Garden.com's demise shows why pure-plays will continue to have a tough time

But in November they became part of another trend among Internet retailers—they closed shop. The problem: Not enough money. “It’s a game of scale,” says Cliff Sharples, president and CEO. “We’ve got well over $100 million invested in this company and it was easy to see we needed to raise more money to achieve profitability.”

Lack of money and inability to achieve scale are the twin scourges of pure-play Internet retailers today. As the Internet moves into the mainstream of retailing, more large, well-funded bricks-and-mortar merchants are developing Internet strategies. And the great advantage they bring to the web is that they already have everything that pure-play Internet retailers are building from scratch. Things like inventory, buyers, warehouses and distribution centers and—maybe most important of all—trusted national brands. “If you’re a Sears or a Wal-Mart, you don’t have to put a lot of extra money into marketing a world-class web site,” says Duif Calvin, San Francisco-based senior retail analyst with iXL Inc. “They can just add a tagline to the advertising they’re doing already: Visit us at our web site.”

In addition, large general-merchandise sellers can leverage a web site investment over a number of product categories and gain an advantage that the pure-plays, especially the specialized ones like Garden.com, have a hard time matching. “Garden.com had 1.5 million customers; Wal-Mart has 100 million transactions a week,” Calvin says. “Wal-Mart gets a scale that Garden.com will never meet.”

Furthermore, he argues, gardening is not a commodity market. “It’s not like books or music, where price is what consumers care about,” he says. Even local garden shops have an incredible number of products. “It’s very hard to price compare,” Sharples says.

And to top it off, gardening enthusiasts are information junkies, not just on gardening tips and techniques that a wheelbarrowful of magazines provides, but also on garden design and making the most of the gardening space they’ve got. One of the most popular features at Garden.com was the landscape planner. It helped gardeners decide which plants would grow best in their climate and with their garden or yard configuration. And it gave them the chance to buy everything that the planner suggested.

That feature certainly was an attraction and set Garden.com apart from the neighborhood garden supply store, Sharples says. “If you aren’t adding unique and distinct value and allowing the customer to do something that the customer can’t do in another medium, what’s the point?” Sharples says.

While Garden.com believed it was offering new value on the web and had, in fact, helped lead retailers to the new way of selling, the company still had to employ the old methods of marketing. It built its brand by TV advertising—primarily home and garden shows—it advertised in gardening magazines and, just before it folded it joined the born-again revivalists who were mailing catalogs. Garden.com mailed nearly 2 million catalogs to consumers whose names it had acquired from traditional home and garden mailing lists. “The catalogs were working well, though the amount we mailed was not really significant,” Sharples says. “We were just getting going.”

Catalogs weren’t the only print medium that Garden.com employed. It also advertised in a variety of gardening and home magazines. Unlike the customer-acquisition orientation of catalogs, print advertising was for the purpose of building the brand. But when marketing money became tight, Garden.com pulled back from its expensive brand advertising. “We started to shut down the brand activity to go to just customer acquisition,” Sharples says. “Although it’s hard to measure the effect of advertising, I don’t regret doing brand marketing at all. It created some good momentum for the company.”

Garden.com’s marketing spending reflects Calvin’s observation that the Internet pure-plays need to spend heavily to create their brands. In the first quarter of FY 2001, which ended Sept. 30, 2000, the company spent $3.8 million in marketing to obtain $2.2 million in sales. That nearly 2-to-1 ratio is consistent with how the company had been spending. In FY 2000, the company spent $26.6 million in marketing for $13.5 million in sales.

To some extent, Garden.com’s marketing strategy was working; the company’s repeat purchase rate was 50%. And its average ticket was $55-$60, bumping up to gardening catalogs’ average ticket of $60-$70.

Further evidence of Garden.com’s inability to achieve scale was the amount it was spending on buying goods. In the first quarter of FY 2001, Garden.com spent $1.8 million for the $2.2 million in goods it sold, gross margin of 18%. That was an improvement from the previous fiscal year’s 15.5%, when the company spent $11.4 million on products that brought in the $13.5 million in revenue. But, as with the rest of retailing, gross margins in Internet retailing, have a twist. Since Garden.com sold advertising, the gross margin could be measured against all revenue—product sales and advertising. In that case, the gross margin was 29%—not all that far off of the 36% that many were expecting about 18 months. “Because Garden.com has virtually no inventory carrying costs, no distribution center costs—the vast majority of products were shipped through our virtual supply chain—our business model looks fundamentally different than most retailers,” Sharples says. “Ultimately, we believe that at scale, this type of model has the potential to deliver greater profit margins than most retailers.”

If Garden.com had achieved those margins, it might have had a chance of staying in business. In a typical retail operation, the cost of goods ranges from 20% for warehouse clubs to as high as 60% for specialty retailers. “They‚d have to achieve a range of 30-35% to sustain any kind of long-term profitability,” says James Okamura, Chicago-based senior partner with J.C. Williams Group Ltd. “Garden.com was admired by many—myself included—they had excellent merchandise and the early-mover advantage. But their aggressive approach to market share acquisition did not allow them to achieve higher margins than that.”

In the end, Garden.com was the victim of investor sentiment, which soured so quickly on dot-coms. “There was a pendulum effect among investors,” Sharples says. “A year ago they were willing to offer high valuations, now it’s swinging completely in the opposite direction.” And Garden.com was unable to hold on until the pendulum began swinging back. “Unfortunately, we were running out of gas from a cash-flow perspective,” he says.

Looking back, Sharples says he wouldn’t do anything differently. “As I think of the context in which we made the decisions, I probably would have made the same decisions now that we made then,” he says. “A lot of people thought that if anyone would survive, we would. We thought so, too.”