them on first? "Until about the fall of 2000 we tried to talk ourselves out of doing Shoebuy," says Savitz. "But the more we did the numbers, the more it made sense."
What made particular sense to them was that the people who were already buying $2.5 billion worth of shoes through mail-order catalogs would almost certainly be open to shopping for them online.
As Savitz and Starble made their calculations, they came to believe they had uncovered what Savitz calls "a hidden gem." It seemed that if shoes were sold right, they could bring in extraordinarily healthy profits. Typical shoe retailers, says Savitz, start with about a 100% markup, but that usually whittles down to a 3.5% net margin after they deduct all their costs. Savitz and Starble were determined to eliminate as many of those costs as possible. To entice potentially reluctant shoppers, they decided to offer free shipping. But even after subtracting that cost and salaries for customer-service, technical, and business-development personnel, they were left with a staggering -- albeit still theoretical -- 30% net profit.
Savitz was determined to maintain that 30%, which to him meant that the company would have no sales force, no inventory, no warehouse, and as few employees as possible. It would be, in other words, a virtual organization. "The virtual company was supposed to be the promise of the Internet," says Savitz, "but somehow that got lost for a lot of people along the way." Maintaining a warehouse and inventory would erode their precious margin by 18 points.
Moreover, says Savitz, by holding inventory Shoebuy would incur the exposure to loss from radically changing trends in footwear. Adding a sales staff would cost the company another 10%. For that reason, Savitz says, he has no plans to add to his staff of eight at any time soon. "We just have to make sure we never spend more than our model will allow," he says. "Otherwise it won't work."
Armed with what they saw as a terrific market potential and the chance to land some hefty margins, the partners set out to use their quantitative skills to manipulate those numbers to their advantage. The number that in the end would matter most: the lowest customer-acquisition cost possible.
One afternoon last fall, Savitz sat at a folding table in Shoebuy's modest corporate office in Boston's financial district, animatedly describing his passion for keeping customer-acquisition costs low. He briskly rattled off a series of well-known online players and the average amounts he had estimated that they spent to snag a single sale: Amazon, $103; Bluefly.com used to be $245 but got it down to $58. And the now-defunct Garden.com, Pets.com, and Furniture.com had struggled along at $71, $200, and $500, respectively. Savitz wouldn't allow Shoebuy's figure to rise above $15.
He chose to keep marketing costs low by establishing alliances with shopping sites and striking customer-share deals with highly focused E-tailers. He also scored a cobranding coup: Shoebuy was featured prominently in a MasterCard ad that appeared in fall and winter 2000 issues of Bon AppÉtit, Martha Stewart Living, and Gourmet magazines, among others. The ad didn't cost Shoebuy anything up front, although customers received a discount by using Master-Card for their Shoebuy purchases.
The other number that would make or break Shoebuy would be what Savitz calls the company's "fulfillment metric" -- how fast manufacturers could get their shoes to Shoebuy's customers. But before he could determine what that number should be, Savitz had to persuade manufacturers to drop-ship shoes from their own warehouses. Typically, shoe manufacturers receive shipments from overseas factories in large crates, which they then ship to retailers. To work with Shoebuy, vendors must set up a consumer-direct fulfillment system from scratch, a process Savitz says has been arduous at best. Even after Savitz signs up a vendor to sell its shoes through Shoebuy, it can take up to six months to get its product on the site.
Mike Kormos, president of Footwear Consulting Group, in Nashville, says it's no surprise that Shoebuy has met with resistance. For one, he says, manufacturers fear channel conflict. More important, says Kormos, is the traditional, hidebound nature of the footwear industry. "There's typically a lethargy in adopting new technology," he says.
Savitz says that manufacturers have gradually embraced the Shoebuy concept. One thing that's worked in Shoebuy's favor has been the attraction of one-stop shopping. "It's hard to make money on the Web when you're only selling a single brand," says Savitz. But what really convinced manufacturers of Shoebuy's value, says Savitz, was their own botched E-tailing efforts. "Some companies have tried selling online on their own," he says. "And they've seen what a costly procedure it is, from building the site to installing in-house customer service. It actually becomes a losing proposition for them."
Savitz admits that launching the company would have been a lot easier if it had maintained its own inventory. "But then you start taking away all the things that make our business model so appealing," he says. Under its current system, Shoebuy can offer a selection of products that would have been impossible if the company had kept its own inventory. The arrangement is also good for cash flow. "We don't pay for shoes until after we sell them," says Savitz.
Savitz believes that Shoebuy's cash-flow advantage explains why the company is still around and onetime competitors like MyFavoriteShoe.com aren't. "They immediately went out and put good names on the site, signed deals with the Bruno Maglis, and bought a boatload of inventory," he says. From Savitz's perspective, that approach was flawed. Even if the folks at MyFavoriteShoe had perfectly forecast their prospective customers' buying patterns, they still would have tied up their cash for six or seven months while they waited for their inventory to sell.
Shoebuy takes on a limited number of each new manufacturer's products on a trial basis. Companies that sign on with Shoebuy agree to ship shoes within an average of three to five days after an order has been placed. "We can't explain to the customer that it wasn't us; the manufacturer screwed up," says Savitz. He and Starble monitor each manufacturer's sales history, and unless a particular style meets their sales expectations, it comes off the site.
Given Savitz and Starble's careful calculations, Shoebuy's 2001 revenue projection seems jarring: somewhere north of $30 million, up from $1.8 million in 2000. How can the founders justify such a "hockey stick" trend line? "We're in a very scalable position," says Savitz. "We have a large market with virtually no competition and more than $60 million in 'inventory' available on the site. We have the infrastructure to sell at that rate, but we don't have the actual inventory risk." Savitz admits that if the company stays at its current run rate, 2001 revenues will be closer to $4 million. "But we went up over 100% from third to fourth quarter 2000 without hiring anyone, and that momentum hasn't stopped," he says.
But for the company to make those projections, will Savitz and Starble need to seek additional outside funding? "No, but we probably will anyway," says Savitz, "because the environment is so good for acquisition targets." Possible candidates might sell similar or complementary items that Shoebuy could roll into its model and scale up appropriately. "But we will never hold inventory, and you can quote me on that," emphasizes Savitz. "I can't see that we'd ever go against our model or abandon the metrics we've established."
With no fanfare and little venture money, the companies profiled here are delivering real stuff to paying customers and making a buck in the process. There may not be any "new rules," but there are rules, and we suspect every one of them will look familiar.
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