September 30, 2002, 12:00 AM

Helping Small Retailers

Overstock is extending its discount selling approach to retailers, becoming a low-cost source of merchandise for small and some not-so-small merchants.

Almost from the start of e-retailing consumers have turned to the web for deals on merchandise. Like other online discounters, Overstock.com Inc. and its CEO and majority shareholder Patrick Byrne have built a business on that trend. Deep discounter Overstock’s sales are rocketing-up 102% to $26.1 million in the second quarter from $12.9 million a year ago and up 22% from the first quarter. With the loss from operations narrowing to $959,000 for the year from $3.9 million a year earlier, it’s on the verge of profitability, no small feat for an Internet pure-play.

Now Overstock is proving that the idea of buying deeply discounted goods on the web has another whole constituency besides consumers-other retailers. Less than a year after it started targeting other retailers as prospective buyers of discounted merchandise, Overstock has moved 15% of its business to b2b and, while being careful as a newly public company not to raise expectations unduly, it’s clear that Byrne would not be surprised to see 50% of Overstock’s revenue coming from other retailers within 18 months.

“Small retailers never had access to liquidation product because liquidation typically sells by truckloads or multiple truckloads,” Byrne says. “They are not set up to have a mom-and-pop call to say they want six blenders. But that grafts seamlessly into the infrastructure that we have.”

Overstock’s success with consumers and retailers alike reflects the fact that it solves a problem for other retailers and manufacturers. It’s leveraged the Internet to open up the marketplace for closeout and end-of-model branded goods, cost-effectively moving merchandise that might have languished in sale displays, stockrooms and local outlet stores, taking up space and, unsold, cutting into the bottom line.

With a team of buyers that scours the country for such merchandise, Overstock scoops it up at 80% less than full retail and sells it online at retail less 60%. The web makes Overstock’s business possible because it allows it to sell merchandise in quantities too small for the traditional liquidation distribution network to handle efficiently.

A taste for deep discounts

In addition to solving manufacturers and retailers’ overstock problems, it’s developing shoppers’ taste for deeply discounted branded merchandise as served up on the web, and showing them that, given some flexibility, it’s not necessary to pay full retail price for branded merchandise. “Whether it’s the economy or a general sense of value associated with the product, the public’s appetite for deeply discounted merchandise is growing,” says Derek Brown, an analyst with W.R. Hambrecht + Co, which was a co-manager of Overstock’s recent IPO. “While that category’s growth doesn’t necessarily have to come out of anybody’s hide, the category that is more likely rather than less likely to feel pain is the full-price online channel.”

Indeed, online liquidators of branded goods are some of the fastest-growing retail sites, and among the only to win outside funding recently from capital markets now wary of dot-coms. Overstock isn’t the only such company to get investors’ attention. Deep discount site SmartBargains.com in August closed a $9 million round of financing with new VC backers and existing ones such as Time Warner AOL Ventures. And fashion discounter Bluefly.com Inc. received additional equity funding from existing investors of nearly $2 million in June with a commitment for more if needed. Probably the strongest measure of the power of discount sites on the web, though, was Overstock’s IPO in May. It raised $39 million from public investors at a time when the flood of Internet company IPOs has dried to a trickle.

The casual observer of the company might wonder exactly what it is that investors bought, for on the surface Overstock’s CEO and its business model seem to change as regularly as the seasons. Since the site went live in 1999, the outspoken Byrne has flashed the colors of a “rapacious capitalist,” building his fortunes by bone-picking the inventory of dead dot-coms; a corporate do-gooder giving third-world artisans a shot at the online marketplace; small businesses’ answer to sourcing discount merchandise; and a sort of GSI Commerce-in-training intent on bringing deep discount storefronts to high-traffic sites that have no e-commerce at all.

Byrne, however, sees no conflict between the changing labels that have earned the Salt Lake City-based company a fair amount of ink over the past few years. “I understand why it looks like we shift around in different directions, but there is a common theme,” Byrne says. “What we’ve built is a liquidation infrastructure. It has very different characteristics from how a typical warehouse operates. The retail system is set up for vast quantities of identical goods; liquidation becomes available in very small lots. We’re set up for that. And once we had that platform, we built from it.” The bottom line about OverstockB2B.com is that it’s simply a way of leveraging Overstock’s infrastructure to meet the needs of a different market, Byrne says.

Lining up

Viewed from that perspective, Overstock’s seemingly disparate elements fall into alignment. Byrne, with both a prior executive career and a string of degrees that includes a Master’s in moral philosophy from Cambridge University, has a fondness for the “rapacious capitalist” moniker. It was a title handed to him by the business press in the heyday of dot-com bust-outs whose inventory he scooped up at cents on the dollar. But in reality, bankruptcy acquisitions never constituted more than a fraction of Overstock’s inventory. “Bankruptcies were what got us a lot of attention, but it was never more than about 25% of our stock,” he says. “The bulk of what we do has always been just finding special opportunities to buy.”

And, he might add, to sell. Overstock was quick to recognize an opportunity when it noticed independent retailers without the buying clout of large chains had discovered the site and were sourcing from it for store resale. “We have a warehouse that already does a lot of sorting thorugh truckloads,” he says. “So we thought, let’s get a separate site that can sell the same products to small retailers in case packs and pallet loads at a discount to wholesale.”

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