How much things have changed... BW article from 05.11.1999:
COMPANY CLOSEUP By Frances Hong May 11, 1999
Value America: Brand Is King in This Web Club
The cyber retailer is off to a bumpy start, but Craig Winn is determined to make it soar with his Net adaptation of the Price Club concept
Craig Winn had achieved enough success in the retailing business that by 1995 he was retired in his late 30s and enjoying life as a Boy Scout leader and Little League coach to his two sons. But at the urging of his wife, who told him he'd be "easier to live with" if he started another business, he dusted off a 20-year-old business plan. After an E-commerce tweak and other updating, he sold the idea to investors, including Paul Allen's Vulcan Ventures, which chipped in $65 million. Today, the idea is Value America (VUSA) a Charlottesville (Va.) online retailer selling products with 1,500 brand names in 25 categories from computers to eyeliner.
Winn is off to a bumpy start. The day he raised $127 million in an initial public offering last month, the stock tripled from its starting price of $23 to a high of $74.25. But the stock was trading at 30 1/2 this morning, even though Value America reported yesterday that revenues are soaring. For the quarter ended Mar. 31, Value America reported revenues of $28 million, far stronger than the $2.2 million a year earlier and even 48% higher than the holiday-boosted sales for the quarter ended in December. "Our focus is on building scale and satisfying our customers," said Winn. "We exceeded our expectations in both areas."
"FEAR AND TREPIDATION." With growth like that, Winn can ride out some bumps. Before releasing the earnings report, he told Business Week e.biz: "Success doesn't always come easy. There is always great pain along the way and moments of fear and trepidation. What makes it harder, is building a business where nobody else has done it or turned a profit."
Value America shares a lot of characteristics with Web companies, but it manages to distinguish itself, too. Besides losing money, it mimics companies such as Yahoo! and Amazon.com by spending heavily in traditional media to establish itself as a brand. Indeed, advertising spending of $23.6 million in the March quarter was just shy of total revenues. Winn leverages his own spending with cooperative advertising agreements with makers of the products he sells.
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One way Value America rounds up customers is by creating income for charities and using their mailing lists
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What sets Value America apart is how it rounds up customers while keeping costs down. Members, who currently pay nothing to join, get a 5% discount on products. Buyers also can direct 1% of the purchase price to their favorite charity. Value America uses the hook with charities to scour their donor lists for potential customers. "A dot-com company is based upon scale," says Winn. "Scale is a multiple of revenue. We use charities' direct-mailing lists, and that makes it less expensive to reach an audience that is highly motivated to support the organization." Winn keeps costs down by having producers ship products direct to buyers, saving on inventories and maintaining a fulfillment staff.
"GREATEST ENTREPRENEUR." Winn, 44, learned his basic lessons from some of the masters of low-cost retailing. Raised in a residential suburb north of Los Angeles, he earned a BS in business administration from the University of Southern California. He started his professional career in wholesaling, working with the Price Club in its early stages and persuading manufacturers to supply the membership club with custom products to eliminate costs. He gives credit for the Value America business model to Sol Price, founder of the Price Club, now Costco Cos., and its warehouse concept. Price is "the greatest entrepreneur in the history of America," says Winn, who incorporated core Price Club elements in his model, including offering a large variety of quality products, having no inventory, and creating income for worthy causes.
Along the way, Winn also operated his own manufacturer's rep firm and moved into the lighting business, becoming one of Home Depot's largest lighting suppliers in the early 1980s. It was a bad vendor relationship with the nation's largest retailer, Wal-Mart, says Winn, that doomed his business and persuaded him to create an environment linking production and consumption -- with a commitment to support brand names. "The most important part of our concept is taking care of the brand," says Winn. "We broaden manufacturers' distribution through offline advertising and sell their products based on merits and not price alone. This works because every manufacturer wants to get its product to the delivery site more efficiently and more effectively. Do you ever go to a retail store to buy the store? You buy the brand."
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Winn designed the original plan as the PC was coming out. Can he now harness Net-multimedia convergence?
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Winn wants to stock up on more brands, pushing into a total of 40 categories soon. Cars and financial services are among the areas he is eyeing. He may even get the chance to deliver on the original idea of making full use of the convergence of Internet and multimedia technology. When he designed his original business plan, "the personal computer was just coming out, and I was thinking the PC would send this repetitive information," he says. "And then the Internet came along, and we designed our solution to capitalize on convergence and integrating telephone support."
With ambitious expansion plans ahead, it may be a while before Winn can dig out of losses, currently running in the $20 million-per-quarter range. With 11% of the company's stock, he's as eager as anyone to move into the black, but building the brand comes first. "No E-commerce company has ever made a profit. Certainly, we will, and the analysts have us making a profit in 2001." From where Winn sits, even Value America's losses can have their advantages. "There was a time I had no idea how I was going to make payroll," he says. "But I thank God for problems and difficult times because if anyone could do what we're doing, everyone would do it. So we stuck to what we believed in and particularly the idea of creating value." Winn's problem is that there's no shortage of investment capital to fund upstart retailers and established cybermerchants are expanding their product lines by the day. Expect to see lots more of Value America's ads in your local paper.
Frances Hong is a New York freelancer who covers technology
Copyright 2000, by The McGraw-Hill Companies Inc. All rights reserved.
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