May 16, 2000
MotherNature.com's CEO Defends
Dot-Coms' Get-Big-Fast Strategy
By JOHN DODGE
Special to THE WALL STREET JOURNAL INTERACTIVE EDITION
Profit or perish. That's the new mantra for dot-com businesses, which until recently
spent with abandon on brand development, advertising and customer acquisition.
Toward that end, MotherNature.com Inc., an online health-products retailer,
wracked up large losses in the last two quarters.
MotherNature's $34.7 million in cash on hand is all
that separates it from oblivion unless the company
breaks even in three to four quarters. The day it went
public last December, its stock hit a high of $14.565
and has beaten a retreat ever since. On Friday, it
closed at $2.
No one feels the clock ticking more than 42-year-old
President and CEO Michael I. Barach. The company
has ceased almost all off-line advertising, which cost
it $7.2 million in the first quarter. Its technology
infrastructure is being leveraged into new ventures. A new Wellness Web channel
has been started, and the company is flexing its purchasing muscle by serving as a
distributor for health-product stores. Leverage, leverage, leverage.
Mr. Barach, a venture-capitalist and attorney with two graduate degrees from
Harvard University, has his up and down days, but sums up the dot-com ride as
exhilarating. WSJ.com caught up with him 10 days ago at the Nantucket
Conference for New England Internet CEOs.
John Dodge: Were public markets crazy in emphasizing growth and brand to the
exclusion of everything else?
Mr. Barach: Only history will tell, but it makes a lot of sense. The capital markets
and the public chose to finance the Internet. That accelerated Internet adoption by
three to five years. Overall, it's been for the good of society. That's not an irrational
thing.
Q: What were the guiding principals at MotherNature.com during those heady
spending days?
A: We had a GBF strategy. GBF stands for Get Big Fast. The quicker you scale up,
the faster you become a leader, and only the leaders have access to cheap capital.
Growing revenue does not blend well with becoming profitable. But it's okay as long
as the market rewards that.
Q: What were the benefits of GBF?
A: In the broad context of history, it's an aberration, but there is some logic to it.
Growing that fast allowed us to achieve economies of scale. In December 1998, we
shipped 50 packages a day. A year later, we had a day where we shipped 5,800
packages. That gets you efficient. We did the right things.
Q: Do you wish you had gotten religion on profits earlier?
A: I don't regret anything we did. Management's objective is to enhance shareholder
value, and you have to look to public markets to determine that value. Those are
clues you take. Last year, companies that lost money had higher stock appreciation
than companies that made money.
Q: When did the company's philosophy shift?
A: Last year, we had a clear hill we wanted to take, and that was to be the best online
retailer of natural products in the world. We felt we took that hill the day we went
public on Dec. 10. Then the bombs starting falling around us and the hill became
radioactive. The hard part emotionally was figuring out the next hill we should take.
That took about a month and forced us to think about what we were really good at.
Q: What governs the company's thinking today?
A: We have a totally different mindset. We're going
to spend as little money as possible to get it done.
We're not as focused on 40% growth as we once
were. It's relatively easy to buy revenue. What's
hard is to get profits.
Q: Describe the new initiatives.
A: We're essentially reselling our technology
infrastructure and are in three lines of business
instead of just retailing, and we'll run [the latter] with
as little cash as possible. For instance, with Web
hosting, we will strip out our name and put in the
customer's name. We'll also do all its shipping and the invoice will bear the
customer's name. We're reselling our intellectual property.
Q: What are you doing in the area of costs?
A: We're pruning more aggressively, focusing on profitable customers over their
lifetime. That means we're growing the customer base at a slower rate.
Q: So now it's GSF, or Get Smaller Fast?
A: Not really, but we added 102,000 new customers in the first quarter versus 157,000
in the fourth quarter, and still, top line revenue in Q1 increased by 28%. Our
customer-acquisition cost has dropped to about $50 in March [from $71 in the fourth
quarter]. We only acquire the customer if the lifetime value exceeds the cost.
We've also focused on mechanics in our business such as freight costs. We just
increased the prices we charge. We were subsidizing about $1.80 in shipping
charges [per shipment]. Now, we are close to breaking even on freight.
Q: You're a venture capitalist and lawyer. Are you also a consumer of health
products?
A: I'm a big believer in natural healing. My father had a heart attack and bypass
surgery at 48 and very aggressively started to consume natural products. My wife
had incurable migraines, which were gone after two acupuncture sessions. I love
what I do and the products I sell.
Q: Does the pressure get to you sometimes?
A: In some respects, what we are doing now is more challenging than last year,
which was pretty easy. Pressure is only a state of a mind. I'd like to be CEO of
dot-com that can turn a profit and be one in the 10% of dot-coms that ultimately
makes it. Some day I could get to tell my grandchildren I was here early [to the
Internet]. |
