Egghead.Com Corp

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EGGHEAD.COM CORP.

Formerly a chain of retail software shops, Egghead Corp. shuttered its brick-and-mortar stores in favor of the Internet in 1997. The Menlo Park, California-based online merchant, renamed Egghead.com Corp., sells computer hardware and software, consumer electronics, and office products. The firm also offers closeout products in its online clearance center and via online auctions. Although Egghead's bold decision to transform itself into an Internet retailer seemed promising at first, a slowdown in technology spending and general recessionary economic conditions in North America began to take a toll on performance in 2000. In August of 2001, the firm filed for Chapter 11 bankruptcy protection.

Egghead was founded in 1984 by Victor D. Alhadeff, whose financial backers included Paul Allen, a co-founder of Microsoft Corp. Alhadeff had noticed that computer salespeople quite often used technical jargon that left the average consumer bewildered. Believing that the process of purchasing computer software could be improved by more effective customer service, Alhadeff opened a store Bellevue, Washington. To make customers feel comfortable in his shop, the retailer used a cartoon character named Professor Egghead as the store mascot and called his employees software "eggsperts."

Within three years, nearly 60 Egghead stores had opened and total sales reached $77.5 million. The firm conducted its initial public offering in 1988. By then, more than 100 stores were in operation. Egghead's rapid expansion proved too aggressive when profits tumbled despite record sales of $350 million in 1989. As a result, the firm closed 29 stores, tightened its inventory management practices, and made store managers responsible for the financial performance of their unit. A new management team re-focused Egghead on direct sales to business clients, which accounted for more than half of total revenues. Restructuring paid off in 1990 as sales reached $519 million and earnings rebounded to $15.4 million.

Price wars in the software industry in the early 1990s prompted Egghead to launch an aggressive marketing campaign. The largest retailer of software for personal computers (PCs) in the United States, Egghead became the first retailer to join the Business Software Alliance, an organization formed to reduce software piracy, in 1995. Sales peaked that year at $862.5 million, with 200 stores in operation and roughly 2,500 workers employed. However, according to a June 1999 article in InformationWeek, "com-petition from the computer superstores that dominated the market by the mid-1990s was taking its toll." In addition, computer software sales were undercut by the fact that many PCs were sold to consumers with software already loaded onto the hard drive.

Egghead divested its direct sales units to Software Spectrum Inc. for $90 million in 1996. As a result, revenues were more than halved to $403.8 million. An ill-fated experiment with a new retail format boosted losses in 1997, prompting Egghead to close 70 struggling stores, shut down a distribution center, and lay off administrative staff. Sales fell to $360.7 million. That year, the firm merged with Surplus Direct Inc., a catalog and Internet reseller of computer hardware and software.

In 1998, Egghead made the drastic decision to exit traditional retailing and focus solely on Internet sales. The firm changed its name to Egghead.com Inc. and slashed nearly 80 percent of its workforce. E-commerce functionality was added to Egghead's already existing Web site. Wanting the ability to handle intense traffic surges without bandwidth problems, Egghead opted to use an Oracle platform for its e-commerce site rather than the Informix and Microsoft SQL server systems it had been using. To increase its visibility, Egghead began forging strategic alliances with firms like @Home Network, Netscape Communications Corp., Yahoo!, and Microsoft Corp. As a result, a link to the new e-tailer was featured on many leading Web sites, such as the Microsoft Network and Yahoo.com. An affiliate agreement with GeoCities allowed merchants selling wares on a GeoCities site to also sell Egghead products and earn a commission for each product sold. Sales that year totaled $293 million, and losses reached roughly $50 million.

Egghead began merger discussions with Internet auctioneer OnSale Inc. in July of 1999. Both firms were concerned with Amazon.com 's decision to move into both software sales and auctioning, and they viewed a merger as a means of more effectively competing against the online retailing giant. OnSale and Egghead completed the deal in November, forming an online retailer and auctioneer of discounted computer software, hardware, and related technology. The newly merged entity retained the Egghead name. By mid-2000, Egghead.com was considered a leader in online software and consumer electronics sales. Because it relied heavily on small business and home office consumers, Egghead was less dependent on holiday shoppers than its rivals. However, despite growing sales, like many online merchants the firm struggled to achieve profitability. Stock prices began to tumble, and reduced spending in the technology sector undercut sales. Despite a $20 million loan from IBM Corp. and a series of layoffs that eventually reduced the firm's workforce by two-thirds, Egghead found itself unable to stay afloat. In August of 2001, the company filed for Chapter 11 bankruptcy protection and announced its intent to sell a portion of its assets to Fry's Electronics, a computer technology retailer based in Sunnyvale, California.