Capmark Financial Group’s newly combined companies generated more than $1 billion in 2014 e-commerce sales.
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But it’s not just failed dot-com retailers who are flooding goods into the liquidators’ bargain web sites; downsizing dot-coms are doing so also. Daphne Li, vice president of marketing and technology for b2b auctioneer DoveBid Inc. notes that the company’s dot-com clients are a mix of those who’ve ceased operations and others seeking to unload surplus equipment and infrastructure as they downsize. “Most of these dot-coms were growing really fast, so they may have cut back on their hiring targets, but they’ve already bought the equipment,” she says. “Or they may be right-sizing the company and now they’ve got extra desks, chairs and PCs. They’re trying to improve their return on assets, so any surplus they have, they want to sell. But it doesn’t make sense to hold your own auction if you only have 20 computers.”
Make me an offer¯online
DoveBid has been around since 1937. It doesn’t deal with surplus inventory, but focuses on the secondary market for capital assets, mostly at Fortune 4000 manufacturers and other companies. DoveBid did its first liquidation of a dot-com company in 1999. Since then, it’s handled hundreds of such liquidations, which now represent about 10% of the company’s business, Li estimates. Among them are Petstore.com, Homegrocer.com, and Internet delivery service Kozmo.com
To handle growing demand, DoveBid has started aggregating dot-com asset liquidations in monthly auctions. The first so-called dot-com exchange, held in April, offered computer, networking and telecom equipment and office furniture from 40 dot-coms. Bidders can attend auctions on site or via webcast. Patent-pending technology developed by DoveBid lets remote bidders place bids in real time. The webcasts, says Li, have quadrupled auction attendance, to the seller’s advantage.
“Traditionally, a lot of people went to brokers to sell surplus,” she says. “But that doesn’t get a lot of competitive bidding going. Auctions are a way to reach more buyers and get some competition going. And the webcasts have really opened up the marketplace.” DoveBid collects both a buyer’s premium of 10% on each item for onsite bidders (12% for webcast bidders), and a seller’s commission that varies but often falls in the range of 5% to 10%.
Overstock.com is building its own warehouse to handle collection and distribution logistics. When dot-coms started crashing last fall, the company already had the infrastructure in place to leverage the opportunity. Supply is key to keeping Overstock’s b2c retail web site replenished, and Byrne keeps a close eye on the financials of wobbly e-retailers. “I know the balance sheets of the publicly traded e-retailers probably as well as they do themselves,” he declares. The company has cooked up its own formula for predicting when teetering dot-coms will fall; so far, accurate to within roughly a month, he says.
Overstock has acquired and liquidated online the inventory of 15 failed e-retailers to date. They include a number of jewelry sites such as Miadora.-com and Adornis.com, plus baby gear retailer Babystripes.com. It bought $500,000 of chairs, tables and lamps from the now-shuttered online furniture retailer GoodHome.com for a mere $80,000; and it paid collapsed hat vendor eHats.com $70,000 for $550,000 in Stetsons and Kangols. Most of the other deals with e-retailers were struck on condition of anonymity. “We buy at retail less 80%, and we sell at retail less about 60%,” he says.
Reducing the chain
Byrne says that selling liquidated merchandise directly to consumers allows Overstock.com to pay higher prices for merchandise. While paying $80,000 on $500,000 may not sound like much, Byrne says he pays higher than the rates paid by many other liquidators. “Unlike other liquidators who pass it down the line to jobbers and wholesalers, each with their own mark-up, we can afford to pay more because we sell right to the consumer,” he says. The company, which recently launched a b2b site, doesn’t stop at inventory. From Toytime.com, it bought computer equipment, desks, and warehouse infrastructure, conveyer belts and racks-even cases of toilet paper and brooms. In fact, Byrne says the company has upgraded its own infrastructure with capital assets it’s acquired in liquidations.
Buying needed technology and infrastructure of the down and out may seem like an appealing, low-cost idea to the up and coming. But it’s not without risk, says Jupiter Media Metrix analyst Heather Dougherty; in fact, it may be less expensive to build new applications from scratch than to retrofit applications that were intended for other uses. Applications that require integration with more than two or three data sources are probably too costly to integrate with existing infrastructure and business processes, she says. Walmart.com was forced to spend an entire month offline last fall while it integrated assets acquired from HomeWarehouse.com, she points out, which didn’t help either sales or the brand’s presence online.
“Enterprising traditional companies are strengthening or creating online retailing initiatives by purchasing the assets of unsuccessful online ventures,” she says. “Buyers must examine assets cautiously, including technology and infrastructure, inventory, and marketing, to determine which components they can salvage for reuse.”
The market for dot-com leftovers may be slowing down now. Even though 55% of the 493 dot-com crashes since January 2000 occurred in the first five months of 2001, according to webmergers.com, two-thirds of web M&A advisers expect greater buying activity in the second half of this year. And in May, the prices paid for failed dot-coms also began moving north. But the reality of liquidation that the new breed of salvagers has brought to the market is permanent. And business cycles being what they are, they are certain to have plenty of opportunities to use those techniques in the future. l
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