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Wednesday, April 21, 2010

Running an E-Commerce Web Site is Easy, Right? Sure, Anyone Can Do It.

In the second our PetMed Express (PETS) posts last July, we wrote the following:
  • Lastly, what about perceived low barriers to entry on the Internet? We argue that barriers to entry are larger than persons appreciate once an Internet franchise successfully carves out a specific niche and has scale - think Amazon (AMZN), Blue Nile (NILE), eBay (EBAY), 1-800-Flowers (FLWS), Youbet.com (UBET). There were and are plenty of me-too participants in the backyards of each player, but the spoils usually go the the number one player in a given market (on- and off-line). And -- a quick aside -- while many knock eBay's e-commerce segment, the reality is that the business generates gobs of free cash flow with excellent margins and isn't going away any time soon.
In this sense, we were referring mostly to the consumer/brand franchise that develops through years of marketing that drives awareness and repeat business. Yet, there is another aspect of running an E-Commerce company that makes these businesses difficult to replicate: the technology side.

A nice illustration of the technical complexities of running a large, multi-brand Web business comes from a recent IBM Webinar featuring 1-800-Flowers.com. Note that we are pleased that shares of the latter company are garnering more Market attention thanks to President Chris McCann's appearance on 'Undercover Boss'.

The Webinar was the following: A 3-Part Plan For Working Smarter In Retail
  • Join IBM, 1-800-Flowers, and Retail Solutions Online as we discuss how you can Develop Smarter Merchandising and Supply Chains by adapting and responding dynamically, Deliver Smarter Shopping Experiences by collaborating to maximize effectiveness, and Build Smarter Operations by enabling technology to meet business needs quickly. Matt Pillar, Chief Editor at Retail Solutions Online and Integrated Solutions For Retailers will moderate the discussion with Karen Parrish, VP of Industry Solutions for IBM and Nachiket Desai, VP of Enterprise Architecture and Business Intelligence at 1-800-Flowers.com
Here are a few slides from the 1-800-Flowers.com portion of the presentation (second half) -

Building an "Agile" platform:

Many components:

Putting it all together:

Conclusion: there is more than meets the eye in running an E-Commerce business.
Those that do it well (e.g. effectively scale while planning for the future) create a major barrier to entry that makes possible (and further strengthens) a durable consumer franchise. For this reason, we continue to like 1-800-Flowers.com and Bidz.com (BIDZ). In addition, we retain our long positions in eBay (EBAY) and PetMed Express although shares of these companies are no longer the bargains they were in 2009. Finally, we should acknowledge that owning/operating a strong Web business is also a critical part of traditional, off-line retailers. In this case, companies that do both well likely find themselves in strong competitive positions.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long FLWS, EBAY, UBET, PETS, BIDZ.

© 2010 Jeffrey Walkenhorst
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  1. I agree there is more than meets the eye (appreciable moat) but these companies are certainly not impregnable. This chart from Alexa.com has me worried about bidz.com


    Also, I worry about loss of market share from a place like PETS to a market leader like Amazon. Amazon clearly has a superior buying experience and I think if they squeezed their margins a bit they could undersell PETS products and put them in trouble.

    That said, I feel like FLWS is a different cat because of its relationships with flower distributors rather than simply as a retailer...also, EBAY is the market leader in its segment which is substantially different than AMZN. May be a buying opportunity there in the next few days...

  2. Hi Hideous,
    Thanks for chiming in.... Re: BIDZ, Alexa traffic is worth tracking from time to time, but conversions are most important. We need the company to profitably increase conversions on traffic to drive revenue and earnings. If Bidz.com can return to Y/Y growth this year without too much margin compression (per current strategy to sacrifice some gross margin to reignite growth), the stock may finally move. Modnique.com seems to be gaining steam, which is good.

  3. PS - of course, growing awareness (traffic) through targeted marketing is also very important...


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