Posted on: Tuesday, December 23, 2003

Discount-retail sites aim to carve online niche

By Leslie Walker
Washington Post

Fifty-five venture capitalists turned down Patrick Byrne's discount-shopping Web site for financing at the peak of dot-com investing mania. So the graduate of Stanford University and Warren Buffett's real-world school of business financed it himself.

Five years later, Overstock Inc. is a publicly traded company, pulling in nearly 7 million shoppers a month to its Internet bargain bazaar and ranking right up there with Target.com and BestBuy.com as one of the Web's top 20 e-commerce sites.

But Byrne, its maverick chief executive, won't be satisfied until Overstock.com becomes a household name on par with eBay and Amazon.com, the Internet's top shopping hangouts, each of which draws more than 30 million people a month.

"In the center of online shopping, there is this great big space waiting to be occupied," said Byrne, who considers eBay a different animal because of its auction pricing and person-to-person selling format. "That is the online outlet center with serious discounts."

Sensing opportunity, Byrne kicked off Overstock.com's first national TV campaign during the fall, slashed prices on books and CDs, and invested several million dollars upgrading its rickety warehouse and computer systems. The spending spree sent the money-losing Overstock Inc. deeper into the red, but its founder told Wall Street he expects a payoff down the road.

Luckily for consumers, Overstock faces stiff competition — and not just from eBay, which aggressively encourages retailers and manufacturers to sell excess inventory on its sprawling site. There's also SmartBargains.com, a smaller operation specializing in closeouts and surplus goods backed by Gordon Brothers Group, one of the biggest retail store liquidators in the country.

Boston-based SmartBargains is privately held and only 3 years old, but it expects to be profitable for the first time this year, according to chief executive Carl Rosendorf.

"The category is really on the move," Rosendorf said. "We offer discounts from 40 percent to 75 and 80 percent off the same merchandise in department stores, and that is driving customers to our site."

Both sell excess inventory, using slightly different models. SmartBargains is strictly "off price" and doesn't handle first-run goods. Salt Lake City-based Overstock sells a mix of surplus and regular items, offering books and CDs at deep discounts, for example, in a bid to attract new customers.

Another difference is that some goods on Overstock.com — roughly half of all sales, according to Byrne — are shipped directly from its retailing and distribution partners. SmartBargains, by contrast, takes possession of all merchandise and handles shipping itself.

That may account for why customers give SmartBargains a higher satisfaction rating on BizRate.com, a site that surveys online shoppers. While 88 percent of customers at BizRate gave SmartBargains a positive rating in the past month, only 53 percent rated their experience at Overstock as positive. Many slammed Overstock for offering poor customer support when orders went astray.

Both sites want to be seen as online versions of the traditional outlet mall, but only Overstock is investing in TV to make the point.

The company started running TV ads in October showing a woman lounging on a white sofa. "Have you discovered the secret of the Big O?" she asks, then reveals it to be "Overstock.com — an online outlet" where shoppers "save up to 70 percent" on designer goods.

Overstock reported $61 million in gross sales for the quarter ending Sept. 30. Its net loss was $3.7 million, more than analysts were expecting. Byrne blamed the widening loss partly on the cost of expanding Overstock's warehouse capacity, telephone-customer support and other technology systems.

He told analysts on a conference call that one reason he ramped up capacity was his belief that Overstock "choked off our growth last year" by operating close to capacity during the holiday rush. Building for future growth means the company takes a short-term financial hit, Byrne acknowledged, but he said he believes the company can move into the black by the fourth quarter of next year.