January 4, 2006, 12:00 AM

The Game Is On

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One area in particular that’s drawing increased interest from GSI’s clients and providing GSI with a new business opportunity is helping big retailers and consumer brand manufacturers expand their e-commerce operations overseas. In May GSI signed an agreement to acquire Aspherio, a third-party e-commerce service provider with a technology platform that operates online stores in 15 countries and in nine languages for clients such as Hewlett-Packard Co. and Logitech International S.A.

In the U.S, GSI built its e-commerce outsourcing operation from scratch, but decided to acquire Aspherio because the company’s platform is already fully integrated and compliant with major European currencies, payments systems and taxation requirements. When the transaction is finalized in the first quarter, Conn says GSI will be well positioned to help clients, particularly consumer brand manufacturers, target new e-commerce opportunities in the United Kingdom, France and Germany, which combined account for online retailing sales of more than $47 billion annually, according to Forrester Research.

“Given the complexities of selling online in overseas markets, the acquisition of Aspherio makes sense becomes it gives us an established infrastructure,” says Conn. “Now we can leverage that infrastructure as more of our enterprise clients look to expand in Europe and elsewhere.”

International development ranks high on GSI’s corporate priority list, particularly as GSI finds itself facing even more competition from other outsourcing companies. For example, even though GSI has nearly six times more outsourcing clients than Amazon Services, Amazon continues to gain ground. Amazon Services, which provides outsourcing services for nine companies, including Target Corp., The Bombay Co. and NBA.com Store, recently signed up eHobbies.com as a new client. Under the agreement, Amazon Services will provide full turnkey e-commerce services to eHobbies, including housing eHobbies’ product inventory at Amazon.com’s regional warehouses.

Taking a page

Another direct competitor, PFSWeb Inc., is also taking a page from GSI’s corporate development playbook and acquiring more inventory and inventory management expertise to expand its presence in the online consumer electronics market. In November, PFSWeb completed a merger with web electronics retailer eCost.com. The merger creates a company with almost $530 million in annual sales and rounds out the services, including inventory supply and distribution, that PFSWeb can offer on an outsourcing basis.

For now, analysts who follow GSI Commerce expect the web retailing outsourcing market to continue to grow and attract even more competitors, possibly even eBay, which in addition to owning and operating PayPal, is making more acquisitions such as Skype, a global Internet communications company, comparison shopping site Shopping.com and Kurant Corp., an e-commerce applications developer.

The acquisitions could make eBay a prime contender to take on more third-party service business and in the process compete head on with GSI Commerce. But eBay and Amazon still need to build up their market share on the high-end of the retail outsourcing business. “Ebay is making acquisitions, but they still place an emphasis on smaller businesses and merchants,” says Scot Wingo, CEO of ChannelAdvisor Corp. and author of “eBay Strategies: 10 Proven Methods to Maximize Your eBay Business.” “They still need to move into the higher end of the market, but that is going to be a longer term play. GSI is a pure service provider, while eBay and Amazon have to deal with the potential issue of competing against their customers and retailers by performing any third-party services.”With more competitors entering the web retailing outsourcing market, Wall Street analysts point out that for GSI to sustain its current market lead it needs to accelerate business development and do a better job of executing new client projects. In 2005, GSI signed major deals to design or redesign web sites for Adidas America, Radio Shack, Aeropostale Inc., GNC Corp., Zale, Levi, C.C. Filson Co., Bath & Body Works, a division of Limited Brands, and others. But GSI was late in implementing several projects, including Adidas America, GNC and Zale, which were expected to launch by the end of October.

“GSI may have somewhat overextended itself on some of its current and pending projects, largely due to capacity constraints on the technology development side” says Brian Pitz, equity research analyst with Morgan Stanley Equity Research North America. “While GSI has incurred delays and higher than expected expenses on certain new project launches, we believe their potential partner pipeline remains strong.”

GSI says unexpected complexities caused delays in launching Adidas, GNC and Zale. But the redesign for Zales.com went live in November and the launches for GNC and Adidas America will take place early in the first quarter of this year, Conn says.

Along for the ride

GSI, which routinely spends more than $1 million in upfront development costs on a major e-commerce launch or site redesign, can expect the business it booked in 2005 to generate at least $100 million in additional merchandising sales over the long term, says a recent research note from CIBC World Markets.

With the prospects for continued growth looking strong, Conn says GSI will continue to concentrate on developing new service offerings and international plans that will help attract the attention of more big chains and manufacturers. “We know there is more competition out there, but we are going to keep our concentration on the enterprise companies like we always have,” he says. “We’re growing because our retailer, entertainment company and manufacturing clients are growing and taking us along for the ride."


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