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In scores of interviews with CNET, former employees and other sources portray the e-tailer as a blueprint for dot-com disaster. a case study in e-tail problems

By Greg Sandoval
Staff Writer, CNET
July 31, 2000, 4:00 a.m. PT reached a crisis point this spring.

In a desperate attempt to impress potential investors, the e-tail company staged an elaborate show in May for two Idealab executives taking a tour of its headquarters in Framingham, Mass. Accountants, human resources workers and engineers were ordered to sit in the company's call center and "look busy," helping imaginary customers while speaking into dead phone lines, former employees said.

Such theatrics apparently paid off: A month later, managed to stave off bankruptcy by the narrowest of margins after receiving $27 million from CMGI, Bessemer Venture Partners and other investment firms. Although chief executive Andrew Brooks said he was "unaware" of the episode, many sources confirmed the ruse and said the company paid another type of price for it.

"It was kind of humiliating," said a former administrator who took part in the incident. "But we went along because we knew that the company needed money."

In many ways, the facade at is an irresistible metaphor for the hard times that have befallen companies in the Internet economy. For years, "old economy" naysayers have issued dire warnings about Potemkin businesses that are long on flash but short on cash.

Throughout scores of interviews with CNET, former employees and other sources portray as a blueprint for dot-com disaster, a company obsessed with the belief that an IPO would solve its mounting problems while drumming up sales when it was ill-equipped to handle the business it already had. They describe an atmosphere of chaos and desperation where executives can't wait to quit and where those who stay develop a bunker mentality that breeds mistrust toward their own employees. Since early last month, six executives and two board members have resigned.

In the blind rush to go public, sources say lost sight of the fundamentals necessary to run a retail business: At one point, an internal audit showed that the company had shipped $1 million in merchandise and had not billed anyone for it. Some believe that Brooks and other senior executives fell under the spell of perceived invincibility that has touched so many Internet entrepreneurs whose fantasies have been fed by the dot-com fever that has created instant millionaires.

"Vendors were screaming for payment, customers were screaming for their purchased goods, and employees were questioned about being seen with former employees," said a former vice president. "Paranoia became evident. At management meetings the sources of 'leaks' were discussed."

Corporate horror stories are nothing new in the annals of retailing, the vast majority of them told before anyone had ever heard of the Internet. But the reversal of fortunes at is still taking customer orders and remains in full operation--is particularly devastating because it had been considered a model for success in moving brick-and-mortar sales online. The Internet's most trafficked home-décor site at the beginning of the year, the company seemed to possess all the makings of an e-tail titan: a killer Web address, offline business experience and an estimated valuation of $255 million.

Moreover, had managed to land some of the highest-profile investors on the Net, most notably CMGI, often viewed as one of the most savvy venture capital firms of the digital age. Based in nearby Andover, CMGI specifically cited the e-tailer's plans to go public at a conference late last year when the firm's chief executive boasted that its revenues could rival those of America Online because of wise investments.

Yet in a testament to the fickle nature of the new economy, has been in full retreat since filing for that initial public offering in January. The company withdrew its IPO plans last month after the stock markets began their precipitous descent in April.

Today, talk of bankruptcy has again emerged in circles familiar with's business, and sources say executives are negotiating with more than 100 creditors to repay only a percentage of what the company owes.

"I don't think they have enough money to make it to Labor Day," one former executive said.

CEO Brooks discounts such fiscal doomsaying as greatly exaggerated, saying his company's situation is no different from that of many other struggling dot-coms feeling the pressures of the consolidation that is sweeping the Internet economy. In an interview with last week, he said negative assessments offered by former employees were either overblown or simply untrue, and he blamed part of's problems on bad press.

When asked about furniture manufacturers that former executives say have not been paid in months, Brooks said: "There is a pattern of prudent behavior in dealing with all our business partners." He added that "successfully delivers items every day" but that fulfillment problems are "endemic" to furniture companies in general.

On its surface, the business appears to be an attractive one: Home furnishings are known for their high profit margins, and the exploding U.S. economy has produced endless streams of young families looking to buy the right armoires and other accoutrements for their new homes.

But the truth is that home furnishing is a grueling business, one fraught with warehousing obstacles, distribution complications and ever-increasing competition. For example, United Parcel Service doesn't deliver large items such as couches or cabinets, so furniture companies must pay expensive shipping fees to deliver large products by truck. The bulkier items eat up valuable warehouse space as well.

And running those operations on the Web--while preparing to take a company public--adds multiple layers of complexity. It is all too easy for executives to get distracted from their core business in the lengthy process of courting venture capitalists and Wall Street analysts, as well as dealing with servers, congestion and customer service.

Andrew Brooks CEO
CNET TV interview on Dec. 4, 1999 
Andrew Brooks

From June 1998 to the present, went from a top home-décor site with high-profile financial backers to a business in crisis.
June 1998
• Steve Rothschild launches
November 1998
• Company replaces Rothschild with Andrew Brooks as CEO
January 1999
• Changes name to
• Receives $13 million in funding
June 1999
• Launches $5 million national ad campaign
• Increases staff to 140
• Receives $35 million from CMGI and other investors
October 1999
• Secures Goldman Sachs as lead underwriter
January 2000
• Files for IPO
March 2000
• Goldman Sachs drops out
• Sees $20 million in first-quarter orders
April 2000
• Begins search for new funding
• Lays off 30 of 230 employees, 12 percent of staff
May 2000
• Stops paying some of its creditors
June 2000
• Prepares severance checks; closure appears imminent
• Three executives resign, a top engineer also quits
• Lays off 80 employees, 41 percent of staff
• Receives $27 million in cash injection
• Pulls plans for IPO
July 2000
• Receives notice of 44 complaints from BBB

CNET Tech Jobs Laid off? Apply for a new job now a case study for e-tail problems

It was amid such frenzy that signs of's troubles began to emerge.

The company lacked an adequate order-tracking system, according to former executives. It had no accurate way to find out whether a purchased sofa was sitting in the manufacturer's warehouse or in the back of some 18-wheeler en route to a home--making it impossible to tell customers when their goods might be delivered with any certainty.

A far more severe problem lay in's distribution operations, sources say. In its quest to drive customers to its site, offered free delivery: Lamps, rugs or other smaller items could be shipped through UPS, but larger pieces had to be moved by truck at exorbitant expense.

"There were many cases when we would get an order for a $200 end table and then spend $300 to ship it," one former engineer said. "We never could figure it out. When we started, we didn't anticipate how difficult the shipping was going to be."

Publicly, the company has said that delivery costs have equaled a third of sales, but former executives said the figure was closer to 50 percent.

"Some of the economics didn't work," said Michael Barach, the chief executive of, who resigned from's board of directors last week. "The reality is when you were offering free shipping you were losing 20 percent on every dollar. But if you think about it, we got goods into their homes at a great bargain."

The angry customer
While those problems persisted, more business was pouring in all the time as became a classic victim of its own marketing success. The company was setting sales records every month, and by August 1999 traffic figures from Web research firm PC Data showed that was running away with the online home-furnishings market.

That's when the company began to face a far more formidable force than any venture capitalist or competitor could present: the angry customer.

"The faster we ran, the farther we fell behind," said a former executive familiar with the company's back-office operations. "Customer calls that were mostly positive months before became negative. They yelled, 'Where's my stuff, where's my product?'"

One of the ways management dealt with growing complaints was to hire more customer service representatives. But that proved no panacea.

Not surprisingly, the most irate customers were those who had put a deposit down for merchandise they hadn't received. Interest would accumulate on their credit cards while often missed the six- to eight-week window it promised for delivery, sometimes by a long shot, according to a customer service representative who left the company last fall.

"One customer I remember had to wait eight months," the former employee said.

"People had to call back four and five times with these issues, and all you could say was, 'I'll give you money back' or 'Would you like to cancel?'" she added. "That's not customer service. There was no tracking, so when they would ask, 'Where is my merchandise?' you couldn't tell them. After speaking to these people you started to sympathize. You knew they were being mistreated, but you were helpless."

Workers became skilled at putting customers off, sources said. Besides offering store credit, they resorted to blaming the delays on manufacturers or on computer glitches. A engineer said he saw company statistics that estimated the number of unsatisfied customers at about 30 percent.

Billing operations were so disorganized that the company even lost track of which customers owed it money. Some shoppers called to ask when they would Portal addiction be billed for items they had received months earlier. Executives assembled a team to review back orders and discovered that had dispatched $1 million worth of goods without billing anyone.

Trail of complaints
In the last six weeks alone, has been the subject of 44 complaints to the Massachusetts Better Business Bureau, which agency spokeswoman Barbara Sinnott called an unprecedented number. Most customers, she said, are demanding to know where their orders are.

Bitter shoppers have posted dozens of complaints at Web forums. On the message boards at Gomez Advisors, an Internet research group, has attracted by far the most complaints of any furniture store, analyst Jeff Quinn said.

Brooks acknowledges that the company has seen a "high volume of customer calls," but he said complaints have accounted for a small percentage compared with the number of orders received.

"What we have done is supplement staff with an outside call center," Brooks said. "They have dramatically improved the situation."

Special report: End of the Beginning is far from alone in encountering the difficulties of bringing the furniture business online., HomePoint and are just some of the e-tailers that have joined the market and are facing formidable problems., which has less than half of's traffic, laid off 50 workers in May, about 13 percent of its staff.

"Furniture in general is a 'high touch' and 'high feel' product that is challenging to sell," Quinn said. "An online retailer has that much greater challenge building out a delivery infrastructure...It's a very tough business either way."

None has had a tougher time than market leader Last month, the company laid off 80 employees, cutting its staff by almost half as it avoided closure through a late cash injection. The company's valuation has plummeted to $20 million, 90 percent less than its estimated worth, according to Fortune magazine.

"It felt so hopeless," said another former employee who resigned in the last month. "It got so bad. The employees were so stressed out. Everybody felt lied to. You dreaded waking up in the morning."

Dozens of e-commerce companies have felt the pinch in recent months, as their venture funding and stock market valuations have dried up.
The following have gone out of business:
Digital Entertainment Network (chapter 11 reorganization)
Epidemic Marketing
Red Rocket

The following have been bought by another company or absorbed:

The following have laid off workers:
CBS Internet unit
J.D. Edwards
Oxygen Media

The following have received emergency care:
Value America

Other sites that list dot-com problems:
F-- Co.
The Industry Standard

Source: CNET sees high-level exodus

End of the beginning for digital economy lays off 41 percent of work force gets cash after close call lays off 50 to cut costs

Markets plunge in frenzied sell-off

Net, furniture sellers not such strange bedfellows a case study for e-tail problems

The long trail of complaints has led directly to Brooks, the 37-year-old chief executive who came to just before Christmas 1998. The former marketing star at German conglomerate Bertelsmann was recruited to transform a local furniture store, Empire Furniture Showroom, into a pure-play online venture.

Steve Rothschild, whose family founded Empire 50 years ago, was banking that it could operate more cost-effectively than brick-and-mortar rivals. It was a familiar plan: The Web would eliminate costly inventory buildup, the thinking went, because could transmit orders directly to the manufacturers and arrange for goods to be shipped straight to customers.

Brooks appeared to be the perfect candidate to lead the charge. His resume listed a Harvard MBA as well as management positions at music mail-order company BMG Direct and teen media firm Channel One Network. He was hired as's vice president of marketing and became CEO after only a month.

Early on, Brooks seemed organized, supportive and accessible, if not a little bookish, one former executive said.

Brooks takes charge
He wasted no time in putting Rothschild's growth plan into overdrive. He ordered his engineers to redesign the Web site. He moved the company out of the dingy warehouse in working-class Worcester and into a plush, 64,000-square-foot office in white-collar Framingham. He helped lure support from CMGI.

"Brooks was fabulous. He listened, he was supportive, and he turned the team into a family," said one executive who left the company last month. Another described the CEO as "a process man...a numbers kind of guy who likes working from charts and diagrams."

MotherNature's Barach, who first suggested that hire Brooks, cites many positive moves by the chief executive. He was instrumental, for instance, in sealing a deal to buy the domain name for $1 million--a steep price but one deemed well worth paying for marketing, identification and other benefits.

Brooks also was able to persuade several large furniture manufacturers to allow the company to sell their products on its Web site at a time when many were openly hostile toward Internet companies. Initially, the manufacturers had feared that online merchants would undercut traditional retailers on price.

"He is a fine leader, a great guy," Barach said of Brooks, who is also a member of the board. "He's probably aged 10 years in the last four months. I think he's ethical and logical."

By the summer of 1999, was in a groove. It had signed up many of the top furniture makers and had stuffed its coffers with $35 million in third-round financing.

The company's board included members who at the time were considered Net stars, such as Barach and CDNow founder and CEO Jason Olim. was ready to execute a strategy favored by CMGI, one that was typical of many Internet companies: seize market share quickly through marketing blitzes and go public as soon as possible.

The company announced that it had launched a $5 million national advertising program in June of last year. But somewhere along the way, spending for the campaign ballooned to nearly $30 million. Expensive print and TV ads were bought, including spots on CBS' "60 Minutes" and Fox's "Ally McBeal."

It also began looking for underwriters to help lead it into public markets. tallied 2 million unique visitors to its site and net sales of $10.9 million in 1999, according to documents filed with the Securities and Exchange Commission in January for an IPO that it was hoped would raise $50 million. By that time, the company had sold $7 million of products in a single month and expected $20 million in sales for the first quarter of 2000, former executives said.

The IPO that didn't happen
Management believed that was ready to go public even earlier, in October 1999, but Goldman Sachs had said the company would have to wait if it wanted the blue-chip investment bank to be the lead underwriter, former executives said. Brooks decided to wait.

Five months later, Goldman bowed out of the undertaking altogether when the stock markets plunged in March--just when had run out of money.

"Brooks said they told us that we weren't ready," a former executive said. "They had heard about our back-end problems and told us to fix them before we went out...and that was it."

Suddenly, found itself without an underwriter when it needed investors badly. It had burned up much of the $76.5 million it received from investors in building brand recognition, and the prospects for an IPO weren't looking any better.

see related story: exodus Inside the company, colleagues had begun to notice changes in Brooks since the move to Framingham.

Sources say he isolated himself, issuing orders mostly through senior vice president Carl Prindle and vice president of marketing Kirsten von Hassel. Many believe that this behavior contributed to the division between him and some executive staff members, and some employees complained to their managers that he rarely talked to the rank and file.

As the company's situation worsened, he became increasingly worried about leaks, ordering all paper and computer printouts shredded at the end of the day, according to former members of his executive staff.

"He worried a lot about competitors getting their hands on secrets and talked a lot about loyalty," one former manager said.

Since the beginning of the year, has gone through two rounds of layoffs.

Last month, sources say, the company was preparing to shutter the business. Executives had already met with bankruptcy attorneys and ordered severance checks for the entire staff, former employees said.

Then, in an eleventh-hour miracle, persuaded initial backers to fork over an estimated $27 million by initiating what is known as a "cram-down"--an arrangement that allows companies to attract new investors by making it cheaper to buy a piece of the business. But this practice also dilutes the stakes held by original investors, who must decide whether to pony up more cash or watch their existing holdings shrink.

So CMGI and the other backers decided to invest once again.

Unfortunately, Barach and others said, the $27 million infusion included a loan of between $8 million and $10 million that had already spent. In addition, they estimate that the company still owes manufacturers and other creditors about $10 million. CMGI and the other investors are doling out portions of the money in weekly or biweekly sums, former executives say, and many employees are worried that they can cut off the company at any time.

The last-minute investment apparently wasn't enough to keep high-level executives from resigning last month. Some said they left partly because senior management had intended to lump together customer deposits for products with funds used to pay operating expenses--even though they knew might go out of business, a move that would have frozen all the company's assets.

"Brooks said at a managers' meeting that the customers could get their deposits back from the credit card (companies)," one former executive said. "It's not illegal, but it's highly questionable behavior. Some of us didn't want to be part of it."

When asked about such concerns, Brooks and former board member Joanna Strobe told that they took pains to protect their customers' money in consultation with company attorneys.

A company is allowed to combine operating expenses with money customers offered as deposits in most states, said attorney Keith Shapiro, president of the American Bankruptcy Institute. But the rules change when companies are at risk of closing.

"A company that is going out of business and takes deposits raises serious questions concerning deceptive trade practices," Shapiro said.

Regardless of how it handles its accounting, the bottom line for's future remains unclear. The company has fewer than 100 employees, down from a peak of 248, and has seen so much turnover that it recently contacted people who had been laid off to see if they would come back to work, a source said.

"The whole industry should have been pulling for It would have brought new excitement and aggressive growth to a kind of stodgy business," this source said. "Now, the whole industry is saying, 'See, I told you so.'" faces

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