Rich Bergsund, chief executive of IdeaForest.com, is an Internet survivor.
Though he spent a decade analyzing startups as a consultant at Bain & Co. Inc., nothing prepared him for the problems of launching a Web site during the height of the dot-com craze.
IdeaForest raised $7 million in 1999 with the intention of becoming the only “pure-play” in the $30 billion arts and crafts industry. But within a month, competition suddenly became fierce. Five online competitors launched their own sites that sold embroidery paraphernalia, latch hook rug kits and myriad other crafts items.
“We thought we were the first with the idea,” Bergsund said. “But no.” He cited Craft.com, CraftClick.com and Craftopia.com, among others.
Like other startups, IdeaForest had ramped up quickly to accommodate an expected flood of online orders. Within a year, the company had 75 employees, five separate business units and a robust Web site. But customers only trickled in.
“That was a steep learning curve for us,” said Linsly Donnelly, the firm’s chief operating officer. “Understanding what it would take to build the marketing muscle behind a brand was pretty significant.”
So Bergsund switched tactics.
Three months after the dot-com fad went bust on Wall Street, IdeaForest raised $21 million in a second round of financing and signed a strategic partnership with Jo-Ann Stores Inc., of Hudson, Ohio, one of the largest fabric and crafts retailers in the U.S. Jo-Ann invested $6.5 million for a 28.5 percent stake in JoAnn.com. Other investors include North Castle Partners, Allegis Capital and Rustic Canyon Group.
“There were relatively few online retailers that already had an off-line name,” said Patti Freeman Evans, a retail analyst at Jupiter Research. “They’ve done a good job at capitalizing on the Jo-Ann name and their relatively loyal customer base.”
Onerous orders
Because JoAnn.com offers 35,000 different products, from balls of yarn to sewing machines, the company ran into trouble fulfilling orders profitably. Initially, it bought all of its own products and shipped them to a third-party warehouse.
“We were losing $20 on every order,” Bergsund said. “The more we sold, the more we lost.” The company had to solve so many problems related to the large number of items it offered online, that its business model ended up being a competitive barrier to entry.
Now, inexpensive items are bought and shipped directly from wholesalers. Fabrics, private-label yarns and scrapbook items come from Jo-Ann Stores through a central warehouse in Michigan. Large products are shipped directly from vendors.
“The way we see it, one day our customer is a seamstress, another day she’s a home d & #233;cor person,” Donnelly said. “So it’s a bit of a different fulfillment model than a lot of other e-commerce businesses.”
All of its former rival craft sites went belly up. Though Michaels Stores Inc., of Irving, Texas, created its own Web site in-house, it scaled back the number of items it offers and now sells only art and framed prints online, not craft supplies.
Customer feedback
Bergsund said that another key aspect of operating an online retailer involves analyzing daily and weekly reports from customers and highlighting the products that sell the best.
JoAnn.com posted strong sales this past Christmas because it pushed a wider assortment of knitting and scrapbook items, the two big fashion trends in the crafts industry right now. Last year, JoAnn.com reported sales of $24 million, a 50 percent jump from $16 million in 2004. The company is profitable and has generated positive cash flow for the past three years.
“The reason the online business is growing is that some market share is shifting to the Internet,” said Laura Ann Richardson, senior vice president at BB & T; Capital Markets, who has a “hold” rating on Jo-Anns Stores, the retailer.
The JoAnn.com site also allows customers to review and rate products. If an item gets a lot of bad customer feedback, the company will tell the vendor and may drop the product from its lineup.
Executives also are working to lower the “abandoned cart rate” that is, customers who sign on to the site but leave without buying a product and increase the “conversion rate,” by getting customers who shop in the stores to move online. It also has a free shipping club to reward customers who place a large number of orders in a short period.
Bergsund is already scouting for vertical growth markets that dovetail with JoAnn.com’s core customers. A year ago it launched JoAnnDesigns.com, a site that allows sophisticated embroidery designs to be downloaded to high-end sewing machines.
“With a startup, you really need a lot of flexibility,” he said.
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IdeaForest.com
Year Founded:
1999
Core Business:
Arts and crafts supplies sold online
Revenues in 2004:
$16 million
Revenues in 2005:
$24 million
Employees in 2004:
20
Employees in 2005:
20
Goal:
Leveraging the JoAnn.com site to move into other online markets
Driving Force:
Supplying arts and crafts to very diverse customers
