In its second-largest acquisition, Amazon buys the company for $970 million.
Faced with marketplace struggles that have become a common story at dot-com start-ups-boiling down to losses in the tens of millions-Pets.com took some of the usual steps to plug a leaky bottom line. It pushed through an IPO. It lured more customers to its sites with steep discounts.
And it moved some low-tech operations to central Indiana.
In September, the company said it would move most of its customer service operation out of pricey San Francisco to cut operating costs. Destination? Greenwood, Ind., where both space and labor are cheaper. The move, calculates the company, will help shorten the path to profitability.
In a retail industry sector where margins have been thin and investors are clamoring for a payback, Pets.com is not the only online marketer looking at relocation as a means to speed itself along that path.
In recent months, San Francisco, the very epicenter of dot-com-dom but one of the most expensive local markets in the country, has seen a number of Internet companies pack up and head entirely or partially out of town. In September, online computer store Egghead.com said it would move 20% of its Menlo Park work force to Vancouver, Wash., in search of more employees at lower labor costs and with less local competition for them. In August, struggling South San Francisco-based dot-com pharmacy PlanetRx announced it would decamp for Memphis, in a move company officials say will reduce cost of operation by as much as half. Redwood City, Calif.-based online insurance broker InsWeb, a denizen of Silicon Valley, in June announced plans to move its entire operation to Sacramento to boost operating efficiencies. And web travel broker Travelocity in September said it would move its 49-person customer service operation from San Francisco to Rancho Cordova in the Sacramento area for the same reason.
Reuniting the family
Most of the companies already have some presence in the locations to which the moves are being made. Pets.com operates a distribution center in Indiana. Egghead was born in the state of Washington and consolidated customer service and distribution facilities in Vancouver more than a year and a half ago following its merger with Onsale.com. Similarly, PlanetRx.com will be joining the bulk of its operations already housed in Memphis, while Travelocity operates a call center in Rancho Cordova.
But at the root of the announced operational consolidations at the cash-strapped dot-coms is the high cost of doing business in Silicon Valley and San Francisco and the real reason they are getting out of Dodge. Spurred by a continuing influx of technology companies seeking a home, office space in San Francisco has gained the dubious distinction of being the most costly in the nation, averaging $80 per square foot and outstripping even Manhattan at an average $67 per square foot, according to CoStar Group, a commercial real estate service. Some office space is even going for $100 per square foot and higher. In Vancouver, Wash., by contrast, office space is going for $25 to $75 a square foot-even the top of the range is below the bottom of the range in San Francisco.
Labor costs scaled to the high cost of living in San Francisco are cutting into the bottom line at dot-coms as well. “Our cost of labor in Vancouver is about 60-70% of our rates in Menlo Park,” says Bill Skinner, vice president of human resources at Egghead.com, which plans to move its engineering, technical operations, accounts payable, loss prevention and inventory accounting functions to Vancouver, where it already employs more than 250 people.
While employees in those jobs who make the move will do so at their current salaries, Egghead expects to save costs in the long run by staffing up locally with employees paid at lower rates geared to the local economy. Egghead expects no dearth of employees to fill its specialized areas because Vancouver, Wash., is near Portland, Ore.
Mara Brazer, president of San Francisco Partners, an urban planning firm, says plenty of technology firms are still knocking on the door to get into the Bay area. But while she doesn’t see a mass exodus of dot-coms from the city, she does see another phenomenon developing. Because of the high cost of space and the high cost of living for workers, “this isn’t a great area for back-office operations,” she says. “Companies are using a different labor force for those functions.”
More and more, that means going out of the area to where labor pool prospects are better as e-retail service operations grow and mature. “We don’t have the number of people locally to fill the opportunities that would exist if everybody tried to fill their support functions out of Silicon Valley and San Francisco-people can’t afford to live on the salaries we would pay,” Skinner says. Indeed, with the average single family home in San Francisco now priced at $300,000-plus, many if not most of the workers in the service sector are priced out of that market.
But the quest to handle customer service and distribution functions at lower cost isn’t the only reason dot-coms are looking to relocate outside San Francisco. At the professional and technical level, competition for workers at dot-coms is stiff, a theme picked up with a humorous edge in recent TV ads from job site Monster.com. “Play hardball,” says a harried senior executive trying to hang onto a young white-collar staffer poised for flight. “Send him a fruitcake.” Jokes aside, massive employee turnover is an expensive reality for Internet companies in technology hotbeds such as San Francisco.
With job openings outstripping qualified workers to fill them, it’s a seller’s job market, and most workers have no qualms about giving their services to the highest bidder when opportunity knocks. That means rapid churn in the work force. “Our turnover rate in Vancouver is about half what it is in Menlo Park,” says Skinner. “We were having an awful time keeping a trained bunch of senior people around in accounting and engineering functions in Menlo Park , which is why those functions were chosen for transfer to Vancouver.”