The problems that made so many dot-coms extinct has Internet superstore buy.com on the endangered species list. The company is trying to extinguish its cash burn by suing to pull out of a long-term sponsorship deal and by laying off workers.
Buy.com is looking to pack in its golf game by trying to get out from under a 5-year, $42.5 million deal to sponsor the Professional Golf Association Tour. The company filed suit in California against the Professional Golf Association Tour alleging the PGA Tour violated a sponsorship agreement when it entered an agreement with USA Networks. Buy.com is seeking $45 million in damages from PGA. The agreement with USA Networks gives its affiliate SportsLine.com exclusive rights to sell merchandise at the PGA Tour site. Buy.com contends that the contract called for it to have the option to sell at the site. Because buy.com was not given that option, it says PGA Tour breached the contract.
The buy.com suit seeks to rescind the 5-year sponsorship agreement signed in 1999.
Regardless of the ins and outs of that contract, Barrett Ladd, retail analyst with Gomez Advisors Inc., says buy.com’s situation is symptomatic of dot-com troubles. From mid 1999 until early 2000, pure-plays were spending millions of dollars to build a brand from nothing, she says. Now companies are looking for ways out of expensive advertising arrangements.
MVP.com, the now defunct sporting goods site, found itself in similar trouble after signing a 10-year deal to provide e-retailing on the SportsLine.com sporting news site. SportsLine later signed an agreement with USA Networks and acquired part of MVP’s assets.
PGA Tour says it did not breach the contract and that buy.com’s management was aware of its plans to enter a relationship with USA Networks. “While we are sympathetic to buy.com’s financial trouble, we are disappointed that its new management would take this unwarranted action as a means to help rectify its own problems,” Ed Moorhouse, PGA Tour executive vice president and chief legal officer, said in a statement. In mid February, buy.com’s CEO and CFO resigned.
But there’s more than just an advertising deal gnawing at buy.com. “Their advertising spending has been just one element of their downfall,” Ladd says. Buy.com’s pricing structure of selling items below cost is very difficult to maintain, analysts say.
Like other troubled pure-plays, buy.com has been taking steps to reel in spending. In two layoffs, the company cut 150 workers from its Aliso Viejo, Calif., headquarters. The layoffs and reductions in outsourced services will reduce the company’s expenses by $29 million per year. Earlier this year buy.com put its U.K. operation on the block and closed its Canadian operations. Australian operations were closed in November. Additionally, buy.com is narrowing its offering to focus on consumer electronics; part of that narrowing involved closing its golf store. Because it owns no inventory, closing the sports shop is only a matter of removing links from the web site, the company says. The cuts, the company says, reflect its learning the business. “We’ve become smarter at managing our outsourcing,” a spokeswoman says.
It will be nearly impossible to find financing for the rest of 2001, Ladd says. “It’s a gloomy situation for any pure-play,” she says, adding that buy.com is going to have to get to profitability by Q4. “They have a long year a head of them, if they make it that far.”