Online exchange reinvents the closeout sale

RetailExchange.com, spun off of New York-based Gordon Bros., a 75-year-old retailer that specializes in close-out sales, has built a marketplace for manufacturers and retailers to trade excess inventory.

The company, which launched mid-February, now hosts more than $100 million in off-price retail products. It also said this week that Ames Department Stores, which operates 460 stores in 19 eastern states, is using its site to buy off-price inventory.

"Exclude autos on one side and fresh vegetables on the other side, and we'll sell everything in between," touts company chief executive Ken Frieze, who is a former executive and board member at Gordon Bros. The company currently has four departments, including apparel and home goods, with more than 1000 listings from "hundreds" of manufacturers, according to Frieze.

The touchstone of such online marketplaces is the community. By connecting thousands of buyers and sellers, e-marketplaces can help make a stilted, money-losing sale process into an efficient, more profitable transaction.

Typically, retailers looking to buy or sell overstock inventory would go through a broker, or "jobber," who profits from knowing the industry intimately and often keeps information close to the vest.

Through an online exchange, however, companies can access a whole world of buyers, thereby creating a more competitive market for their products. Higher demand drives up prices and can turn excess inventory--often sold at a loss--into a modest profit.

Buyers are interested in off-price merchandise because it bolsters their margins, and through such sites, retailers such as Bloomingdale's and Macy's can pick and choose products that fit into their merchandise mix. Buyers can search on the site by merchandise, department, manufacturer name and price, as well as the discount percentage off wholesale.

For buyers, the service is free; however, RetailExchange charges sellers $25 for a listing and 5 percent on each completed sale. All companies must register and be approved as valid operations before they can buy or sell products.

Getting rid of traditional brokers may be a plus for companies selling surplus, but the loss of their knowledge in a deal can be a minus for buyers.

"Brokers give companies inside information (to a product or company). A Web site can't replicate the intelligence of the broker," Williams said.

According to Forrester Research, sales at online marketplaces for consumer products will reach $300 million in 2001, and reach about $29 billion in 2004, 2 percent of total industry sales. Industry executives estimate the total market for wholesale goods in the United States is worth $25 billion annually.

These numbers are attracting several competitors.

TradeOut.com, founded in October 1998, launched early last year and targets the surplus inventory market, among other industries. The Ardsley, N.Y.-based company filed for a public offering last week, and, backed by eBay, signed a partnership with Yahoo this week to offer listings through Yahoo's new business-to-business marketplace.

E-commerce veteran QRS last year launched Tradeweave.com, an online marketplace for the retail industry. And i2i.com, a "horizontal" marketplace that also hosts many different industries, recently partnered with the National Retail Federation, a consortium of more than 3,000 member companies.

For all the competition, RetailExchange believes industry expertise and backing give it a wedge for acceptance in a market that centers on relationships. Gordon Bros. owns a majority stake in the company, and Internet Capital Group invested $11 million in December for a 25 percent stake.

In retail, the brand image of a product is paramount to its success in stores. Companies such as Saks Fifth Avenue and Bradley often need to know and trust the company that is buying their brand name.

"A marketplace is something that leaves a product's brand wide open--it runs in reverse to how manufacturers protect their brand," said Rick Villars, vice president of Internet and e-commerce at research firm International Data Corp. "RetailExchange addresses the brand management issue."

A "channel control" feature on the site lets sellers designate which companies can buy their goods. For example, a company can say: "I only want to sell these goods outside the United States or to discount department stores. Or I want to sell to Sears but not to Kmart." The service then filters out all other requests.

Signing up the buyers and sellers could prove the most difficult task for online exchanges. Many traditional manufacturers and retailers are not tech-savvy, though they may have efforts to become so underway.

"They need to show they can grease the wheels" by providing the products and the back-end services such as financing, credit and negotiation tools, said Steve Kafka, e-business analyst with Forrester Research.

Buyers and sellers negotiate such issues as the shipping terms through discussion threads on the site, much like instant chat, and the sale can be finalized online or offline. RetailExchange said it plans to offer credit options from the site later this year.

Because so many specialized exchanges are cropping up, industry observers say that no one marketplace will reach critical mass, a key factor to success.

"Eventually you'll see online marketplaces link together because they can't make it without each other," said Don Gilbert, senior vice president of information technology for the National Retail Federation. "If the exchanges are linked, then you bring more sellers together for more efficient pricing."