Can Overstock Reroute Its Road to Irrelevance?

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When Bed Bath & Beyond named Overstock.com as the “stalking horse” bidder for its intellectual property last month, it wasn’t much of a shock. Overstock exited all of its non-home merchandise categories in 2022, and as one of the leading ecommerce retailers focused on the home, it was a natural buyer for Bed Bath & Beyond’s domain name, trademarks, customer lists, and other IP.

Redirects

Typically, when a retailer scoops up a former competitor’s IP assets in a bankruptcy auction, it uses the email list for marketing purposes and sets the bankrupt brand’s web address to redirect shoppers to its own site. That’s what Barnes & Noble did after it bought Borders’ U.S. IP assets in 2011. Dick’s Sporting Goods did the same after buying Sports Authority’s IP in 2016.

However, Overstock has much grander ambitions for the Bed Bath & Beyond brand. Shortly after being confirmed as the winner of the bankruptcy auction in late June, the company announced that it would fully rebrand as Bed Bath & Beyond and retire the Overstock name. It will also rename its Club O loyalty program as Welcome Rewards (the name of BBB’s loyalty program).

Adopting the Bed Bath & Beyond brand could plausibly help Overstock jumpstart its growth and become a more credible rival to Wayfair and Amazon in the home-focused e-commerce business. But while Bed Bath & Beyond has a large customer base, acquiring those customers profitably won’t be easy. As a result, this ambitious scheme could easily backfire.

A Business in Search of a Brand

In explaining the decision to rebrand, CEO Jonathan Johnson noted that Overstock’s name has been a hindrance more than an asset to the business. While the company began life as a liquidator, it hasn’t had that business model in two decades.

This created customer confusion. Shoppers looking for bargain-basement liquidation deals would visit the website and be disappointed by the “smart value” offering. Other potential customers might like the products and price points but be turned off by the Overstock name, associating overstocks with poor quality or flawed merchandise. Meanwhile, some vendors were leery of associating their brands with a website that sounded like a liquidator.

Due to these issues, management has been eager to rebrand for years. However, they balked at the cost of creating and marketing a completely new brand, which Johnson estimated could total hundreds of millions of dollars.

Instead, for just $21.5 million, Overstock was able to acquire a well-known brand that is closely associated with home furnishings. This will allow Overstock to pair the Bed Bath & Beyond brand with its “asset-light” business model, which centers on drop shipping by vendors rather than carrying inventory (let alone operating stores).

Overstock has already rebranded as Bed Bath & Beyond in Canada, as BBB had already completed its liquidation there. With BBB close to completing the liquidation of its U.S. operations, Overstock expects to rebrand in the U.S. by late August.

A Tough Sell

While there’s a clear strategic rationale for rebranding, management (and many Wall Street analysts) may be underestimating the difficulty of acquiring Bed Bath & Beyond’s customers while retaining Overstock’s legacy business model.

First, Bed Bath & Beyond was always a store-centric retailer. Even when former CEO Mark Tritton moved to modernize the company’s operations, he focused on omnichannel initiatives like curbside pickup and same-day delivery that capitalized on the existing store base.

Thus, while longtime BBB customers were disappointed when the chain announced it was liquidating, they won’t necessarily flock to the new e-commerce-only Bed Bath & Beyond. Without physical stores to support product discovery, same-day services, and easy returns, the new Bed Bath & Beyond won’t carry the same appeal for the brand’s die-hard fans.

Second, loyal customers of the old Bed Bath & Beyond who check out the new site may feel they have gotten a bait-and-switch. The first five merchandise categories featured on the old Bed Bath & Beyond’s website were bedding, bath, kitchen, dining, and storage/cleaning. Those “destination” categories accounted for about half of the brand’s sales. By contrast, the relaunched Canadian ecommerce site leads with furniture, outdoor, lighting, rugs, and decor.

Overstock has touted adding a huge number of bed and bath products to its assortment in recent weeks. Nevertheless, it will quickly become clear to website visitors that the new Bed Bath & Beyond mainly specializes in the “beyond” part of the assortment and is nothing at all like the old Bed Bath & Beyond.

Third, Overstock is running against the wind by rebranding at a time when consumers are cutting back on home-related spending. Indeed, Overstock estimates that its revenue fell more than 20 percent year over year in the second quarter. That comes on top of the 34 percent sales decline it reported a year earlier.

The company plans to ramp up marketing investments to bring existing and new customers along as it relaunches as Bed Bath & Beyond. But if consumers don’t have much money to spend on furniture and home furnishings, those investments may not pay off.

Will Growth Be Profitable?

Even if Overstock’s rebooted Bed Bath & Beyond manages to grow by tapping into the huge base of legacy BBB customers, that growth won’t necessarily be profitable.

Making money as a pure-play e-commerce retailer is extraordinarily challenging. Industry giants like Amazon and Wayfair have struggled to make money following the early pandemic boom. With less scale (Overstock generated $381 million of revenue in the first quarter, compared to $2.8 billion for Wayfair and well over $100 billion for Amazon), Overstock is at a structural disadvantage, given the importance of storing items close to customers to reduce delivery costs.

Overstock has tried to offset this disadvantage through a drop shipping business model. Since its vendors own the inventory, Overstock doesn’t have to worry about taking clearance markdowns on slow-selling merchandise.

This business model has been viable, albeit not very profitable, mainly because Overstock’s focus on furniture, rugs, and outdoor has led to high average order values: consistently over $200 in recent quarters. At that kind of price point, it’s possible to cover high shipping costs and still eke out small profits.

Making money in legacy BBB’s core bed, bath, kitchen, dining, and storage categories will be much more difficult. For example, today, you can buy a basic corkscrew on Overstock for just over $7 after discounts (and free shipping with no minimum purchase). That’s guaranteed to be a money-losing transaction.

Other retailers can make money at that price point by selling in stores or by imposing a minimum purchase for free shipping (assuming the items can ship in a single package). As a drop shipping business, Overstock wouldn’t benefit from requiring a minimum purchase, as items from different vendors will always ship separately. Thus, the company faces a take-it-or-leave-it proposition: either sell low-priced items at a loss or stop offering them and risk losing customers.

A Calculated Risk

Some analysts and pundits view Overstock’s purchase of BBB’s IP and its plan to rebrand as Bed Bath & Beyond as a master stroke. However, it’s more accurate to call it a calculated risk for a struggling company that doesn’t have much to lose.

The potential upside is clear. For a relatively small investment, Overstock acquired a widely-known brand and an extensive customer list. That could provide a foundation for desperately-needed revenue and profit growth.

But pleasing its own longtime customers as well as BBB loyalists while maintaining margin discipline will be a tricky balancing act. Johnson (the Overstock CEO) acknowledged that the brand integration will put pressure on profitability in the near term due to factors like elevated marketing expense, lower average order values, and more generous coupon offers.

Prior to the Bed Bath & Beyond deal, Overstock was on the road to irrelevance. Whether rebranding as Bed Bath & Beyond enables a sustainable turnaround or merely worsens the company’s cash burn without providing a path to profitable growth remains to be seen.

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