Some excerpts from a paper on Overstock.com written in 2007.
Overstock.com is an on-line retailer that sells merchandise that is either produced for Overstock.com or bought by them or merchandise sold for other parties (wholesalers, manufacturers and retailers) with Overstock.com being the intermediary. The company thus acts as an on-line retailer making goods available to customer at wholesale or below wholesale prices. The merchandise offered include bed-and-bath goods, home décor, kitchenware, watches, jewelry, electronics and computers, sporting goods, apparel and designer accessories.
Overstock.com partners with leading brand-name companies that enable them to buy products at discounted prices. These savings are passed on to the consumer via its on-line marketplace.
Overstock.com has identified a segment of customers that would like to purchase leading brands at below retail prices. They would like to wear leading brands , even though a bit out of date and at the same time retain a bit of exclusivity. These customers are discerning bargain hunters and have high disposable income. They also prefer the convenience of shopping on-line rather than traveling to outlet malls or to sales.
The merchandise made available to on-line buyers is sourced in 3 different ways:
Surplus: The surplus left over for each season’s or year’s expected target sales is usually disposed off by the manufacturer. This surplus is purchased by Overstock.com at below whole-sale costs and sold to its customers.
Canceled Orders: Retailers may cancel orders with wholesalers or manufacturers when they discover that sales have tapered. This is another source of surplus stock with manufacturers.
Downsizing: A company may wish to downsize, or move facilities or reduce its inventory for various reasons. This is another source of goods available at highly discounted rates.
Purchased goods are delivered to customers via mail carriers such as UPS, FedEx and USPS. The modes of shipping are Standard Shipping (ground shipping), Expedited Shipping such as Next Day , Two Day and Three Day Shipping. Most orders are shipped within 1 – 4 business days. Since Overstock.com only sells what it has available in its inventory , it does not have any back orders to handle.
Overstock.com’s initial strategy was to buy excess & closing down inventory from retailers, e-tailers and defunct companies. The merchandise was purchased at below whole-sale prices and sold to its online customers below the original retailer’s cost price. This allows it to preempt any cost cutting by other retailers for simliar or same items. This is still the heartbeat of its business strategy. It has also carved out alliances with other e-tailers, retailers and handles the online marketing and selling of their goods. Orders are generated from its web-site and forwarded to the partner retailers. It also hosts online auctions where users can bid for goods. Besides these , it has also partnered with AutoNation to allow its users to locate dealers for new and used cars online. It has recently partnered with Enterprise Rent-a-Car to make their inventory of cars available to its users. Another diversification is its travel web-site that allows users to book flights, hotels, cars, lodging, cruises and vacations at lower than usual prices.
Overstock.com also has Worldstock, a store within Overstock devoted solely to carrying the works of artisans, especially disadvantaged artisans, and selling them as inexpensively as possible so as to maximize the amount of return for them. The company asserts that it follows ethical guidelines, is sustainable and is socially responsible while reselling goods sourced from these artisans in South-East Asia. Worldstock emphasizes sustainabliity, fairness and transparency.
The IT strategy includes a CRM, Data Warehousing and Data Analytics that are sourced from existing customer data, current and past transactions and click stream data. Data analysis is real-time and does not rely on batch processing. The data flow into this back-end processing IT infrastructure is via the on-line store and customer interaction with the Overstock.com and affiliated partner web-sites. This allows the various departments to query for up-to-date information across different dimensions and different departmental views.
Logistics & Distribution Strategy
Overstock.com works very closely with UPS during peak season , when most of their orders are received. Overstock.com leverages UPS’ capacity and technology to have quick and correct order fulfilment during this Peak period between Thanksgiving & Christmas. The UPS services used by Overstock.com include Forecasting, UPS Ready, Dockside Visibility, Tracking, Exchanges & Returns and Billing & Analysis. Overstock.com also works with a reverse logistics company called Newgistics that handles all its returns starting from its SmartLabel printed labels for returning customers to print-out.
Besides UPS, Overstock.com also dispatches packages via FedEx and USPS.
Fund-raising History & Investors
Overstock.com was founded as D2–Discounts Direct in 1997 and changed its name to Overstock.com, Inc. in 1999. Overstock.com Inc. was incorporated in Delaware on February 27, 2002. Overstock.com went public May 30, 2002 at an offering price of $13 per share. The IPO format used by Overstock.com was the Open IPO. This raises capital via a public auction, thus theoretically allowing the public to determine the fair market value of the company stock.
Date Went Public: May 30, 2002
Filing Date: Mar 5, 2002
Proposed Offer Price: $12.00 to $16.00
Actual Offer Price: $13.00
First Day Open: $13.50
First Day Close: $13.03
Shares Offered (mil.): 3.00
Offering Amount (mil.): $39.00
Post-Offering Shares (mil.): 14.30
W.R. Hambrecht & Company, LLC
Overstock.com’s strategy was to work with traditional, powerful retailers by giving them an efficient way to liquidate excess inventory and leveraging that to offer consumers low prices consistently, visit after visit, on brand-name merchandise. Launched only in the second half of 1999, Overstock.com
that year realized gross bookings of $1.8 million; by 2004, that figure had soared to $541
million. In its first six years, Overstock.com has witnessed approximately 100 percent
growth, year after year.
The experienced executive team and the large war-chest raised by Overstock.com are the source of it powering ahead with its expansion plans. Also, the B2B online store where small retailers can sign up and purchase merchandise to be sold at their premises is an innovation that has been copied by other online retailers.
Overstock.com has not yet broken even and its marketing costs per customer have risen in the past year. Unless one of its diversifications start returning more than industry average profits, further diversification is going to be harder because of increasing costs.
Overstock.com has a great business model. Taking it overseas, perhaps, into Europe and perhaps Japan either by brand franchising or entry into those markets would be a great opportunity.
Amazon.com. Ebay.com and other online retailers are the biggest threats faced by Overstock.com. This coupled with the fact that relentless expansion could cause an implosion especially if the numbers don’t add up to a break-even in the near future is a strong possibility.
Logistics & SCM Challenges
One of the many challenges facing Overstock.com (and other retailers) is the fact that items arrive at the warehouse without any bar-codes. Customer orders for distinct items make locating the different items an onerous task. Also partner manufacturers or retailers do not have an easy way of tracking source of orders whether from Overstock.com or other e-tailers. A solution to this would be the tagging of items at the item level which would allow the needed information to be embedded in the RFID identification codes. This would reduce order lead time and deliver to customers much quicker. An early implementation of this can be a source of competitive advantage. A complete integration into the existing information systems can make information transfer across the organization and to suppliers much more seamless and automated.
The challenge Overstock.com faces is how to continue its phenomenal growth and be profitable in the face of stiff competition from other e-tailers and e-auctioneers notably Amazon.com, eBay and Yahoo! Auctions. Overstock.com’s core business model of selling excess inventory is unassailable and it is the category leader in that segmentation. However, it’s diversification such as partnering with other retailers, selling cars and travel are an indication that it recognizes the growth limitations. WorldStock is a good idea but the Overstock.com web-site does not hype it suggesting that there is a limited market for such items. The strategy of selling stock to small-scale retailers at below wholesale prices is however worth pursuing especially with an aim of turning around inventory quickly.
Sales revenues have declined over the past year, and overall net income is still -ve , since a major chunk of spending is on IT infrastructure and upgrades to handle their growth. Gross bookings are sought to explain away the declining income. Internet traffic to Overstock.com might have increased but these are not translating into equivalent sales and their marketing costs have increased in the past year per customer. This indicates a plateau being reached. Will the core model now face stagnation?
On the bright side, the expenditure on IT infrastructure and close partnerships, have poised them for partnerships , acquisitions that can be handled and have given them a cost advantage with among the lowest shipping costs coupled with quick delivery. Amazon.com does provide free shipping but order fulfillment takes much longer.
OpenIPO : WR Hambrecht + Co’s OpenIPO® auction is a new way to take companies public that increases access to IPOs. Based on an auction system designed by Nobel Prize-winning economist William Vickrey, the OpenIPO auction uses a mathematical model to treat all qualifying bids in an even-handed and impartial way. It is similar to the model used to auction U.S. Treasury bills, notes and bonds.( a dutch auction). Just like a typical auction, the highest bidders win in an OpenIPO auction. But there are important differences. In the OpenIPO auction, the entire auction is private, and winning bidders all pay the same price per share – the public offering price.
1> OpenIPO : http://www.wrhambrecht.com/inst/openipo/index.html
2> Overstock.com web-site: http://www.overstock.com
3> Yahoo! Finance Web-site: http://finance.yahoo.com
4> Wasserman, Elizabeth. "Making RFID click on line: technology offers challenges, but also potential for e-retailers.(RETAIL TECHNOLOGY: RFID)." Chain Store Age 82.3 (March 2006): 66(2). InfoTrac OneFile. Thomson Gale. Cyprus International Inst of Management. 4 Apr. 2007 <http://find.galegroup.com/itx/infomark.do?&contentSet=IAC-Documents&type=retrieve&tabID=T003&prodId=ITOF&docId=A143240447&source=gale&srcprod=ITOF&userGroupName=cypiim&version=1.0>.
6> Overstock.com Success Story: http://www.newgistics.com/assets/docs/Overstock_Case_Study.pdf
8> Wikipedia http://www.wikipedia.org
9> Shopping Online with eBay Express, Amazon, Overstock and Google Checkout By David Steiner AuctionBytes.com September 21, 2006 http://www.auctionbytes.com/cab/abn/y06/m09/i21/s01
10> Case Study: http://www.foundrynet.com/pdf/cs-overstock.pdf
11> Viveiros, Beth Negus. "Take That, Goliath.(Overstock.com gives small businesses lower wholesale prices)(Brief Article)." Direct 13.9 (July 2001): 5. InfoTrac OneFile. Thomson Gale. Cyprus International Inst of Management. 4 Apr. 2007