Outpost Vies to Avoid Dotcom Death

When Darryl Peck returned in April to the CEO?s office at Outpost.com (also known as Cyberian Outpost), he had just one item on his to-do list: save the online retailer he founded six years ago from foundering. Now Peck, who had spent the last five years as chairman of the board, has done that, in a way.

On May 30, Outpost agreed to be acquired by PC Connection Inc., a Merrimack, N.H.-based marketer of computer equipment for small- and medium-sized companies. Outpost?s shareholders must approve the deal, but it?s hard to imagine they won?t: the stock that traded near $40 per share during the heady dotcom boom times has lingered around $1 per share for much of the year.

The deal means that Outpost will continue to operate its online store at Outpost.com and will get lines of credit to continue operating and maintain its inventory.

Rob Leathern, a digital commerce analyst at Jupiter Media Metrix in San Francisco, said the deal makes sense for both parties. Outpost, which had reported cash flow and credit problems, needed support. And PC Connection wanted to boost its online sales channel and found value in Outpost?s systems for selling computers and electronics online.

It all comes down to margins. That?s the big lesson of the Outpost story. After all the dotcom drama, the IPO highs, expensive advertising to build brand recognition and free shipping offers, Outpost had to run a profitable retail business.

The Kent, Conn.-based online retailer, which hawks computers and consumer electronics, reported $355 million in sales for its year ended Feb. 28 ?an 87 percent surge from the previous year. Profit margins on those growing revenues run 15 percent. Outpost?s website design wins kudos from consumers for its ease of use and personalization features. The company has signed deals with retailers like Canton, Mass.-based Tweeter Home Entertainment Group and Brookstone in Nashua, N.H., to handle all of their online commerce operations, from front-end website design and management to back-end logistics and customer service.

These used to be promising signs for an e-commerce business model. But the emphasis for a pure-play dotcom pioneer like Outpost has shifted from future prospects to present-tense profits. So while sales surged, losses continued ($30.2 million for the year, down from $35.6 million a year ago). Like hundreds of once high-flying B2C websites, Outpost.com has taken a beating during the past year from Wall Street and the venture capital community. Outpost?s stock price was at 80 cents the day before the PC Connection announcement down from its high of $39.50 a share in November 1998, and Outpost officials acknowledged that the company was running out of cash. In April, Outpost faced some harsh realities, including layoffs?110 employees or nearly 30 percent of its staff?and changes in the high-level executives. The departures included Paul D. Williams, chief financial officer, and Kate Vick, a four-year veteran who served as CEO and president from January through April. Peck immediately stepped in after Vick?s abrupt April 13 departure.

Survival Tactics

Peck?s first orders of business were the layoffs and other changes to Outpost.com?s operating model, which he hopes will lead to profits in a time frame that satisfies investors and opens the doors to new financing. Wall Street analysts agree those were necessary steps but still see challenges ahead. ?Financing is their major issue, and the market is clearly not receptive to retailers these days,? notes George Sutton, managing director at Dain Rauscher Wessels, an investment bank in Minneapolis.

Still, Sutton and others see potential. At a time when other online retailers have shut down, Outpost continues to grow more than its revenue. Business from repeat customers was up from 49 percent in fiscal 2000 to 57 percent in 2001 (the fiscal year ends Feb. 28). Customer acquisition costs dipped from $100 two years ago to about $32 now. And customers have increased their average order size to around $280, a fact attributable to a change in the company?s shipping policy made in February, which restricts free overnight delivery to orders over $100.

As part of his cost containment, Peck in April eliminated all free shipping, charging $3.95 a pound for second-day air and $5.95 a pound for next-day delivery, with a rate schedule that charges less per pound for heavier objects.

Meanwhile, Outpost has cultivated a new revenue stream. Its e-Business Services, the name for its hosting services offered to brick-and-mortar retailers and manufacturers, is now used by Tweeter, Brookstone (and its Gardner?s Eden affiliate).

Tweeter CFO Joe McGuire says the joint venture with Outpost, in which the Tweeter selection of high-end electronics gear is offered on the Outpost.com site, was the most expedient and cost effective way to get this brick-and-mortar company on the Web. Tweeter avoids spending millions of dollars and man-years developing a commerce site and also gets a hand with online merchandising and back-end fulfillment, including shipping orders out to customers and handling product returns and customer service. ?It?s smarter to partner with someone who?s been around the block than reinvent the wheel in terms of a Web presence,? says McGuire.

Outpost.com may be onto something. For the past couple of years, the site has won accolades from groups like BizRate.com, which ranks B2C websites, and Forrester Research?s PowerRankings survey for excellence in the overall online shopping experience, not to mention customer service?attributes that are not easy to come by for the average company with no proven talent for the Web. ?They?re well renowned on the service side?they get you product quickly, and the customer experience is good, which is a testament to their back-end [technology and processes],? says Sutton, the analyst at Dain Rauscher Wessels. ?That?s been the spark for these attractive deals.?

This wouldn?t be the first time Outpost was able to transform itself to adapt to changing markets. Outpost.com hit the Web in 1995 as a Macintosh software reseller, but shifted gears quickly during the height of the B2C gold rush to sell computers and peripherals. When the tide turned on the B2C e-tail sector last year, Outpost.com once again steered its strategy on a slightly different course. To compensate for the downturn in PC sales, Outpost.com began emphasizing peripherals such as handheld computers, cell phones and other wireless devices.

Executives also fleshed out plans for e-business Services, recognizing that its significant investment in Web technology and expertise in online merchandising might just be another way to get revenue. Two weeks before she left, former CEO Vick said the move into services was a natural one for Outpost. ?Diversification is not a wholesale move into selling flowers, for example,? she said. ?We have to take the core competency we have?selling expensive, complicated things via the Internet?and leverage it into other areas.?

Lightbulb: Retail Isn?t Enough

Vick said she realized the potential for selling services in the summer of 1999, when she was vice president in charge of business development for Outpost.com. As Vick toyed with the concept, a couple of Outpost marketing executives and their consulting partners played around with the idea over Guinness beers one night at a local pub. A full-day offsite meeting was arranged at Vick?s home down the street from Outpost headquarters one drizzly July day. The decision that came down: Outpost would make a serious play for services customers.

?What Outpost understood better than many dotcoms was that retail is a tough business, and they had made significant investments in technology that could be an asset to others,? says Augie MacCurrach, principal of DiaLogos, a Boston-based CRM consultancy. Dialogos assisted Outpost in the development of its e-commerce infrastructure and has provided subsequent services.

Specifically, Outpost.com had a soup-to-nuts e-commerce backbone that went far beyond taking orders off the Web. Using a mix of packaged applications, custom programs and integration with back-end enterprise applications, Outpost.com?s systems addressed both order fulfillment and inventory management. Data warehouse analysis tools also helped uncover patterns in the ways customers interact with the site, helping Outpost identify cross-selling opportunities and promotions that encourage repeat sales.

Yet to offer these capabilities on a service-provider basis, Outpost.com needed to make some significant technology changes. During the next six months, CTO Raymond Karrenbauer led a project to replace Outpost?s original website, built with Broadvision?s packaged e-commerce application framework. Outpost developed its own Java applications to make this framework scale and adapt to meet the needs of different partners. ?We had to change to support a service-providing atmosphere rather than a one-off dotcom,? Karrenbauer says.

Karrenbauer says Outpost rebuilt its primary e-commerce application?everything from checkout to shopping carts?to accommodate the selling of other goods. ?We?re in a position now where we could easily take on an energy company client or a health-care company as well as another retailer and rapidly deploy them on a website in about two months,? he says.

Outpost signed the deal with Brookstone about six months before launching its new Java-based infrastructure, and it took Outpost about four months to get the Brookstone store up and running. The initial arrangement, made in November 1999, was essentially for a boutique to be added to the Outpost.com site to sell Brookstone goods for the 1999 holiday season; that led to a full-blown, two-year Web hosting and fulfillment services arrangement announced in May 2000. Brookstone pays Outpost a monthly management fee, and Outpost buys product from it at a predetermined margin to sell on the website.

Since its online presence went live, Brookstone has been most impressed with Outpost?s performance, both from the standpoint of keeping the site up and running around the clock, even in peak sales periods, as well as in shipping orders out to customers. ?They have been up and running without interruption over 99 percent of the time,? says Ken Mesnik, Brookstone?s executive vice president of merchandising, ?and we?ve been shipping orders, even during the December holiday season, right on schedule.? Another plus is Outpost?s experience in merchandising, for example, promoting batteries with items that require them. ?If we had gone to a service provider who had no experience in hard goods gifting, they wouldn?t have had the same institutional knowledge that Outpost has,? Mesnik says.

On the downside, Mesnik says Brookstone hasn?t benefited as much as it would like from Outpost.com?s touted data analysis capabilities. One of the goals moving forward, he says, is to improve information flow between Outpost and Brookstone regarding customer traffic and demographics.

Tweeter, on the other hand, appreciates the data that Outpost.com furnishes regarding its Web traffic as a key piece in its online merchandising effort, McGuire says. Tweeter maintains its own website to provide content on its products and for store locator information. But once customers click on the shopping cart icon, they land in ?Electronics by Tweeter,? a navigation bar tab on the Outpost.com site that embodies the joint venture. It?s there that the analysis of customer behavior is paying off. One recent promotion offered a Tweeter digital camera and an Apple PowerBook (sold by Outpost.com) bundled as a digital editing package. ?To the customer, there was one transaction and one shopping cart,? McGuire says.

Much of that customer experience happens because Tweeter and Outpost put lots of legwork into integrating their systems so that elements like purchase orders are passed in real-time between the pair?s accounting and inventory management applications.

Where the Outpost relationship has really paid off is in upholding what McGuire calls Tweeter?s ?slavish? attention to customer service for the Web. That was what sold him on Outpost?s services. McGuire first learned about Outpost.com when an investment banker relayed the story behind a recent argument with his wife. The story went like this: He had asked her to devote some time during the day to researching a home printer. He hopped onto Outpost at 10:30 that evening to place the order, but neglected to tell his wife. When the package arrived the next morning, his wife was livid that he had wasted her time when he had obviously already placed the order, she figured, days before.

Intrigued, McGuire says he was eager to meet Outpost executives when the investment banker wanted to make an introduction. Tweeter executives shopped at Outpost as a test drive, each sending items back for returns, McGuire says, ?and every time, the turnaround was great. It was clear to us they were fanatical about customer service.?

As happy as he is with the relationship, McGuire admits he has concerns that the current unfriendly e-tailing climate might take its toll and Outpost won?t survive. ?With one dotcom death after another, that?s one of my biggest fears,? he said. McGuire can rest now, too.