Overstock.com 2003 Annual Report Download - page 6

However, we believe that the market for online liquidation is still early in its development and is characterized by only a limited number of competitors,
some of which utilize an auction model to price their goods. Furthermore, we believe that there are no dominant companies in the online liquidation market,
and many of the companies that do offer overstock or liquidation merchandise are focused on single product lines.
Lastly, small retailers are under competitive pressure from large national retailers. Small retailers generally do not have purchasing leverage with
manufacturers; consequently, they are more likely to pay full wholesale prices and are more likely to receive inferior service. We believe that small retailers
generally do not have access to the liquidation market because liquidation wholesalers are most often interested in liquidating large volumes of merchandise,
rather than the small quantities appropriate for small, local retailers.
The Overstock Solution
Overstock utilizes the Internet to create a more efficient market for liquidation merchandise. We provide consumers and businesses with quick and
convenient access to high-quality, brand-name merchandise at discount prices. We believe we are unlike other online liquidators because we focus on multiple
product lines, offer a single price (as opposed to an auction format), and serve both businesses and consumers.
We have a "direct" business, in which we buy and take possession of inventory for resale. We also have our "fulfillment partner" business, which we
formerly called our "commission" business. In our "fulfillment partner" business, we sell merchandise of other retailers, cataloguers or manufacturers
("fulfillment partners") through our Websites. We currently have fulfillment partner relationships with approximately 250 third parties which post over 6,000
non-BMV products on our Websites. Prior to July 1, 2003, we did not physically handle the merchandise we sold for our fulfillment partners, as the
merchandise was shipped directly by them. They also handled all customer returns related to those sales. Beginning July 1, 2003, we took responsibility for all
returned items relating to these sales and we now handle the possible resale of any returned items. We made the decision to change this policy to have more
control over the Overstock customer shopping experience, as we believe that a seamless customer experience is key to creating loyal, long-term customers. By
accepting returns at our warehouse, we can verify that fulfillment partner products are being packaged and shipped to our standards. Additionally, as customer
returns are now all shipped to one location, the process is much more simple and convenient for our customers. As a result, beginning July 1, 2003, we are
considered to be the primary obligor for these sales transactions, and we assume the risk of loss on the returned items. As a consequence, we now record
revenue from sales transactions involving our fulfillment partners (excluding travel products) on a gross basis, rather than recording a commission on those
sales as we did prior to July 1, 2003.
During the fourth quarter of 2003, we added a discount travel store to our Website. We use a fulfillment partner to supply the travel products (flights,
hotels, rental cars, etc.) in our travel store. For the products sold in our travel store, we do not currently have inventory risk or pricing control, and do not
directly provide customer service. Therefore, for these sales we are not considered to be the primary obligor, and record only our commission as revenue.
For both our direct and our fulfillment partner businesses we have a consumer and a business-to-business ("B2B") sales channel. Therefore, our business
consists primarily of four combinations of these components: direct consumer, direct B2B, fulfillment partner consumer and fulfillment partner B2B. During
2003, we also operated a warehouse store from our Salt Lake City warehouse where we sold certain items that could not be economically sold on our
Websites. Sales from the warehouse store in 2003 accounted for less than 1% of our total revenue, and in January 2004, we closed the warehouse store.
4
Overstock provides manufacturers with a one-stop liquidation channel to sell both large and small quantities of excess and closeout inventory without
disrupting sales through traditional channels. Key advantages for manufacturers liquidating their excess inventory through Overstock include:
Resolution of channel conflict. Channel conflicts arise when a manufacturer's excess inventory is sold through the same channel as their other
product offerings. Since excess inventory is usually sold at a discount, sales of the manufacturer's other product offerings may be impacted as a
consumer in a retail store may opt for the excess product or become confused by the pricing and model discrepancies. By using Overstock,
manufacturers have an alternative and independent channel where they can sell excess inventory without the fear of hindering the sale of their
other products.
Single point of distribution. Manufacturers often use multiple liquidation sources to clear their excess inventory. Multiple sources create
additional logistics issues that they would rather avoid. By using Overstock, manufacturers have a single source for the distribution of excess
inventory.
Improved control of distribution. By using Overstock, manufacturers can monitor what kind of customer, whether individual consumer or small
retailer, ultimately purchases their merchandise. In addition, a manufacturer can request that its products be offered in only one of our sales
channels in order to avoid sales channel pollution.
Improved transaction experience. By having a reliable inventory clearing channel, manufacturers are able to more quickly and easily dispense of
their excess merchandise.
Overstock also offers consumers a compelling alternative for bargain shopping. Key advantages for consumers include:
High quality and broad product selection. Most of the merchandise offered on our Websites is from well-known, brand-name manufacturers.
We typically have approximately 12,000 non-BMV products and approximately 500,000 BMV products (books, magazines, CDs, DVDs, video
cassettes and video games) in up to twelve departments.
Convenient access on a secure site. Our customers are able to access and purchase our products 24 hours a day from the convenience of their
home or office. Further, we do not sell any personal information about our customer base to third parties.
Responsive customer service and positive shopping experience. Our team of customer service representatives (which includes employees,
temporary employees and outsourced staff) assists customers by telephone and e-mail. Our customer service staff answers approximately 85% of
phone calls within 30 seconds, and responds to approximately 98% of its e-mails within 12 hours. For our consumer business, we include a return
•
•
•
•
•
•
•