December 26, 2000, 9:55 AM

After grounding brick & mortar model, Egghead takes flight as dot-com

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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, 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, 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 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.

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