Meet Mister Buy(everything).com Selling products below cost, Scott Blum, the maverick chairman of Buy.com, is out to revolutionize all of retailing. He's even been talking to the CEO of a Big Three automaker.
By Eric Nee
March 29, 1999
(FORTUNE Magazine) – Sitting atop a bluff overlooking the Pacific, Scott Blum's house is a modernist fantasy that sticks out from the drab, conservative homes around it. Most of the other houses in Ritz Cove, a plush, gated community just south of Laguna Beach, Calif., are typical, albeit large, examples of Orange County architecture. A mishmash of Mediterranean styles--Ionic columns, red-tiled roofs, walled courtyards, wrought-iron hardware--the houses are painted in muted whites, pinks, or browns.
Not Scott's house. His 6,800-square-foot home is a set of interconnected geometric shapes built from poured concrete, green glass, and stainless steel, a sleek design that somehow suits its natural surroundings. "Some people tried to stop me from building it," says Blum, 35. "They even threatened to sue me." But they picked the wrong guy to intimidate. Scott Blum has made a living out of getting what he wants. And he really wanted oceanfront property in Ritz Cove. Back in 1984, Blum (rhymes with "plum") was a 19-year-old parking-lot attendant at the adjacent Ritz-Carlton Hotel. "I told the other attendants that someday I was going to own a house in that development," says Scott. Last year, after four years of legal wrangling, he and his wife, Audrey, moved in.
Soon Blum may have enough money to buy the whole development, and the hotel, if he so chooses. Buy.com, the e-commerce company he founded less than three years ago, will probably go public in the next few months with a valuation of ten times the company's annualized revenues, or roughly $4 billion. Scott, who is chairman of the company, owns 65% of the stock. The actual value of Buy.com will depend on tangible stuff, like its revenue growth rate, and also on less tangible factors, like investors' appetite for Internet stocks. One thing the valuation will not depend on is the company's profits.
That's because the business plan for Buy.com, headquartered in Aliso Viejo, Calif., is as bold--or reckless--as the design of Scott's house. The company resells computers and other products at or below cost, and is now losing "a couple of million dollars a month," according to the president and CFO, Allen Barbieri. That's the plan: Like other e-businesses, including FreePC.com and online auction house OnSale, Buy.com aims to build a large base of loyal customers who will return again and again to its Website to buy products. The goods themselves are bait. The profits--yes, these companies all intend to turn a profit someday--will come from the sale of advertising and ancillary services like warranties and equipment leases.
It's too early to say whether the model will work, but Buy.com is furthest along in implementing the plan. The company's slogan, "the lowest prices on earth," is attracting customers. Buy.com launched its Website in November 1997. At first it sold only computers, but now it offers software, books, videos, and electronic games, with CDs and other products soon to come. In 1998, Buy.com had about $125 million in revenues, and Barbieri expects to do three to five times that in 1999. With those kinds of sales, Buy.com is off to one of the fastest starts of any U.S. company.
It's not enough for Blum. He's purchased the rights to more than 4,000 Web addresses covering all kinds of products that he might sell, including buymusic.com, buystuff.com, buyetoys.com, and even buycars.com--which may explain his recent two-hour breakfast with Jacques Nasser, the CEO of Ford Motor. (More on that meeting later.) "My goal is to reach $10 billion in revenue with 1% gross margins on product sales," he says. And he'd like to get there by 2003.
To learn more about this would-be Sam Walton of e-commerce--Blum also owns tenpercentoffwalmart.com--I met Scott at his house early one morning in February. But not early enough, it seems. Blum answers the door dressed in workout clothes, ready to begin his four-times-a-week workout. When I decline to join him, Scott, his dog, Daisy, and his personal trainer, Rory Santos, head down the 100-yard path to the beach for a 30-minute oceanside run. Sipping a cup of coffee, I watch them briskly jog past the NO DOGS ALLOWED sign at the beach entrance.
When they return, Scott and Rory hit the gym, located at the front of the house. Scott puts his jogging shoes on the bench next to his other four pairs of jogging shoes and three pairs of biking shoes. Scattered around the gym are three surfboards, two mountain bikes, and a road bike. Scott takes up his position on the incline board for a set of sit-ups before tackling the weights. He complains about the workout but doesn't slack off. "He tries to beat me when we're jogging and at everything else," says Rory, who has been Scott's trainer for two years. "But I don't let him."
Scott's been a fierce competitor since he was a youngster. He started swimming at age 5, was a national champion at 8, and kept at it until 16. He showed such promise that his adoptive father, William Blum, moved the family from San Jose to Orange County so that Scott could join one of the best swim clubs in the U.S., the Mission Viejo Nadadores. At the National Junior Olympics, 14-year-old Scott won four gold medals, two silver, and one bronze. "He was smaller than everyone else his age. If he had been bigger, he'd have broken every record," says his proud father.
Today Scott channels most of that competitive energy into work. A whiteboard in his office lists Buy.com's ten goals for 1999. Goal No. 10 reads "Beat Amazon." "We plan to exceed Amazon's revenues in December," Scott says. To put that in perspective, Amazon had $250 million in sales during its last quarter--Buy.com, remember, had about $125 million in sales last year. A stretch? Yes. But according to Scott's estimates, Buy.com is growing 50% faster than Amazon.
Buy.com's headquarters is in a nondescript industrial and office park in the hills east of Laguna Beach. It's a two-story box, a cheap space that houses a handful of offices, a cluster of cubicles, and a shipping bay in the rear for returned products. Across the street is a UPS distribution center.
The offices are frugal for a good reason. Until last year, when Buy.com raised $60 million from Japanese tech company Softbank in return for a 20% equity stake, the company was largely funded out of Scott's pocket. Blum acts as if every penny the company spends is his. "He's almost ruthless" when negotiating deals, says David Ingram, owner of video and videogame distributor Ingram Entertainment, which sold its SpeedServe e-commerce business to Buy.com in exchange for 4.4% of the company and a seat on the board. "He doesn't want to take your head off totally, just partially."
In a business that promises the lowest prices in the world, every nickel counts. Scott spends money where he must, and nothing more. Buy.com has only 90 employees. Anything that can be outsourced is. Buy.com once had its own 50-person customer-support group. No longer. Now it contracts with Softbank Services, which has some 400 people working the phones for the company. Still, customer service seems an afterthought. Buy.com's Website is a clunky mess, and the company recently irritated a slew of customers by refusing to fill all the orders it received for a $588 computer monitor that it mistakenly priced at $164.50.
Buy.com's distributors handle all the order fulfillment for the company. This distinguishes it from Amazon.com, which has built its own distribution system, complete with warehouses of books and thousands of employees. But Blum wanted to sell all kinds of cut-rate products, and spending money and time to build a proprietary distribution system never seemed to make sense. Since it relies on distributors, the company has no inventory. Barbieri expects that by keeping operating costs low--and by pulling in advertising and other types of revenue--in three to four years Buy.com will have pretax net profit margins of 4% to 5%, similar to those of Wal-Mart.
Blum does spend liberally on advertising. To drive traffic to his site, he must turn Buy.com into a household name, and soon. The day I visit, Blum reviews a proposed print ad that features side-by-side photos of hand-held Palms, one from CompUSA and the other, at a lower price, from Buy.com. The Buy.com product is identified as a Palm Pilot, while the CompUSA product is called a "Palm Job." "I love it!" booms Blum. The women nearby hate it. "You've got to lighten up," he says. "This is supposed to be fun." Who cares about good taste if customers remember your name? A 30-second spot that ran during the Super Bowl features a man on all fours who crawls up behind a dog, sniffs its rear, and follows it off camera. "Buy.com," intones the voice-over. "Check us out."
Pushing things to the edge is the norm for this guy, and sometimes he goes over. Scott was kicked out of Mission Viejo High School in his junior year when he drove the principal's golf cart into the swimming pool. "After quitting swimming [at 16], I completely lost my mind. I did it all," he admits, declining to elaborate on the meaning of "all."
Blum was then sent off to live with a friend of the family's in a Denver suburb, where he straightened himself out and graduated from high school. He moved back to Newport Beach and started parking cars at the Ritz. In 1985, Scott took a job selling women's shoes at a Nordstrom department store; in three months he became the store's top shoe salesman. "It was easy. I focused on selling $400 boots instead of $40 shoes," he says.
While still at Nordstrom, Blum started his first company. Microbanks was one of the first sellers of add-on memory modules for Macintosh computers. Scott had the good fortune to lock in a contract to buy memory chips from Texas Instruments and Micron just before prices escalated. So unlike Buy.com's margins, Microbanks' were huge. "My cost was $80, and I'd sell [the chips] for $550," says Blum. In his first year he had a net profit of $1.2 million on revenues of $1.8 million. A year later, days before his 21st birthday, Scott sold Microbanks to Sentron Technology in San Diego for $2.5 million in cash.
With his father, William, as CEO, Scott then co-founded Pinnacle Micro, which started by reselling optical disk drives manufactured by Sony. Eventually the company blossomed into an $82-million-a-year business that designed and sold its own storage devices. Then came a series of financial crises. Scott, who was executive vice president, may have helped push the business too aggressively. In 1995 and 1996, both Ernst & Young and Coopers & Lybrand resigned as auditors, a shareholder lawsuit was filed, and the Securities and Exchange Commission launched an investigation into Pinnacle's accounting practices. (The company was accused of booking revenues before it should have.) Scott resigned from Pinnacle in late 1995 and settled with the SEC in October 1996. He paid no penalty and admitted no guilt but agreed to abide by SEC regulations in the future. William Blum still runs Pinnacle. "Obviously Scott made a big mistake," says Buy.com board member Donald Kendall, the former CEO of PepsiCo. "He was young and aggressive. There's no question he learned from it."
Blum insists that he was not forced to leave. He had worked for his father for nearly a decade, he says, and was ready to move on: "Everyone assumes you're the dumb son. I had a lot to prove."
As he set out to create Buy.com, though, Blum continued to work under cover of a paternal shadow. Unlike most young technology entrepreneurs, he actively courts the advice of older executives from a range of industries. He now relies on the 78-year-old Kendall nearly as much as he once depended on his father.
Describing a scene that seems almost too psychologically rich to be true, Blum says the two first met in 1995 at the Mange Moose lodge in Jackson Hole, Wyo., after a day of skiing. Blum, a schmoozer who always seems eager to please, noticed an older man sitting in a chair opposite the fireplace. As a way of introduction, Blum offered him a Cuban-made Montecristo cigar and lit it with Pizza Hut matches. His friendship with Kendall was clinched in that one gesture. Montecristos are Kendall's favorite cigar, and at the time PepsiCo owned Pizza Hut. "What Scott's doing is very exciting," says Kendall. "At my age it's good to keep up with what's happening."
The Buy.com board includes five older men, all with experience in running a large company or division. Kendall ran Pepsi; another Pepsi veteran, John Sculley, 59, was CEO of Apple Computer; Wayne Thorson, 72, is president of a privately held construction company in Bemidji, Minn.; Bill Richion, 62, was vice president of global accounts at Hewlett-Packard; and James Roszak, 57, was president of the life insurance division of Transamerica Life.
Blum raves that the board "gives the company more credibility. But that is outweighed by their wisdom." He may be right: This board isn't stacked with excitable types ready to sign off on the latest in Internet hype. "Buy.com is very different from the businesses I'm used to," says Thorson with a laugh. "It's like night and day." Thorson Inc. is one of the largest highway-construction companies in the Midwest. "I'm from the old school. I keep asking, When are we going to show a profit?" Even the lone venture capitalist on the board, Scott Russell, a 38-year-old general partner at Softbank Technology Ventures, agrees. "It's nice to be surrounded by senior operating executives," says Russell.
On March 1, Blum added one more key senior executive when he hired Gregory Hawkins to replace him as CEO. Hawkins, 44, had been head of global sales for $22-billion-a-year computer distributor Ingram Micro. "Scott felt strongly that Buy.com should have a CEO with more experience," says Sculley. "Not many entrepreneurs recognize how important it is to get the right person at each stage." Sculley should know. He was hired as CEO by Apple Computer founder Steve Jobs, only to force Jobs out after a legendary power struggle.
With Hawkins, Blum has put in place an operating team that can deliver on his dream--and even produce a profit someday. One of Hawkins' first tasks is to buff up customer service. Says Kendall: "This is just like any other business. People come back not just because it's the cheapest, but also because they trust you." Blum, meanwhile, remains chairman, looking for new worlds for Buy.com to conquer.
Blum believes that Buy.com's way of doing business can be applied to any number of old-world industries. Included among the thousands of Web addresses that Buy.com has purchased, for instance, are buyinsurance.com and buycars.com. Those are, says Blum coyly, "two areas we have a high interest in."
If any business is ripe for the disintermediation made possible by the Internet and business models like Blum's, it's the auto industry, with its slow-moving dealers reluctant to share any data at all with customers. Blum won't reveal the details of his February breakfast with Ford's Nasser, except to say, "It was to get to know each other and potentially find synergies between the two companies." As he flirts with traditional Big Business, Blum is saying all the right things: He insists that even as companies such as his begin to sell cars over the Web, dealers will have a continuing role, especially to deliver and service the cars.
There's no doubt about it: Blum seems to be maturing. On Dec. 31 his wife, Audrey, delivered their first children, twins Will and Emma. "They're up all night," he says with a smile. "I don't sleep."
Scott Blum's on the verge of having everything he's dreamed of. He tells the story of a high school class in which he and the other students were asked to paste on a whiteboard the things that were important to them. Scott put up toilet paper (ever the joker), play money, a photo of a model, and a photo of a Ferrari.
Needless to say, the teacher jumped all over him, saying that those were exactly the kinds of materialistic items he didn't want his students to strive for. But they are now the things Scott has. He will soon be a billionaire. Audrey is a former model. He just bought a new Porsche 996. And he can buy all the toilet paper he wants.
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