The New York Times
Aug 27, 2007
E-Commerce Report
Late to Web Retailing? There’s Still Money There
By BOB TEDESCHI
DURING the tech bust, GSI Commerce Inc. was the company that salvaged many operations. Beginning in 2000, as start-ups failed, GSI increased its business by buying distressed online retailers like Fogdog.com and Ashford.com, and running the entire operations more efficiently than the retailers could themselves.
Now the business, which makes money by helping companies like Toys “R” Us and Linens ’n Things operate online stores, hopes it can again raise its growth through an acquisition of a different kind.
The company, which is based in King of Prussia, Pa., announced this month that it would buy privately held Accretive Commerce, one of GSI’s few big competitors, for $97.5 million in cash. The acquisition should help GSI maintain its position as the leader in this niche, analysts said.
But no matter who may be in the lead, just about everyone is doing well, thanks to new investments in e-commerce technologies and services by traditional retailers, like Diane von Furstenberg and Tommy Bahama, and others.
“These companies are all experiencing growth, and a lot of it is coming from the late bloomers,” said Sucharita Mulpuru, a retail analyst with Forrester Research. “There are also tons of companies that may have had some semblance of a Web presence who are now building out their e-commerce functionality.”
GSI, for instance, signed an agreement this year to build the first e-commerce site for Gordon’s Jewelers, a division of Zale Corporation. And last week, GSI unveiled a revamped e-commerce site for the Public Broadcasting Service, ShopPBS.com.
Assuming its deal with Accretive closes as expected within the next two months, those clients will line up with roughly 15 other customers that Accretive had attracted in recent years, including American Eagle Outfitters and Restoration Hardware.
Analysts said the purchase is a good defensive measure, as Accretive had competed directly with GSI. But according to Michael G. Rubin, GSI’s chief executive, the acquisition is significant in that it improves the company’s flexibility.
GSI makes most of its money by signing up stores for all-in-one packages of e-commerce services, in which GSI designs and manages the Web site, carries inventory and handles shipping — in most cases, running the entire online operations for clients. In exchange, it keeps an undisclosed share of the revenues.
The Accretive acquisition underscores a shift in strategy, where GSI is giving clients more options, like e-mail promotions or Web site design, for a flat fee.
GSI’s shift away from a one-size-fits-all approach is a wise one, said Aaron Kessler, an analyst with Piper Jaffray, an investment firm. Mr. Kessler said that the company’s increased focus on selling advertising services to its clients, in particular, “helps them become more of an agency. That’s a higher-margin business.”
Some of Accretive’s customers pay others like ATG, an e-commerce software company, to build their Web sites, or install software to help manage their inventory of goods online.
But because GSI also sells the same services and products to clients, its acquisition of Accretive could have ripple effects for ATG. Bob Burke, ATG’s chief executive, said he expected to keep Accretive’s customers even after the business moves to GSI.
GSI, a publicly traded company, reported that its second-quarter revenue increased about 10 percent from the same period a year earlier. Before announcing the Accretive acquisition, GSI said it had expected sales for its fiscal year to top $721 million, and net income to reach more than $41 million.
One curious development in this category in recent years is what analysts have characterized as the diminished stature of Amazon.com. Several years ago, Amazon opened a new line of business it called Enterprise Solutions, by signing Borders, Toys “R” Us and other big retailers to deals in which Amazon would essentially run the e-commerce operations of those businesses.
The Toys “R” Us partnership, though, devolved into a bitter dispute in 2004 after the toy retailer accused Amazon of violating their contract by allowing competing toy sellers to offer goods on Amazon.com. Amazon lost the ensuing lawsuit last year, which released Toys “R” Us from the partnership. Borders has said it would not renew the Amazon deal when it expires next year.
Mr. Kessler, of Piper Jaffray, said Amazon “has made a strategic decision to stop competing for larger players.”
An Amazon spokesman, Craig Berman, declined to comment on Mr. Kessler’s statement. “Enterprise Solutions is an important option for merchants, along with the other offerings we have,” he said. “And it’s an important component to be able to offer merchants, regardless of their size.”
Fry Inc., which builds and operates Web sites on behalf of companies like Brookstone and Godiva also has benefited from more demand from retailers. According to David Fry, the company’s chief executive, sales have increased by 30 percent over the past two years. (The company is privately held and does not disclose revenue figures.)
Mr. Fry said that sales should continue to grow briskly, despite GSI’s strengthened competitive position, and despite a general slowdown in the domestic growth of e-commerce sales. E-commerce executives, he said, will need expertise to compete.
“As an e-commerce manager, in the past, you didn’t have to do anything to get 30 percent growth,” Mr. Fry said. “Now, you have to do what other people do: work for a living and take customers away from your competitors.”