In its second-largest acquisition, Amazon buys the company for $970 million.
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As a result of the cost efficiencies—and aided by lower prices for materials like steel that make up a big part of its inventory—DiscountRamps.com has reduced the typical outstanding balance on its credit line from around $1.5 million to $500,000, Lederhause says.
But the improved cash flow wasn`t enough to help the e-retailer get a loan when it closed a deal in March 2009 for a new warehouse. While Lederhause never had trouble before getting bank loans for similar purchases, this time he had to contact several banks before finding one willing to make the loan, and then only if the U.S. Small Business Administration would guarantee half the amount.
Lederhause hired a company that prepares SBA applications, but that company was backlogged by similar requests, as was the lending agency itself, and it took from March to September to get the loan approved. Meanwhile, Lederhause was forced to rent truck trailers to store stock, and jam excess inventory into existing warehouses, impairing productivity, he says.
DiscountRamps did find one lender willing to extend more credit—American Express Co., which raised the borrowing limit on the e-retailer`s business card from $450,000 to $700,000. Lederhause charges everything he can to the AmEx One card—including pay-per-click advertising spend, inventory and shipping charges—and says he saves hundreds of thousands of dollars each year through the discounts AmEx negotiates and the points he earns on the card.
But the AmEx charge card is designed for expenses that a company will pay off each month. When it comes to borrowing money for longer periods, including for acquisitions, Lederhause normally turns to banks, and they`re not responding.
Although he`s bought seven companies over several years, helping increase DiscountRamps` annual sales to about $15 million, Lederhause says he`s not pursuing deals actively now because of the lack of credit, and passed on one deal in late 2008 because he couldn`t get a loan. "We`d like to make acquisitions, but we know if it`s anything bigger than $500,000 or $600,000 we`re not going to be able to get a loan," he says. "Even though we`re a financially strong company with great credit, they don`t care. You`re not going to get the money easily."
Even when banks do lend, e-retailers now have to jump through more hoops—at a cost—to get less money, says Wilder of SportsGiant, which generates about 75% of its approximately $28 million in annual sales online, and the rest through two stores.
He says banks are requiring a higher ratio of cash flow to interest, which means retailers can borrow less than before. And lenders are requiring more field inspections, audits and appraisals, adding to the cost of a loan. "If the nominal interest rate on a loan is 5-6%, the additional costs might make the real cost 10% or higher," Wilder says.
SportsGiant was able to get a loan last year based on its inventory, largely because 90% of it had been purchased within six months, which made it more attractive from the lender`s point of view. Banks lending against assets calculate how much they can get if they have to sell those assets, Wilder says, and new inventory is easier to sell.
While using the loan to increase inventory and marketing, Wilder says he put off discretionary spending on technology, including for analytics and marketing tools, and avoided slashing prices to boost sales, focusing instead on increasing profit margins.
He also reduced personnel costs by about 15% by identifying ways to reduce workers without significantly impacting service. For instance, the company`s call center no longer is staffed early in the morning when there were relatively few calls. "Customers can`t call until 9 a.m. Eastern," Wilder says. "We might lose a few sales, but a lot of those people would call back. The vast majority of calls are customer service calls, such as people tracking their orders, and they`ll often call back."
Like Wilder, Chesman of igourmet says he`s sharply cut spending to boost profits.
The e-retailer of imported luxury foods has cut its work force in half from its peak two years ago, mostly by scaling back marketing initiatives aimed at growing sales. "We`re in a holding pattern, waiting for the macro climate to improve before we aggressively start to grow again," Chesman says.
Igourmet also exited ventures that generated sales but not profits, such as producing gift baskets for other retailers. It`s also ended relationships with some online affiliate sites that Chesman felt were cutting too deeply into profits. And it`s culled about 10,000 from the 60,000 keywords it used to bid on for paid search ads, eliminating terms that generated little profit.
Cash on delivery
The e-retailer, which never had much luck getting credit from banks, now has little choice but to pay its bills on time—many suppliers that used to extend credit now require payment on delivery, Chesman says. That shift, and Chesman`s reluctance to carry debt when business is weak, also led the e-retailer to slash inventory, holding 15-30 days worth of stock now versus 90-120 days a few years ago.
The down economy and marketing cutbacks combined to reduce sales by 30% last year, Chesman says. But the company, which lost money in 2008, made a profit in 2009. "We had been focused on growing the top line," Chesman says. "In 2009 and beyond, we`re more focused on making sure they`re profitable sales."
Chesman is not the only one chanting that mantra, or seeing the results of careful cost controls. Wilder says sales at SportsGiant were down slightly in 2009, but profits were up significantly. At DiscountRamps, sales increased only 4%—after years of double-digit growth—but profits doubled.
Only the strong—and the cash flow-positive—will survive in a period when consumers are cautious and banks even more so. Gone, at least for now, are the go-go days of growth at all costs, replaced by an era in which e-retailers must manage to the bottom line and carefully pick their spots for expansion.
It`s even tougher for start-up e-retailers
If established online retailers have trouble getting loans, imagine what it`s like for the husband and wife team of Robert and Elizabeth Antunovic who began building their e-retail company, Nap Inc., in 2007.