Baby Essentials Succeed Where Pet Food Failed

The New York Times:

It sounds like a recipe from the Internet’s cookbook for business disasters. Sell bulky commodity items at prices low enough to compete with grocery stores, and ship them for free to consumers.

The recipe vaporized businesses like Pets.com, Webvan and other giants of the dot-com bust, but now it is being revived, successfully, in at least one category, baby supplies.

Thanks to improvements in shipping techniques and technologies, sites like Amazon.com and Diapers.com are selling huge quantities of diapers, baby wipes and formula, parenting’s triple play. And although the companies are probably not making much money by doing so, they are bundling these staples with more profitable baby goods to fatten the bottom line.

It is a time-tested strategy of grocery stores, but for years e-tailers could not charge grocery store prices for diapers because shipping costs were too high. Now they can at least break even on such sales, said Marc Lore, chief executive of Diapers.com.

“When you’re shipping diapers, wipes and formula, after shipping costs are taken out, there’s really nothing left in the way of profits,” said Mr. Lore, whose two children, for the record, are out of diapers. “But you add in shampoo, lotions, feeding bottles and those things come out with 35 to 50 percent gross margins.”

As the company expanded its product selection to include more of those profitable items, Mr. Lore said, gross profit margins jumped to about 13 percent now from 4.6 percent in 2005. About 45 percent of the site’s orders now include something other than diapers, wipes and formula.

The real trick to making the business work, though, is in how the company ships its less profitable goods. Rather than simply stuffing packages of diapers into a box that is roughly the right size for shipping, Diapers.com wrote software to analyze a customer’s order and select from among 25 different boxes to avoid U.P.S.’s charge for oversize shipping.

That approach, Mr. Lore said, saves $2 to $3 in shipping costs on a typical $100 order. The two Diapers.com warehouses were selected according to U.P.S. shipping zones, so 45 percent of the site’s customers can be upgraded to free overnight shipping. That, Mr. Lore added, is an important element, because parents typically wait until they are nearly out of diapers before they plan another shopping trip or Internet order.

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Photo by almoko.

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