Overstock.com spins profit from unwanted goods

PALO ALTO, Calif. (Reuters) - Shoppers who ordered the popular workout book "Body for Life," from Amazon.com Inc. (AMZN.O) paid $18.20 and saved $7.80 off the list price. But customers of a lesser known site called Overstock.com paid just $16.38.

They probably stumbled upon some very cheap jewelry, toys and random gift ideas at the same time. Like the white goose down comforter, for instance, which at $73.99 was 63 percent off the retail price. Or the $680 pumpkin-colored Italian leather handbag, marked down to $159.99.

Overstock.com's merchandise is new, not used. And unlike the things sold on auction sites like eBay that are popular among the bargain-minded, it does not require that you engage in a bidding contest every time you want to make a purchase.

Perhaps most notably, while so many big online stores remain unable to speak of profits, except that vague kind of profit excluding every unusual and not-so-unusual expense from their income statements, Overstock earned a bona fide profit during December.

No funny math
"We are profitable. We have net profits, based on true generally accepted accounting principles," said Patrick Byrne, Chief Executive of Salt Lake City, Utah-based Overstock. "We made about $300,000 or $400,000 in December, and we will be profitable from here on out."

Clearly Overstock is not yet a leading player in online retail. The $80 million in revenues it is estimating for all of 2001 compares with some $639 million Amazon.com booked in its most recent quarter alone.

But while Amazon matures into a business whose growth rate has slowed to single digit range, Overstock says it is just getting started. It is projecting 2002 revenues, from products ranging from Hewlett-Packard computers to Ralph Lauren apparel, will total between $250 million and $350 million.

The concept behind Overstock is not new. For as long as manufacturers have been selling merchandise to retailers, they have sought other outlets for all the leftover or out-of-date products -- everything from the cashmere sweaters in that shade of pink that is so "last year," to the boxes of cereal that are perfectly fine to eat in January, but packaged as Christmas promotions.

It's what the Internet has long promised but rarely delivered: A new way to deal with old problems. Stores often find they need something more advanced than the 50-percent-off rack, to clear out all the old stuff when one season ends and new merchandise for the next season arrives,

The mission of Overstock.com is to make the existing offline liquidation system more efficient. It may sound pretty ho-hum at this stage in the dot-com game in which so many businesses that set out to eliminate the middle man wound up being eliminated themselves.

But there may be a difference with Overstock.com. The close-out merchandise business is far more fragmented than traditional retail and, by most accounts, has a lot more room for improvement.

Before Overstock was relaunched in 1999 as an online retail site, in fact, it was in the business of connecting manufacturers with the individuals and small companies, commonly known as jobbers, that deal in close-out inventory.

"We would fax out notices of deals to about 6,500 people who were making a living buying and reselling this excess merchandise," said Byrne. "It is a very fragmented market."

ChannelAdvisors, a company in Research Triangle Park, North Carolina, consults manufacturers on how to handle leftover merchandise, and says the path that close-out merchandise follows before it lands in one of the offline discount retailers like Big Lots, is extremely circuitous.

Competition from eBay
"We will sell merchandise somewhere in Texas and see it move five or six times before it is sold to consumers and every one of those middlemen is skimming," said Scot Wingo, Chief Executive of ChannelAdvisors. "The Internet takes a lot of middlemen out of the product."

That can mean cheaper prices for the consumer. Or, more profit margin for Overstock, which is often able to buy the close-out merchandise at pennies on the dollar.

Shoppers for the most part have good things to say about Overstock.com, although many offer one caveat.

"It is not the place to go when you have a very specific purchase in mind," one shopper wrote on the online review site Epinions. Unlike Amazon.com, which sells every mainstream book in print, the selection at Overstock.com is hit or miss.

As Overstock continues to grow, it could find another caveat in its sparkling business plan: inventory costs. Rather than just serving as the liaison between the buyer and the seller, Overstock purchases all the close-out merchandise and stores it in a warehouse until it is sold.

The company maintains that because it acquires merchandise so cheap in the first place, it can handle the additional carrying costs. Still, dot-com history has shown that these costs are never insignificant.

Steep warehouse expenses were one of the main factors that forced a growing eToys out of business last year, and they are one of the reasons Amazon.com still struggles to make money while, eBay which carries no merchandise, is comfortably profitable.

EBay itself now is expanding into the close-out merchandise arena and could present its own competitive threat to Overstock if it continues to sign up new businesses to use its site to sell direct to consumer

"Today it is a fairly small percentage of our business," said eBay spokesman Kevin Pursglove. "But the reality is that a lot of retailers and manufacturers recognize the fact that online sales present a good opportunity."