From Zero to $1 Million a Day at Tiny E-Commerce Firm

TIMES STAFF WRITER

With more than 400,000 retailers flocking to the Internet, the marketing hyperbole flies fast and loose. The largest flower shop. The cheapest music store. The best selection of sporting goods.

BuyComp, tucked away in the suburban hills of Aliso Viejo, joined the crowd last November with similar heady claims: an online comparison-shopping service with the "lowest prices on Earth."

It's a bold claim, and one difficult for a fledgling and privately held company to prove. But BuyComp insists it can indeed provide shoppers with the lowest prices, thanks to its e-commerce technology and some key agreements with product distributors and hardware manufacturers.

So far its sales figures back up its boasts as a rising flood of online consumers flock to the company's Web site (http://www.buycomp.com). BuyComp says it's on a pace to hit $130 million in revenue this year, which would catapult it past the record set by Compaq Corp. in 1983 for the largest first-year revenue generated by an American business.

In less than a year, BuyComp has gone from zero sales to nearly $1 million a day. Officials at Santa Ana-based Ingram Micro Inc., the world's largest distributor of technology products and BuyComp's key distributor, confirm the numbers, and note that the online store is on target to average $2 million in daily sales by the end of the year.

That means that tiny BuyComp, already blasting past its better-known competitors, would quickly be closing on Dell Computer Corp., the leading business-to-consumer online retailer, which pulls in more than $4 million in sales a day.

"BuyComp is a secret shared by online consumers," said Scott Russell, a general partner at Softbank Corp., the Japanese technology giant known for making key investments in promising Internet firms. Softbank, which owns stakes in Yahoo and E-Trade Group, recently spent $20 million to pick up a 10.5% chunk of BuyComp.

One question hanging over the company: the corporate past of founder Scott Blum, which includes a now-settled class-action lawsuit and federal regulatory inquiry into Irvine-based Pinnacle Micro Inc.

"I've made a lot of mistakes, but I've learned from them," Blum said. "I'm an idea man. I'm not the one who should be running a multibillion-dollar company."

Buzz Growing for E-Commerce

As corporations and consumers become more comfortable with Internet security issues, e-commerce has emerged as the business world's hottest buzzword. Researchers at International Data Corp. recently projected that online spending will reach $32.4 billion this year, more than triple the $12.4 billion in 1997.

And technology products--from software and hardware to digital cameras and PDAs--are the most common goods found inside Internet shopping carts.

"When it comes to general consumers, people do not care who they're buying their PC from online," said Nicole Vanderbilt, a senior industry analyst with Jupiter Communications. "Right now, the thing that matters to the average consumer is finding out who is offering the lowest prices."

In 1996, Blum spotted an opportunity to tap into this desire for savings. The 34-year-old executive recruited two programmers--Robb Brock, who handled the e-commerce back end, and Web designer Kevin Richards--convincing them to spend a year developing an e-commerce engine to handle online transactions and an artificial intelligence program to track product prices. The venture was boot-strapped with $1 million of Blum's own savings, he said.

While Brock and Brent worked on the technology, Blum aggressively pitched his idea to product distributor Ingram Micro. What BuyComp wanted was simple: to use Ingram's vast warehouse of products as the invisible backbone of its Web site. Blum's strategy was to win the business of customers who use electronic comparison-shopping services.

At its most basic level, BuyComp is a retailer that never touches the goods it sells. In its spartan real-world facility, several rows of operators handle phone orders and customer complaints.

Online consumers find the site either through word of mouth; through shopping "bots," or computer programs that canvass the Internet for the best prices; or through the company's strategically positioned ads at Web portals such as Yahoo and Shopper.com.

BuyComp's Web site offers more than 30,000 products for sale or lease, with a catalog ranging from new hardware, software, memory cards and a slew of related items. Once an order comes in, BuyComp automatically transfers the bid to Ingram Micro, which then packages and ships the order to the customer.

By working almost exclusively with Ingram Micro, BuyComp says, it can get its products at a lower price. "Sometimes we're only a nickel cheaper," Blum said. "But a nickel saved can mean a sale for us and not for our competitors."

Such price cuts mean BuyComp's profit margin remains a slim 0% to 2%. BuyComp officials won't say whether the company is profitable.

"Relying on slim margins to gain market share is a very risky strategy," said Jim Balderston, analyst at Zona Research Inc. in Redwood City, Calif. "Quite simply, you don't make any money."

The key to BuyComp's future, say analysts, is its business model. Revenue comes from three areas: ads on its site, profit from product sales and its line of "buy" stores.

Many hardware manufacturers, unwilling to alienate local retailers, have hesitated to begin selling their product directly to the public through the Internet. Their corporate Web sites provide information, but not an order form.

BuyComp adds that final link with its customized BuyStores, or online retail sites devoted to selling a particular company's products. Curious about the latest Nokia computer monitors or 3Com's Palm Pilot? Go to the company's corporate site, read up on the products and jump to a list of resellers who carry the products--including Buy3Com and BuyNokia.

Public Offering Is Planned

BuyComp plans to go public by the end of the year, hoping to tap into the IPO madness that has surrounded Internet companies. Blum said he is in talks with three investment banking firms about possibly underwriting the deal--Morgan Stanley Dean Whitter, Goldman Sachs and Merrill Lynch. Banking officials could not be reached for comment.

Blum has enjoyed such promise before. While the onetime Ritz-Carlton valet prefers to recall his start-up successes, he is best known for his failures at Pinnacle Micro, an optical drive manufacturer.

Blum and his father, William, started the Orange County company in 1987. The elder Blum, who spent 21 years as an engineer and sales and marketing manager at Hewlett-Packard Co., used $83,000 from a lump-sum retirement payoff to jump into the field.

The company boomed initially, as the advent of multimedia technology for the consumer market--and its promise of data-hungry computers combining text and video to produce film-like images--put the company in contention for the multibillion-dollar storage industry.

But by 1995, analysts say, the once-shining firm made a critical misstep when it tried to make storage devices instead of just selling them.

That year, the company's auditor, Ernst & Young, resigned over a sales-booking dispute. The incident, in which $2 million in sales were recorded in the wrong periods, led to a shareholder lawsuit that was settled by Pinnacle for $2.3 million in cash and stock.

By 1996, Pinnacle went into default on a $5-million line of credit with Bank of America and borrowed $10 million from overseas investors to pay off the bank and fund product development. And a second auditor--Coopers & Lybrand--resigned in a dispute over the way the company recorded $406,000 in certain engineering expenditures.

SEC Probe of Pinnacle Execs

Both Blums quit in 1996, although William later returned to Pinnacle as part of a management shake-up. The Securities and Exchange Commission launched an investigation of Pinnacle, the Blums and several other executives; the subsequent suit accused them of using sales from one quarter to bolster the previous quarters' numbers, allowing the firm to meet year-end sales goals.

In October, Scott Blum settled with the regulators' suit, agreeing to abide by securities laws in all future deals. He paid no penalty, neither admitting nor denying the allegations.

Pinnacle Micro has been attempting to work out an acceptable out-of-court reorganizational plan to repay its creditors. But three creditors filed an involuntary-bankruptcy petition in August to try to force the drive maker into liquidation.

"I've been really wary against over-promoting BuyComp, because I know I have to prove my credibility to people again," said Blum, who says that his BuyComp paycheck is only $2 a month.

To bolster BuyComp's credibility on Wall Street--as well as downplay his own corporate history at Pinnacle--Blum said, the online retailer will name a new chief executive and chief financial officer by early next month.

"Scott's past did play a big part in our decision to invest in BuyComp," said Softbank's Russell. "We do like to invest in people with experience, whether it's good or bad. And we see it as a very good sign when a founder is willing to step aside and bring in top management from the outside."

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Times staff writer P.J. Huffstutter can be reached via e-mail at p.j.huffstutter@latimes.com.

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