With new financing and a deal with an offline retailer, 800.com hopes to survive the shakeout

Hollywood Entertainment is the second largest video superstore chain in the U.S. Reel.com will direct customers who want to buy movies, music or electronics to 800.com, which offers more than 300,000 movies, music titles and leading-brand electronics. 800.com will execute and fulfill all customer orders made via Reel.com and Hollywood Entertainment will receive a commission on all sales, although the companies did not disclose the financial terms. Drew says 800.com’s reputation for providing superior customer service helped cement the deal and it expects others to follow, although he declines to elaborate.

Duif Calvin, vice president in the global retail practice at iXL Enterprises, says that while the deal gives 800.com good exposure, selling electronics online is still a cutthroat business that few retailers are making a profit on. “Presumably the deal will give them additional sales from the increased traffic from Reel.com, but it depends on how much it is costing 800.com to pay Reel.com and if they paid a premium to be the only retailer selling videos there,” she notes.

In addition, 800.com says it is ready to handle the customer load and does not fear that customers calling about low-cost videos will overwhelm its call center and force customers buying high-end electronics to wait for service. Video customers will talk to customer service reps while electronics customers will talk to specialists.

The deal with Reel.com comes at a significant time for both entities, say traffic figures from comScore Networks Inc., which tracks online traffic and sales. According to comScore, 800.com’s traffic has steadily increased while Reel.com’s has decreased. Just six months ago, Reel.com had 29% more traffic than 800.com; it now has 55% less traffic than 800.com. At least the remaining visitors to Reel.com are more engaged in the content, comScore says. Reel.com customers view more pages at the site than previously and spend three times as much time on the site as the average online visitor. That bodes well for 800.com as it makes its pitch to sell videos to Reel.com’s customers.

Hollywood Entertainment will promote shopping at Reel.com online and at its 1,800 stores in 47 states and Washington, DC. For a limited time, new 800.com customers will save $5 off movie orders of $50 or more and get a free rental coupon for Hollywood Video stores. “In terms of competition with other online electronics retailers, it’s a real plus for 800.com to have the brick-and-mortar connection,” says iXL’s Calvin. “800.com is really trying to sell like a retailer and to do that they have to understand the customer. Reel.com will help them do that.”

Until now, 800.com has built its retail business on its boutique style of sales and service. When Internet retailing started, the premise was to allow consumers to shop whenever they wanted without having to deal with humans. “Many folks getting into online retailing fell into one of two buckets: mass merchants selling commodity products or those that focused on a low price point. Because we decided to be a specialty retailer, we had to provide full services to our customers,” Drew says. “Specialty retailers tend to focus on more complex product categories that require a consultative selling process, which means having pre- and post-sale support.”

The attention to customer support has contributed to smart growth this year. Drew says he expects to reach $60 million in revenue this year, up 25% from last year’s $48 million.

With capital on its side, clearly 800.com is holding fast in the e-commerce market even as competitors are struggling. In May, the company bought out assets from former competitors Roxy.com, an electronics store, and EverythingWireless, a direct marketer of wireless products. As part of the deal, 800.com now has the rights to the two companies’ URLs, databases of 800,000 names, and catalog and creative assets. The acquisition marked 800.com’s entrance into the wireless phone market.

While 800.com is buying up some competitors, others are struggling. Buy.com, which re-launched its web site in September, was bought back by its founder Scott A. Blum after the company was delisted from the NASDAQ exchange due to poor stock performance and reported layoffs and a sharp decrease in sales. Outpost.com also has had a rocky ride recently, as it laid off employees, lost nearly $10 million in Q1 2001 and dropped its free shipping program. It also was the target of an acquisition, was dropped by its suitor then picked up by another.

Furthermore, 800.com’s reps receive training through the manufacturers’ authorization programs. And the 800.com support staff is full of industry veterans with substantial experience in selling high-end electronics, the company says. They are trained to cover all the general products as well as provide expert technical advice on certain products.

Providing that meticulous level of customer service is key in attracting high-end, specialty product manufacturers, who don’t want their best brands associated with discount general retailers that merely ship out a box with some manuals. Drew explains that manufacturers, like any other company concerned about its brand, want to know that retailers selling their goods can provide the level of support they think is needed to support their higher-end products. “The biggest key to getting manufacturer authorizations is to have product specialists,” Drew says. “We invested in having this kind of infrastructure which took a couple of years.” 800.com was the first Internet-only retailer to be authorized to sell Toshiba, for instance, and is one of the few authorized to sell Sony products.

Drew says this status ensures the company will be able to provide the retail environment that keeps customers coming back. “When you’re authorized you have access to more products and you can buy directly from the manufacturer,” he says. “Our 70-plus leading brand authorizations have a huge impact on gross margins and, ultimately, profitability because they enable a direct relationship. This direct relationship ensures better price, selection and supply privileges. Authorizations also give us access to the better goods, which have higher gross margins.”

Being an authorized dealer also helps with better marketing. “You then have access to promotional programs, sometimes advertising and coop dollars and manufacturer promotions,” says Drew. In one example of a manufacturer promotion, 800.com, with the support of Sony, offered free shipping on all Sony electronics during a rebate promotion earlier this fall geared toward increasing conversion rates and average order size. The promotion gave gift checks good at 800.com to buyers over certain levels. “The other thing you get is the opportunity for product returns and stock rotation,” says Drew. Retailers who are not authorized sellers have to eat the cost of a returned product.

Other marketing includes online ads, affiliate programs, as well as direct mail catalog, e-mails and postcards. 800.com has 30,000 affiliates, with such online partners as the OurHouse.com home furniture site, that direct customers to the electronics store.

Drew says 800.com gets lessons every day in the importance of in-house, integrated customer service. A customer considering a home entertainment system may visit 800.com four times in three weeks before making the purchase. That means it’s important to have a single conversation with the customer, which equates to having a system that tracks multiple contacts with the customer. “Customers get frustrated having to start over with a new person so we implemented a system that tracks every conversation and puts it in a single customer record so customer service reps can pick up where the last one left off,” Drew explains. “It’s been a saving grace for us and customers really like it when they’re cared for.”

The company points to high customer satisfaction ratings in Forbes Best of the Web and Yahoo! Internet Life’s Best Electronics Site ratings in 2000, as evidence that in-house fulfillment and customer service are worth the investment. “The payback is that we drive service levels up, which helps us make more sales,” Drew says. “As we grow, these expenses become a smaller percentage of cost of sales.” Furthermore, 800.com says its product return rate is about half the industry average. While 800.com will not say what its rate is, Shop.org’s recently completed survey of multi-channel retailers reports that the returns for electronics purchased online are about 4%.

800.com this year introduced the fourth generation of its web site. A key improvement is adding choice boxes to the search results page so customers can narrow their choices by product subcategories, as well as by price, brand format and other features. The site also added Interactive Wizards to the car audio and wireless stores that provide a live connection between customers and service reps and the Accessory Matchers to the PDA and wireless stores that matches accessories to products. Both will be available throughout the site for other products eventually.

On the back end, 800.com has 28 major applications running on 130 servers, including online help chats, online forums and “anything the customers need,” Drew says. Other features on the site include in-depth product information and online buying guides, side-by-side product comparisons, navigation by price, feature or brand and a price matching policy. Drew says 800.com added these features to give customers all the information they need in one place. “In our focus groups we found that consumers blend advice from consumer product reviews in magazines, authoritative friends and retailer suggestions to make decisions about buying consumer electronics. Consumer electronics are complex products and consumers like to check out all the information on them before buying,” he says. “We make sure we provide it all in one place on our site.”

It also added more wireless products and accessories and promoted the offerings with free shipping on all PDAs in early autumn.

800.com may have its ducks in a row, but that does not mean it is immune to competition from big sellers online. The recent meeting of the minds between Amazon.com’s electronics division and Circuit City’s stores could present a new competitive challenge. The deal involves selling Circuit City products via Amazon online and allowing customers to pick up the goods at local Circuit City stores, a clear move toward a multi-channel strategy that analysts say is key to survival.

But 800.com tries to put the new competitive threat in the best light. The partnership, Drew says, “points to the importance of the core tenets of our business model: Because of our full-service, specialty approach, our 70-plus leading-brand authorizations and an infrastructure that enables us to control the entire customer experience, we feel we are able to provide the best service, selection and value in web-based consumer electronics retailing. This puts us in an excellent position to continue to compete and differentiate ourselves in the category.”

andrea@verticalwebmedia.com