September 30, 2002, 12:00 AM

Buy.com’s Blum Takes on Goliath

(Page 2 of 4)

A media company

Blum agrees that an Internet-only approach is not enough, although he believes the Internet will always account for a significant portion of Buy’s sales. That is why he characterizes what he’s doing as “building a media company, not an Internet company.”

While industry observers say the television venture will give the Internet site much needed exposure and drive consumers to the site, the benefits are not without considerable risk.

“Right now, Buy.com has trouble getting people to its web site. The site can’t reach out and grab people. TV can get people’s attention and get them to go to the web site and it should generate a lot of traffic for Buy.com,” says Ken R. Cassar, senior analyst for New York-based Jupiter Research. But at the same time, Cassar notes that TV is certainly costly and risky. “It’s too early to tell whether the benefits will outweigh the risks in this situation,” he says.

Adding to the risk is the fact that the Buy.com model for mixing entertainment and commerce is untried. While others have mixed the two before, Buy.com appears to take the use of entertainment farther than what industry veterans such as the Home Shopping Network, QVC or infomercial producers have done, Cassar says.

Finally, Cassar questions whether Buy.com has the financial and other resources to pull off such an ambitious venture. Not only is TV expensive, but it also requires investments to be made well in advance of receiving any revenues. “This is not a public company so it is hard for me to tell how much financial resources are at Buy.com’s disposal. However it appears that the ability of Buy.com to fund these innovations comes down to Scott Blum’s personal ability to fund them,” he says. That said, Cassar is quick to add, “Scott Blum is not afraid to take a gamble.”

In addition to moving into new sales channels, Buy.com may expand its product offerings-but cautiously. Blum doesn’t want to make the same mistakes prior management made of moving into products that don’t fit with existing ones or meet the needs of the current Buy.com customer. And he expects to make greater use of partners in product offerings. “I’d like to see us get into travel items, such as luggage,” he says. “But if we got into something like ticketing, it would have to be with a partner that was already established in that business.”

Serious belt-tightening

The aggressive pricing and potential expansion of products and delivery channels come after some serious belt-tightening at the company. Blum characterizes the company he bought back as bloated and ill-managed. It had 650 employees; he reduced the number to 125. Part of that reduction came as the result of getting rid of warehouse operations and internal order fulfillment. “We rely on our partners and we make sure we partner with the best rather than try to do everything ourselves,” Blum says.

For example, rather than try to keep an inventory of popular books in warehouses, Buy.com relies on Ingram Book Group, one of the nation’s largest book distributors, to keep the items in stock and ship as requested. While some experts believe that inventory in a retailer’s own warehouse assures that items will be available upon request, Blum says he can get guaranteed delivery without the cost. “More than 98% of our orders ship the same day we receive the order,” he says. “Ingram knows its stuff better than we ever can. Why should we think we can do it better?”

Still, some observers note that the TV venture could present a different kind of challenge to Buy.com’s partners. “While Internet sales have their peaks and lulls, overall, the sales are somewhat evenly spaced out,” says Jupiter’s Cassar. “But with TV, the vast majority of your sales come within a half-hour of your broadcast. It’s important that you have partners that know how to handle those challenges. HSN and QVC have developed the internal capacity to handle that type of customer demand.”

Also as part of the staff reduction, Blum cut overhead at the top. “Prior management had 27 vice presidents and 60 directors,” he says. “That’s too much leadership. Now we have two vice presidents.” In addition to Blum as CEO, Robert Price is president. Price oversees the day-to-day side of the business at its headquarters in Aliso Viejo, Calif., while Blum charts the strategic direction of the company most of the year from his home in Jackson, Wyo.

Blum’s final act in the reduction plan was to get rid of product lines that didn’t fit with the type of goods Buy.com was selling; jewelry and office supplies were the first to go.

With the cost cuts completed, Buy.com showed a slight profit for the first time this year. While not revealing specifics, Blum said the company made “a couple hundred thousand” for the first two quarters of this year on sales of nearly $90 million a quarter.

With his $23.5 million purchase, Blum maintains he got an incredible deal. “Most good technology companies are valued at 1.8 times sales and even average companies should be worth one times sales,” he says. “At one times sales, this company should be worth $400 million.”

But not everyone thinks he got a great deal. “This is a more challenging environment than it was even a year ago,” says Scient’s Calvin. “The multi-channel providers have become so much more powerful with their online offerings, it will be hard for companies like Buy.com to compete.”

Buy.com has focused its product line along items that consumers want to purchase online and that can easily be fulfilled-books and small electronics being the biggest examples. However, that strategy also creates a problem in that Buy.com’s products then are similar to those of many other online retailers and traditional retailers with online outlets, Calvin says. The real challenge, she says, is to find products that are not already commonly sold online that consumers are likely to want to buy online or from television. And that, she argues, is not easy.

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