e-Commerce Report: Baby Essentials Succeed Where Pet Food Failed

By BOB TEDESCHI

IT sounds like a recipe from the Internet's cookbook for business disasters. Sell bulky commodity items at prices low enough to compete with grocery stores, and ship them free to consumers.

The recipe vaporized businesses like Pets.com, Webvan and other giants of the dot-com bust, but now it is being revived, successfully, in at least one category, baby supplies.

Thanks to improvements in shipping techniques and technologies, sites like Amazon.com and Diapers.com are selling huge quantities of diapers, baby wipes and formula, parenting's triple play. And although the companies are probably not making much money by doing so, they are bundling these staples with more profitable baby goods to fatten the bottom line.

It is a time-tested strategy of grocery stores, but for years e-tailers could not charge grocery store prices for diapers because shipping costs were too high. Now they can at least break even on such sales, said Marc Lore, chief executive of Diapers.com.

''When you're shipping diapers, wipes and formula, after shipping costs are taken out, there's really nothing left in the way of profits,'' said Mr. Lore, whose two children, for the record, are out of diapers. ''But you add in shampoo, lotions, feeding bottles and those things come out with 35 to 50 percent gross margins.''

As the company expanded its product selection to include more of those profitable items, Mr. Lore said, gross profit margins jumped to about 13 percent, from 4.6 percent in 2005. About 45 percent of the site's orders now include something other than diapers, wipes and formula.

The real trick to making the business work, though, is in how the company ships its less profitable goods. Rather than simply stuffing packages of diapers into a box that is roughly the right size for shipping, Diapers.com wrote software to analyze a customer's order and select from among 25 different boxes to avoid United Parcel Service's' charge for oversize shipping.

That approach, Mr. Lore said, saves $2 to $3 in shipping costs on a typical $100 order. The two Diapers.com warehouses were selected according to U.P.S. shipping zones, so 45 percent of the site's customers can be upgraded to free overnight shipping. That, Mr. Lore added, is an important element, because parents typically wait until they are nearly out of diapers before they plan another shopping trip or Internet order.

Revenues at Diapers.com, which is privately held and based in Montclair, N.J., jumped to $36 million last year from $11 million in 2006, Mr. Lore said, and are on pace to reach $84 million this year. The company recently raised $7 million from Bessemer Venture Partners, which backed Skype and BlueNile.com, among others.

That sum will come in handy as the company competes more vigorously with Amazon, which began selling diapers four years ago. Tom Furphy, an Amazon vice president who oversees the company's groceries division, would not comment on the profitability of diapers, but he said the economics swung in Amazon's favor when it sold enough diapers to buy them by the truckload.

Sales were further bolstered last year, when Amazon introduced its ''subscribe and save'' program, where customers receive regular shipments of goods at a 15 percent discount. ''It's an absolutely perfect fit for this,'' Mr. Furphy said.

Customers who sign up for the product subscription program, which covers nearly 20,000 items, typically request multiple products. Mr. Furphy would not disclose the number of subscribers, but he said the program ''has been a runaway success for us.''

As Diapers.com tries to compete with the e-commerce behemoth, it will also edge into the territory of an established leader of the online baby category, BabyCenter.com. The site, which is owned by Johnson & Johnson, earns money both through sales and advertising. It counts Diapers.com as one of its advertisers -- a logical choice, since BabyCenter's online store veers more toward upscale baby clothes and gear than supplies and consumable goods.

But Mr. Lore, of Diapers.com, said he would slowly build out the site's product selection, to the point where it could in future years carry strollers and other gear. Tina Sharkey, BabyCenter's chairwoman, said she was not concerned. Last year, consumers spent just under $2 billion on baby supplies online, she said, quoting statistics from Forrester Research. ''There's a lot to go around, and BabyCenter's store is not everything,'' Ms. Sharkey said.

If anything, the number of baby-related goods on the market is surging, as manufacturers try to capitalize on the growing tendency among consumers to spend lavishly on their new offspring. The origins of this trend are anyone's guess, but some analysts suggest that, as people have children later in life, they have more to spend on them. A cultural preoccupation with celebrity babies, some industry executives said, also helps.

Such a trend could seem headed for oblivion in a shrinking economy, but Ms. Sharkey believes not. ''You might see softening demand for the giant purchases, but it won't affect this market because these are the joys,'' she said. ''People are much more aware now of how short a time they have with their children at these young ages.''

That would bode well for the expansion hopes of Diapers.com, of course. In the meantime, though, Mr. Lore played down the broader implications of his company's success in selling otherwise unprofitable goods. Consumers should not, in other words, expect to see dog food appearing online with the words ''free shipping'' anywhere nearby.

Fifty pounds of dog food, he said, yields less than $5 in gross profit before shipping costs, whereas 50 pounds of diapers would yield $30. ''So the improvements we've made would certainly help,'' Mr. Lore said, ''but fundamentally, the Pets.com business model doesn't work.''

Source: New York Times