Value America Slashes E-Commerce Operations

Further fueling speculation that Net stocks and rushed IPOs have set e-commerce up for a retrograde period, Value America (Nasdaq: VUSA) is cutting its workforce nearly in half and will reduce its product offerings to a handful of categories that are proven sellers on the Internet.

Value America, which launched its online department store in February 1997 and went public in April 1999, closed its first day on the market with more than a $32 (US$) gain, closing at $55.19 after hitting a high of $74.25. Value America won further market approval by luring Microsoft co-founder Paul Allen as a strategic investor.

Hitting the Brakes

Now, less than nine months later, the Charlottesville, Virginia-based company is saying that it has stretched itself too far and needs to back up a few steps. Calling the move a “strategic refinement,” Value America will cut its sales back to four categories: PCs and peripherals, computer software, consumer electronics and office supplies.

Value America had rapidly expanded its shopping selection to more than 25 categories and added customer service personnel to serve those additional areas. As it scales back its offerings, the company will also cut its workforce by about 47 percent, consolidate its various offices, and look for other areas to cut costs.

“We are building on Value America’s proven strengths and are discarding what doesn’t perform,” CEO Glenda Dorchak said.

The company now predicts that fourth quarter earnings will be six to nine percent lower than initially expected, despite unexpected highs for the entire online retailing industry during the year-end holiday sales period. Value America attributed its lagging performance to product fulfillment delays and system transition issues that occurred when it installed a new infrastructure.

Remembering the Customer

Echoing concerns that many industry analysts have voiced lately about online merchants’ poor customer service operations, Dorchak said the company will increase its focus in that area. “Value America is streamlining to reduce costs and maximize the efficiency of our inventory-less business. We also realize our customers are our company. Our business must be designed around customer service and operational efficiency,” she said.

As it strips away its non-performing product categories, the company will put greater energy into those categories that provide a good mix of product selection, product fulfillment, customer service and gross margins, she added.

Value America plans to direct its customer acquisition efforts almost exclusively to online marketing and advertising, dropping its offline efforts that have included billboards and magazine ads.

Value America will also increase its efforts in the business-to-business and government markets to supplement its consumer sales.

The company appointed a special committee including FDX Chairman Frederick Smith, William Savoy, head of Paul Allen’s Vulcan Ventures, Thomas Casey, vice-chairman of Global Crossing, and Michael Steed, managing director of Pacific Capital Group, to find new strategic opportunities for Value America.

Resignations and Terminations

Value America also announced that co-founders Craig Winn and Rex Scatena resigned from their positions, but did not give a reason for their departure. The two men founded Value America in 1996 and launched it a year later.

Winn served as CEO of the company until last March, and was chairman of the board until November. Scatena served as vice-chairman after filling a number of management positions during Value America’s formative years.