January 31, 2001, 11:24 AM

Garden.com's demise shows why pure-plays will continue to have a tough time

(Page 2 of 2)

To some extent, Garden.com’s marketing strategy was working; the company’s repeat purchase rate was 50%. And its average ticket was $55-$60, bumping up to gardening catalogs’ average ticket of $60-$70.

Further evidence of Garden.com’s inability to achieve scale was the amount it was spending on buying goods. In the first quarter of FY 2001, Garden.com spent $1.8 million for the $2.2 million in goods it sold, gross margin of 18%. That was an improvement from the previous fiscal year’s 15.5%, when the company spent $11.4 million on products that brought in the $13.5 million in revenue. But, as with the rest of retailing, gross margins in Internet retailing, have a twist. Since Garden.com sold advertising, the gross margin could be measured against all revenue-product sales and advertising. In that case, the gross margin was 29%-not all that far off of the 36% that many were expecting about 18 months. “Because Garden.com has virtually no inventory carrying costs, no distribution center costs-the vast majority of products were shipped through our virtual supply chain-our business model looks fundamentally different than most retailers,” Sharples says. “Ultimately, we believe that at scale, this type of model has the potential to deliver greater profit margins than most retailers.”

If Garden.com had achieved those margins, it might have had a chance of staying in business. In a typical retail operation, the cost of goods ranges from 20% for warehouse clubs to as high as 60% for specialty retailers. “They‚d have to achieve a range of 30-35% to sustain any kind of long-term profitability,” says James Okamura, Chicago-based senior partner with J.C. Williams Group Ltd. “Garden.com was admired by many-myself included-they had excellent merchandise and the early-mover advantage. But their aggressive approach to market share acquisition did not allow them to achieve higher margins than that.”

The pendulum

Garden.com’s end came swiftly but in an orderly way. It announced in mid November that it was going out of business. It kept the site live for a few weeks, with messages to customers about when they could expect delivery of ordered products and how to handle returns. It immediately started a going-out-of-business sale, and urged anyone with questions about outstanding orders to resolve them right away.

In the end, Garden.com was the victim of investor sentiment, which soured so quickly on dot-coms. “There was a pendulum effect among investors,” Sharples says. “A year ago they were willing to offer high valuations, now it’s swinging completely in the opposite direction.” And Garden.com was unable to hold on until the pendulum began swinging back. “Unfortunately, we were running out of gas from a cash-flow perspective,” he says.

Looking back, Sharples says he wouldn’t do anything differently. “As I think of the context in which we made the decisions, I probably would have made the same decisions now that we made then,” he says. “A lot of people thought that if anyone would survive, we would. We thought so, too.”

Garden.com was a pioneer on the Internet and so had little experience to guide it. Even today, the path to successful Internet retailing remains unclear. “It’s still the early days of selling on the Internet,” Sharples says. “Customers are still trying to figure out what to do and b2c companies are still trying to figure out the best way to add value to Internet shopping.”

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