Boo.Com: In Search of E-tailing Excellence? - Download MS Word File

Introduction

It all started so brilliantly in 1999. Founded by a trio of Swedish entrepreneurs, Ernst Malmsten, Kajsa Leander and Patrik Hedelin, Boo.com was the first truly global Internet retailer of fashion and sportswear. Kajsa and Ernst went into partnership in the early 90s, orchestrating a series of cultural projects initially in their native Sweden and later around the world. In 1996 they set up Leander Malmsten, a publishing house with the specific aim of introducing up-and-coming authors to the Swedish market. With signature dust jackets and an innovative stable of authors, Leander Malmsten soon built up a reputation as Scandinavia's premium publishing boutique.

E-tailing: A growing industry

Mimicking trends in the US, online shopping in the UK is fast gathering pace. A study by Verdict (http://www.verdict.co.uk), a retail consultancy, revealed that the numbers of Internet shoppers in the UK were pelting ahead--up by 71% to 3.2m in the six months to April 2000. Average annual spending by these customers was increasing too. From a total online spend of Stg 581m in 1999, Verdict is expecting electronic shopping (including interactive TV and Internet-enabled mobile phones) to generate revenues of Stg12.5bn in the UK in 2005. The study points to several issues relevant to the e-tailing industry growth such as supply-side of online shopping, online security, better performance, and new technologies (see Appendix A).

Building on entrepreneurial spirit

Following the early success, in August 1997 Kajsa, a former model and Ernst, a former book critic, set up the Internet bookstore bokus.com. A phenomenal hit, bokus.com exceeded all expectations, rapidly becoming the world's third largest online bookstore after Amazon and Barnes & Noble. In February 1998, Patrik Hedelin was retained as financial advisor to bokus.com. Shortly thereafter Patrik negotiated the sale of the company to Swedish Cooperative KF, one of the largest retail and media companies in Scandinavia.

The Vision

It was at this point that boo.com was born. The vision was clear - to become the world's leading online retailer of fashion and sportswear. Boo had highly ambitious plans from the start. It was trying to achieve something that even leading e-commerce companies such as eBay, Yahoo! And Amazon never attempted. It wanted to set up in 18 countries simultaneously, selling trendy sportswear at premium prices using cutting edge technology. The vehicle was a cutting edge web site and a team of dynamic individuals, hand-picked from the worlds of fashion, new media, marketing, business, technology and finance. The outcome was an awesome virtual shopping experience that is believed to surpass anything that currently exists on the web. One of the first e-tailers to start up in Europe, Boo built its own technology to run e-commerce operations, handling the sale of goods on the website and tracking them from supplier to buyer. These functions are available in software packages, but Boo poured a large part of its funding into building its own. "It is a great company, very pioneering," said one man.

"Boo.com will revolutionize the way we shop," Ms. Leander said on a promotional CD-ROM that cost the company more than half a million dollars to produce. "It's a completely new lifestyle proposition." The concept mixed the sexiness of the Internet and fashion.

The retail site was complimented by boom, an interactive online magazine which brings together streetlife, fashion, sport, art and technology from around the world. The company was based in London's Carnaby Street, with offices in New York, Munich, Stockholm and Paris.

High profile investors

Swedes drew up an audacious business plan to create Boo.com, the leading global retailer of trendy sports wears, and that would be at the technological cutting edge. Two of its founders, Ernst Malmsten and Kajsa Leander took the plan to investors and quickly notched up some of most prestigious names in retailing and finance. And, this was also done in style. They plopped down their gold American Express cards at the SoHo Grand Hotel in Manhattan and made lunch reservations. Then they faxed their five-page business plan to the major Wall Street banks -- with the SoHo Grand's name and fax number prominently atop -- and copies of an article about them in Esquire magazine from 1993, when they started a Nordic poetry festival in New York City, making sure to plug their appearance on the "Today" show on NBC. Not mentioned was that the festival went over budget by about $200,000, as the two later confirmed.

J.P. Morgan, the US investment bank, led Boo’s fund raising in return for an equity stake and brought in a number of investors. One investor said it was valued at more than Dollars 200m (Pounds 125m) after third round funding. Investors included Bernard Arnault, chairman of the LVMH luxury goods group, the Benetton family and Goldman Sachs, the investment bank and a banking family from Saudi Arabia. They were attracted by Boo's plans for a business with global scale .

Boo became the most heavily funded most high-profile European Internet start-up in Europe. In January 1999, the Internet boom had yet to arrive on Europe. According to one estimate, the world-wide market for e-tailers will grow 5.5 times between 1999 and 2003 to $170bn. Such figures encouraged the huge run-up in Internet stocks, only partly reversed after March. Only its subscribers had heard of Freeserve, and Lastminute had about 600 registrations on its website. By contrast, Boo.com had already raised $135m (£90m) to finance perhaps the most audacious start-up in history. There was no paucity of publicity. Boo appeared on the covers of Fortune magazine and Industry Standard, the magazine for the Internet industry. The Boo founders also posed for the cover of Fortune magazine. Boo was featured among the "Cool Companies: 12 start-up superstars". And, that was not all. Boo was also profiled in Newsweek, Vogue and Elle. Elle magazines hailed the Boo founders as the "literary rock stars of Europe".

The overwhelming interest in the company tempted early financial backers to block new invertors for fear of seeing their stakes diluted, according to Ernst Malmsten, chief executive of Boo. "If you looked at Boo in concept as potentially a global company, then spending Dollars 100m building it is not necessarily a lot of money. We were hoping to build a company worth Pounds 1bn," is the way one Boo investor put it. This was a new trend in the Internet economy. The mindset in some new start-up was shifting from cost control to get-big-fast by spending on huge marketing and start-up expenses. It was argued that if you successfully became big fast enough, additional sales could be made at low incremental costs (since pure play internet firm is a virtual store), thus rising profits rapidly.

E-tailing Business Model

Boo was founded on the tenet that when it comes to fashion, people around the world are interested in the same brands (see Appendix B); have access to the same magazines, movies and culture; and are asking for the same things, according to Rob Talbot, director of marketing for Boo.com. The merchandise to be offered in each country was to be the same, with the exception of a few vendors. The target audience selected were 18 to 24-year-olds around the world.

Total e-tailing concept

Boo developed its own web-based technology and carried its own inventory. Boo seemed to establish full control of supply chain management. The back end was fulfilled by Boo.com and products were supplied to its customers by Boo.com. Boo.com did not provide links to websites of other companies. In short, Boo was establishing a ‘total e-tailing concept’, which dealt with supporting inventory, distribution centres, and fulfilment and customer service. Orders were filled and shipped out of one of two warehouses: one in Louisville, KY, which handled fulfilment for the United States and Canada, and another in Cologne, Germany, that filled orders placed within Europe.

The Launch, e-brand and marketing

The birth of Boo.com was one of the most talked about launches in the Internet economy. Its arrival was preceded by a media blitz, complete with print ads and a pre-launch site. "In marketing, we were looking for a name that was easy to spell across all the different countries and easy to remember ... something that didn't have a particular meaning," Rob Talbot, director of marketing for Boo.com. At the time of its launch, Boo was marketing in seven languages--Swedish, Finnish, Danish, German, French, British English and American English-in the United States, Canada and 15 European Union countries.

Boo set up its marketing strategy as a combination of off-line media and online marketing. "We utilize print and radio as well as online newsletter banners and exclusive partnerships with other sites that allow us to merchandise and market ourselves, as well as drive traffic to our site," explains Talbot.

Marketing activity involved professional communication such as offline advertising through TV, radio, and fashion magazines like Elle, exhausting some of the funding within six months (25 million Euros). Part of this media mix was a 44 page print catalogue, which showcased 33 of the dot-com's products, mailed to existing customers as well as to key Internet and fashion executives. Named the Look Book, the catalogue, as Talbot explains it, was intended to extend its brand off-line, as well as a way to interact with non-Boo customers. Online community was also developed for creating an enhanced online experience for Boo’s customers.

Internet Marketing Operations

The Boo’s ambitious plans involved high costs. One of the biggest costs was in building Boo’s technology platform, which had to be designed to allow premium prices to be maintained in different countries, sales in different currencies and orders channelled back to a distribution system that could deliver within days on a global basis. It also needed to link in with suppliers’ networks, which were typically small trendy sportswear outlets that lacked modern IT systems. "We asked the big consultancies such as Andersen Consulting to build the whole system, but they didn’t have the experience. So we built it ourselves," says Ms Leander.

Building the system in-house proved challenging. Not everything went according to the plan though. To begin, Boo didn't meet its highly publicized launch date. The site was scheduled to debut in May 1999, but the infrastructure needed to launch in 18 countries took longer to complete. The site was six months late in launching, and then was hard to access. The site didn't go live until November 1999. Improvements in the website were made later and it was starting to perform well and deliver real revenues.

Online Shopping Experience

The company spent a considerable effort in developing the website. The company wanted it to be the envy of the Internet world. E-business at the Internet speed was rightly thought to be important. Technically, it was a great website- 3D images and innovative features such as Miss Boo, a cartoon avatar who advised buyers on their style choices. Customers could click on 3D images on Boo's website to view their trainers from different angles. It also cost a lot to maintain. About $6m was spent on spring/summer fashion ware. It cost $200 to photograph each product, representing a monthly cost of more than $500,000. Boo also had a call centre of about 80 people, based in its Carnaby Street offices. "It was probably the most expensive call centre in the world," said one Internet chief executive. Some customers though found their computers too slow to download the complex 3D images, or handle the innovative features such as Miss Boo. The average visit to a site was five minutes, but to get into Boo and reach the chance to buy something took 20-30 minutes.

A satisfied work force

Boo paid its staff well - £50,000 on average - but most were not given stock options. But the hours were long and hard and stories abound of working through the night and at weekends. This was offset by a congenial working atmosphere. "It was more like being back at school with your friends than being at work," one woman said. "It is not often you get to spend $130m. It was the best fun… the atmosphere in the business was great. We thought we were the next Microsoft, so profits didn’t matter," said another employee. One employee, who works in the finance department, however, said: "When I joined it was the coolest place to work. But although the management had this great vision, they had no idea how to get there. It was extremely chaotic and spending went out of control."

In an environment of over eager investors, cost controls quickly became lax. "There was no chief operating officer, they took six months to recruit a chief financial officer, and four months to find a technology officer. No performance targets were ever set for Boo by the investors," commented one investor. It was reported in the press that there were some excessive spending by the company: of first class flights, stays at expensive New York Hotels, and team dinners at the Ivy restaurant in London’s Covent Garden. One employee says: "People want to build empires and appoint their own staff. There were three creative directors, and PRs with PR assistants. Senior management used to travel first class to Paris and New York and take all their executive assistants with them, with limo rides to the airports. The founders also had their properties paid for." It is also alleged that founders’ original contracts had included the benefit of rent-free accommodation. Mr. Malmsten lived in Notting Hill, and said some refurbishment costs had been paid for by Boo. Ms Leander lived in Primrose Hill. They also each received a salary of £100,000. There seemed to be an environment of high salaries, hard work, long working hours and little social life. Founders of Boo claimed to have hired best brains at some very high salaries. Some of them had worked in big companies before. These employees wanted to have business class travelling in their contracts, it was alleged. "You can’t expect very senior people to fly economy," adds Ms. Leander. "When most of us were travelling within Europe we flew the cheapest possible using Go or Ryanair." Another senior manager said the culture of Boo, and the scale of its ambitions, helped foster an atmosphere in which costs did not matter. "In my view the costs are not unreasonable. Our ambition is to build a global company, with an enormous brand."

At one stage Boo employed 450 people. It attracted "some of the brightest and the best brains in Europe", according to one investor. They included senior management from Adidas, Footlocker and Barney’s. Management are not the only ones who allowed costs to get out of hand. It is alleged that some were also paying more attention to the vision than to value. Boo’s board, which included appointees from Europ@web and Benetton, also seems to have offered little direction or advice. Board meetings were frequently held by mobile phones than in person.

Marketing performance and the future

It was reported that although audience and sales tripled during the site's first quarter, boo.com failed to meet sales targets. In January 2000, the firm fired 20% of its employees and began losing key executives. February results were far from satisfactory. There were only half-a-million unique visitors and sales below 1 million per month, despite targeting 18 countries in seven languages. This disappointed investors like Benetton's 21 Investimenti, which declined to participate in further financing rounds. Originally positioned as a lifestyle site competing on premium brand selection and not on price, the site switched to offering 40% discounts by January. And although the site revelled in rich content and rich media at launch, by April it had ditched its fashion newsletter, gagged virtual assistant Ms. Boo, and launched paper catalogues as a low-tech alternative to its three-dimensional product presentation online. The future suddenly looked less rosy.

The End Game

Boo.com couldn’t manage to get further funding and its cash was fast running out. This was not surprising, giving the cash burn rate the company had. Eventually, Boo was divided and sold. Its back-end system was purchased by Bright Station, a British Internet company, and its brand, web address, advertising materials and online content went to Fashionmall.com (Nasdaq: FASH), a New York-based Internet company. Boo's strong brand identity across Europe and around the world positions fashionmall.com, Inc. for global expansion of its vertical portal concept.

Mr Ben Nasarin, 34 year old chief executive of Fashionmall.com said: 'We want to use boo.com as a global fashion portal for the UK, and German, Swedish, Italian, French and Spanish speaking markets’. Fashionmall.com, reintroduced Boo.com as a fashion portal linking consumers to other e-tailers that sell Boo-like clothing and taking a commission on every sale. When the new Boo was started, its ads billed it as "Boo.com, the sequel. The site you've been waiting and waiting and waiting for."

Appendix A

UK e-tailing: Growth story

Mimicking trends in the US, online shopping in the UK is fast gathering pace. A new study by Verdict (http://www.verdict.co.uk), a retail consultancy, reveals that the numbers of Internet shoppers in the UK is pelting ahead--up by 71% to 3.2m in the six months to April 2000. Average annual spending by these customers is increasing too, up from Stg316 ($475) six months ago to Stg322 now. From a total online spend of Stg581m in 1999, Verdict is expecting electronic shopping (including interactive TV and Internet-enabled mobile phones) to generate revenues of Stg12.5bn in the UK in 2005. Verdict’s predictions of high-octane growth:

* More online outlets for shoppers. You can't shop at your favourite store if the site doesn't exist. 87 of the UK's top 100 retailers now have websites but a mere 36 have transactional capabilities. There's plenty of room for supply-side growth here.

* Greater security. Over 40% of the country's Internet users remain worried by security issues. Increased familiarity with the web, new methods of payment and improving encryption techniques will settle their nerves.

* Better performance. E-tailers are relatively new to the game too. They'll have to fix the technical bugs, iron out the delivery issues, and improve customer relationships in order to thrive. In the process they'll win new customers and inspire loyalty among existing ones.

* New technologies. Interactive TV and mobile commerce will offer further platforms to online shoppers while new software will assist specific sectors-for instance, Verdict reckons the development of body scanning will drive online clothing sales.

Verdict's forecasts also offer some pointers as to how this growth will play out across sectors. The grocery sector is set to pound out the highest absolute revenues-almost Stg5bn-worth in 2005-while the steepest revenue growth will come in the clothing & footwear industry, which pulled in just Stg5m last year and will garner over Stg1.8bn in 2005. But both of these measures come with inbuilt distortions-the size of the sector as a whole in the case of groceries, and the low starting-base in the case of clothing.

More telling as a measure of online activity is the percentage share of total retail activity that online sales are forecast to grab. Here the clear winners, both now and five years out, are the industries which have already scaled up their Internet presence aggressively-books, music and computer software. No surprise there: these are industries whose products can be delivered over the web or are thought not to require the same physical handling by consumers at point of sale as other items.

Even so, only online sales in the software industry are forecast to breach the 50% threshold. Electronic sales of books and music are still hovering at 20% of the overall market in 2005. In other sectors, online sales will account for far more modest shares-Stg12.5bn-worth of overall online revenues in 2005 only represents 5% of forecast retail sales in the UK.

Appendix B

Boo.Com’s Product Line

QUESTIONS:

1. Identify the key issues in the case.
2. Critically examine the business model adopted by Boo.com.
3. Perform a SWOT analysis for Boo.com
4. Boo.com failed and the brand is now part of another e-tailer, Fashionmall.com. What e-tailing strategy would you have suggested to Boo.com to turnaround their marketing performance?

By Dr. Devashish Pujari, Assistant Professor, McMaster University, Canada

The case is based on secondary information sources which are available from the case writer Dr Devashish Pujari,McMaster University, Hamilton,Canada. It was prepared as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation.