After grounding brick & mortar model, Egghead takes flight as dot-com
By Rick Markley
After cracking under the weight of its bricks-and-mortar store, Egghead hatched a plan to salvage the company as a pure-play. The 16-year-old company that once tried to be everything to everyone is now zeroing in on business-to-business sales. And with a new strategy and a new partner, Egghead.com is ready to cross the profit threshold.
Seated in the front car of Egghead’s decade-and-a-half-long roller-coaster ride is George Orban. Orban began his involvement with the company as an investor and board member; he has been the CEO and now serves as co-chairman. The ride began in 1984 when Victor Alhadeff launched Egghead in Seattle as a storefront software retailer. Not having a retail background, Alhadeff struggled to raise money for the new company. At the same time, Orban—with an extensive retail background—was considering starting a chain of PC oriented stores. An investment banker talked Orban out of his plan in favor of investing in Egghead. In 1985, Orban joined Egghead as investor, advisor and director. That same year, Egghead attracted more investments and was primed to grow. “Its curve intersected with the steep curve of software demand and interest in PC products,” Orban says. “The company grew faster than management’s ability to control the business. It hadn’t put into place the infrastructure to support what had become a very complex business.”
At its peak, there were 280 stores; an outbound sales force that sold to corporate, government and educational entities; and a catalog division. Between the late 1980s and the mid-1990s there were several management changes, “none of which did a particularly effective job,” Orban says. By 1995, the revenue base stalled and the company fell into a crisis. The board sold the direct sales arm, which included the corporate, government and educational business. The remaining resources were concentrated on the troubled retail business. At that point, Orban, who worked for The Sprout Group of Donaldson, Lufkin and Jenrette as a venture capitalist on Wall Street, became Egghead’s chairman, and shortly thereafter CEO. “It became apparent very early on that we had to cut the bleeding in the retail chain,” he says.
Applying a tourniquet
Following the Christmas selling season of 1997, Egghead made two major changes. First, it closed all its retail stores to turn its attention to the Internet. Then the money started to roll in. “We caught the wave of enthusiasm over the Internet,” Orban says. “We grew our Internet business so that within the 12 subsequent months we were one of the largest online retailers; our quarterly sales revenue exceeded $40 million. On the basis of that, we raised $80 million in the spring of 1999.” Second, it realigned its focus away from b2c to b2b.
Radical leaps such as shutting stores and going completely online are par for Orban’s life. Orban holds a bachelor’s degree in chemistry, a master’s degree in international affairs from the University of Paris and an MBA from Columbia University. “I was 20 and I just couldn’t see myself cloistered in a lab,” he says. “I wanted to develop a historical perspective. So I immersed myself in the history of the 20th Century.” After completing his international studies degree, Orban, a Canadian citizen, spent five years abroad as a trade delegate for the Canadian diplomatic service. He spent several years with a company with international interests in several areas including retail before heading to Columbia.
With competition heating up on the Internet, Egghead had to quickly achieve scale. The best way to get scale was to team up with somebody in a similar business, he says. Egghead began discussions with Onsale to merge the two operations. Combined, the assets of the companies were very favorable, not only to preserving both companies but also to giving them the opportunity to grow, he says. The two struck an agreement in July 1999. Orban and Onsale’s Co-founder Jerry Kaplan now serve as co-chairmen; Jeff Sheahan was named president and CEO this July.
“One of the things that Jerry Kaplan and I shared throughout our Internet experience was a great deal of cynicism for the value the consumer brought to our businesses,” Orban says. “The consumer was not a particularly profitable customer. We thought the money spent on marketing (by pure-plays looking to establish brand awareness) was egregious and largely unproductive. We both felt the business customer was the best customer.”
Egghead is looking to acquire b2b customers and find inexpensive ways to accommodate b2c customers. “Less than 50% of our customers are business, but they account for a far greater amount of the revenue and a far smaller portion of the overhead. Our focus has been on opening the door to profitable business, and you’re going to see that accelerate now.”
Taking aim at the small-to-medium business customers is a sound strategy, says Robert Labatt, research director with Gartner Group, Stamford, Conn. However, he cautions, that the b2b market is competitive and its customers hard to reach. Egghead is using its telephone sales force to go after business customers. “Telephone sales are a great way to go; that makes sense,” Labatt says. But, he adds, Egghead’s success will be determined by how it carries out its plan. “It’s all in the execution.”
To embrace the business customer, Egghead.com redesigned its web site this summer. The site now has networking and accessories tabs, a business solutions center for leasing options, volume pricing and open accounts, government and education centers, and an extranet where customers can examine their purchasing histories. Egghead is not turning away b2c business, but is completing those transactions online with automated email responses. “Once we have human intervention with the consumer, the orders turn unprofitable,” Orban says. The transformation also included ditching the professorial Egghead logo in favor of a design using the name only. The professor lost his tenure in April.
In its new model the company has never made a profit. Orban adds that because of the business’ complexity, he is not sure if it ever turned a profit in its storefront incarnation. Orban forecasts that Egghead will become profitable by the end of 2001, and there are signs the company is moving in that direction.
To cut costs, Egghead.com moved about 20% of its jobs from Silicon Valley to Vancouver, Wash., this summer. The move will reduce operating costs and allow it to more easily hire and retain staff. Egghead reported second quarter losses of $17.7 million, an improvement from its $22.4 million loss for that period in 1999. The company also reported that the average order size for the second quarter was $217, up from $202 in the first quarter. Repeat customers accounted for 74% of its second quarter purchases compared with 66% of its first quarter purchases.
Internet retail consultant Gomez.com ranked Egghead fourth overall on its summer 2000 scorecard for Internet computer stores, up from number five. In category rankings, Gomez scored Egghead third for ease of use and second for bargain hunter. Gomez says Egghead does a good job integrating information such as inventory and shipping details into the product and order pages, but does not offer extended warranties or consumer reviews.
Jennifer Jordan, a senior equity research analyst with First Security VanKasper, says Egghead stock is a strong buy. “Its been ugly and its continuing to be ugly,” she says of its current stock value. But, she believes Egghead’s goal to reach profitability by 2001 “will be tight, but doable.”
The biggest challenge facing dot-coms is acquiring customers, Orban says. “It is very expensive to establish a national consumer brand. That’s why a lot of these Internet retailers are going to fail.” As for Egghead, it is banking on 16 years of retail experience and its new focus on b2b to not only keep it from the scrap heap of failed dot-coms, but boost it into the elite group of profitable e-retailers.
