FORBES EGGS::: Forbes, Inc. Aÿ
Forbes
June 15, 1998
From the ashes of a store chain, a new Egghead is born: a retailer that exists only in cyberspace.
By Nikhil Hutheesing
AÿAÿAÿIN FEBRUARY George Orban fired 80% of the employees of Egghead Software, closed all the stores and hung out the company's shingle as Egghead.com. The company thus became the first major retail chain to abandon the physical world for cyberspace. The foray wasn't so much bold as it was desperate. Egghead was on the point of going under.
The Spokane, Wash. company was born in 1984, an era of fat software profits. By 1992 it had 250 stores, 2,500 employees, $ 700 million in revenue -- and competition. Mass merchandisers from CompUSA to Wal-Mart were beginning to stock software next to the hard drives and shampoo bottles. Prices fell, and Egghead foundered. First it tried selling higher-margin computer hardware, then it experimented with a few giant-size stores. But it was too late. In 1996 Egghead posted an operating loss of $ 20 million and closed nearly half its stores.
That year the company's board set its hopes on Orban, 52, a longtime Egghead investor who in 1982 had turned around Ross Stores, a troubled department store chain, by making it into a discount clothing chain. Orban was living in Aix-en-Provence, in the south of France. He liked the quiet life but did not enjoy watching from a distance as his $ 500,000 investment in Egghead twisted slowly down the drain. He took on the job of chairman and moved to Spokane. Eight months later he added the title of chief executive.
Orban took one look at the income statement, and it just jumped out at him: The stores were bleeding, but Web site sales were up fivefold, to $ 12 million in the quarter ended last December. So he closed the remaining stores and started making Internet alliances and acquisitions.
Although CompUSA, Computer City and others all sell over the Internet, Egghead could hope to capitalize on its strong brand name if it could only let Web surfers know of its presence. The company is spreading the word through agreements with such companies as GeoCities, Yahoo!, CNET and USA.Net.
Web commerce cuts overhead to the vanishing point. With it, Egghead can reach markets too small for a store, anywhere in the world, 24 hours a day, with limitless shelf space. Egghead now offers 40,000 products; it plans to offer 100,000 by the end of the year. Customers who order on-line are easier to track and thus to target with selective advertising. Egghead has already started to dispense with the mail by delivering software electronically.
The savings are substantial. Orban says Egghead used to spend $ 4 million up front to build and stock a retail store. Now there are no bricks and mortar to pay for, and the order of cash flow is reversed in favor of the merchant: First you sell, then you deliver. Some of the benefits get passed on to consumers, who pay 10% to 20% less than they did in Egghead's stores. Quicken Home & Business 98 CD-ROM, by Intuit, costs $ 76 (including shipping) from Egghead.com, $ 85 at Wal-Mart, and $ 90 at CompUSA. There is another benefit to buying on-line -- you don't always have to pay sales tax.
Orban hasn't lost his knack for discount merchandising. He bought Surplus Direct, a Web-based clearinghouse for refurbished computer equipment. Egghead also runs Surplus Auction, which takes bids on used computers.
As bandwidth increases, Egghead will be able to distribute more software electronically, and reap the savings. International Data Corp. predicts that sales for software distributed over the Web will grow from $ 550 million today to $ 4.6 billion in 2000. By then, total software sales on the Web, including packaged software, will hit $ 6 billion.
Egghead has to hustle for a share of that market. In its fourth quarter of fiscal 1998, Egghead sales dropped 16% from the year before, to $ 74.5 million. The company had a net loss of $ 35 million. Still, investors seem optimistic: Since Egghead announced it was becoming a Web-only company, its stock has surged from $ 6.50 to a recent $ 9.18 |
