Buy.com shifts Net dollars, picks offline shop

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Buy.com recruited Rubin Postaer & Associates to handle its estimated $20 million offline advertising account. The agency hiring comes as the computer e-tailer, under the gun to improve its financial position, shifts ad dollars from traditional to interactive media, where it expects to get more bang for the buck.

Rubin Postaer, Santa Monica, Calif., takes over offline creative and media-buying work that had been handled in-house since Gotham, New York, completed a project leading up to Christmas. Black Rocket, San Francisco, had the account before that.

Rubin Postaer prevailed over finalist Grey Worldwide, Los Angeles, in a review of 17 California agencies. Jon Firestone, former president-CEO of BBDO Worldwide's Minneapolis office and a consultant to Buy.com, assisted in the review.

Buy.com will keep online creative and buying in-house, coordinating with Rubin Postaer's offline work.

INTEGRATED VIEW

"We view online and offline as highly integrated," said John Herr, Buy.com's senior VP-sales and marketing.

The company last year spent $42 million on advertising, with $26 million in traditional media that included TV, radio and print. The rest--$16 million, or 38% of the budget--went online.

Buy.com's revenue is growing, and its ad budget will increase this year to an estimated $60 million. Mr. Herr declined to confirm the budget, but noted the online/

offline mix will shift to about 65%/35%. That suggests online will more than double to about $39 million, while traditional media will shrink to about $21 million.

Online includes banner ads and e-mail. The offline media plan is to be determined; Buy.com recently has emphasized radio and print.

Numbers tell the story why Buy.com is changing its ways. In the landgrab of 1999, Buy.com saw sales leap fourfold to $596.8 million. One problem: Buy.com spent $603.7 million to purchase the goods, meaning it sold its wares below cost. Little surprise that Buy.com last year lost $130.2 million.

Buy.com in the first quarter of this year charged its customers more than it paid.

"Consistent with our merchandising strategy, we have started to raise prices on many of our products," Buy.com said in a May filing with the Securities & Exchange Commission.

Even so, Buy.com lost $32.8 million in the first quarter after factoring in expenses.

While the e-tailer has branched into consumer electronics, golf, books and travel, sales of computer hardware and software dominated the first quarter--accounting for more than 85% of revenue.

FUTURE IN QUESTION

Buy.com went public early this year--and has seen its stock on the skids since then as Wall Street turned cold on e-tailing. Buy.com stock last week was down 85% from its peak. At the end of May, Goldman Sachs & Co. put Buy.com on a list of ailing e-tailers it said "may have difficulty existing as standalone companies."

But Mr. Herr vowed Buy.com will get efficiencies in marketing that will allow it to survive.

"We're spending a lot of time really trying to quantify the value of everything we're doing (in marketing)" he said. "We're certainly looking to stay on a clear path to profitability."

Mr. Herr sees Internet media and direct marketing as synonymous, and he's putting more money into Web advertising and e-mail because of their efficiency in targeting existing customers--repeat buyers account for 60% of revenue--as well as new prospects. Buy.com closely tracks how much it costs to acquire a customer. The company is beginning some direct mail, as well, though it will apply most of its direct money to the Net. "We want to reach people when they're ready to buy online."

So why bother with offline ads at all? Because, Mr. Herr said, traditional media remain important for awareness, branding, depth and reach, and complement the message in online ads.

FALL CAMPAIGN

Rubin Postaer is best known for its work for American Honda Motor Co., but Mr. Herr said Buy.com was impressed with its breadth of experience across categories.

"We're excited to work with them," he said.

A campaign is expected this fall, gearing up for the fourth quarter.

Some rivals, including CompUSA's Cozone.com, already have disappeared. Buy.com could benefit in two ways: Fewer rivals means less price competition; consumers concerned about shaky e-tailers may steer to the better-known dot-coms, such as Buy.com and Amazon.com. (Buy.com and Amazon.com charge similar prices on some lines, which could hurt Buy.com if consumers decide they prefer the comfort and safety of Amazon, considered the strongest pure-play e-tailer.)

Amid an e-tail shakeout, Mr. Herr contended Buy.com has the scale to survive.

"If you don't really have critical mass and scale today, it's going to be hard to survive the shakeout," Mr. Herr said.

Copyright June 2000, Crain Communications Inc.

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