Case Study

Bluefly.com: High Style Gone High Tech

Ken Seiff paced back and forth as he spoke on his mobile phone by the hotel pool at the Las
Ventanas resort in Mexico, while his wife and two young children laughed and played in the
water nearby. This was his real first vacation in over 3 years. Despite being thousands of miles
away from his midtown Manhattan office, Seiff couldnt escape the demands of being CEO of
Bluefly, Inc., the thriving Internet apparel retailer he founded in June 1998. As he talked through
strategic financing options with a group of potential investors and members of his board and
management team, Seiff reflected on how much his life had changed over the past few years.

Company History
The Road from Golf to Gucci
Ken Seiff graduated from The Wharton School of Businesss undergraduate program in 1986
and, like many of his classmates, went to work for a strategic consulting firm. He subsequently
transferred to another firm where he analyzed leveraged buyout opportunities.
While
performing due diligence on a deteriorating golf apparel manufacturer, Seiff developed the idea
that ultimately became Pivot Rules. Seiff believed that the company could be an attractive
acquisition target because he thought that focusing on younger, more stylish customers could
turn the company around. While the deal fell through, Seiff continued to incubate the idea. He
realized that an attractive niche of the golf apparel market was being underexploited. Ultimately
he decided to leave the LBO firm and create a company to serve that niche, and Pivot Rules
was born.
Seiff founded Pivot Rules in 1991. For the first few years, Pivot Rules grew rapidly and seemed
destined to become a very successful company. Under Seiffs leadership, Pivot Rules grew
from zero sales in 1991 to over $7 million in sales by 1994. But the company was
undercapitalized and, because of this, it didnt get big enough, fast enough. In 1995, the
upward trajectory peaked, and growth started to fall at an alarming rate after a host of high
profile competitors, including Nike and Polo Ralph Lauren, with superior brand identity and
power over retailers, entered Pivot Rules market. These competitors began to take up the bulk
of the shelf space at the same upscale department stores to which Pivot Rules had historically
sold its merchandise.
Although Seiff felt that Pivot Rules still excelled at communicating its message directly to
customers, competing against consumer behemoths like Nike and Polo was nearly impossible
without additional capital. Seiff took the brand downstream in 1996 in an attempt to fly under
the radar of his competitors. While this strategy bought some time, it was not a long-term
solution. Seiff turned to the public markets and launched a modest IPO in 1997, raising $5.9
million after expenses.
As he contemplated the changing competitive landscape, Seiff conceived a new structure for
Pivot Rules that would capitalize on its strengths and avoid the need to compete for shelf space
with larger, better-known companies. Pivot Rules would approach the golf apparel market
through three avenues; it would open its own retail stores to serve key regional markets,
distribute its own catalog to serve the U.S. market, and launch a Web site to serve its global

customers. While researching the online distribution channel, Seiff realized that he had
discovered another incredible opportunity. While single-brand retailers such as J. Crew, Lands
End and The Gap were among the most successful online retailers, there was no company
making a sophisticated effort at selling multiple brands of apparel on the Internet. Recognizing
the opportunity to gain first-mover advantage in a huge new market, Seiff knew that he would
have to move quickly.

Hatching a Winning Business Model

In evaluating successful online retailers in other markets, Seiff realized that most offered both
an enormous breadth of selection and substantial discounts relative to traditional brick and
mortar retailers. He knew that most of the popular apparel brands did not yet have an Internet
strategy. He believed that they would therefore be reluctant to sell their in-season product
online, and that this reluctance could turn to outright hostility if he attempted to sell in-season
product at the types of discounts that online shoppers were growing to expect. After sizing up
the situation, Seiff realized that launching an off-price business that sold end-of-season
merchandise would allow him to offer both the discounts and breadth of merchandise necessary
to succeed on the Internet.
Both catalog and brick and mortar merchants had neglected the off-price segment for various
reasons. Cataloguers had largely ignored the segment because the long lead times and
replenishment capability required for a successful catalog operation could not support the small
number of units per style typical of an off-price retailer. Traditional retail stores shied away from
offering merchandise at deep discounts because they were afraid of alienating their suppliers,
who could literally put them out of business by withholding product. Traditional off-price apparel
stores, such as T.J. Maxx and Loehmanns, had failed to offer a satisfactory consumer
experience and did not offer designer merchandise with a strong fashion point-of-view.
Seiff realized that the Internet enabled an environment in which an off-price retailer could
provide the best aspects of all three traditional retail channels. Such a company could offer high
quality brand name apparel at deep discounts, the convenience of catalog shopping and
superior customer service. On May 15, 1998, Seiff announced his decision to expand the
companys scope to sell off-price fashion on the Internet. Pivot Rules shares doubled on the
day of the announcement.

Bluefly Takes Off

This marked the official beginning for Bluefly. Seiff sold the rights to the Pivot Rules brand
name and reallocated all of his financial and human resources to building the Bluefly.com Web
site. On September 8, 1998, less than three months after hiring its first employee, Bluefly.com
opened its virtual doors with huge hopes for success. Since the Web sites launch, the Company
has been in nonstop hyper-growth mode. Its headquarters in Manhattans fashion district has
seen its employee roster grow from 8 employees in June 1998 to 85 in March 2000, including 9
buyers, 15 customer service representatives and 14 information technology specialists.
Blueflys growth in headcount has coincided with an impressive record of financial results. In
the first quarter of 2000, net revenues climbed to $3.6 million, more than 1,000% higher than the
$305,000 of revenue generated in the first quarter of 1999, and 17% better than the $3 million in
net revenues in the fourth quarter of 1999. Bluefly finished the first quarter with 507,000
registered users, of which 87,500 were customers. The average order size was $94.60. As is
the case with most Internet retailers, Blueflys substantial investments in marketing campaigns
and infrastructure have precluded the Company from posting a profit thus far. (See Exhibit 1
Bluefly Financial Statements)

Financing Blueflys Future

As Seiff reflected on all that has happened, his thoughts returned to his desire to secure
additional financing. Bluefly raised $5.9 million in its 1997 IPO with an additional $11.2 million
of proceeds coming in the first quarter of 1999 from the exercise of warrants associated with the
IPO. The other significant cash infusion came in July 1999, when Bluefly issued convertible
preferred stock to Soros Private Equity Partners, LLC for $10 million.
Seiff knew that once he had the money in place, he would have to address many other
challenges on the road to becoming a billion-dollar retailer. He wondered, How are we going to
attract the customers, vendors and employees we need to take Bluefly to the next level? How
are we going to convince our current customers to keep coming back and to consider us their
store of first choice? How are we going to scale our infrastructure to support the robust sales
volume we are expecting for Christmas 2000 and for the years to come? And, how are we going
to continue on the same trajectory once more competitors launch Internet initiatives? Above
all, he reflected on the lessons he learned from Pivot Rules. He knew that Bluefly had an
incredible opportunity to seize market leadership as an off-price e-tailer, and he was determined
to get big enough, fast enough.

Concept and Business Model

Bluefly is a leading Internet retailer of high quality designer fashions and home furnishings at
outlet store prices. The Company sells over 350 brands of designer apparel and home
accessories at 25% to 75% off of retail prices via its Web site http://www.bluefly.com. It sources
its products from traditional retailers excess inventory, odd lots, and manufacturers end of
season or past season merchandise.

Value Proposition to Customers

Bluefly aims to deliver to its customers the best that department stores (such as Saks Fifth
Avenue and Neiman Marcus), catalogs (such as J.Crew and Spiegel) and off-price retailers
(such as TJ Maxx, Ross and Loehmanns) have to offer, without any of the drawbacks. While
department stores offer customers a large designer selection and good customer service, they
do not offer discounts. While catalogs offer convenience and excellent customer service, they
do not offer a designer selection and, they too, do not offer discounts. Finally, while off-price
retailers offer attractive discounts, they do not offer customer service and they lack a designer
selection of merchandise. Bluefly believes that it can provide customers with the designer
selection of department stores, the convenience and customer service of catalogs and the
discounts of off-price retailers. To deliver this optimal online shopping experience, Bluefly.com
has employed the following strategies: sell a broad and well-merchandised selection of name
brand products, offer significant discounts to full retail prices, provide friendly and available
customer service, grant a liberal return policy (90 days) and provide sophisticated search
technology that allows customers to quickly locate the items that interest them.
A critical feature that helps Blueflys deliver a superior customer experience is its proprietary
MyCatalog technology. MyCatalog allows consumers to input their measurements and
preferences and then view their own personalized catalogs. MyCatalog allows the customer to
narrow her product search to only those fashions that are available in her size rather than
having to sort through a host of products that will not fit. Furthermore, each MyCatalog is
personalized to the consumers particular taste and is constantly updated as new styles are
added to the site. MyCatalog removed much of the hit-or-miss frustration often associated with
off-price shopping (particularly the lack of available sizes). Bluefly is working on a technology to
notify customers when new items become available that match a particular customers
MyCatalog profile, allowing her not to worry about missing out on a limited quantity of appealing
3

designer merchandise. MyCatalog also provides Bluefly with invaluable information about its
customers shopping habits and interests. Beyond using the MyCatalog database for direct
marketing purposes, Bluefly is also able to reduce its inventory risk by mining the database prior
to investing its capital in often risky, fashion-forward inventory. MyCatalog is a key component
of Blueflys value proposition to existing and future customers.

Value Proposition to Suppliers

Historically, traditional off-price retailers had been the primary liquidation vehicles for designers
excess inventory. Many designers were concerned with potential brand dilution that selling to
this channel generally entails. By creating an upscale environment on its Web site, Bluefly has
prevented the brand dilution vendors have historically experienced in the traditional discount
channel. In the world of brick and mortar retailers, it is very expensive to invest in store layout,
design and dcor, and since off-price retailers aim to pass along the largest discount possible to
their customers, most have elected not to make this investment. Likewise, in order to keep
overhead low, off-price retailers minimize the number of sales associates on the selling floor and
try to hire the least expensive labor they can find. This hiring practice, not surprisingly, has left
much to be desired in terms of customer service. Finally, off-price retailers often ignore the
fashion/designer pecking order when displaying apparel to customers. For example, in a store
like Daffys, it would not be uncommon to find a $7 Pierre Cardin T-shirt hanging next to a $400
Giorgio Armani blouse.
Bluefly is committed to protecting its suppliers brands and to ensuring a high caliber shopping
experience. Given the superior economics of online virtual real estate, Bluefly is able to create
an upscale, luxurious and fresh environment at a fraction of the cost a traditional retailer must
bear. Finally, Bluefly guarantees its vendors that their merchandise would be tastefully displayed
next to designer merchandise of the same caliber. To this end, the Company often chooses not
to procure merchandise from vendors who do not match the upscale, exclusive profile that
Bluefly is trying to convey. Nevertheless, Blueflys consistent brand strategy and existing
assortments attracted numerous young, up-and-coming designers to contact the Company for
inclusion on the Web site. Clearly, with its stylish Web site, emphasis on customer service and
stringent merchandise display standards, Bluefly provides high-end designers with a more
appealing environment in which to liquidate inventory than the clearance racks at off-price
stores.

Merchandizing Strategy
Blueflys merchandising strategy is an integral element of its branding strategy. Each season,
its merchandising team selects products with a particular fashion point-of-view and theme in
mind. The Company only sells first-quality designer fashions for men, women, teens, and kids.
In Spring 2000 it added a house wares category, which includes items like candles, linens, and
bath products, which are often produced by licensees of the same designers that supply Bluefly
with apparel merchandise. Unlike many traditional outlet stores and off-price department stores,
Bluefly does not sell factory seconds, irregulars, or special-ordered lower quality products.
Bluefly has direct supply relationships with approximately 70% of the designers whose products
are offered on its Web site. It sources the balance of its inventory from retailers and third-party
consolidators. This affords the Company more control over the quality of the merchandise it
sells and allows the Company to cherry pick only the best and most fashionable styles available.
For the right to purchase only the styles and colors it wants, Bluefly is willing to pay vendors a
slight premium compared to other off-price retailers, which generally take the entire lot of
garments regardless of their fashion integrity.

The following is a representative sample of the brands featured on Bluefly:

Anna Sui
Burberrys
Cross
Dolce & Gabbana
Fendi
Gianni Versace
Guess
Karl Lagerfeld
Montblanc
Perry Ellis
Steve Madden
Yves Saint Laurent

Benetton
Calvin Klein
Diesel
Elizabeth Arden
Fila
Giorgio Armani
Helmut Lang
Levis
Nautica
Prada
Todd Olham
Zegna

Brooks Brothers
Christian Dior
DKNY
Escada
Geoffrey Beene
Gucci
Jones New York
Liz Claiborne
Nike
Ralph Lauren
Tommy Hilfiger

Source: Bluefly.com Web site

Fashion Content
The Company has developed exclusive relationships with popular fashion magazines such as
Harpers Bazaar, Marie Claire, Esquire, Seventeen and Metropolitan Home. Bluefly leverages
these relationships through co-branded pages and interactive content to help communicate the
merchandising teams fashion outlook for each season (see Exhibit II Sample WebPages).
Bluefly also publishes Flypaper, an online monthly magazine that covers the dynamic world of
fashion, offering style tips, trend updates, and designer spotlights. The exclusive content
provided by Blueflys partners not only differentiates Blueflys Web site from other online
retailers, but it also bestows a level of credibility upon Blueflys emerging brand. By featuring
hot products and trends, Bluefly hopes to drive online sales. By simultaneously providing our
customers with trusted fashion advice and the ability to buy the hottest fashion items in the
same environment, we can collapse the purchase process to the point where opinions are
formed and purchases are made with the point and click of a mouse, says Seiff.
Blueflys partnerships are representative of a recent trend among Internet retailers to broaden
their exposure through numerous media channels. Lauren Levitan, an equity research analyst
at the investment bank Robertson Stephens, regards this trend as a positive development. She
comments, While the majority of these initiatives may be seen as marketing expenses today,
over time, these media plays could become profit centers, potentially enhancing the business
models of e-commerce players.1
Marketing
Bluefly was the only off-price retailer advertising in top fashion magazines such as Vogue,
Harpers Bazaar, Marie Claire, Esquire and Metropolitan Home in 1999 and 2000. In 1999, it
began running a major advertising campaign in leading fashion magazines that clearly
communicated its brand image and defined its targeted customer. While Bluefly spent
approximately $11.5 million in 1999 on selling, marketing and fulfillment expenses, the
campaign was tremendously successful in building brand awareness. In December 1999,
Bluefly was ranked among the top 20 apparel sites, based on unique visitors by Media Metrix, a
web traffic measurement firm.2

Robertson Stephens, Weekly Shopping Cart: The Convergence Drums Keep Beating,
February 18, 2000.
2 The Industry Standard, March 6, 2000.
5

Bluefly also ranked at the top of Consumer Reports assessment of e-commerce apparel sites
and was the top ranked Internet pure play in similar reports issued by Forrester Research and
Gomez Advisors.3 To date, the Company has always paid for advertising in cash, rather than
giving up valuable equity in the business. Blueflys ads depict its target customer and the
lifestyle she leads. She is young, urban, and stylish and up-scale. In the ad campaign, we see
her hosting a cocktail party in her downtown loft furnished with retro-modern classics. She is
simply cool and hip. What does she want? Fabulous fashion. Fierce prices, proclaim the
Bluefly ads. The customer that Bluefly is targeting is aged 20-45, has at least $45,000 in annual
income and aspires to be fashionable but does not necessarily want to pay full price (see
Exhibit III Sample Fashion Magazine Advertisement).
Seiff believes that the primary purpose of the print ads is to build the Companys brand.
Furthermore, he believes that building a strong brand name would be essential to winning over
a critical mass of customers, which would allow Bluefly to enjoy superior economics in the
future. More recently, Bluefly has begun to experiment with ads that feature key products such
as pashmina shawls, with the intention of driving sales for a particular garment rather than just
for the purpose of building the Bluefly brand. If successful, product placement ads should help
the Company manage inventory turns when it takes large inventory positions in a particular
garment.

Web Site Design

Bluefly has a strong team of dedicated graphics designers and photographers, who ensure that
its Web site is visually appealing and that its merchandise is attractively displayed. Bluefly has
an in-house studio that allows the Company to photograph its merchandise in a cost-effective
way and enables it to display its products on its Web site in a uniform way. Bluefly management
considers the operational efficiency of its photo studio a key competitive advantage.

Operations
Bluefly recognizes that perfecting its operations from order placement to delivery is essential to
generating repeat purchases and endearing customer loyalty. To ensure rapid execution of
customers orders, the Company takes title and delivery of its inventory before offering it online.
As a result, there are no backorders or out-of-stock situations. Everything displayed on the site
is available to be shipped. The Company typically ships orders within twenty-four hours of the
order being placed. Blueflys standard shipping method is UPS, at $3.95 per shipment, which
usually takes two to three days to arrive at the customers premises. The Company can ship
items by overnight delivery for an additional charge. This represents a competitive advantage
for Bluefly, as other online retailers depend on vendors to direct ship the merchandise to the
consumer. By controlling the inventory, Bluefly can live up to its reputation for quality and
customer service.
One aspect of customer service that Bluefly chose not to own is order fulfillment. Instead,
Bluefly works with a third-party fulfillment provider located near Chicago, Illinois. Bluefly is by
far the largest customer of its fulfillment provider. As of April 2000, the Company could handle
processing and fulfilling over 50,000 SKU's of limited quantity merchandise. Although order
fulfillment is a key determinant of how a customer views her experience with Bluefly, the
Company can not economically justify spending precious capital on warehouses and on
developing an in-house packing and shipping capability at this point in its evolution.
However, it regularly sends employees from the New York office to the Chicago warehouse to
monitor the fulfillment operations and to help out during critical times like the Christmas holiday
3

The Industry Standard, March 6, 2000.

6

season. Blueflys management feels that the Company has done a good job managing the
process from customer order to actual delivery, although there is clearly room for improvement.
Following the 1999 Christmas selling season, industry analysts gave Bluefly's delivery and
fulfillment a grade of 12 out of 15 possible points. This grade was on the same level as Internet
retailing icons such as Amazon.com and Etoys.com, and was second only to Boo.com, which
received a grade of 13 points.4 The Company currently is working on further improving its
fulfillment operation. As the next step, in April 2000, Bluefly began notifying its customers by
email when their order is actually shipped from the warehouse.

Technology
The single most valuable piece of Bluefly's technology is "MyCatalog", the personalization tool
that customers can use to customize Bluefly's offerings to their own preferences. This
technology permits demand-driven sourcing and allows the Company to anticipate demand by
brand, size, and style. This technology, although complicated in nature and difficult to duplicate
by others, is currently not protected by a patent. However, none of the competitors in the
Internet space were employing a similar technology as of April 2000. Another important
component of the Bluefly technology is the real-time updating of inventory. Since the Company
sells limited quantity items, having real-time inventory is critical. As soon as a customer places
an item in her virtual shopping cart, the items locator number is automatically removed from
inventory so that duplicate orders for the same exact item are not possible.
Bluefly recently began to use NetPerceptions software to track customers' buying patterns and
to anticipate demand. While the company has been tracking and storing customers purchase
patterns on the site, it is eventually planning to track customers browsing patterns as well. After
building a more robust history, Bluefly is planning to be able to market to its customers on a
one-to-one basis. However, the company recognizes that it would take time for the Company to
reach that point. The NetPerceptions software can become confused if, for example, one
person is purchasing clothing for herself, for her husband and for her child. The more products a
customer has purchased, the better the software works, as it accumulates knowledge from past
purchases. Recently, the Company launched a program to email messages to existing
customers to recommend new products, and the Company expects to introduce other such
direct marketing efforts as the quality of its data improves.

Competition
As of April 2000, Bluefly has few direct competitors in its defined niche of off-price fashion sold
online. Bluefly believes that most of its competitors are working under different business
models, or are targeting slightly different markets. Fashionmall.com functions as a vertical
fashion portal, providing links to various full-price retailers. It derives revenues from advertising
and commissions from click-through. It does not own its inventory as Bluefly does.
Outletmall.com on the other hand, sells its own products but positions itself as an online
discount retailer first and foremost. A subsidiary of Fashionmall.com, its main pitch is
guaranteed quality at great prices, and less focus is given to the Web sites appearance and
graphics. It offers a wide range of products, from mens, women and kids apparel to home
products. It emphasizes product discounts in the presentation of its merchandise, and doesnt
allow customers to return or exchange merchandise.
In March 2000, Outletmall.com announced its plans to transition out of direct e-commerce and
into a vertical portal business model, like its parent, Fashionmall.com. Outletmall.com will now
generate revenue by selling traffic, space and advertising to vendors and from transaction fees
4

Credit Suisse First Boston, 1999 Holiday E-commerce, January 20, 2000.
7

on sales. Boo.com, a full-price retailer backed by LVMH, targets a very young, trendy and urban
customer. In terms of visual presentation, it is just as appealing as Bluefly; it also uses animated
characters (Miss Boo) to provide an enhanced and enjoyable shopping experience. Customers
are allowed to zoom in, rotate and even fit products. Boos target market is more focused than
Bluefly's - it only sells womens apparel, accessories and other lifestyle products, and has a
defined athletic or downtown look. As a result its merchandise is much more limited.
Another full-price competitor is Macys.com. This site also has the ability to determine a
customers preferences and to make reasonable suggestions by using tracking software. It also
has the clicks-and-mortar advantage, as customers have the option of going to the nearest
Macys to try on or return merchandise. On the other hand, Macys.com does not offer content to
enhance the customers on-line experience. Nevertheless, given the financial backing of Macys,
its reputation for good assortments and service, and its click-and-mortar advantage, Macys.com
presents a formidable threat to Bluefly. TJX Companies is the largest off-price retailer of apparel
and home fashions in the United States and worldwide. According to its 1999 annual report, TJX
operates 604 T.J. Maxx stores, 475 Marshalls stores, and Winners Apparel Ltd., a Canadian offprice family apparel chain with 87 stores. TJX also operates HomeGoods, a U.S. off-price home
fashion chain with 35 stores, and T.K. Maxx, an off-price family apparel concept in the United
Kingdom, the Republic of Ireland, and the Netherlands, which has 39 stores. TJX strives to
provide value to its customers by delivering brand names, fashion, quality and compelling
prices. TJX had no stated Internet strategy as of April 2000.
Loehmanns, with 44 stores in 17 states, considers itself to be the only national upscale off-price
specialty retailer. Loehmanns is best known for its Back Room, where it offers designer
clothing at 30% to 65% lower than department store prices. More recently, Loehmanns has
expanded its offerings to include shoes, juniors, fragrances, gifts and intimate apparel. While
Loehmanns has launched its Loehmanns.com Web site, the site only allows visitors to find
store locations, to learn about current/upcoming sales and to join the Insiders Club, Loehmanns
loyalty card program. Loehmanns ran into financial difficulties in the past few years and was
undergoing bankruptcy reorganization as of Spring 2000. In the meantime, the company has
not indicated whether it intends to add an e-commerce functionality to its Web site.
Century 21 Department Store, also known as "New Yorks Best Kept Secret ", has more than 15
departments of quality and designer merchandise at 25%-75% off retail prices. Its departments
include European and American Designer Mens, Ladies, and Childrens Clothing, Mens, Ladies
and Childrens Shoes, Lingerie, Linens, Cosmetics, Handbags, Luggage, Housewares and
Electronics. Century 21 operates solely in the state of New York and has not expressed any
intentions to expand on a national or broader regional basis. The companys Web site,
c21stores.com, offers the same functions as the Loehmanns Web site discussed above.
Daffys, with its tagline Clothing Bargains for Millionaires has product offerings similar to
Loehmanns and Century 21, with a large inventory of European and American designer clothing
sold at discounts to traditional department store prices. Daffys.com offers the same functions
as Loehmanns and Century 21.

Market Environment
In early 2000, the stock market experienced wild fluctuationsas much as 600 points in a single
dayand Internet companies valuations suffered as all of the leading financial newspapers and
magazines reported that investors appetites for business-to-consumer Internet companies had
dwindled. Although for the previous year, e-commerce was a hot buzz word among investors,
overnight the word e-commerce became almost taboo. Even apparent e-retailing leaders such

as Value America and CDNow.com had issued warnings that they may not survive. 5 The Wall
Street Journal reported on its front page, many e-tailers are running out of money, or are not
getting any in the first placeSome critics suggest that much of the promise of consumer
Internet commerce is fading.5 John Warnock, Chairman of Adobe Systems Inc., summarized
the situation by saying There is a huge shakeout going on and there will only be a handful of
survivors.
Despite recent negative press, Internet retailing enjoys and is projected to enjoy phenomenal
growth. IDC projects that U.S. Internet commerce will grow from $133.1 billion in 2000 to
$707.9 billion in 2003 (see chart below). This growth can be attributed to start-up e-tailers as
well as the online initiatives of incumbent brick-and-mortar retailers. According to Shop.org, the
number of Internet sites that have commerce functionality has grown to at least 30,000 and
approximately 1,000 of these have achieved sales volumes in excess of $500,000.

US Internet Commerce
1998-2003E
$707.9

$800.0
$700.0

$ in Billions

$600.0
$407.2

$500.0
$400.0
$222.8

$300.0
$74.4

$200.0
$100.0
$0.0

$133.1

$37.2
1998

1999

2000

2001

2002

2003

Wall Street Journal, April 5, 2000.

9

SOURCE: IDC AS REPORTED IN GOLDMAN SACHS INTERNET QUARTERLY, SEPTEMBER 28, 1999
Supporting the lofty projections for Internet commerce growth are buoyant projections for
growth in the number of U.S. online users. According to IDC, U.S. online users will grow from
103.1 million in 2000 to 177.0 million in 2003.

US Online Users
1995-2003E

177.0

180.0
148.6

160.0

in Millions

140.0

126.0

120.0

103.1

100.0

80.8

80.0

62.8

60.0

38.7
23.2

40.0
9.7

20.0
-

1995

1996

1997

1998

1999

2000

2001

2002

2003

Source: IDC as reported in Goldman Sachs Internet Quarterly, September 28, 1999

Current Situation
Supplier Relationships
There is an old retailing adage, you cant sell from an empty basket. With respect to Blueflys
business model, Seiff knows that one of the most important challenges facing Bluefly is to
convince high-end fashion designers to allow their merchandise to be sold on Bluefly.com. Only
a few of these designers have been selling to Internet retailers, and Blueflys team of merchants
needs to convince the others that they should turn to Bluefly when considering their liquidation
strategy. This would not always be easy to do since many designers are wary of the Internet
and of off-price retailers, in general. Other suppliers have never allowed their designs to be
liquidated through another party and have always liquidated their products through companyowned outlet stores or warehouse sales. Many designers are still trying to determine their own
Internet strategy and until they do so, they are hesitant to sell their merchandise through
Bluefly.com. Designers need to decide whether they want to have a company-run Web site or
whether they would rather depend on third-party retailers to sell their goods over the Internet. If
designers decide on a company-run Web site strategy, they then have to decide whether to sell
current season, full-price designs only or whether to sell past season, liquidation merchandise
as well. Finally, many designers fear the potential backlash and retaliatory consequences of
selling their high fashion designs over the Internet. Designers have always had to balance the
fine line of getting rid of excess inventory, while not alienating their core clients, the national
department store chains.

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If a department store is angered by where a designer decides to sell their goods, the
department store may permanently terminate its buying relationship with that designer. For
example, when Levis launched Levi.com, a leading department store that represented one of
Levis top accounts pulled Levis jeans from their shelves and cancelled all forward orders.
Despite these issues, Bluefly has made the recruitment of top designers one of its highest
priorities. Its business model has been designed to provide a better liquidation channel for
designers. Blueflys buying team spends much of its time knocking on doors and preaching this
message to designers with whom they worked previously while buying for upscale department
stores such as Saks Fifth Avenue and Bergdorf Goodman. Although Blueflys buying team
originally was met with resistance from some brands, Bluefly managed to open up direct
relationships with over 200 brands during 1999.

Positioning
Bluefly positions itself first and foremost as a fashion destination, even though it also offers
value and good service to its customers. In its December 31, 1999 10-K SEC filing, the
Company describes itself as a leading Internet retailer of designer fashions and home
furnishings at outlet store prices. The Companys decision to position itself as a designer
retailer first, and an outlet store last is indicative of its branding strategy. Bluefly believes that
positioning itself as a fashion Web site as opposed to an online discount retailer gives it a
number of advantages. It is a key factor in convincing designers to agree to sell their brands
through Bluefly. Also, it allows Bluefly to go after upscale Internet users who may not be
accustomed to discount shopping. Rather than targeting traditional off-price shoppers, the
majority of whom were not on the Internet as of 1999, Bluefly is seeking to convince those who
already are on the Internet to shop off-price. The Company believes that the key to attract
these customers is by positioning itself first and foremost as a fashion destination.
While statistics show that the Company has done a good job in driving traffic to its site, (see
Media Metrix data cited earlier), it is not clear whether customers truly understand that
Bluefly.com is an off-price store. While this indicates a successful execution of the Company's
branding strategy, it makes it more difficult to live up to customers expectations in that
customers may not find every product in the size that they want. Moreover, how Bluefly.com
positions itself could have a major impact on the Companys realistic addressable market size.
While the market for fashion apparel was estimated to be at $200 billion in 2000, the market for
off-price apparel was estimated to be $27 billion.6

Customer Acquisition and Retention

Achieving scale will be a key driver of future profitability, and customer acquisition and retention
are key to achieving scale. Bluefly acquires customers both through its advertising campaign
and through strategic partnerships with leading Internet portals. It is prominently featured in five
out of the top seven portals. In August 1999, Bluefly expanded its marketing agreement with
AOL and became an anchor tenant in its Outlet Stores Department. Bluefly has also entered
into an agreement with Yahoo! to create a co-branded version of its online store on Yahoo!
Shopping.

Below is a summary of some of the marketing alliances that Bluefly has established over the
past two years:
6

Source: Bluefly
11

Portal
Visitors*
Yahoo.com
47.55 mm
MSN.com
37.40 mm
AOL.com
32.19 mm
Lycos.com
28.01 mm
Netscape.com
22.42 mm
Amazon.com
14.35 mm
TheGlobe.com
4.01 mm
Women.com
3.51 mm
*Average unique monthly visitors. Traffic numbers based
Matrix.

Affiliation
Co-branded site
Co-branded site
Anchor Tenant
Premier Vendor
Anchor Tenant
Z-Shop Affiliate
Anchor Tenant
Premier Vendor
on March 2000 data from Media

Bluefly has a number of strategies that help it retain customers. Bluefly management believes
that is has established switching costs through its MyCatalog technology, which requires
customers to enter their personal information. After having their preferences stored on the
Bluefly site, customers may be less likely to go to other sites, where they would have to reenter
all of their personal information and create a new set of preferences. Bluefly also believes that
as its NetPerceptions software begins to build up enough history on a customer to accurately
understand customers shopping habits and tastes, customers would be less likely to switch to
other Web sites that do not know their shopping habits at all. Bluefly recognizes that it has not
taken full advantage of all of the customer information it has collected. Blueflys CEO and
management team have been asking themselves: How else can the company use this
information to retain customers? Also, what should we be doing to attract more new
customers?

Human Resources
Bluefly has been successful in recruiting top industry talent. Its senior managers have proven
track records in the fashion, media, entertainment and e-commerce industries or as
management consultants or lawyers. The Company has been growing at breakneck speed.
While there were 8 employees when Bluefly was launched in September 1998, the Company
now employs over 85 people. The working environment at Blueflys offices in the fashion district
in midtown Manhattan is fast-paced and entrepreneurial. An overriding issue that continues to
challenge Bluefly as it grows is the need to hire new employees at an aggressive pace while
maintaining the quality of its team.
In practice, the most potent recruiting weapon Internet companies have is stock options.
However, Blueflys stock has been trending down since the beginning of March 2000. After
reaching a high of $16 per share at the end of December 1999, the stock was trading near its
52-week low at under $5 per share in May 2000. The future performance of the Company's
stock is likely to have an impact on the Company's ability to attract new talent. Even after finding
the right people, management has to deal with integration issues. The Company realizes that,
sooner or later, it will have to institute more formalized procedures to cope with the larger group
of employees. The goal of the management team is to accomplish this without becoming too
corporate and bureaucratic. Like most growing companies, Bluefly faces the challenge of
maintaining its forward-thinking entrepreneurial culture as it grows.
Strategic Options
Seiff knew that Bluefly had many challenges in front of it, but he was confident that he had built
a team that is up to the task. The big question is, will Bluefly raise enough capital to cement its
12

lead? Up until the early months of 2000, this didnt seem to be much of an issue. Venture
capitalists and investment bankers were banging down the doors of companies like Bluefly,
looking to make investments in all kinds of e-tailers in hopes of finding the next Amazon. The
biggest challenge was doing the right deal at the right time -- trying to time rounds of financing
with expected increases in valuation, in order to minimize dilution. But recently, the market had
changed; public and private investors were shunning investments in e-tailing as indiscriminately
as they had rushed into them a year ago. For purposes of accessing cash and to achieve more
attractive economies of scale, many industry analysts have suggested that Internet retailers
may need to consolidate. Furthermore, private investors that were looking at the e-tail space
were moving their money into retailers who operate under a clicks-and-mortar model rather than
a pure Internet business model.
Seiff wondered what type of partner would make sense for Bluefly. Should Bluefly form an
alliance with or even merge with another Internet retailer, or should it consider partnering with a
brick and mortar retailer? Should the partner be an apparel retailer, a discount retailer or could
it operate in a completely different line of business than Bluefly? If Bluefly decides to acquire
one of its competitors, who would be the best target? More fundamentally, does it make sense
for Bluefly to pursue this type of partnership with anyone, given that its stated goal is to build a
brand and business model that is fundamentally different from any of these potential partners?
While Seiff had learned first hand the power of strength in the capital markets, he also knew that
no good business makes strategic decisions solely at the behest of Wall Street. Part of him said
that the best course would be to ride out the current storm in the markets by taking more money
from Soros and looking for a recovery in the Fall or Winter. To fully evaluate the situation, Seiff
wanted to size up the competitive landscape. He wondered whether Bluefly had achieved a
sustainable competitive advantage over its online and offline competitors. If not, how much
more time would he need to build that advantage and how much money would it take? Would
the slowdown in the market for Internet investments buy him more time to grow the business
without fear of a better-capitalized competitor coming along?

Conclusion
After three hours had passed, Seiffs phone call was winding down and he could at last get back
to vacationing with his family. Soros Private Equity Partners had decided to make a follow-on
investment in Bluefly. Soros would commit up to $15 million of financing during the course of
the year, to be drawn down upon at Blueflys option. This would give the Company the flexibility
to consider different strategic options without drawing down on a large equity investment at the
dilutive share prices presented by the current market. However, this flexibility has come with a
price, as Bluefly was required to grant the Soros group warrants to purchase up to an additional
175,000 shares. But, Seiff felt that this was a small price to pay for Blueflys new-found flexibility
in a market that has been squeezing many of its online peers. To celebrate the new
commitment by Soros, Seiff planned a quiet picnic supper on the beach with his family and a
few close friends. As he jumped back in the pool, Seiff was elated that he wouldnt have to worry
about financing for the next year, but he knew that Blueflys hardest work and toughest
decisions were still ahead of him.

EXHIBIT I Financial Statements

BLUEFLY, INC.
Consolidated Balance Sheets

13

As of December 31, 1999 and 1998

Dollars rounded to the nearest thousand
1999

1998

ASSETS
Current assets:
Cash and cash equivalents
Funds deposited with factor
Inventories, net
Prepaid expenses and other current assets
Current assets of discontinued operations
Total current assets
Property and equipment, net
Other assets

7,934,0000
0
7,020,000
1,080,000
0
16,034,000

2,830,000
2,264,000
429,000
624,000
553,000
6,700,000

1,037,000
38,000
17,109,000

497,000
15,000
7,212,000

4,287,000
2,236,000
6,523,000
0
6,523,000

489,000
267,000
756,000
64,000
820,000

5,000

49,000

34,000

27,763,000
(17,231,000)
10,586,000
17,109,000

10,395,000
(4,037,000)
6,392,000
7,212,000

LIABILITIES AND SHAREHOLDERS EQUITY

Current liabilities:
Accounts payable
Accrued expenses and other current liabilities
Total current liabilities
Deferred income taxes
SHAREHOLDERS EQUITY
Preferred stock--$0.01 par value; 2,000,000 shares
authorized, 500,000 shares issued and outstanding in
1999,
(liquidation preference: $20 per share plus accrued
dividends)
Common stock--$0.01 par value; 15,000,000 shares
authorized, 4,924,9906 and 3,433,2555 shares issued and
outstanding, respectively
Additional paid-in capital
Accumulated deficit

EXHIBIT I, cont. Financial Statements

BLUEFLY, INC.
Consolidated Statement of Operations
For the years ended December 31, 1999, 1998 and 1997
Dollars rounded to the nearest thousand

14

1999
4,951,000
3,766,000
1,185,000

1998
215,000
266,000
(51,000)

Selling, marketing and fulfillment expenses

General and administrative expenses
Internet business start up costs
Total operating expenses
Operating loss from continuing operations

11,424,000
3,460,000
14,884,000
(13,699,000)

1,121,000
1,166,000
332,000
2,619,000
(2,670,000)

819,000
819,000
(819,000)

Interest and other income, net

Loss from continuing operations before
income taxes

440,000
(13,257,000)

142,000
(2,528,000)

123,000
(696,000)

Income tax benefit

Loss from continuing operations

2,000
(13,257,000)

50,000
(2,478,000)

227,000
(469,000)

63,000

(1,178,000)

88,000

(13,194,000)

(3,656,000)

(381,000)

(342,000)

(13,536,000)

(3,656,000)

(381,000)

(2.83)
.01

(.89)
(.43)

(.22)
.04

4,802,249

2,770,869

2,149,315

Net sales
Cost of sales
Gross profit

Discontinued operations:
Income (loss) from operations,
net of income tax
Net loss
Preferred stock dividends
Net loss available to common
shareholders
Basic and diluted (loss) income per share:
Continuing operations
Discontinued operations
Weighted average shares outstanding

1997
-

Case Review and Analysis Assignment

1. Key Facts of the Caese
2. Challenges/OpportunitiesStrengths, Weaknesses, Opportunities, Threats
3. Value Proposition
4. Key Success Factors
5. Detailed Evaluation:
You are Ken Seiff, the CEO of Bluefly.com and you are meeting with your Board of Directors on
January 24th. You are anxious about this because since the last board meeting 3 months ago,
your stock price has fallen dramatically, i.e., from a 52-week high of $16 to a current price of
approximately $3. In addition, your loss from continuing operations grew from $2.7 million in
1998 to $13.7 million in 1999. As the CEO of the company, one of your primary responsibilities
is growing shareholder value. You know that there will be major fallout of dot.com companies in
15

the foreseeable future and you are concerned because you and your team have given all of
your energies into making Bluefly a successful company.
1) CONDUCT A SWOT ANALYSIS OF BLUEFLY

2) Optional Review Questions:

As the CEO, you must anticipate specific questions that the Board will ask:
1. How should Bluefly position itself, i.e., as a fashion destination or as an off-price
store?
2. Should profits be a major objective or should gaining size and market share take
priority?
Profit motive is a short term plan and company who are in growth phase cycle should
not consider the same.
In order to come up with the crisis which Bluefly positioned itself now, it has to follow
a plan to increase the market size and then obtain market share in that.
One has to increase the size of pie i.e. market size and for that it need to expand.
Fashion retailer and e-commerce is booming and there is continuous increase in the
customer base and different options to include in your selection to attract more
customer.
The main focus should be to increase the selection but at the same time efficiently
management of Inventory is key in this business.
It will follow a cycle if one do that

Selection --- Customer experience Enhance --More Customer Traffic on website

-- More Seller will on board -- Selection Increase
Use this cycle in a smart art
and this will go on a cycle and this will lead to the growth of the company. Hence, it
will reap the benefit in the long term.

3. Can you continue to expand the number of suppliers that you are buying directly
from or will their major department store customers put pressure on them to cut you
off?
Expanding the number of the suppliers is the key. But it has to be done using both
and PULL and PUSH strategy of marketing. Company need to show the benefit and

16

convenience it will provide to the customers and how the traffic will increase and how
it can use Economies of Scale and Scope of different fashion brand to reduce the
cost but at the same time not to break the price.
Company should target to on-board as many suppliers as it can get of fashion
industry. And as the traffic start to increase many folds and other seller start reaping
the profit, more and more suppliers would be associated with Bluefly.
4. How will you continue to obtain qualified personal as you continue to grow? Most
people have joined your company because of the future value of their stock options.
If we could show our employee long term vision then we can attract more and more
talent.
As shown in the Financial statement, we are losing the stock value because the
sales has gone down significantly .
As per the CYCLE shown above if we can increase our selection and traffic on
website, Sales will increase and hence Bluefly will have strong Growth in future.
Once Growth is high, will can have lower cost structure for operations and efficient
system to increase the profitability and reduce the operational cost. Hence stock
future will increase.
Calculate few ratio :
Current Ratio
Quick Ratio
Return on Sales
And put a para on how u can increase those using SELECTION as the lever.

5. What are your strategic options going forward?

6. What direction/options would you proposeWhyJustify your answer

17