E-tailers turning extra inventory into extra cash

The online discount site lets companies quietly dump slow-selling goods while sidestepping potentially angry manufacturers who do not want to see their merchandise in discount bins. The catch: The retailers must be prepared to slash prices at least 45 percent.

"We tell retailers they're not going to make a bunch of money on this," said Overstock chief executive Patrick Byrne. "We are a way for them to get their inventory dollars back."

Since investors began fleeing technology stocks in April--especially those of e-commerce companies--large numbers of Web retailers have faced a cash crunch. Most need to put the inventory dollars back into play.

"For a lot of these e-tailers, their money is tied up in their stock," said Alan Alper, an analyst with Gomez. "They can't invest in new inventory until they dispose of their goods. By selling it through discounters, however, they're lucky to get 55 to 70 cents on the dollar."

Companies such as iSolve, TradeOut and RetailExchange.com have also begun tapping into the heaps of merchandise that distressed online companies are looking to unload.

Privately held Overstock is the online equivalent of a closeout buyer, a role that has existed in the offline world for a long time. The Salt Lake City company also obtains goods through liquidation sales, which it did this week when it bought much of the inventory of defunct Net retailer ToyTime.com.

The twist is that Overstock uses technology to streamline the process. In the brick-and-mortar world, a closeout buyer must purchase the goods, haul them to a warehouse, pay workers to reprice the products, and sometimes remove identifying tags so the retailers they came from will not be revealed.

However, in the online version, retailers send Overstock electronic photographs, called JPEGs, and written descriptions of the merchandise. Byrne posts them on the Overstock Web site and handles the returns and customer service. The retailer is responsible for shipping the merchandise.

When retailers have a lot of merchandise to move, Byrne sets them up with access to Overstock's operating system, enabling the merchant to display its goods at will. At the end of each day, the retailer can log on and compile orders, process returned products, pull items off the site or put others on.

The dot-com shakeout has been a boon to Overstock's business, Byrne said. The company is handling about 12 e-commerce companies, most of which are struggling, he said. To drum up business, Byrne said he contacts troubled companies when he hears about them.

"Inventory management is so important, and the dot-coms aren't very good at it," Byrne said. "It's kind of an embarrassment for them to have to deal with us. It's an admission that they have screwed up their inventories."

Byrne said he "polices" his dot-com partners closely for fear that some of them are so short on money or close to shutting down that they may fail to ship orders.

"Our name is the only one the customer sees, so we don't want them embarrassing us," he said. But Overstock's appeal is that it allows retailers to sell goods anonymously.

Retailers can avoid irritating their suppliers by selling marked-down goods in this way. In the retail world, some manufacturers avoid selling to retailers that cut the prices.

The reason for that is that manufacturers, especially makers of higher-end goods, feel they have a brand to protect, and many say that when their goods are marked down, it tarnishes the company's image.

"Any way you can preserve your relationship with your suppliers while staying true to bottom-line objectives is critical, particularly during these somewhat rocky times," Gomez's Alper said.

Byrne declined to identify the majority of e-commerce companies he has partnered with, but did say that two of his best dot-com clients are luxury goods maker Miadora.com and Jewelry.com.

Lisa Benacquista, a marketing representative at Jewelry.com, confirmed that both companies sell goods through Overstock. San Mateo, Calif.-based Miadora acquired Jewelry.com in February.

Jewelry.com, which began selling on Overstock in April with seven items, now has 69 items displayed on the site, she said.

The initial seven items, including sapphire and diamond rings and a gold-heart pendant, sold out in two days, Benacquista said. Before that, the items were collecting dust on Jewelry.com's shelves for four months.

Benacquista said Miadora is not worried about angering manufacturers because most of the goods the company sells on Overstock are liquidated items it gets from manufacturers.

Another way Jewelry.com stays out of trouble with manufacturers is that while it displays goods at a cut rate on Overstock, it continues trying to sell them at full price on its own.

Manufacturers "are happy to get rid of them," she said. "And we're happy to have this new sales channel."