Bluefly.com: High Style Gone High Tech
Ken Seiff paced back and forth as he spoke on his mobile phone by the hotel pool at the Las Ventanas resort in Mexico, while his wife and two young children laughed and played in the water nearby. This was his real first vacation in over 3 years. Despite being thousands of miles away from his midtown Manhattan office, Seiff couldn’t escape the demands of being CEO of Bluefly, Inc., the thriving Internet apparel retailer he founded in June 1998. As he talked through strategic financing options with a group of potential investors and members of his board and management team, Seiff reflected on how much his life had changed over the past few years.
Company History
The Road from Golf to Gucci
Ken Seiff graduated from The Wharton School of Business’s undergraduate program in 1986 and, like many of his classmates, went to work for a strategic consulting firm. He subsequently transferred to another firm where he analyzed leveraged buyout opportunities. While performing due diligence on a deteriorating golf apparel manufacturer, Seiff developed the idea that ultimately became Pivot Rules. Seiff believed that the company could be an attractive acquisition target because he thought that focusing on younger, more stylish customers could turn the company around. While the deal fell through, Seiff continued to incubate the idea. He realized that an attractive niche of the golf apparel market was being underexploited. Ultimately he decided to leave the LBO firm and create a company to serve that niche, and Pivot Rules was born.
This case was researched and written by Diana Dreyer-Wagner, Dayle Ellen Hochman, Mine Nisanci, and Patrick Reyno, MBA '00, under the supervision of Professor Alan Kane as the basis for class discussion rather than to illustrate either effective or ineffective handling of a strategic situation.
Copyright Columbia Business School May 2000
Seiff founded Pivot Rules in 1991. For the first few years, Pivot Rules grew rapidly and seemed destined to become a very successful company. Under Seiff’s leadership, Pivot Rules grew from zero sales in 1991 to over $7 million in sales by 1994. But the company was undercapitalized and, because of this, it didn’t get big enough, fast enough. In 1995, the upward trajectory peaked, and growth started to fall at an alarming rate after a host of high profile competitors, including Nike and Polo Ralph Lauren, with superior brand identity and power over retailers, entered Pivot Rules’ market. These competitors began to take up the bulk of the shelf space at the same upscale department stores to which Pivot Rules had historically sold its merchandise.
Although Seiff felt that Pivot Rules still excelled at communicating its message directly to customers, competing against consumer behemoths like Nike and Polo was nearly impossible without additional capital. Seiff took the brand downstream in 1996 in an attempt to fly under the radar of his competitors. While this strategy bought some time, it was not a long-term solution. Seiff turned to the public markets and launched a modest IPO in 1997, raising $5.9 million after expenses.
As he contemplated the changing competitive landscape, Seiff conceived a new structure for Pivot Rules that would capitalize on its strengths and avoid the need to compete for shelf space with larger, better-known companies. Pivot Rules would approach the golf apparel market through three avenues; it would open its own retail stores to serve key regional markets, distribute its own catalog to serve the U.S. market, and launch a Web site to serve its global customers. While researching the online distribution channel, Seiff realized that he had discovered another incredible opportunity. While single-brand retailers such as J. Crew, Lands’ End and The Gap were among the most successful online retailers, there was no company making a sophisticated effort at selling multiple brands of apparel on the Internet. Recognizing the opportunity to gain first-mover advantage in a huge new market, Seiff knew that he would have to move quickly.
Hatching a Winning Business Model
In evaluating successful online retailers in other markets, Seiff realized that most offered both an enormous breadth of selection and substantial discounts relative to traditional brick and mortar retailers. He knew that most of the popular apparel brands did not yet have an Internet strategy. He believed that they would therefore be reluctant to sell their in-season product online, and that this reluctance could turn to outright hostility if he attempted to sell in-season product at the types of discounts that online shoppers were growing to expect. After sizing up the situation, Seiff realized that launching an off-price business that sold end-of-season merchandise would allow him to offer both the discounts and breadth of merchandise necessary to succeed on the Internet.
Both catalog and brick and mortar merchants had neglected the off-price segment for various reasons. Cataloguers had largely ignored the segment because the long lead times and replenishment capability required for a successful catalog operation could not support the small number of units per style typical of an off-price retailer. Traditional retail stores shied away from offering merchandise at deep discounts because they were afraid of alienating their suppliers, who could literally put them out of business by withholding product. Traditional off-price apparel stores, such as T.J. Maxx and Loehmann’s, had failed to offer a satisfactory consumer experience and did not offer designer merchandise with a strong fashion point-of-view.
Seiff realized that the Internet enabled an environment in which an off-price retailer could provide the best aspects of all three traditional retail channels. Such a company could offer high quality brand name apparel at deep discounts, the convenience of catalog shopping and superior customer service. On May 15, 1998, Seiff announced his decision to expand the company’s scope to sell off-price fashion on the Internet. Pivot Rules’ shares doubled on the day of the announcement.
Bluefly Takes Off…
This marked the official beginning for Bluefly. Seiff sold the rights to the Pivot Rules brand name and reallocated all of his financial and human resources to building the Bluefly.com Web site. On September 8, 1998, less than three months after hiring its first employee, Bluefly.com opened its virtual doors with huge hopes for success.
Since the Web site’s launch, the Company has been in nonstop hyper-growth mode. Its headquarters in Manhattan’s fashion district has seen its employee roster grow from 8 employees in June 1998 to 85 in March 2000, including 9 buyers, 15 customer service representatives and 14 information technology specialists.
Bluefly’s growth in headcount has coincided with an impressive record of financial results. In the first quarter of 2000, net revenues climbed to $3.6 million, more than 1,000% higher than the $305,000 of revenue generated in the first quarter of 1999, and 17% better than the $3 million in net revenues in the fourth quarter of 1999. Bluefly finished the first quarter with 507,000 registered users, of which 87,500 were customers. The average order size was $94.60. As is the case with most Internet retailers, Bluefly’s substantial investments in marketing campaigns and infrastructure have precluded the Company from posting a profit thus far. (See Exhibit 1 – Bluefly Financial Statements)
Financing Bluefly’s Future
As Seiff reflected on all that has happened, his thoughts returned to his desire to secure additional financing. Bluefly raised $5.9 million in its 1997 IPO with an additional $11.2 million of proceeds coming in the first quarter of 1999 from the exercise of warrants associated with the IPO. The other significant cash infusion came in July 1999, when Bluefly issued convertible preferred stock to Soros Private Equity Partners, LLC for $10 million.
Seiff knew that once he had the money in place, he would have to address many other challenges on the road to becoming a billion-dollar retailer. He wondered, “How are we going to attract the customers, vendors and employees we need to take Bluefly to the next level? How are we going to convince our current customers to keep coming back and to consider us their store of first choice? How are we going to scale our infrastructure to support the robust sales volume we are expecting for Christmas 2000 and for the years to come? And, how are we going to continue on the same trajectory once more competitors launch Internet initiatives?” Above all, he reflected on the lessons he learned from Pivot Rules. He knew that Bluefly had an incredible opportunity to seize market leadership as an off-price e-tailer, and he was determined to get big enough, fast enough.
Concept and Business Model
Bluefly is a leading Internet retailer of high quality designer fashions and home furnishings at outlet store prices. The Company sells over 350 brands of designer apparel and home accessories at 25% to 75% off of retail prices via its Web site It sources its products from traditional retailers’ excess inventory, odd lots, and manufacturers’ end of season or past season merchandise.
Value Proposition to Customers
Bluefly aims to deliver to its customers the best that department stores (such as Saks Fifth Avenue and Neiman Marcus), catalogs (such as J.Crew and Spiegel) and off-price retailers (such as TJ Maxx, Ross and Loehmann’s) have to offer, without any of the drawbacks. While department stores offer customers a large designer selection and good customer service, they do not offer discounts. While catalogs offer convenience and excellent customer service, they do not offer a designer selection and, they too, do not offer discounts. Finally, while off-price retailers offer attractive discounts, they do not offer customer service and they lack a designer selection of merchandise. Bluefly believes that it can provide customers with the designer selection of department stores, the convenience and customer service of catalogs and the discounts of off-price retailers.
To deliver this optimal online shopping experience, Bluefly.com has employed the following strategies: sell a broad and well-merchandised selection of name brand products, offer significant discounts to full retail prices, provide friendly and available customer service, grant a liberal return policy (90 days) and provide sophisticated search technology that allows customers to quickly locate the items that interest them.
A critical feature that helps Bluefly’s deliver a superior customer experience is its proprietary MyCatalog technology. MyCatalog allows consumers to input their measurements and preferences and then view their own personalized catalogs. MyCatalog allows the customer to narrow her product search to only those fashions that are available in her size rather than having to sort through a host of products that will not fit. Furthermore, each MyCatalog is personalized to the consumer’s particular taste and is constantly updated as new styles are added to the site. MyCatalog removed much of the “hit-or-miss” frustration often associated with off-price shopping (particularly the lack of available sizes). Bluefly is working on a technology to notify customers when new items become available that match a particular customer’s MyCatalog profile, allowing her not to worry about missing out on a limited quantity of appealing designer merchandise.
MyCatalog also provides Bluefly with invaluable information about its customers’ shopping habits and interests. Beyond using the MyCatalog database for direct marketing purposes, Bluefly is also able to reduce its inventory risk by mining the database prior to investing its capital in often risky, fashion-forward inventory. MyCatalog is a key component of Bluefly’s value proposition to existing and future customers.
Value Proposition to Suppliers
Historically, traditional off-price retailers had been the primary liquidation vehicles for designers’ excess inventory. Many designers were concerned with potential brand dilution that selling to this channel generally entails. By creating an upscale environment on its Web site, Bluefly has prevented the brand dilution vendors have historically experienced in the traditional discount channel. In the world of brick and mortar retailers, it is very expensive to invest in store layout, design and décor, and since off-price retailers aim to pass along the largest discount possible to their customers, most have elected not to make this investment. Likewise, in order to keep overhead low, off-price retailers minimize the number of sales associates on the selling floor and try to hire the least expensive labor they can find. This hiring practice, not surprisingly, has left much to be desired in terms of customer service. Finally, off-price retailers often ignore the fashion/designer pecking order when displaying apparel to customers. For example, in a store like Daffy’s, it would not be uncommon to find a $7 Pierre Cardin T-shirt hanging next to a $400 Giorgio Armani blouse.
Bluefly is committed to protecting its suppliers’ brands and to ensuring a high caliber shopping experience. Given the superior economics of online virtual real estate, Bluefly is able to create an upscale, luxurious and fresh environment at a fraction of the cost a traditional retailer must bear. Finally, Bluefly guarantees its vendors that their merchandise would be tastefully displayed next to designer merchandise of the same caliber. To this end, the Company often chooses not to procure merchandise from vendors who do not match the upscale, exclusive profile that Bluefly is trying to convey. Nevertheless, Bluefly’s consistent brand strategy and existing assortments attracted numerous young, up-and-coming designers to contact the Company for inclusion on the Web site. Clearly, with its stylish Web site, emphasis on customer service and stringent merchandise display standards, Bluefly provides high-end designers with a more appealing environment in which to liquidate inventory than the clearance racks at off-price stores.
Assortments
Bluefly’s merchandising strategy is an integral element of its branding strategy. Each season, its merchandising team selects products with a particular fashion point-of-view and theme in mind. The Company only sells first-quality designer fashions for men, women, teens, and kids. In Spring 2000 it added a housewares category, which includes items like candles, linens, and bath products, which are often produced by licensees of the same designers that supply Bluefly with apparel merchandise. Unlike many traditional outlet stores and off-price department stores, Bluefly does not sell factory seconds, irregulars, or special-ordered lower quality products.
Bluefly has direct supply relationships with approximately 70% of the designers whose products are offered on its Web site. It sources the balance of its inventory from retailers and third-party consolidators. This affords the Company more control over the quality of the merchandise it sells and allows the Company to cherry pick only the best and most fashionable styles available. For the right to purchase only the styles and colors it wants, Bluefly is willing to pay vendors a slight premium compared to other off-price retailers, which generally take the entire lot of garments regardless of their fashion integrity.
The following is a representative sample of the brands featured on Bluefly:
Anna SuiBenettonBrooks Brothers
BurberrysCalvin KleinChristian Dior
CrossDieselDKNY
Dolce & GabbanaElizabeth ArdenEscada
FendiFilaGeoffrey Beene
Gianni VersaceGiorgio ArmaniGucci
GuessHelmut LangJones New York
Karl LagerfeldLevi’sLiz Claiborne
MontblancNautica Nike
Perry EllisPradaRalph Lauren
Steve MaddenTodd OlhamTommy Hilfiger
Yves Saint LaurentZegna
Source: Bluefly.com Web site
Fashion Content
The Company has developed exclusive relationships with popular fashion magazines such as Harper’s Bazaar, Marie Claire, Esquire, Seventeen and Metropolitan Home. Bluefly leverages these relationships through co-branded pages and interactive content to help communicate the merchandising team’s fashion outlook for each season (see Exhibit II – Sample WebPages). Bluefly also publishes Flypaper, an online monthly magazine that covers the dynamic world of fashion, offering style tips, trend updates, and designer spotlights. The exclusive content provided by Bluefly’s partners not only differentiates Bluefly’s Web site from other online retailers, but it also bestows a level of credibility upon Bluefly’s emerging brand. By featuring hot products and trends, Bluefly hopes to drive online sales. “By simultaneously providing our customers with trusted fashion advice and the ability to buy the hottest fashion items in the same environment, we can collapse the purchase process to the point where opinions are formed and purchases are made with the point and click of a mouse,” says Seiff.
Bluefly’s partnerships are representative of a recent trend among Internet retailers to broaden their exposure through numerous media channels. Lauren Levitan, an equity research analyst at the investment bank Robertson Stephens, regards this trend as a positive development. She comments, “While the majority of these initiatives may be seen as marketing expenses today, over time, these media plays could become profit centers, potentially enhancing the business models of e-commerce players.”[1]