E-tailers lose ... and Overstock.com wins
Summary
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Overstock.com buys close-out inventory and resells it cheap. The demise of e-tailers has helped fuel Overstock.com's growth. The more e-tailers go bankrupt, the more Overstock.com can buy inventory for pennies on the dollar.
So far, the strategy has worked well. In an interview, Overstock.com CEO Patrick Byrne didn't disclose the size of the profit, but just the fact that the company is in the black says a lot. In the last month, Overstock.com's sales have jumped from $4 million to $9 million a month and early indicators show the company's sales are growing exponentially. The company said it can stay at break-even with $4 million in sales.
Byrne also noted that Overstock.com took $27 million to turn a profit. Of that sum, Byrne, who ran uniform company Fechheimer Brothers for Warren Buffett's Berkshire Hathaway, put up $20 million through his personal investment fund. Byrne owns 60 percent of Overstock.com, which hasn't taken any venture capital handouts, he said.
For perspective, Amazon.com (amzn) has an accumulated deficit of $1.75 billion through Sept. 30 without a profit. eToys Inc. (etys) has a $339.9 million deficit through Sept. 30 without a profit, according to the companies' Securities and Exchange Commission filings.
Overstock.com's strategy is simple -- take a small sliceof the $50 billion close-out business. In retail, goodsthat don't sell get pushed by "jobbers" and otherparties, who then sell them to bargain basement stores.It's a fragmented market that Overstock.com couldconsolidate.
And the dot-com implosion has only helped thecompany. Overstock.com has purchased e-tailerinventories worth more than $44 million at retail valuefrom the likes of Adornis.com, BabyStripes.com,eHats.com, jewelry.com, Miadora.com andToyTime.com. The company also bought Gear.com, asporting goods e-tailer, in an all-stock transaction.
Overstock.com's purchase of ToyTime.com's inventoryillustrates how the company makes money.ToyTime.com had $8 million in inventory based onwholesale prices that could have been sold for $10million to $11 million retail. Byrne said Overstock.comgot ToyTime's inventory for $3.7 million. The margingives Overstock.com "a lot of room to play," and tothrow in perks like free shipping, said Byrne.
The company also partners with e-tailers and retailersto move goods anonymously. Retailers often don't wantto upset suppliers by cutting prices just to clear outinventory. Under that scenario, Overstock.com takes acommission, said Byrne.
Overstock.com has kept its expenses low. Thecompany's Utah warehouse cost $2.5 million to build.Byrne shunned the automation other e-tailers cravebecause it doesn't make sense for moving close-outinventory.
Byrne isn't shy about the company's ambition. "Thepure play e-tailers won't last," he said.
"We'll be opportunistic," he said. "Closeout buying hasbeen around a long time."
Byrne admitted that he keeps tabs of publicly-tradede-tailers such as eToys, Ashford.com,Buy.com (buyx), and their financial prospects.If Byrne's forecast that these e-tailers won't last iscorrect, Overstock.com could swoop in and buy theirinventory in bankruptcy court.
But there's a catch.
Overstock.com would need a lot of capital to buy outthe inventory of a big e-tailer, and that may dictate aninitial public offering in 2001. Byrne said there's a 50-50chance of an IPO, but for now he doesn't want to talkabout offerings. Employees that yap too much aboutIPOs face grounds for dismissal, said Byrne.
"You run a company like the stock market doesn'texist," he said. "Running a company for market hype isfatalistic."
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