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Additional Cases
Boo.com: Poster Child for Dot.Com Failure?
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Boo.com arrived on the Internet scene promising its investors and online shoppers the treat of a profitable Web site and of high-quality, stylish, designer sportswear purchased easily from their office or home. Thanks to advanced widespread publicity, Boo.com became perhaps the most eagerly awaited Internet IPO (initial public offering of stock) of its time. However, the company declared bankruptcy only six months after its Web site had been launched and before the company could ever undertake an IPO. Investors lost an estimated $185 million while shoppers faced a system too difficult for most to use. Many people are still wondering how it could have all gone so wrong so swiftly.
The idea for Boo.com came from two 28-year old Swedish friends, Ernst Malmsten and Kajsa Leander, who had already established and later sold Bokus.com which was the world’s third-largest online bookstore after Amazon.com and Barnes & Noble. The two were joined by Patrik Hedelin, an investment banker at HSBC Holdings. Boo planned to sell trendy fashion products over the Web, offering such brands as North Face, Adidas, Fila, Vans, Cosmic Girl and Donna Karan. The Boo business model differed from other Internet startups in that its products would be sold at full retail price rather than at discount. Malmsten labeled his target group as “cash-rich, time-poor.”
The Boo Web site enabled shoppers to view every product in full color 3-D images. Visitors could zoom in to individual products, rotating them 360 degrees so visitors could view them from any angle. The site’s advanced search engine allowed customers to search for items by color, brand, price, style, and even sport. The site featured a universal sizing system based on size variations between brands and countries. Visitors were able to question Miss Boo, an animated figure offering fashion advice based on locale or on the specific activity (such as trekking in Nepal). Boo.com also made available a telephone customer service advice line. In addition, Boo was to feature an independently run fashion magazine to report on global fashion trends. Future plans included expansion into Asia and a site targeted at young teenagers. Those who purchased products from Boo.com earned “loyalty points” which they could use to obtain discounts on future purchases.
The company offered free delivery within one week and also free returns for dissatisfied customers. The Web site was fluent in seven languages (two of which, American and British English, were extremely different). Local currencies were accepted from the 18 original countries, and in those countries national taxes were also calculated and collected. Taxation was particularly complex because so many countries could be involved in one transaction. “Boo.com will revolutionize the way we shop…It’s a completely new lifestyle proposition, ” Ms. Leander proclaimed. The founders planned to advertise its site broadly both prior to launching and after. “We are building a very strong brand name for Boo.com,” stated Malmsten. “We want to be the style editors for people with the best selection of products. We decided from day one that we would want to create a global brand name.”
Although many important financial giants rejected investment in Boo.com, J.P. Morgan & Co., an old-line investment bank, decided to back the project even though it had done no startups for many decades. According to The New York Times Morgan liked the concept “because Boo wouldn’t undercut traditional retailers with cut-rate pricing as many e-retailers do.” The Morgan bankers were also impressed by the two founders who had previously successfully launched an Internet company (Bokus.com). Moreover, they were impressed by promised rewards of “55% gross margins and profitability within two years,” according to the Times. Morgan found other early-stage investors, including Alessandro Benetton (son of CEO of Benetton), Bain Capital (a Boston high-tech venture capital company), Bernard Arnault (who has made a fortune in luxury goods), Goldman Sachs, and the very wealthy Hariri family of Lebanon.
With startup funds in hand, Malmsten and Leander set a target date of May 1999 for launching the Web site. Boo planned to develop both its complex Internet platform and customer-fulfillment systems from scratch. Management originally planned to launch in the United States and five European countries simultaneously, but soon expanded the number of countries to 18. It also wanted a system that would handle 100 million Web visitors at once. When the launch date began to loom close, management committed $25 million to an advertising budget, a huge sum for a startup. The company chose to advertise in expensive but trendy fashion magazines such as Vanity Fair as well as on cable television and the Internet. Malmsten and Leander even managed to appear on the cover of Fortune magazine before the Website had been launched.
With so much technical development to be accomplished, the company moved the target date back to June 21. As June approached management decided to open satellite offices in Munich, Paris, New York and Amsterdam. Several hundred people were hired to take orders from these offices once the site went live. However, the launch date had to be postponed again because of incomplete development, resulting in so many of the staff sitting idle for months. “With all those trophy offices, Boo looked more like a 1950s multinational than an Internet start-up,” claimed Marina Galanti, a Boo marketing director.
By September the company had spent $70 million and so Boo undertook more fund-raising. With the pre-launch advertising campaign over months earlier, the Web site was finally launched in early November. The promised mass marketing blitz never materialized. With the original advertising campaign long over, observers commented that by raising people’s interest while delaying the opening resulted in many disappointed and alienated potential customers. Moreover, the site reviews were terrible. At launch time, 40 percent of the site’s visitors could not even gain access. The site was full of errors, even causing visitor computers to freeze. The site design, which had been advertised as revolutionary, was slow and very difficult to use. Only one in four attempts to make a purchase worked. Users of Macintosh computers could not even log on because Boo.com was incompatible with them. Users without high-speed Internet connections found that navigating the site was painfully slow because the flashy graphics and interactive features took so long to load. Angry customers jammed Boo.com’s customer support lines. Malmsten indicated that the company actually wanted the negative press stories about usability problems in order to draw more attention to Boo.com. “We know the game and how to play it. If we didn’t want to be in the press we wouldn’t,” he said. Sales in first three months amounted to only about $880,000 while expenses heavily topped $1 million per month. The Boo plan quickly began unraveling.
In December J.P. Morgan’s representative on Boo.com’s board of directors resigned, leaving no one from Morgan to advise the company. In late December with sales lagging badly and the company running out of cash, Malmsten was unable to raise enough additional investment, causing Boo to begin selling its clothing at a 40% discount. This changed Boo’s public image and its target audience. However, Boo’s advertising did not change to reflect this strategy shift. During December finance director and partner Patrik Hedelin left Boo’s London headquarters to return to Stockholm permanently. This departure was not made public until late in January 2000. Rumors then spread that Hedelin had real differences with his two partners.
On January 25 Boo.com announced a layoff of 70 employees, starting its decline from a reported high of about 450 persons, a huge number for a startup. In late February J.P. Morgan resigned as a Boo.com advisor. According to reports it feared being sued by angry investors. In March, when sales reached $1.1 million, Boo was still spending far more than its income. In April, Boo’s finance director Dean Hawkins resigned to take another Internet job. In that month Internet stocks plunged on the stock market, and plans for a Boo IPO were shelved. On May 4 Boo.com confirmed that the company had been unsuccessfully looking for further financing. Finally on May 17 Malmsten hired a firm to liquidate the company, announcing his decision the next day. He also indicated that the company had many outstanding bills it could not pay.
One problem leading to Boo.com’s bankruptcy was its lack of overall project development planning and of management control—it just didn’t exist. “When you strip away the sexy dot-com aspect and the technology out of it, these are still businesses that need the fundamentals—budgeting, planning, and execution,” observed Jim Rose, CEO of QXL.com PLC, an online auction house. “To roll out in 18 countries simultaneously, I don’t think even the biggest global companies like IBM or General Motors would take that on.” None did. Boo, a startup, was the first to try such a feat. Noah Yasskin, an analyst with Jupiter Communications, said, “[Boo.com] had very little spending restraint to put it mildly.” An example of its free spending mentality was its offices, which were rented in high-priced areas. For instance its London offices were located on Carnaby Street and in New York they were located in the West Village, both trendy, expensive neighborhoods. Numerous reports surfaced of employees flying first class and staying in five star hotels. Reports even surfaced that communications that could have gone by regular mail were routinely sent by Federal Express.
Many in the financial community noted the lack of oversight by the board. Management controlled most of the board seats, with only four being allocated to investors. However, those four investor representatives rarely attended board meetings. Moreover none had any significant retail or Internet experience. The board failed to offer management the supervision it clearly needed.
Serious technical problems contributed as well. Developing its own software proved slow and expensive. The plan required rich, complex graphics so visitors could view products from any angle. The technicians also had to develop a complex virtual inventory system because Boo maintained very little inventory of its own. Boo’s order basket was particularly intricate because items were actually ordered from the manufacturer not from Boo, so that one customer might have a basket containing items coming from four or five different sources. The site also had to enable its customers to communicate in any one of seven languages and to convert 18 different currencies, a problem which the euro would only have somewhat reduced a year later. It also had to calculate taxes from 18 different countries. Developing all this complex software in-house caused one prospective investor to observe “It was like they were trying to build a Mercedes-Benz by hand.”
Industry analysts observed that 99 percent of European and 98 percent of U.S. homes lack the high-capacity Internet connections required to easily access the graphics and animation on the Boo.com site. No Apple Macintosh computer could access the site. Navigating the site presented visitors special problems. Web pages existed that did nothing, such as the one visitors reported that displayed only a the strange message that “Nothing happens on this page—except that you may want to bookmark it.” Product descriptions were displayed in tiny one square inch windows, making descriptions not only difficult to read but also to scroll through. Boo developed its own, very unorthodox, scrolling method that people found unfamiliar and difficult to use. Moreover interface navigation was too complex. The Boo hierarchical menus required precise accuracy because visitors making a wrong choice had no alternative but to return to the top to start over again. Moreover, the icons were miniscule. One annoying aspect of the site was the constant presence of Miss Boo. While she was developed to give style advice to browsers and buyers, she was constantly injected whether the visitor desired her or not. Many visitors reacted as they might have if they were shopping in a brick and mortar store and had a live clerk hovering over them, commenting without stop.
On June 18 Fashionmall.com purchased the most of remnants of Boo.com, including its brand name, Web address, advertising materials and online content. (Bright Station PLC purchased the company’s software for taking orders in multiple languages to market to other online businesses that want to sell to consumers in other countries.) “What we really bought is a brand that has phenomenal awareness world-wide,” explained Kate Buggeln, the president of Fashionmall.com’s Boo division. The company plans to use the Boo brand name to add a high-end site similar to its long-existing clothing site. The new Boo.com was launched on October 30 with a shoestring $1 million budget. The site is much less ambitious than its earlier incarnation, acting primarily as a portal and does not own any inventory. It features about 250 items for sale ferreted out by a network of fashion scouts. Rather than getting bogged down in taking orders and shipping goods, Boo will direct customers to the Web sites that sell the merchandise they wish to purchase. Buggeln is optimistic about the Boo.com’s chances of success this time around. Boo has managed to attract a huge number of visitors, 558,000 in April 2000 alone compared with 208,000 for Fashionmall.com. Even when Boo.com was inactive, about 35,000 people visited the Web site each week.
Sources: “Welcome to the new BOO.COM,” www.fashionmall.com/boo/home/, February 17, 2003; “Boo’s Journey to Failure,” news.bbc.co.uk, October 31, 2001; “Boo.com Goes Bust,” www.tnl.net/newsletter, May 19, 2000; Andrew Ross Sorkin, “Boo.com, Online Fashion Retailer, Goes Out of Business” The New York Times, May 19, 2000; Stephanie Gruner, “Trendy Online Retailer Is Reduced to a Cautionary Tale for Investors,” The Wall Street Journal, May 19, 2000; Sarah Ellison, “Boo.com: Buried by Badly Managed Buzz,” The Wall Street Journal, May 23, 2000; David Walker, “Talk About A Real Boo-boo,” Sydney Morning Herald, May 30, 2000; Andrew Ross Sorkin, “Fashionmall.com Swoops in for the Boo.com Fire Sale,” The New York Times, June 2, 2000; Bernhard Warner, “Boo.com Trims its Bottom Line,” TheStandard, January 25, 2000; Polly Sprenger, “Boo Founder: Don’t Cry for Me,” TheStandard, February 11, 2000; Rikke Sternberg, “All About the Brand,” BizReport, April 3, 2000; Polly Sprenger, “More Creaks and Groans at Boo.com,” TheStandard, May 4, 2000; Christopher Cooper and Erik Portanger, “‘Miss Boo’ and Her Makeovers,” The Wall Street Journal, June 27, 2000; Stephanie Gruner, “Resurrection of Boo May Prove Existence of Dot-Com Afterlife,” The Wall Street Journal Europe, September 6, 2000; Suzanne Kapner, “Boo.com, Online Fashion Flop, Is Ready to Rise From Ashes,” The New York Times, October 17, 2000; Suzie Amer, “If you build it, will they come?” Forbes ASAP, May 25, 1999; Lauren Goldstein, “boo.com,” Fortune.com, July 7, 1999; Polly Sprenger, “Where is Boo.com,” TheStandard, September 17, 1999.
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