Case Study 5.3 Boo hoo – learning from the largest European dot-com failure
‘Unless we raise $20 million by midnight, boo.com is dead.’ So said boo.com CEO Ernst Malmsten, on 18 May 2000. Half the investment was raised, but this was too little, too late, and at midnight, less than a year after its launch, Boo.com closed. The headlines in the Financial Times, the next day read: ‘Boo.com collapses as investors refuse funds. Online sports retailer becomes Europe’s first big Internet casualty.’
The Boo.com case remains a valuable case study for all types of businesses, since it doesn’t only illustrate the challenges of managing e-commerce for a clothes retailer, but rather highlights failings in e-commerce strategy and management that can be made in any type of organization.
Boo.com was a European company founded in 1998 and operating out of a London head office, which was founded by three Swedish entrepreneurs, Ernst Malmsten, Kajsa Leander and Patrik Hedelin. Malmsten and Leander had previous business experience in publishing where they created a specialist publisher and had also created an online bookstore,
bokus.com, which in 1997 became the world’s third largest book e-retailer behind Amazon and Barnes & Noble. They became millionaires when they sold the company in 1998. At Boo.com, they were joined by Patrik Hedelin who was also the financial director at bokus, and at the time they were perceived as experienced European Internet entrepreneurs by the investors who backed them in their new venture.
The vision for Boo.com was for it to become the world’s first online global sports retail site. It would be a European brand, but with a global appeal. Think of it as a sports and fashion retail version of Amazon. At launch it would open its virtual doors in both Europe and America with a view to ‘amazoning the sector’. Note, though, that in contrast, Amazon did not launch simultaneously in all markets. Rather it became established in the US before providing local European distribution through acquisition and re-branding of other e-retailers in the United Kingdom for example.
The boo.com brand name
According to Malmsten et al. (2001), the boo brand name originated from film star Bo Derek, best known for her role in the movie 10. The domain name ‘bo.com’ was unavailable, but adding an ‘o’, they managed to procure the domain ‘boo.com’ for $2,500 from a domain name dealer. According to Rob Talbot, director of marketing for Boo.com, Boo were ‘looking for a name that was easy to spell across all the different countries and easy to remember … something that didn’t have a particular meaning’.
The audience targeted by Boo.com can be characterized as ‘young, well-off and fashion-conscious’ 18-to24-year-olds. The concept was that globally the target market would be interested in sports and fashion brands stocked by Boo.com.
The market for clothing in this area was viewed as very large, so the thought was that capture of only a small part of this market was required for Boo.com to be successful. The view at this time on the scale of this market and the basis for success is indicated by New Media Age (1999) where it was described as
The $60b USD industry is dominated by Gen X’ers who are online and according to market research in need of knowing what is in, what is not and a way to receive such goods quickly. If boo.com becomes known as the place to keep up with fashion and can supply the latest trends then there is no doubt that there is a market, a highly profitable one at that, for profits to grow from.
The growth in market was also supported by retail analysts, with Verdict predicting online shopping in the United Kingdom to grow from £600 million in 1999 to £12.5 billion in 2005.
However, New Media Age (2005) does note some reservations about this market, saying:
Clothes and trainers have a high rate of return in the mail order/home shopping world. Twenty year olds may be online and may have disposable income but they are not the main market associated with mail order. To date there is no one else doing anything similar to boo.com.
The Boo.com proposition
In their proposal to investors, the company stated that ‘their business idea is to become the world-leading Internet-based retailer of prestigious brand leisure and sportswear names’. They listed brands such as Polo, Ralph Lauren, Tommy Hilfiger, Nike, Fila, Lacoste and Adidas. The proposition involved sports and fashion goods alongside each other. The thinking was that sports clothing has more standardized sizes with less need for a precise fit than designer clothing.
The owners of Boo.com wanted to develop an easy-to-use experience which re-created the offline shopping experience as far as possible. As part of the branding strategy, an idea was developed of a virtual salesperson, initially named Jenny and later Miss Boo. She would guide users through the site and give helpful tips. When selecting products, users could drag them on to models, zoom in and rotate them in 3D to visualize them from different angles. The technology to achieve this was built from scratch along with the stock control and distribution software. A large investment was required in technology with several suppliers being replaced before launch which was 6 months later than promised to investors, largely due to problems with implementing the technology.
Clothing the mannequin and populating the catalogue was also an expensive challenge. For 2000, about $6 million was spent on content about spring/summer fashion wear. It cost $200 to photograph each product, representing a monthly cost of more than $500,000.
Although the user experience of Boo.com is often criticized for its speed, it does seem to have had that wow factor that influenced investors. Analyst Nik Margolis, writing in New Media Age (1999), illustrates this by saying:
What I saw at boo.com is simply the most clever web experience I have seen in quite a while. The presentation of products and content are both imaginative and offer an experience. Sure everything loads up fast in an office but I was assured by those at boo.com that they will keep to a limit of 8 seconds for a page to download. Eight seconds is not great but the question is will it be worth waiting for?
Of course, today, the majority of European users have broadband, but in the late 1990s the majority were on dial-up and had to download the software to view products.
Communicating the Boo.com proposition
Early plans referred to extensive ‘high-impact’ marketing campaigns on TV and newspapers. Public relations were important in leveraging the novelty of the concept and human side of the business – Leander was previously a professional model and had formerly been Malmsten’s partner. This PR was initially focused within the fashion and sportswear trade and then rolled out to publications likely to be read by the target audience. The success of this PR initiative can be judged by the 350,000 e-mail pre-registrations who wanted to be notified of launch. For the launch Malmsten et al. (2001) explains that ‘with a marketing and PR spend of only $22.4 million we had managed to create a worldwide brand’.
To help create the values of the Boo.com brand, Boom, a lavish online fashion magazine, was created, which required substantial staff for different language versions. The magazine wasn’t a catalogue which directly supported sales, rather it was a publishing venture competing with established fashion titles. For existing customers the Look Book, a 44-page print catalogue was produced which showcased different products each month.
The challenges of building a global brand in months
The challenges of creating a global brand in months are illustrated well by Malmsten et al. (2001). After an initial round of funding, including investment from JP Morgan, LMVH Investment and the Benetton family, which generated around $9 million, the founders planned towards launch by identifying thousands of individual tasks, many of which needed to be completed by staff yet to be recruited. These tasks were divided into twenty-seven areas of responsibility familiar to many organizations including office infrastructure, logistics, product information, pricing, front-end applications, call centres, packaging, suppliers, designing logos, advertising//PR, legal issues, and recruitment. At its zenith, Boo.com had 350 staff, with over one hundred in London and new offices in, Munich, New York, Paris and Stockholm. Initially boo.com was available in UK English, US English, German, Swedish, Danish and Finnish with localized versions for France, Spain and Italy added after launch. The web site was tailored for individual countries using the local language and currency and also local prices. Orders were fulfilled and shipped out of one of two warehouses: one in Louisville, Kentucky and the other in Cologne, Germany. This side of the business was relatively successful with on-time delivery rates approaching 100% achieved.
Boo possessed classic channel conflicts. Initially, it was difficult getting fashion and sports brands to offer their products through Boo.com. Manufacturers already had a well-established distribution network through large high-street sports and fashion retailers and many smaller retailers. If clothing brands permitted Boo.com to sell their clothes online at discounted prices, then this would conflict with retailers’ interests and would also portray the brands in a negative light if their goods were in an online ‘bargain bucket’. A further pricing issue is where local or zone pricing in different markets exists, for example lower prices often exist in the US than Europe and there are variations in different European countries.
Making the business case to investors
Today it seems incredible that investors were confident enough to invest $130 million in the company and, at the high point, the company was valued at $390 million. Yet much of this investment was based on the vision of the founders to be a global brand and achieve ‘first-mover advantage’. Although there were naturally revenue projections, these were not always based on an accurate detailed analysis of market potential. Immediately before launch, Malmsten et al. (2001) explains a meeting with would-be investor Pequot Capital, represented by Larry Lenihan who had made successful investments in AOL and Yahoo! TheBoo.com management team were able to provide revenue forecasts, but unable to answer fundamental questions for modelling the potential of the business, such as ‘How many visitors are you aiming for? What kind of conversion rate are you aiming for? How much does each customer have to spend? What’s your customer acquisition cost. And what’s your payback time on customer acquisition cost?’ When these figures were obtained, the analyst found them to be ‘far-fetched’ and reputedly ended the meeting with the words. ‘I’m not interested. Sorry for my bluntness, but I think you’re going to be out of business by Christmas.’
When the site launched on 3 November 1999, around 50,000 unique visitors were achieved on the first day, but there were only 4 in 1,000 placed orders (a 0.25% conversion rate). Showing the importance of modelling conversion rate accurately in modelling business potential. This low conversion rate was also symptomatic of problems with technology. It also gave rise to negative PR. One reviewer explained how he waited: ‘Eighty-one minutes to pay too much money for a pair of shoes that I still have to wait a week to get?’ These rates did improve as problems were ironed out – by the end of the week 228,848 visits had resulted in 609 orders with a value of $64,000. In the 6 weeks from launch, sales of $353,000 were made and conversion rates had more than doubled to 0.98% before Christmas. However, a relaunch was required within 6 months to cut download times and to introduce a ‘low-bandwidth version’ for users using dial-up connections. This led to conversion rates of nearly 3% on sales promotion. Sales results were disappointing in some regions, with US sales accounting for 20% compared to the planned 40%.
The management team felt that further substantial investment was required to grow the business from a presence in 18 countries and 22 brands in November to 31 countries and 40 brands the following spring. Turnover was forecast to rise from $100 million in 2000/01 to $1,350 million by 2003/04 which would be driven by $102.3 million in marketing in 2003/04. Profit was forecast to be $51.9 million by 2003/4.
The end of Boo.com
The end of Boo.com came on 18 May 2000, when investor funds could not be raised to meet the spiralling marketing, technology and wage bills.
Source: Prepared by Dave Chaffey from original sources including Malmsten et al. (2001) and New Media Age (1999).
Which strategic marketing assumptions and decisions arguably made Boo.com’s failure inevitable?