Overstock.com 2008 Annual Report Download - page 7

Table of Contents
The disposal of excess, or overstock, inventory represents a substantial burden for many manufacturers, especially those who
produce high-quality branded merchandise. Manufacturers seek to avoid liquidating through traditional retail channels where the
manufacturer's discounted products may be sold alongside other full-price products. This can result in weaker pricing and decreased
brand strength, and is known as channel conflict or sales channel pollution. As a result, many manufacturers turn to liquidation
wholesalers and discount retailers. These liquidation channels provide manufacturers limited control of distribution and are, we
believe, unreliable and expensive to manage when compared with their inline channels.
Despite the challenges manufacturers encountered in the liquidation market, the proliferation of outlet malls, wholesale clubs, and
discount chains is evidence of the strong level of consumer demand for discount and closeout merchandise. However, consumers face
several difficulties in shopping for this merchandise. For example, many traditional liquidation outlets are in remote locations and
have limited shopping hours, which we believe makes shopping burdensome and inconvenient. In addition, in the traditional
liquidation outlet there are space constrains limiting the number of products that can be offered at any given time.
We also believe that the market for online liquidation is characterized by a limited number of competitors, some of which use an
auction model to price their goods. Furthermore, we believe that many of the online 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.
In the fourth quarter 2008, we faced unusual competition from brick and mortar retailers seeking to liquidate inventory directly.
The macroeconomic slowdown and discounting by brick and mortar retailers have mixed effects on us. The effects include increased
price competition and cautious consumers, but also include opportunities for us to acquire inventory at unusually low prices.
The Overstock Solution
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 full-priced product offerings. Since excess inventory is usually sold at a discount, sales of the
manufacturer's full-priced 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
full-priced 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, raw materials or production capacity.
Overstock also offers consumers a compelling alternative for bargain shopping. Key advantages for consumers include:
• High quality and broad product selection. Much of the merchandise offered on our Website is from well-known, brand-
name manufacturers. In the Shopping section of our Website, we currently have approximately 201,000 non-BMMG
products and approximately 450,000 BMMG products (books, magazines, CDs, DVDs, and video games) in eight major
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 computer. We do not sell any personal information about our customer base to third parties.
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