Egghead.com
Are the eggs now scrambled?
An extension of the Harvard
Business Review Case study.
From 1999 to the present.
Prepared by:
WJ Patterson
Spring 2000
Introduction
The purpose of
this research paper is to look at Egghead.com from the end of the case study in
the Harvard Business Review – “Egghead to Egghead.com”, printed
Egghead began a trend in the computer industry as a boutique software provider, which was the beginning of the phenomenon that we know today as the computer superstore. When that business model did not provide the return to its shareholders, the management of Egghead decided to switch gears and turn its sights toward the Internet as the primary vehicle for the sale of its goods and services. In January 1998, Egghead decided to close all of its “bricks and mortar” retail locations and move all of its sales operations to an e-Business web site called Egghead.com. In doing so, they also renamed the company Egghead.com. According to Robert Scally (Discount Store News, Feb 9, 1998), Egghead was the first traditional bricks and mortar chain retailer with a substantial storefront base to abandon its storefronts for cyberspace. Furthermore, Scally (1998) states that Egghead, which was once the Number 1 software retailer, was struggling in recent years as its ‘strip mall’ type of boutique stores could not compete with computer superstores and mass merchants who now were selling hardware and software products at deep discounts. With the drop in margins, the management of Egghead was forced to re-evaluate its marketing and delivery strategies. With the drop in margins came huge losses, as reported by Scally.
John Hough, an Egghead
representative, was quoted in an article in InfoWorld (Feb 9, 1998, pg 53,
Mathew Nelson) as saying “The company (Egghead) made the move (to the web)
based on the opportunity for new business. It is primarily a choice about how
to focus the company’s management and resources. The best opportunity for the shareholder and
the customer was to put 100 percent of our energy and financial resources
behind a very strong Internet company.”
Most observers according to Nelson (1998) believe that their move to an
Internet strategy was a last ditch effort to save the company in the wake of
competition from the superstores, such as CompUSA and
The original Harvard Business Review case study ends with the company moving towards the Internet. Sales were growing, the stock was favorably received on Wall Street as the price of the shares were at an all time high in November of 1998 at over $30.00 per share. And as important, the company had itself achieve small economies of scale by closing all of its retail storefronts. According to Candee Wilde(Information Week, June 7, 1999), the changeover to the Internet had saved Egghead approximately $86,000,000 in inventory costs alone. Before the change over, inventory costs were over $100,000,000. With the move to the Internet, the company was able to drop its inventory levels down to just over $14,000,000. In addition to bringing down its inventory costs, Wilde states (1999) that the companies move to the Internet brought the company tremendous savings from not only having to maintain their retail outlets, but it also freed the company from having to maintain those spaces by providing them with inventory that would be duplicated in each storefront location. This allowed the company to reduce its shrinkage and waste. Wall Street reacted positively to the move by the company to the Internet. Sales were on the rise and the stock price had risen to an all time high of over $30 per share in November of 1998. As of June 2000, the stock price of the company has fallen to $3.00 per share. The figure below shows the steady fall of the price of the company stock as it has been traded on the NASDAQ stock exchange.
As shown in the chart, the time
surrounding the change from traditional storefront to the companies Internet
only strategy was met with great anticipation.
Unfortunately for the company, since November of 1998, the stock has
steadily fallen. As of today,
This paper will take at look at the following factors as to how they pertain to the rapid downturn of Egghead.com. The following areas will bet looked at in detail:
- Web Strategy – This paper will look at the strategy implemented as said in the original Harvard Business Review case study and see what the results actually were through today.
- Competition – How did the competition react to Egghead’s move to the Internet? What did Egghead do to differentiate itself from its competition? What has the competition done to differentiate itself from Egghead? Which of the competitors of Egghead have done well in their efforts on the Internet?
- Cash Flows – During the past 2 years, the company has needed an infusion of cash to continue operations. Why? Where did the money come from?
- Financial Performance – Why has the stock price fallen to under $5.00? Why is the company losing money?
- Future – What does the future hold for this company? Can it survive? What does it need to do to turn itself around?
Web Strategy
On
Also with the closing of the storefronts, the company management decided that the name of the company must be changed to reflect the new strategic business plan. The name Egghead.com was chosen and a new company logo was designed.
Source: www.egghead.com
The literature at the time of this change and conversion was positive to the move. According to Matt Nannery (Chain Store Age, New York, Jun 1998, v74, i6,p102), “I’d give a trimmed-down Egghead a pretty good chance of making it online. While its stores have suffered, its on-line sales have risen as a percentage of total revenue. Free from store overhead and staff, Egghead could look pretty good this time next year.” In the article, “Egghead pins its future on the Internet”, Scally writes , “Egghead has a good chance of succeeding as a web retailer. Egghead has a well known trade name to build on as well as experience in Internet and catalog sales.” In another article from the literature review, Sharon Machlis (ComputerWorld, Feb. 2, 1998, v.32, i.5, p. 4) quotes Tony Amico, an analyst from International Data Corp, “Egghead’s high profile focus on Internet selling could have the same effect on software as Michael Dell has had on hardware. Its only the beginning of a free for all” In the same article, Nicole Vanderbilt, a Jupiter Communications analyst says that “Certainly a move by such a big player….is indicative of the momentum being built.”
As there were many people ‘singing the praises’ of this move, there were however, as many if not more, detractors. Matthew Nelson (InfoWorld, Feb 9, 1998, v.20, i.6, p. 53) writes, “However, most observers believe the move to the Internet exclusively was more of a last ditch effort to save the company in the face of competition from ‘megastores’ such as CompUSA.” Nicole Vanderbilt is also quoted Discount News (Feb. 9, 1998) as saying, “Someone will come to dominate software sales on the web, but it’s not clear Egghead will be the player to do it.”
Much of the
literature at the time suggests that on that day in Feb 1998, the celebrity
“Death Watch” began for Egghead. It has
even gone so far as to pin a ‘date of death’ on the company. Tracey Siepel (Knight Ridder/Tribune Business
News,
Closing all of its doors and firing 80% of its staff did have some positive short-term economic and financial effects on the company as earlier indicated. Mostly , it allowed for the company to focus on its core business activities. Egghead’s business now came primarily from three different web sites. Egghead.com was the provider of the software and some hardware; Surplusdirect.com was the provider for surplus and excess software and hardware; and Surplusauction.com was a web site that was the auction equivalent to Surplusdirect. With this move, the company was also able to broaden its product offerings. According to Fattah (Sept 1998), Egghead was able to increase its SKU’s from 40,000 to 100,000. Also the article stated that the company was able to reduce its inventory from $70,000,000 to $10,000,000 due to the partnerships with distributors Ingram Micro and Merisel. These companies would direct ship to customers straight from their warehouses. Egghead now would never see the product. Egghead was now outsourcing most of its shipping and delivery operations, which resulted in savings to the company.
Another important aspect of the business plan was to create a ‘killer’ web site. Going from a conventional retailing model to Web-only sales created many challenges for the IT department of Egghead. In her article, “Leaving brick and mortar for the Web gives IS key role”, Sharon Machlis (Computerworld, May 25, 1998) looks at some of the challenges and issues with the convergence of brick and mortar selling with web-only selling. She points out that not only does the IT manager (Tom Collins) have programmers and technical people on his staff, but also he has to now deal with marketing people and copywriters. She also points out that because of this convergence, Collins has to put MORE of his focus on the core retailing business and less on the technology. That in itself sounds like an oxymoron – How can an IT manager of a company that just went 100% to the web NOT be totally focused on technology? The answer is really very simply.
To understand the answer one must go back to the 60’s and 70’s. The atypical IT person was looked upon as the guru. Today we use the loving term, GEEK. They were the people that usually went to their office and never came out, except to eat and go home. They were more like hermits. They had all of the technical skills that would be required for the job, but that was it. Today, the role of the IT manager has totally evolved. Not only do they have to be the “gurus”, but also the skill set needed for the job has changed dramatically. According to Shelly / Cashman / Serwatka (Business Data Communication, 2nd Edition, 1997, Course Technology) the new skill set includes the following in addition to needed technical / technological / programming skills:
Ø People
Skills
Ø Management
Skills
Ø Finance
Skills
Ø Technical
Writing Skills
So with the new breed of IT managers and personnel come with it a new skill set. A skill set that is better equipped to handle the challenges and issues of today’s new business economy. Simply stated, If you are still living in the IT PAST, you will not be able to compete in today’s new business environment. The effects of the Internet on traditional business models are changing. The rules of yesterday are being changed to ‘fit’ the challenges of todays new E-conomy.
In their book, Corporate Internet Planning Guide, Gascoyne and Ozcubukcu refer to several strategic objectives when planning the web strategy for an E-Business. They list the following objectives:
Ø Align
Internet objectives with the business objectives
Ø Develop
Customer Intimacy
Ø Have
Innovative Products and Services
Ø Make
everyone an expert
Ø Make
it easy for everyone to do business with you
Ø Getting
more from less
In closing all of their stores, Egghead totally aligned its web strategy with its existing business strategy. The business objective was a simple one, reduce costs and increase sales to produce returns to shareholders. At the beginning of this process, they were successful in reducing overhead and cost. However, they were not able to sustain the momentum.
With moving sales to the Internet, Egghead’s objective was to become more intimate with their customers. They changed the name to Egghead.com to reflect their new business strategy and hired a new advertising agency, Grey Advertising. According to an article in Editor & Publisher (5/8/00, v133, i19, p36, Ken Kiebeskind), Egghead.com planned to invert $50 million in a new advertising campaign to announce and market their new business strategy.
Six months after closing all of its stores and moving all of its business to the Internet, Egghead.com received a four-and-a-half star (out of five) rating from BizRate.com according to an article in PR Newswire (June 8, 2000). According to the article, customers submitted more than 100,000 surveys rating Egghead.com in the following categories:
Ø Ease
of ordering
Ø Product
selection
Ø Product
Information
Ø Price
Ø Privacy
Policies
The company received four or more stars in each of the categories according to the article. The results of this survey was positive feedback to the company and confirmation that the move was at least pleasing to their customers.
Overall the company and its customers were well pleased with the initial results from the opening of the E-Store. Wall Street was also reacting favorably to the results. The stock price was on the rise and as of November, 1998 was at an all time high of almost $30.00 per share.
Competition
Egghead.com was the first company in the computer industry to move its entire operations to the Internet. So from that standpoint, they did not have any E-competition. They did have to contend with all of the brick and mortar competition. The computer superstore business model was flourishing. CompUSA, Computer City and others were continuing to grow their businesses. The threat to Egghead from these competitors was these competitors had product that the customers could touch and see. If a customer wanted to browse before they bought, these brick and mortar stores were perfect. If a customer was unsure of exactly what they wanted or needed, again, these brick and mortar stores were the perfect solution. Moving away from its roots of brick and mortar retailing did have its advantages, but, it also had serious disadvantages for a company that had founded itself on being very customer driven. Egghead was founded in the early 1980’s after an unsuccessful trip to a computer software store. The move away from its roots eventually did come back to haunt the company.
Competition is everywhere for Egghead.com. In their 1999 annual report, they list the following as their competition:
Ø Online computer retailers such as Buy.com, Cyberian Outpost, eCost, Onvia, Club Computer, CompUSA, and Value America
Ø Internet auction houses such as uBid, First Auction and eBay
Ø Manufacturer direct sales such as Dell Computers and Gateway Computers
Ø Companies with substantial customers bases in the computer and peripherals catalog businesses such as Micro Warehouse Inc., Insight Enterprises Inc., Creative Computers, Inc., and CDW Computer Centers Inc.
Ø Numerous indirect competitors that specialize in electronic commerce or derive a portion of revenue from electronic commerce, including Internet Shopping Network, New England Circuit Exchange, America Online, Inc., Cendant Corporation, and Yahoo! Inc.
Ø Storefront technology retailers such as CompUSA, Best Buy, Circuit City, Radio Shack, H.H. Gregg, Inc., The Good Guys, and Fry’s Electronics
Financial Performance / Cash Flows
The ability of any business to continue operations depends upon its ability to do the following:
Ø Generate Positive Cash Flows
Ø Maximize
Shareholder Value
Ø Operate
efficiently such that profits are generated
From 1997 to 1999, Egghead has had a decline in its cash flows. In 1997 cash and cash equivalents at the end of the year was $123,947,000. By the end of the year for 1999, cash and cash equivalents were $68,223,000. What makes this decline stand out even more is the fact that in 1998 the company raised just under $100 million through an offering of more stock. The main contributor to this decrease was the year-end loss in 1999 of $154,929,000. There were also some significant write offs due to the merger with OnSale, Inc., and online auction company which Egghead acquired in July of 1999. This merger is still a mystery as to why it happened. According to an article in Computer Reseller News (July 14, 1999, David Jastrow) OnSale had posted eight quarters in a row with losses and Egghead has posted nine consecutive quarterly losses. OnSale’s stock price had plummeted from an all-time high in November 1998 of $97.63 to $22.50 at the time of the article. The strategy behind the merger according to OnSale CEO Jerry Kaplan was to “combine two top technology retailers to create a clear market leader.”
Because of this merger even more financing was required. In April of 2000, Egghead announced that it had sold three million shares of its common stock to Acqua Wellington for $23,000,000. Now Egghead.com CEO Jerry Kaplan was quoted in an article in Business Wire (4/3/00) saying, “This financing has significantly strengthened our cash position on favorable terms to the company, and we are very pleased with our relationship with Acqua Wellington, as we believe we have sufficient cash reserves to meet our operational needs, we do not anticipate the need to raise additional capital in the near future.”
Two weeks later in an article in Knight-Ridder/Tribune Business News (April 18, 2000) it was reported in a mid-March edition of Barrons that Egghead.com had been given exactly 4.4 months to live. The ‘death watch’ had begun on this company. Kaplan was furious at this report. He was quoted in the same article as saying, “I was disgusted. It was wildly incorrect.” But the reality is that maybe it was “wildly incorrect’. While it has been 4.4 months since that statement was made and Egghead.com is still doing business on the Internet, there stock as of this writing is at an all-time low of $3.00 per share.
Future
What does the future hold for this company? Will this company finally turn the corner and become what its leaders are expecting? If you believe what the ‘pundints’ are reporting, the end is near. If you look at the value of the stock price as it has slowly declined over the past 18 months, the people who vote with their checkbooks are also betting that the company will not be around much longer. Returns to shareholder in the forms of dividends has not occurred since before 1995.
The company states in its 1999 annual report that “An investment in our common stock involves a high degree of risk.” Some of the risks listed are:
Ø We
expect to incur net losses for the foreseeable future
Ø We
may seek additional financing and may not be able to secure it
Ø Due
to competitive pressures, our profit margins may remain low for the foreseeable
future
Ø Our
operating results may fluctuate significantly and may be difficult to predict
Ø If
we are unable to manage our growth, our business could be harmed
Ø We
depend on key employees
Ø The
expected benefits of the merger with the old Egghead might not be realized
Ø We
operate in an extremely competitive market and we could lose revenue and
customers to our competitors
Ø If
we cannot continue to build strong brand loyalty, our business will be harmed
Ø We
have a limited operating history as an online commerce company, which makes our
business difficult to evaluate
Ø Our
business may face increased government regulation
Ø We
face risks associated with purchasing and carrying of our own inventory
Ø We
rely on merchandise vendors for supply, shipping and quality of products
Ø We
rely on other third parties in conducting our operations
Ø Our
online commerce systems are vulnerable to interruption
Ø We
may be unable to protect our intellectual property
Ø We
could face litigation risks
Ø We
expect our stock price to be volatile
The listings of these risks are not encouraging to potential investors, especially in light of the falling of the stock price. One could look the old Indian lore of “Dakota Wisdom” to find insight. What do you do with a potentially dead horse? Do you change riders? Do you buy a much stronger whip that you currently are using? Do you reassure your investors that this is the way it has always been ridden so we will continue to ride it this way. Do you declare that this horse is not dead? That is what the leadership of this company continues to do. For all of the pessimism from outsiders, the leadership of the company still remains optimistic about a turnaround.
In their book, Net Ready, Anne Hartman and John Sifonis list the four pillars for ‘Net Readiness’ as being:
Ø Leadership
Ø Governance
Ø Competencies
Ø Technology
Egghead.com decided to go where no person had gone before. The idea of closing all of their brick and mortar stores was unheard of at that time. One could look at the analogy of being the first coach of a brand new team. What we find is that the new coach does not really last very long, because at some point the fans do want a winner. This is what has happened to Egghead.com. They were the first to go to the Internet. The ‘fans’ were extremely excited about the new ‘team’. Their stock price soared to an all-time high. But even as the stock price was rising, losses were mounting. They were mounting quickly and consistently. But Egghead.com was not the only Internet company to not turn a profit. Most all of the other ‘dot.coms’ have also consistently posted losses. Amazon.com is the best-known case. They have never returned a profit, yet their stock price has continued to rise until last week (June 15, 2000). The stock took a turn as investors (fans) have had enough of the losses. They are now demanding returns. In an article in Computer World, April 24, 2000, Vol 34, No. 17, Page 1, Carol Sliwa , “Amazon Opens Book on Web Site” (http://www.computerworld.com/home/print.nsf/all/000424D86E) , the author describes Amazon.Com ‘s survival is based on a concept called “Scaling”. In the context of the article concerning Amazon.com, “Scaling” was their “No. 1 strategic initiative”. It was their ability to scale their business to meet the needs of their customers. IN the case of Amazon.com, it was the ability to scale their business upwards and do it very quickly to meet growing customer needs. The major problem that Amazon.com has faced is they have always been behind the ‘eight ball’. Their initial business plan called for the back end operations systems to be built on a certain level of sales. The leadership did not envision that sales would be so high. Their delivery and operational systems have been in a catch up mode since day one. The problem has never been increasing revenues. The problem has always been to be able to efficiently deliver goods at small profit margins and make a profit. With E-Business, one must take the mindset of a grocery store manager. They have many items that they make pennies on. Each penny is important and ways must be found to drive operational costs lower. Amazon.com built its delivery systems on certain projects and would have to shut the business down for 90 – 120 days to bring them to the levels that they need to deliver products to their customers efficiently. Unfortunately, their shareholders and customers will not allow them to shut down the business for that upgrade.
The E-business craze is only still in its infancy. There are numerous “how to” books on the market to show you how to start a successful E-business. The problem is that there really is no research or history to show one truly what is successful. We have studied several books in this class that gives the reader good sound logical principles for building a successful E-Business. One could list all of those and make a good case for Egghead.com to be a success in E-Business. A builder of a home does not begin that project without the goal of building a quality, solid home. A pilot does not allow his plane to leave the ground without the assurance that the plane is fit to fly. In the same light, the leadership of Egghead.com made what they considered to be the best decisions based on what there company could do. They did not set out to fail. But it still begs the question to be asked, “WHY?”. Why has this company not achieved the results it intended? Why is it a company the prognosticators are predicting its demise? Why is it a company the shareholders are losing faith in?
The answer can be summed up very simply. This company has not attracted customers to its web site to continually buy its products. You can have the best products and the best price, but if you do not have enough customers to buy them, you do not remain in business for very long. In the book, Corporate Internet Planning Guide, the authors list many steps an E-business company must take to ‘Reinvent’ its marketing efforts. The following are the ten steps listed:
Ø Be
first to market with innovative solutions
Ø Align
and coordinate marketing and IT groups and information systems
Ø Employ
targeted and innovative advertising strategies
Ø Exploit
existing niches and create new niche business opportunities
Ø Integrate
your solution into your customers daily practice
Ø Create
a more complete customers solution
Ø Capitalize
on the massive global audience
Ø Select
complementary interlinking business partners
Ø Allow
customers to create, define, test, and market products themselves
Ø Learn
from customer behaviors and habits
Egghead.com was first to market with this innovative solution. But we have seen sometimes why being first may not be the best. In the case of Egghead.com, it may have been their Achilles heal. They did everything possible from a business perspective to align their marketing efforts with their IT efforts. Where thy did fail was to employ targeted and innovative advertising strategies to capitalize on the massive global audience. How does one measure the success of its advertising efforts. It is measured in sales, which then should translate into profits. This is not to say that the company’s only problem was in marketing. Not true. They had and still to this day have tremendous operational inefficiencies. The combination of Egghead with Onsale has proven to be a disaster. Neither company had turned a profit in the two previous years before the merger and the combined company has not yet come close to turning a profit. We have seen that many companies are ‘READY for the NET’, but in the infancy of E-business there have been few if any companies that have been truly NET READY.
Back in the 1960’s, society was going through a period called “Aquarius”. People were singing the song that was made popular by the group, “The Fifth Dimension”. And the chorus of the song was on the minds of most Americans, “…this is the dawning of the age of Aquarius. ..No more falsehoods or derisions, Golden living dreams of visions, Mystic crystal revelation, And the mind's true liberation, AQUARIUS, AQUARIUS ” (Billy Davis & Marilyn McCoo, 1968). Little did we know that as that song was being sung, a technology that would change the face of business and the world was being born. The groundwork to develop what was to be known as the Internet had begun by scientists within the United States Department of Defense. And in early 1990’s, a man by the name of Tim Berners-Lee would take the Internet and make it useful for the mass populous by creating the World Wide Web and a markup language called HTML. We are now at the dawning of the 21st century, we truly are at the beginning of the “age of E-Commerce”. While we will probably not hear a song about this, E-Business is revolutionizing the face of business. Today, E-Business has taken the business world by storm. In fact most all businesses have a web site out of necessity or out of a desire to sell their products over the Internet. The challenge for those companies is to make efficient use of that site and to be able to turn that web site into a profit center, and not just a cost of doing business.
“Gentleman,
start your engines, the race is on!!!!!!!!!!!!!!!!!!!!”
Works
Cited:
- “Egghead to Egghead.com” Harvard Business Review Case Study,
599-033.
- Egghead.com 1999 annual report (on order)
- Fortune, “Egghead averts annihilation”,August 17,
1998, Jeanne Lee, Vol. 138, Issue 4, Pg 194
- Adweek, “4 emerge to poach Egghead.com”, June 22,
1998, Michael McCarthy, Western Edition, Vol. 48, Issue 25, Page 3.
- Chain Store Age, “A good egg?”, June 1998,
Anonymous, Vol 74, Issue 6, Pages 61-62
- Chain Store Age, “Egghead, Amazon roll the dice”,
June 1998, Matt Nannery, Vol 74, Issue 6, Pages 102.
- InfoWorld, “Egghead moves it basket online”, Feb.
9, 1998, Matthew Nelson, Vol. 20, Issue 6, Page 53.
- Discount Store News, “Egghead pins it future on
the Internet”, Feb 9, 1998, Robert Scally, Vol. 37, Issue 3, Page 6 &
102.
- Computerworld, “Leaving brick and mortar for Web
gives IS key role”, May 25, 1998, Sharon Machlis, Vol. 32, Issue 21, Page
6.
- Computerworld, “Egghead shuts stores, becomes
cyber-retailer”, May 25, 1998, Sharon Machlis, Vol. 32, Issue 21, Page 4.
- InfoWorld, “Changing the rules”, June 15, 1998,
Matthew Nelson, Vol. 20, Issue 24, Page 88-92.
- Technology Review, “Egghead scrambles to virtual
retailing”, Nov/Dec. 1998, Steve Ditlea, Vol. 101, Issue 6, Pages 56-60.
- Information Week, “Egghead’s Net Bet Pays
Dividends”, June 7, 19999, Candee Wilde, http://www.informationweek.com/737/egghead.htm
- Source
(http://quotes.nasdaq-amex.com/quote.dll?chart=5&page=charting&mode=basics&symbol=EGGS%60&selected=EGGS%60
- MC Technology
- Editor & Publisher, “Egghead breaks our of its
shell”, 5/8/00, v133, i19, p36, Ken Liebeskind.
- Computer
Reseller News, “Onsale and Egghead.com Agree to Merge”, July 14, 1999,
David Jastrow, http://www.crn.com/search/display.asp?ArticleID=7413
- Net
Ready, Amir Hartman & John Sifonis with John Kador, McGraw Hill,
2000
- Computer
World, April 24, 2000, Vol 34, No. 17, Page 1, Carol Sliwa , “Amazon Opens
Book on Web Site” (http://www.computerworld.com/home/print.nsf/all/000424D86E)