The Game Is On

Ever since Global Sports Inc., now GSI Commerce Inc., appeared on the web retailing scene seven years ago, the company has made all the right moves to become the market leader in providing turnkey third-party e-commerce services to big chain retailers and consumer brand manufacturers.

But these days GSI must put up a good offense and maintain a solid defense as it looks to fend off a number of new and existing competitors who have no qualms trying to knock GSI out of the game and grab a bigger share of the web retailing outsourcing market.

Building out from sports

GSI vaulted to the top of the turnkey outsourcing business when it parlayed an early series of third-party service deals with a few sporting goods retailers into a diversified company that today includes more than 50 major clients, including Adidas America, Levi Strauss & Co. and RadioShack Corp.

But to maintain its lead and keep pace with outsourcing rivals, including Amazon Services LLC, the e-commerce outsourcing arm of Amazon.com Inc., GSI is working to roll out even more third-party services and capitalize on new international business development opportunities in Europe and elsewhere. In early 2005, GSI formed a new partner services group and began offering retailers new programs such as search engine marketing management and e-mail marketing.

In May 2005, GSI also acquired Aspherio S.L., a Spanish provider of outsourcing e-commerce services, and is now eyeing new European opportunities, including capitalizing on helping U.S. web retailers extend their brand and business to established markets such as the United Kingdom. “As a company, we’ve done a lot, but there is still a lot we can do,” says Michael Conn, GSI senior vice president of corporate development. “We have an excellent chance to offer more services and grow as our retailers grow and we are going to take advantage of it.”

Looking like a retailer

GSI built a successful e-commerce outsourcing business by looking and acting virtually the same as a web retailer. In the sporting goods, electronics and entertainment markets, GSI performs almost all the e-commerce, customer service and order processing duties for 20 chains and manufacturers. It also owns and controls the inventory on a number of major e-commerce sites such as The Sports Authority Inc., Dick’s Sporting Goods Inc., Palm Inc. and others.

“With their expertise, they can say to a bricks-and-mortar retailer, ‘We can build and operate a large scale e-commerce site better and more efficiently than you can internally so let us do the heavy lifting,’” says Michael Golden, CEO of home accessories web retailer Home Décor Inc. and GSI’s first chief operating officer. “It’s a compelling business model that’s helped them sign up a number of big name clients.”

GSI’s biggest single market segment remains sporting goods. The company owns an inventory of more than 140,000 products that it sells on about two dozen sporting goods sites or mass merchandise sites with a sporting goods category. Under its arrangement with retailers, the retailer manages its brand and marketing while GSI supplies the inventory, provides most e-commerce operations and handles order management. With this type of arrangement, GSI collects all the e-commerce revenue and pays the retailer a royalty based on a percent of total sales.

“Sporting goods taught us all about the ins and outs of maintaining a large and diverse inventory since we carry everything from apparel to footwear,” Conn says. “The lessons we learned in sporting goods are the ones we are now applying in different segments.”

The financial transition

After seven years in business, GSI has made the financial transition from a start-up operation to an established company. GSI will report its final numbers in February, but in 2005 expects net revenues to increase 29% to about $432 million from $335.1 million in 2004. GSI also expects to post net income of around $5 million in 2005, compared with a net loss of $337,000 in 2004.

For several years, GSI has offered big box retailers a standing set of outsourcing services that range from web design and e-commerce systems operation to order management and customer service. But now GSI is diversifying and through its new partner services unit is offering other programs such as search engine marketing management, e-mail marketing and list maintenance and even interactive media. So far about 40 customers use GSI to manage all or a portion of their interactive marketing program, including Ace Hardware Corp.

GSI discovered that web retailers who already used GSI for existing services also wanted GSI to help them with marketing and customer acquisition. “A lot of the retailers we work with are developing e-commerce as a sales channel, but they also see the web as a broader means to build up their brand and multi-channel retailing,” says Steven Davis, GSI senior vice president of partner services. “In many ways we are already joined at the hip with the clients we serve and could work with them on marketing and design-related projects.”

GSI now offers a suite of additional services in four categories such as creative services, photography, interactive marketing and customer relationship management. In the future, GSI plans to offer retailers programs to introduce or enhance rich media, develop interactive programs such as videocasting or real simple syndication and even designing and mailing print catalogs. To differentiate its programs from other agencies and marketing firms, GSI prices it services based on a percentage of the retailer’s or manufacturer’s e-commerce sales instead of collecting a portion of the advertising dollars spent on search engine marketing campaigns, as traditional agencies charge. “We aren’t charging a fee that is a percentage of the total media spend,” Davis says. “We collect a fee on the back end that’s a portion of e-commerce sales. Clients tell us they like this program because our pay-for-performance is tied directly to the sales cycle.”

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Straight from the client

GSI develops new outsourcing services based on market trends and annual surveys it conducts with its retailers and manufacturers at various user meetings. “We ask them to tell us about their priorities and developments and what other programs they would like to see us offer,” Conn says. “It’s a good venue for future business development.”

One area in particular that’s drawing increased interest from GSI’s clients and providing GSI with a new business opportunity is helping big retailers and consumer brand manufacturers expand their e-commerce operations overseas. In May GSI signed an agreement to acquire Aspherio, a third-party e-commerce service provider with a technology platform that operates online stores in 15 countries and in nine languages for clients such as Hewlett-Packard Co. and Logitech International S.A.

In the U.S, GSI built its e-commerce outsourcing operation from scratch, but decided to acquire Aspherio because the company’s platform is already fully integrated and compliant with major European currencies, payments systems and taxation requirements. When the transaction is finalized in the first quarter, Conn says GSI will be well positioned to help clients, particularly consumer brand manufacturers, target new e-commerce opportunities in the United Kingdom, France and Germany, which combined account for online retailing sales of more than $47 billion annually, according to Forrester Research.

“Given the complexities of selling online in overseas markets, the acquisition of Aspherio makes sense becomes it gives us an established infrastructure,” says Conn. “Now we can leverage that infrastructure as more of our enterprise clients look to expand in Europe and elsewhere.”

International development ranks high on GSI’s corporate priority list, particularly as GSI finds itself facing even more competition from other outsourcing companies. For example, even though GSI has nearly six times more outsourcing clients than Amazon Services, Amazon continues to gain ground. Amazon Services, which provides outsourcing services for nine companies, including Target Corp., The Bombay Co. and NBA.com Store, recently signed up eHobbies.com as a new client. Under the agreement, Amazon Services will provide full turnkey e-commerce services to eHobbies, including housing eHobbies’ product inventory at Amazon.com’s regional warehouses.

Taking a page

Another direct competitor, PFSWeb Inc., is also taking a page from GSI’s corporate development playbook and acquiring more inventory and inventory management expertise to expand its presence in the online consumer electronics market. In November, PFSWeb completed a merger with web electronics retailer eCost.com. The merger creates a company with almost $530 million in annual sales and rounds out the services, including inventory supply and distribution, that PFSWeb can offer on an outsourcing basis.

For now, analysts who follow GSI Commerce expect the web retailing outsourcing market to continue to grow and attract even more competitors, possibly even eBay, which in addition to owning and operating PayPal, is making more acquisitions such as Skype, a global Internet communications company, comparison shopping site Shopping.com and Kurant Corp., an e-commerce applications developer.

The acquisitions could make eBay a prime contender to take on more third-party service business and in the process compete head on with GSI Commerce. But eBay and Amazon still need to build up their market share on the high-end of the retail outsourcing business. “Ebay is making acquisitions, but they still place an emphasis on smaller businesses and merchants,” says Scot Wingo, CEO of ChannelAdvisor Corp. and author of “eBay Strategies: 10 Proven Methods to Maximize Your eBay Business.” “They still need to move into the higher end of the market, but that is going to be a longer term play. GSI is a pure service provider, while eBay and Amazon have to deal with the potential issue of competing against their customers and retailers by performing any third-party services.”With more competitors entering the web retailing outsourcing market, Wall Street analysts point out that for GSI to sustain its current market lead it needs to accelerate business development and do a better job of executing new client projects. In 2005, GSI signed major deals to design or redesign web sites for Adidas America, Radio Shack, Aeropostale Inc., GNC Corp., Zale, Levi, C.C. Filson Co., Bath & Body Works, a division of Limited Brands, and others. But GSI was late in implementing several projects, including Adidas America, GNC and Zale, which were expected to launch by the end of October.

“GSI may have somewhat overextended itself on some of its current and pending projects, largely due to capacity constraints on the technology development side” says Brian Pitz, equity research analyst with Morgan Stanley Equity Research North America. “While GSI has incurred delays and higher than expected expenses on certain new project launches, we believe their potential partner pipeline remains strong.”

GSI says unexpected complexities caused delays in launching Adidas, GNC and Zale. But the redesign for Zales.com went live in November and the launches for GNC and Adidas America will take place early in the first quarter of this year, Conn says.

Along for the ride

GSI, which routinely spends more than $1 million in upfront development costs on a major e-commerce launch or site redesign, can expect the business it booked in 2005 to generate at least $100 million in additional merchandising sales over the long term, says a recent research note from CIBC World Markets.

With the prospects for continued growth looking strong, Conn says GSI will continue to concentrate on developing new service offerings and international plans that will help attract the attention of more big chains and manufacturers. “We know there is more competition out there, but we are going to keep our concentration on the enterprise companies like we always have,” he says. “We’re growing because our retailer, entertainment company and manufacturing clients are growing and taking us along for the ride."