ONLINE SALES - The dash for cash

With e-commerce gaining increasing interest, resellers are turning their backs on the traditional side of the business to become online organisations.

Your product reselling business may be worth less than zero unless their backs on the traditional side of the business to become online organisations. you have a service, or better still an e-commerce hook, to reel in all those footloose but fussy investors.

Take Vanstar, the US reseller formerly known as Computerland. It has put its product reselling arm up for sale because the company's $643 million market capitalisation would be greater if it retained only its profitable service and consulting business, which accounts for only $200 million or so of Vanstar's $3 billion annual revenues.

Look at Egghead too, once the biggest operator of storefront software retailing outlets in the US. In February, the veteran retailer said it would shut down its last 80 stores and turn itself into an internet-only operation.

The transformation hasn't come cheaply. Egghead took a one-off charge of $42 million in the fourth quarter to cover the closure of all its retail stores, a distribution centre in California, inventory liquidation and severance payments to 800 staff. This sort of investment comes easier when you have shareholders funds to tap.

Egghead's makeover has had a startling effect. The retailer was dying on its feet last year when it closed 77 of its then 156 stores and withdrew from 30 US regional markets. This year, it seems to be turning its fortunes around. Operating from a greatly reduced cost base - Egghead now employs 200 staff to manage its pared down operation - it looks as well-placed as most to profit from the explosion in Web-based commerce.

Egghead owns three internet commerce sites. For the fourth quarter ended 27 June, its Surplus Auction site alone recorded sales of $13.7 million, 95 per cent up on sales of $7 million in the third quarter. Full-year revenues were $28.2 million. The company now has 168,000 bidders on its books, up from 29,000 in September last year.

In response to its internet push, Egghead shares have soared to stratospheric levels. Its market cap is about $900 million, a PE multiplier of 250 on annual sales of $30 million. The e-commerce shift has given Egghead a market valuation similar to that of CHS Electronics, a company with sales of more than $12 billion.

Egghead is, in common with CHS, a logistics company but with an internet name attached. As the likes of Yahoo and Excite have proved, an internet brand goes down very well with the investment community.

But is Wall Street wrong? Internet real estate valuations have more in common with the Japanese property boom in the 80s - when Tokyo was said to be worth more than the entire state of California - than with reality.

And Egghead's market cap is based more on a hope that it will do to software retailing what amazon.com is doing for books, than on any sober assessments of future earnings and growth prospects.

If it wins, long-term shareholders will be laughing. But if Egghead ends up worse than second place, behind, say, Cyberian Outpost, Netscape's Software Depot or other leading portal sites, ZDNet or amazon.com, then it won't be bringing home the bacon for anyone who stays the course.

The online superstore spun out of e-commerce vendor Cybersource in January, software.net, looks like a stronger contender than Egghead. As a company that has always been a virtual retailer, software.net carries little baggage.

But it shows you need very deep pockets to succeed in this game.

In April, the vendor signed a three-year multimillion dollar deal with portal wannabe Excite, in which it became exclusive reseller of software for key sections of Excite. These include the software department of the computer and internet channel, the software shopping area of the shopping channel and the small business department of the Business and Investing Channel. Software.net will also have non-exclusive placement in other areas on Excite. Certainly a cheaper option than opening shops or mailing catalogues.

But it's a mistake to overplay the e-commerce pitch in discussions of Web-based retailing, warns Ross Alderson, managing director of Birmingham internet development house TW2, which boasts Software Warehouse, SCH, Mitsubishi Electric and M&C Saatchi among its clients.

'E-commerce is simply a buzzword for efficient transactions. Issues such as brand, trust and security don't disappear simply because you're on the internet.'

He also believes the threat posed by the internet to resellers is overplayed: 'The internet doesn't kill resellers - resellers kill resellers.' Alderson warns businesses not to confuse the medium with their corporate goals, citing Dorling Kindersley by way of example. 'DK floundered because it thought it was in the CD-Rom business and CD-Roms turned out to be just a temporary medium,' he says.

Few computer vendors have got to grips with this distinction, Alderson believes. The result is unrewarding, poorly designed sites that focus on transactional elements at the expense of everything else. 'There's no understanding of interface, of human behavioural patterns, of how to help people interact with data and data interact with data,' he adds.

Alderson also hits out at Dell, the manufacturer that claims to pull in $6 million a day from internet-based transactions. 'The Dell site is low value for its customers,' he argues. 'The only value it brings is the value of the internet, its ubiquity and ease of access - there is no inherent value in the site itself.

'It's trading-only, which isn't particularly intuitive, and it takes five times longer to order a product than over the phone. The site is set up for the benefit of the company rather than its customers. By getting customers to spec up their own systems, Dell cuts down its costs, but the result is a less rewarding experience than speaking to a rep.'

But there is a huge market for Dell-style embedded ordering systems that enable corporates to make repeat purchases as cheaply as possible. Most of the top UK resellers now have online e-commerce systems. Computacenter, Action Computer Supplies, Elcom, ICL Multi-Vendor Computing and Corporate Software & Technology, all claim that huge chunks of their business are transacted electronically.

The nature of corporate resellers doesn't change simply because they have an e-commerce system in place. Action, for example, estimates that between five and six per cent of orders placed through its Website come from consumers. The majority of these are people who also buy from the Action catalogue or Website on behalf of their companies, according to chief operating officer Duncan Wilkes.

He claims the vendor has no intention of using the Web to 'enter the retail sphere.' Action's strategy is business-to-business, and it operates in a product market worth 'somewhere north of #7 billion', says Wilkes.

'We have no intention of diverting resources into alternative markets. Any retail, home users or consumers have been acquired inadvertently.' But clearly, the company has no intention of turning away business from unexpected sources.

Having an efficient ordering system in place is no more than one would expect from the product reseller. And the internet is a useful mechanism for driving down transaction costs. Smaller companies with poor ordering systems will go to the wall or be snapped up by rivals with better logistics.

Corporates will continue to require hand-holding - internet or no internet - and they'll continue to buy in services. The question is, who from?

The danger for smaller Vars is that they will lose out on this score too.

The big product resellers also earn - or want to earn - good revenues from services. Efficiency in product delivery enables companies to drive a beachhead into their customers' service business. Which is why Vanstar's decision to junk its product reselling business looks all the more surprising.

It would be interesting to find out how much of its $200 million services and consulting revenues is independent of its product reselling business.

Some strictly e-commerce vendors have been forced to take the opposite approach to Egghead. In the US, Cybersource, and Techwave, which operates its own commerce site, are well-known examples.

The UK has its own representative in the shape of Infobank, the AIM-listed e-commerce house. Following the collapse of its e-commerce fulfilment agreement with ICL Multi-Vendor Computing, Infobank paid #18 million for Software Corporation, the fast-growing Yorkshire corporate software reseller.

Although bought at a substantial turnover multiple, Software Corporation has brought to Infobank some bulk and a useful revenue stream. Infobank likes the software reselling business so much that it's negotiating to acquire another UK channel player.

Software Corporation has quickly become a core division for Infobank, but does this take the company away from its original focus as an e-commerce house? According to Infobank, the integration of Software Corporation is now complete. It has pumped money into people, systems and training to be able to meet its 'objective of becoming the preferred supplier of products and services in its market.'

But this will affect net profits in the first-half results. Gross profits and revenues have grown rapidly, 'in line with projections', but there have been some margin weakness. The latter reflects public sector buying patterns, according to Infobank, which predicts that margins will pick up in the second half of the year.

The reseller unit has enabled the vendor to keep shareholders in line while it navigates the difficult route of turning its e-commerce operation into a business turning over proper money. But the transition isn't coming easily. Shares tumbled last month after Infobank issued a trading statement, in which it blamed heavy channel and product development costs for results that would be 'significantly below expectations'.

But Infobank, founded by former Microsoft UK boss David Fraser, has had more luck with its Singapore operations, which is based around touchscreen kiosks. The division has been strengthened by the #230,000 cash acquisition of the assets of the public e-commerce terminal (PET) business from Goldtron Interactive.

On completion of the deal, a Singapore-owned venture capital fund will buy 500,000 shares in Liestal, Infobank's wholly-owned Singapore subsidiary, which will take over the running of the PET network of e-commerce touchscreen kiosks. Infobank also intends to integrate its core InTrade technology into the PET system.

So Infobank is making all the right noises - except on the trading front.

But the vendor claims it's beginning to pick up speed in its e-commerce division. It has particularly high hopes for Infobank InTrade, but continuing product development is costing Infobank a lot of money.

It has already signed deals with Hewlett Packard and Intel to promote its e-commerce software in Europe. But the costs of developing an indirect channel and 'the length of time required for the channel partners to bring Infobank InTrade to the market, will have a significant impact on the performance of this division in the current year,' the company admits.

The Infobank experience shows there's still plenty of life in the traditional reselling game. It's always useful to have a cash cow to milk, if you're trying to transform your company into an online player.

Otherwise businesses are going to have to look for investors with very deep pockets and the patience of Job.