Memphis Logs On
Can America's Distribution Center make a profit on the internet?
By Mark Jordan
AUGUST 2, 1999: You can't go to the biggest music store in Memphis.
It's not that it's particularly selective or you are particularly unworthy, it's just that Memphis' largest music store doesn't exist -- at least not in the traditional sense. It has no sign, no showroom, no pierced sales people. It exists, instead, in that slippery netherworld known as the World Wide Web. But while its walls may be virtual, its success is very real.
Founded in 1996 by college friends Rob Nesbit and Pierce Ledbetter, EveryCD.com is among the top five online music retail sites on the Internet, filling as many as 4,000 orders a day with weekly sales over $100,000.
Nesbit originally founded the company as a mail-order CD club, and the company still publishes its mammoth 900-page catalog featuring more than 350,000 titles. But this spring, for the first time orders placed through EveryCD.com surpassed catalog orders.
The online version of the company still follows the music-club model. Unlike sites such as CDNow, which anyone can log onto at any time and buy a disc, EveryCD patrons actually join a club, paying as much as $39.95 for a one-year membership. For that price, they get access to an unlimited selection of records, tapes, and CDs at wholesale prices.
"It's like a club because of the wholesale prices, but it's not like a club because of the selection," says EveryCD Web producer Ross Gohlke. "Most music clubs just offer the bestsellers. We offer everything."
They do this by working with more than 20 distributors instead of the handful most online CD stores use. And if one of their regular sources doesn't have what you want, EveryCD's six-man customer-service team -- "the living search engine" -- will find it by scouring the Internet.
"We have a 95 percent fill rate [percentage of requests that can be filled] as opposed to around 60 percent for most other sites," says Paul Ringger, EveryCD's director of Web development. "Our customers are more selective. They are people who are placing big orders, looking for select hard-to-find things, trying to complete collections."
Ringger tells me this as I sit on a bed in the converted downtown warehouse apartment EveryCD calls its Memphis headquarters. With a fully stocked kitchen and a battery of computers in the living room, this apartment overlooking the trolley tracks has kind of high-tech-meets-home atmosphere that has become the stuff of computer-age legend. Here one can easily imagine the early days of Apple computer, when Steve Jobs, Steve Wozniak, and a handful of employees worked out of the garage of Jobs' parents' home.
The young Internet professionals (Yippies) of EveryCD aren't out to change the world like those early Silicon pioneers, but in a quieter, less noticeable way, start-up companies like theirs are radically altering the face of business around the world. And those changes are having a profound effect on the Memphis economy, as Memphis finds itself standing at the gate of 21st-century commerce.
According to early figures from a study conducted by the Center for Economic Research in Electronic Commerce at the University of Texas-Austin, the Internet economy contributed $301.4 billion and 1.2 million jobs to the U.S. economy in 1998. Those figures place the Internet at a level that rivals the automobile, energy, and telecommunications industries, despite the fact, the study points out, that the World Wide Web has only been in existence for five years.
Of that total revenue, almost $102 billion came from the burgeoning field of electronic commerce, which also had the highest employment numbers in the Internet economy, with almost 482,000 jobs.
Increasingly those jobs are winding up in Memphis. Earlier this year, Toys 'R' Us, the toy retailing stalwart that just last year jumped into the online market with its Web site toysrus.com, announced that it would launch a 500,000-square-foot distribution center in southeast Shelby County. The nation's second largest toy retailer behind Wal-Mart (and a distant number two online behind eToys), Toys 'R' Us is acquiring the state-of-the-art Memphis distribution center of New Jersey-based Proteam.com for $30 million.
More recently, Barnes & Noble announced that it is looking to place a distribution center for its online arm, www.bn.com, in Memphis. The Barnes & Noble distribution center would employ as many as 600 people.
"We are definitely seeing more of an interest in the e-commerce field," says John Bradley, senior vice president of economic development for the Memphis Area Chamber of Commerce.
Though no one has done a study to determine e-commerce's impact on the Memphis economy, according to Bradley, there has been a significant increase in interest from online retailers and that increase is a direct payoff of the city's decision to cast itself in the now-familiar role of "America's Distribution Center."
"You can take orders anywhere but you still have to distribute those goods and it has to make sense financially for you to do so," Bradley says. "Memphis offers several things that make it attractive to these businesses. The most important thing for these businesses is ready access to shipping. FedEx is based here. UPS just opened its third facility here. But also USPS [the United States Postal Service] is an important element. We have a sorting facility for them. Another key factor is real estate. At any given time there is 2.5 to 3 million square feet of warehouse space available. That's a huge plus for anyone looking to come in and set up shop right away."
Anitesh Barua, associate director at the Center for Research in Electronic Commerce, agrees that -- even more than in traditional retail -- a powerful distribution network is what makes e-commerce work.
"The distribution aspect has the physical apparatus," says Barua. "Actually, the online operation may be in another city and may be very small and only employ a few people. The distribution of physical goods is what is really going to drive employment. Distribution is still very labor-intensive and, even if automated to some degree, still requires a lot of human oversight."
Though it would be nice to report that EveryCD set up its online shop in Memphis for these logistical reasons, the truth is the company is here largely because of Ringger. During the first year of the site's development, Ringger lived and worked in New York for extended periods. But the tug from his roots back home -- Ringger is a lifelong Memphian with a wife in city government -- proved too much of a strain. With Ringger at its nucleus, EveryCD began building its Memphis operation.
Currently, EveryCD employs approximately 80 people in three cities -- Memphis, Stanford, Connecticut, and New York. In the coming months, however, the company's Stanford operation will be moved to Memphis, putting all operations here except business development and marketing, which will remain in New York.
"There are simply some things you can't do anywhere else but in one of the major cities," says Ringger.
But while EveryCD's Memphis operation may have come about by happenstance, the company soon discovered that there were benefits to being a new kind of fish in a little fish bowl.
"Memphis has the Web development resources we need at the lower price that we need," says Gohlke. "If you want cutting-edge design, you'd go to New York traditionally. But as far as the combination of technology and shipping that e-commerce demands, you can't beat Memphis."
Of particular advantage, according to Ringger, has been the unexploited supply of tech workers in the area who can be hired at a fraction of the salary they would demand in high-tech centers such as New York or California.
"It would cost 50 to 100 percent more to get the same talent we have here in New York. A [database administrator] that costs $60,000 here costs $120,000 there," he says. "There are a lot of people here who are tech and Web savvy, who are better than their situation. A lot of these people work at ad agencies, who just don't get technology, or at large corporations, where they just don't get to use their skills as much or as creatively."
And though EveryCD insists shipping was a distant second on its list of reasons to base in Memphis, even the founders concede that FedEx has made their existence here possible.
"The infrastructure is here that other cities don't have, and it's here largely because of FedEx," says Ringger, pointing to the city's largely under-utilized fiber-optic network, which makes high-speed data transfers possible.
But Memphis must overcome several handicaps before it positions itself as a leader in the new virtual marketplace.
There have already been severe setbacks. In May, Amazon.com, the nation's number-one online book retailer, scuttled plans at the last minute to locate a major distribution center here that would have employed hundreds. The company instead decided to build three hubs in Kentucky and Georgia. Chamber of Commerce officials are still perplexed as to where they went wrong.
In the meantime, some industry watchers say that Memphis' economic leaders should be concerned about the quality of the jobs they are attracting. The Amazon jobs, like those at the Toys 'R' Us and Barnes & Noble distribution centers, still would have basically been warehouse positions, which traditionally don't pay well, especially compared to other segments of the Internet economy.
"While distribution may drive the number of jobs, the quality of those jobs is not the best to be found," says Barua. "The big bucks in the Internet economy are in the tech side of things."
But Bradley at the Chamber of Commerce argues that any jobs are good for Memphis. Besides, he says, companies like to consolidate their operations, as EveryCD is in the process of doing now. If a company locates its distribution center in Memphis, it's possible other departments will follow.
"I think there is a perception out there that Memphis is focused only on distribution," Bradley says, "but I think there's much more to us than that."
But beyond the question of jobs, there's the issue of support for the small start-up companies such as EveryCD and the locally based online pharmacy store Planet Rx, which are driving the current Internet economy. Until recently, such companies have been left adrift on the Memphis business landscape, scrambling for the people and resources they need.
"Eventually, we'll get to the point where we'll have to reach outside of Memphis for people because that's the way it traditionally happens here," says EveryCD's Ringger. "There are just not enough people in the job market with the kind of skill we need. And unfortunately, all the talent that is here is going to continue to bleed out of Memphis unless there are 20 companies like us. There just aren't the tech opportunities to keep the talent."
There are efforts underway, however, to build a high-tech community in Memphis. EveryCD's Gohlke is involved in Lick The Toad, an informal club of Yippies that gathers frequently to exchange ideas, share problems, and basically confirm that they are not alone in Memphis' cyber community.
"Anybody -- male or female, preferably female -- who is doing this work can join," says Ringger, joking about his industry's overwhelming male population. "It's great to know that there are people who have an expertise that you may not have that you can talk to."
More important for its immediate impact on the economy, however, is the recent announcement that a business "incubator," designed to nurture nascent start-ups, will set up operations downtown.
"We're now in the long, arduous process of turning financial commitments into contracts, but we expect to have the contracts down in 30 to 60 days," says Bryan Eagle III, chairman of the nonprofit Memphis Incubator Systems Inc.
The incubator's ultimate home will be a restored warehouse on Calhoun near Tennessee Street. But since that building won't be ready for at least a year, Eagle says the incubator is considering leasing a smaller facility to accommodate the dozens of entrepreneurs who have contacted him.
Though not dedicated exclusively to high-tech business start-ups, Eagle says that Memphis' unique qualities will make it a natural home for Internet start-ups.
"Our sweet spot is businesses that exploit Memphis' resources," Eagle says. "Memphis has great potential for Internet businesses because it has cheap digital connectivity, and we have tremendous technical support here."
"[The business incubator] is critical," says Barua, of the Center for Research in Electronic Commerce. "The incubator is providing a low-cost infrastructure which [start-up businesses] couldn't afford otherwise. They offer equipment, technical support, expertise, and advice that are essential."
Similar incubators have been in operation elsewhere around the country for years. Dell Computers in Austin, Mindspring in Atlanta, and Los Angeles' eToys -- which recently made an initial public offering that valued it at $7 billion -- are examples of high-tech incubator success stories.
Until Memphis Incubator Systems announced that it had obtained federal funding for its project, Memphis was the largest city in the United States without an incubator program.
"Memphis is really lagging behind the rest of the country as far as incentives and programs for these kinds of companies," says Ringger. "Memphis really needs to follow the lead of cities like New York that have excelled in this area."
Sitting in the bedroom at EveryCD, Ringger and Gohlke are excited about what the future holds for their company. Besides the impending department transfers, in the next few months the Memphis operation plans to abandon its informal, funky downtown digs for a professional office and warehouse site in the newly refurbished Defense Depot. And by the end of the year, they plan to launch a redesigned version of the Web site with important interactive and content upgrades. EveryCD is taking on the shape of an up-and-coming Internet contender.
"I don't think any of us think of Memphis except when we're going to get our groceries," says Ringger. "We're looking at Amazon.com. We're looking at CDNow. We're looking at the top Internet companies because that's who we're competing against, and the market is big enough that we can be successful without being number one."
Adds Gohlke, "It's very different from the old retail model, where your peers are geographically based. We're not just competing with Cat's or Shangri-La. We're against everybody."
Learning domestic arts off the Web for good clean fun and profit.In a spacious, well-lit kitchen, a Cordova woman is putting a pot of water on to boil and gathering ingredients off shelves and out of the refrigerator. But she's not cooking; she's getting ready to make raspberry-scented lotion bars, a solid, heavier version of liquid lotion.
Working out of her home, Laura Bruhns makes glycerine soaps, lye soaps, lip balms, lotion bars, bath salts, and bath fizzers to sell through her mail-order company, Lathers by Laura.
"I started originally making bath salts," Bruhns says. Looking for a less expensive way to procure bath salts, she started playing around on the Internet and found an easy bath-salt recipe. From there she tried to make glycerine soap using a store-bought kit. When the quality of the soap's base didn't meet expectations, she bought a 43-pound tub of glycerine soap base from a base manufacturer. Back on the Internet, she found other recipes for lotion bars, bath fizzers, and lye soap and decided to try them, too. "The lye soap is the most difficult," she says. "The lye really scared me. Then my husband convinced me it wouldn't be as bad as I thought."
When Bruhns first started making her soaps and balms last November, she gave the products of her hobby out as gifts. After awhile, "my husband told me I couldn't make any more unless I started to sell it. There are only so many showers you can take." Bruhns' husband, a telecommunications manager, is her soaping partner; he helps make the lye soap and the wooden molds that give it shape.
"I think one of the biggest things we have to deal with is finding a perfect recipe. Soap should be long-lasting, should lather well, but still moisturize your skin -- if you find that combination, you have the perfect recipe," says Bruhns.
Bruhns has a large, black three-ring binder where she keeps the hundreds of recipes she's collected off the Internet. Recipes she's tried are at the front of the binder; the many still untested reside in the back.
"Soap is an art," she says. "There are so many variables." Even the weather can affect her products; when it's raining, Bruhns can't make bath fizzers because the ingredients react with the humidity in the air.
But when a recipe isn't working and she's not sure why, Bruhns will get on the Internet and ask other members of her electronic soaping community. "Everybody is so willing to help, " she says, no matter what time it is. She explains that most of the soapers work late at night because, like Bruhns, they have small children. Bruhns' 3-year-old son "still takes a nap, so we just wait until he does that."
To make the raspberry-scented lotion bars, Bruhns puts a jar of beeswax in a pot of boiling water. The beeswax begins melting as she takes a chunk of white shea butter (a fat made from the seeds of the shea tree) out of the refrigerator and places it on a digital scale. "Having a good scale is a necessity," Bruhns says. "The scale needs to be to the tenth of an ounce." To get the correct amount of shea butter, she shaves slivers off with a kitchen knife, weighing it after every cut. The shea butter is placed in a small glass jar and put into the microwave, where it revolves around and around until it is melted into a golden oil. The butter is then mixed with cocoa butter and jojoba, a wax that stays liquid at room temperature and is the closest thing to sebum, an oil produced by the skin. Hot, melted beeswax is carefully poured into the mixture, instantly solidifying in the cold oils. Bruhns puts the jar into the boiling water and starts to stir it slowly. When everything is combined, she takes the jar off the stove, turns off the electric burner, and moves the pot to the back of the stove. The boiling stopped, the kitchen is instantly quiet. Bruhns picks up a large, brown bottle and adds the raspberry fragrance oil to her lotion base.
For many of her products, Bruhns will not use just one fragrance but will combine scented oils to make unique smells. "I like to play around with it," she says. Not that this hasn't gotten her into trouble. "I made some stuff that really smelled bad. It went in the garbage."
To test fragrances, Bruhns mixes scents with toothpicks or cotton swabs and then leaves it in a plastic bag for a few days. "Some scents disappear. It's not going to smell the same as it does when you first put it together," she says.
After the fragrance is impregnated into the solid lotion, Bruhns pours the golden liquid into three white plastic containers that look like deodorant bottles. The liquid sinks as it solidifies, and Bruhns tops off the containers to make a perfectly smooth surface.
When she began, the former accountant got some of her supplies locally, but found it was too expensive. Now Bruhns buys everything she needs for her wares through the Internet. "When you're as small as I am, it's all about research and getting the best price."
Bruhns' supplies are shipped directly to her door from around the country. "Every day the doorbell rings and I get excited, thinking about what it might be. It's like Christmas."
As for companies like Bath & Body Works that sell the same types of products, Bruhns says, "I try not to compete with them because I can't do what they do, but it's a great place for ideas, and to see what scents are selling."
The scents that people prefer seem to vary with the seasons. "In summertime, fruits sell," Bruhns says. "I don't know what I'll do for fall, pumpkin maybe. People are loving watermelon right now."
In addition to the mail-order business that officially opens August 1st, Bruhns has a booth at the Southern Creation Craft Mall at Sycamore View and Stage Road. and is planning on setting up a Web site soon. She'll also be at the Libertyland crafts fair. "Hopefully from there it will take off," says Bruhns. -- Mary Cashiola
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