Furniture.com a case study in e-tail problems
By Greg Sandoval
Furniture.com reached a crisis point this spring.
In a desperate attempt to impress potential investors, the e-tail company staged an elaborate show in May for two Idealab executives taking a tour of its headquarters in Framingham, Mass. Accountants, human resources workers and engineers were ordered to sit in the company's call center and "look busy," helping imaginary customers while speaking into dead phone lines, former employees said.
Such theatrics apparently paid off: A month later, Furniture.com managed to stave off bankruptcy by the narrowest of margins after receiving $27 million from CMGI, Bessemer Venture Partners and other investment firms. Although chief executive Andrew Brooks said he was "unaware" of the episode, many sources confirmed the ruse and said the company paid another type of price for it.
"It was kind of humiliating," said a former Furniture.com administrator who took part in the incident. "But we went along because we knew that the company needed money."
In many ways, the facade at Furniture.com is an irresistible metaphor for the hard times that have befallen companies in the Internet economy. For years, "old economy" naysayers have issued dire warnings about Potemkin businesses that are long on flash but short on cash.
Throughout scores of interviews with CNET News.com, former employees and other sources portray Furniture.com as a blueprint for dot-com disaster, a company obsessed with the belief that an IPO would solve its mounting problems while drumming up sales when it was ill-equipped to handle the business it already had. They describe an atmosphere of chaos and desperation where executives can't wait to quit and where those who stay develop a bunker mentality that breeds mistrust toward their own employees. Since early last month, six executives and two board members have resigned.
In the blind rush to go public, sources say Furniture.com lost sight of the fundamentals necessary to run a retail business: At one point, an internal audit showed that the company had shipped $1 million in merchandise and had not billed anyone for it. Some believe that Brooks and other senior executives fell under the spell of perceived invincibility that has touched so many Internet entrepreneurs whose fantasies have been fed by the dot-com fever that has created instant millionaires.
"Vendors were screaming for payment, customers were screaming for their purchased goods, and employees were questioned about being seen with former employees," said a former Furniture.com vice president. "Paranoia became evident. At management meetings the sources of 'leaks' were discussed."
Corporate horror stories are nothing new in the annals of retailing, the vast majority of them told before anyone had ever heard of the Internet. But the reversal of fortunes at Furniture.com--which is still taking customer orders and remains in full operation--is particularly devastating because it had been considered a model for success in moving brick-and-mortar sales online. The Internet's most trafficked home-décor site at the beginning of the year, the company seemed to possess all the makings of an e-tail titan: a killer Web address, offline business experience and an estimated valuation of $255 million.
Moreover, Furniture.com had managed to land some of the highest-profile investors on the Net, most notably CMGI, often viewed as one of the most savvy venture capital firms of the digital age. Based in nearby Andover, CMGI specifically cited the e-tailer's plans to go public at a conference late last year when the firm's chief executive boasted that its revenues could rival those of America Online because of wise investments.
Yet in a testament to the fickle nature of the new economy, Furniture.com has been in full retreat since filing for that initial public offering in January. The company withdrew its IPO plans last month after the stock markets began their precipitous descent in April.
Today, talk of bankruptcy has again emerged in circles familiar with Furniture.com's business, and sources say executives are negotiating with more than 100 creditors to repay only a percentage of what the company owes.
"I don't think they have enough money to make it to Labor Day," one former Furniture.com executive said.
CEO Brooks discounts such fiscal doomsaying as greatly exaggerated, saying his company's situation is no different from that of many other struggling dot-coms feeling the pressures of the consolidation that is sweeping the Internet economy. In an interview with News.com last week, he said negative assessments offered by former employees were either overblown or simply untrue, and he blamed part of Furniture.com's problems on bad press.
When asked about furniture manufacturers that former executives say have not been paid in months, Brooks said: "There is a pattern of prudent behavior in dealing with all our business partners." He added that Furniture.com "successfully delivers items every day" but that fulfillment problems are "endemic" to furniture companies in general.
On its surface, the business appears to be an attractive one: Home furnishings are known for their high profit margins, and the exploding U.S. economy has produced endless streams of young families looking to buy the right armoires and other accoutrements for their new homes.
But the truth is that home furnishing is a grueling business, one fraught with warehousing obstacles, distribution complications and ever-increasing competition. For example, United Parcel Service doesn't deliver large items such as couches or cabinets, so furniture companies must pay expensive shipping fees to deliver large products by truck. The bulkier items eat up valuable warehouse space as well.
And running those operations on the Web--while preparing to take a company public--adds multiple layers of complexity. It is all too easy for executives to get distracted from their core business in the lengthy process of courting venture capitalists and Wall Street analysts, as well as dealing with servers, congestion and customer service.
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