Giant slayer: little-known GSI Commerce puts the hurt on Amazon

Chief Executive, The, July, 2005 by Russ Banham

There is no king in King of Prussia, Pa., but if there were it would be Michael Rubin, the 33-year-old wunderkind chairman and CEO of GSI Commerce. Headquartered in this nobly named 18th century city on the outskirts of Philadelphia, Rubin has played David to Amazon.com's Goliath over the past four years, battling for corporate clients who seek online sales and distribution capability.

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Both GSI and Amazon provide soup-to-nuts, integrated ecommerce solutions that spare companies from developing and managing their own Web sites. Both companies also offer downstream order fulfillment, inventory management and customer service. Despite being a fraction of Amazon's monstrous size, GSI deftly wields a mighty slingshot, besting its rival with a higher number of signed, major clients.

GSI has racked up 50 big name accounts, branded manufacturers, retailers and entertainment companies like Burberry. Estee Lauder, Comedy Central, NASCAR, RadioShack, HBO, Linens & Things, palmOne, Polo, Ace Hardware, kate spade and the Public Broadcasting System. Consumers who visit these companies' Web sites to buy something won't know that GSI is doing all the work behind the scenes--taking their online order, picking, packing and shipping the merchandise, handling their post-sale queries and, most importantly in the online world, analyzing their buyer preferences to craft individualized email marketing and advertising campaigns.

GSI and Amazon are the market leaders in the nascent ecommerce outsourcing business, selling a comprehensive suite of services that assist companies' online sales and distribution. While there are other such soup-to-nuts providers like Digital River, VCommerce and Escalate, GSI and Amazon are way ahead in terms of clients.

Both companies also compete with providers of piecemeal ecommerce solutions, such as IBM and ATG in the Web site development space; Submit; Order, FedEx and United Parcel Service in the order fulfillment/inventory management area; and Siemens and Avaya in the call center space. But when it comes to a "pure alternative," says Legg Mason vice president and senior analyst Scott Devitt, "there's really only GSI and Amazon, and that's not a bad position to be in." Amazon declined to comment.

Depending on the client's wishes, GSI will do all or part of the following: design and manage the company's online store using its own and partnering vendors' technology, fulfill customer orders from two 500,000-square-foot distribution centers in Kentucky (or drop-ship merchandise directly from the manufacturer to the customer's home), and provide customer service through its 87,000-square-foot, 350-person call center. Most GSI clients want the whole shebang, perceiving these tasks better left to someone else.

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In the past year, GSI has undergone a metamorphosis. It has refashioned its organizational structure to provide enhanced customer service, hired a co-president to share operating responsibilities with Rubin and brought in a new CIO to upgrade the range of data mining and analytics services provided to clients. Regarding the latter, GSI is working with leading CRM software developers like Epiphany and Omniture to extract more intelligence on customer buying behavior, giving GSI's clients greater range to up-sell and cross-sell their wares.

The emphasis at GSI is on growth. On June 1, the company closed a public offering that raised $80 million, and the cash infusion is earmarked to enhance its clients' ecommerce businesses and enrich the overall customer experience via internal technology development and acquisitions. GSI anticipates improving the features and functions, speed, navigation, search and usability of its clients' online enterprises, as well as the customer service, fulfillment and other services it offers in its ecommerce platform.

After losing money its first four years, publicly traded company GSI finally reported a full-year profit of $340,000 on revenue of $335.3 million in 2004, following the footsteps of rival Amazon, which reported its first full-year profit in 2003 after nearly a decade in business. GSI projects earnings this year in the $10 million to $12 million range on revenue of $390 million to $410 million.

Where GSI is leading, however, is in soup-to-nuts ecommerce solutions, a business concept Rubin says he conceived while vacationing in the Caribbean in 1998. Although tiny when compared with Amazon, whose 2004 fiscal year revenues were $6.9 billion. GSI was first to realize that retailers and manufacturers would prefer to outsource online sales, marketing, distribution and customer service than undertake these activities internally.

"I anticipated the bubble would burst and that would dampen companies' enthusiasm to venture online, given the cost of developing and maintaining Internet technology," Rubin says. "I also believed that the winners would be the big brands and retailers, not the upstart Internet companies. I figured more than 75 percent of ecommerce would be done by multichannel retailers." In his analysis, those companies saw the opportunity to generate some online sales revenue but also saw how they could push customers into their stores through innovative online and email marketing campaigns and to up-sell and cross-sell customers by analyzing their buying preferences and patterns.