Overstock.com - a lesson in how not to run your internet retail business
I had an awesome opportunity yesterday to meet a former Overstock employee with an inside scoop on how the business is run. There has been quite a bit of press on Overstock.com lately involving Patrick Byrne’s response to terrible Q3 financials (”My bad,” he said in the press release) and his father taking his place as the CEO. Check out Henry Blodget’s brief explanation on what’s going on at Overstock. Even Mark Cuban has thrown in his two cents on Overstock’s poor management decisions.
So that’s all fine and good - people are allowed to be paranoid and use red herrings such as a war on short-sellers to mitigate their losses as the stock falls (though I wouldn’t recommend it) - but what can an internet retailer learn from this experience? What can Overstock’s phenomenally poor model teach small and large retailers alike? There are a few lessons to be learned here…
Cover your expenses with decent margins
The days of grabbing market share at the expense of profits on the internet are over. OK, some companies still employ this model and (occassionally) it works but it is a very risky model and, quite frankly, unnecessary for smart entrepreneurs and marketers. I am never impressed that a company can generate $200M in revenues with $50M in losses - with an endless supply of capital you would have to be very un-business savvy not to be able to do this.
Companies that impress me are companies like eBay and Newegg - these are two companies that were able to reach profitability rather quickly by devising a sound model. Newegg is an especially good example of this since they are a pure-play internet retailer.
Anybody remember Value America? I expect that we will be able to read a similar story about the fall of Overstock in the future. The “insider” I met recently told me that before Overstock went public they were grossing a 15% margin - perhaps in a large-ticket industry this would be sufficient, but for the relatively small-ticket items Overstock sells this is financial suicide. (Disclaimer: I do not know what kind of margins Overstock maintains since their IPO but I assume it is a bit higher to appease shareholders)
Take responsibility for bad decisions and learn from them
You would think by now that Patrick Byrnes would understand that improving the fundamentals of Overstock is a smarter approach to improving the stock price than ranting and threatening to sue short-sellers and financial analysts - but you would be wrong. In the most recent earnings call Patrick Byrnes mentioned the fundamentals - revenues, expenses, profits - not even one time. To his credit it seems that he has at least taken responsibility for Overstock’s recent misstep with an ERP implementation, but it seems like too little too late.
Overstock has had one profitable quarter - just one profitable quarter. You would think that between 1997 (when Overstock was established as Discounts Direct) and now that the management team would “get it.” They seem much more interested in artificially inflating the price of their stock than they do in cleaning up their financials and building a company that will attract investors rather than speculators.
Some things work in internet retail and some don’t - your goal is to find out what works in your industry and what doesn’t. Some lessons you have to learn the hard way and some lessons you can learn from mistakes other companies have made - let Overstock be your guide in how you should not run your internet retail business.
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Small correction: In both their Q2 and Q3 earnings call, OSTK talked about their fundamentals. They didn’t talk about them in their special litigation call a few months ago, but that was not an earnings call.
Comment by Will — November 6, 2005 @ 4:33 pm
[…] Preston Willy focuses on the actual business and the lessons that can be gleened from Overstock’s failure: Cover your expenses with decent margins […]
Pingback by Binomial Marketing Experiment » Overstock Q2 Earnings Call: “My Bad” — November 6, 2005 @ 4:56 pm
Will,
Thank you for the correction. Although fundamentals are very important at least they did not allow the short-selling issues to dominate an earnings call.
Preston
Comment by admin — November 7, 2005 @ 9:03 am
[…] When people find out I work for an internet retailer in Utah they usually ask me what I think about Overstock (based in SLC). I think that Overstock is a company fighting an uphill battle (appealing primarily to a very price-sensitive demographic), but I do think that the company has a lot of potential when they start running the company to generate profits as opposed to just revenues. […]
Pingback by The Preston Blog - An internet marketing blog for internet retailers » 14% Margins? Nice one, Overstock… — October 1, 2006 @ 7:45 pm