BlueLight led the dot-com spin-offs; now it’s leading prodigal sons back to retail parents
By Andrea McKenna Findlay
When BlueLight.com launched in 1999 with start-up guru Mark Goldstein as CEO, there was no question that the Internet spin-off wanted to do things its own way. The company set out alone to build an Internet powerhouse that featured Martha Stewart Living brands and did not rely on its parent, Troy, Mich.-based Kmart Corp., to help—or to some minds, interfere—with its plans. In that way, it was typical of dot-com spin-offs of the day.
After a huge marketing push as an online superstore, a provider of Internet services and a developer of its own online shopping base, BlueLight has suddenly adjusted its course. The company went through a major site redesign in April, dropping apparel from the line and making other changes to match its demographics base. It then laid off an undisclosed number of marketing and merchandising staff, with those functions transferring to Kmart. Finally, it said goodbye to Goldstein, the founder who had had the vision of re-introducing the BlueLight name to the online mainstream. The changes came about in order to cut costs and help BlueLight meet its goal of moving toward profitability, the company says.
Throughout the web world, straying children are being brought back into the family. Far from wanting to divorce the web operations from the parent, retailers today are building on the power of national brands to attract web shoppers and the power of large orders to get favorable prices on merchandise. In both trends, BlueLight.com is no exception. In fact, BlueLight, which was high profile in its desire to be separate from its parent and had the decidedly non-corporate, flamboyant Goldstein at its helm, may even be the epitome of the trend. “The next chapter of BlueLight.com is about further optimizing Kmart economics, not focusing on independent innovation,” Goldstein said in a statement. Goldstein will continue to be an Internet consultant to Kmart.
Kmart is quick to point out that Goldstein’s departure was planned and was not a direct result of the changes at the company. He’s an entrepreneur whose strength is in start-ups, the company says. “Mark started three other companies and he sold every one the day they started operating on a day-to-day basis,” a spokesman says.
Ending in the same spot
Considering the state of the online market today, BlueLight’s move has come as no surprise to market observers. “Regardless of the original source of capital, they are reverting to the traditional model by moving some operations back to the parent company,” says Jim Okamura, a partner at retail consultants J.C. Williams Group. BlueLight was set up as an independent company in order to move faster and more efficiently to build the company and get a web site up in 10 months, the spokesman says.
Even though BlueLight was known for taking an independent approach, it has ended up in the same tight economic situation as other offline retailers who struggled to build an online presence. “BlueLight took a different path from other retailers but they have all ended up in the same spot. Whoever has invested in them, a parent or VC investors, wants to see these companies make a return,” Okamura says. BlueLight is majority owned by Kmart, but also is funded by Softbank Venture Capital and Martha Stewart Living Omnimedia Inc. Kmart declines comment on BlueLight’s restructuring, saying only that Kmart is supportive of the decision for BlueLight to further leverage Kmart’s assets.
Everyone in the market can point to the economy for this turn of events. BlueLight acknowledges that the changes at BlueLight are a direct reaction to the tough economic times. “Even though we had a gangbusters holiday season, everyone saw the economy softening,” the spokesman says. “Basically it’s why the board decided to do the restructuring to keep us on the path to profitability.”
Other options that BlueLight could have pursued—and still can—are making an initial public offering and being bought back by one of the investors. The spokesman says an IPO or a buyback could still happen, although there are no plans to pursue either option.
Even though companies like Saks Inc. have recently absorbed their online operations, speculation that BlueLight will be folded fully back into Kmart is premature. “Like everyone else in the retail market, BlueLight is probably in a cash crunch,” says Neil Stern, a partner at Chicago-based McMillan/Doolittle LLP retail consulting firm. “It’s a question of how long the other investors want to fund it, but Kmart is likely to be the most committed to making it work. There’s always the possibility that BlueLight could be folded back into Kmart but having outside owners could make that hard to do.”’
In step with the times
For now, Kmart is only taking over the marketing and merchandising to leverage its resources, the company says. “We’re not anticipating any further cuts,” the spokesman says. “The biggest thing about the move is realizing the econ-omies of scale and the efficiencies that Kmart already has with its 2,100 stores.”
Because Kmart can get such good deals for its stores it can also get good deals for web site merchandise. Although some observers speculate that at some point the importance of buying for the stores might overshadow buying for the yet-to-be profitable web site, BlueLight does not expect any shortcomings.
Kmart also will provide marketing support for BlueLight. “Kmart does so much offline advertising that BlueLight doesn’t need someone to do it in-house,” the spokesman says.
Functions such as marketing and merchandising, which are historically bricks-and-mortar retailers’ strengths, make sense to leverage with a parent company, analysts say. “BlueLight is right in step with the times,” says Randy Covill, senior retail analyst at AMR Research Inc. in Boston. “The driving realization is that the multi-channel retailers are winning out over the pure-plays. The offline stores have the buying and merchandising expertise.”
As Bluelight begins to use more of its parent company’s resources, observers wonder whether the strategy of providing Internet access through an ISP sponsored by BlueLight as a way to attract customers will continue. The ISP service launched in December 1999 as a free service but switched to tiered payment options after the initial ISP supplier went bust. The basic service offers 12 free hours to meet the needs of typical users who spend six to seven hours online per month. A second tier charges $9.95 for 100 hours, geared towards heavy Internet users. The third tier, aimed at rewarding Bluelight.com shoppers, gives free Internet service to those who make a purchase at BlueLight.com: for purchases from $1 to $100, users get one month free service; users who spend $100 to $150 get two months free; users who spend $150 to $200 get three months free, and so on up to six months of free service. So far the company has 6.6 million ISP users.
But how long BlueLight will pursue this avenue is in question. “BlueLight has a business model that is in an evolution right now,” Stern says. “They initially had very big plans to be the dominant ISP. That and remaining an independent e-commerce site are probably not going to materialize.”
However, BlueLight officials say Kmart CEO Chuck Conaway “loves the ISP strategy,” considering it a crucial point of differentiation between BlueLight.com and other online retailers. The BlueLight spokesman adds that plans to promote the ISP service are not likely to change.
Tracking the evolution
As liquidation sites become more popular and as online retailers like BlueLight struggle to survive in the current market, some observers wonder if BlueLight.com would become for Kmart what the BlueLight special is in the stores: a liquidation vehicle. But BlueLight contends that the different product mix between the stores, which carry more apparel and seasonal items, and the web site, which has 220,000 SKUs compared to a store’s 75,000, ensures that the web site will not be an outlet for overstock. BlueLight will continue to house its own products in its Ohio-based warehouses with fulfillment vendor Submit Order.
Most retail analysts believe BlueLight is heading in the right direction and will maintain its online presence even without the high-profile Goldstein at the helm. “BlueLight has struggled as much as anyone else to get the right mix online,” Stern says. “It is trying to evolve as the market evolves.”
Christopher Merritt, principal at retail consulting firm Kurt Salmon Associates in Atlanta, says BlueLight has opportunity to grow by using Kmart’s resources. “It will be interesting to see how fast it leverages those resources to broaden its web offerings,” he says.
andrea@verticalwebmedia.com
