The West Coast Phenomenon…
Is this the next wave of the future?

by Kathy Greer

     Okay, so I was at an auction last week and they were selling off a private paperweight collection, one tray lot after another… And they were going cheap, seven or eight paperweights on a tray for less than $40 a tray. And there was no buyer’s premium! As a paperweight collector, I thought I was in heaven. Except I only wanted a couple of the weights for my personal collection. What to do with the others?  When I started thinking about all the work it was going to take to list each paperweight on eBay, and take all the pictures, and answer all the email questions, I almost stopped bidding. Then I thought, what the heck. I’ll just drop them off at my neighborhood AuctionDrop and let them do the work.
    My neighborhood what?
   Recent technology articles have touted the growing popularity of eBay drop-off stores. A concept that originated in California has a number of followers with catchy names like AuctionDrop, iSold It, QuikDrop, AuctionWagon, NuMarkets, Pictureitsold,  AuctionValet,  Drop N Run and DropSmart.
   In the January 7, 2004 issue of the online newsletter AuctionBytes, Ina Steiner announced, “Two More eBay Consignment Drop-Off Stores Open in California.”
   Specifically, iSold It opened its first location in Pasadena, California, and AuctionValet opened its first location in Lake Forest in Orange County, California.
   The concept behind all of these brick-and-mortar businesses is to sell consumer goods on eBay, with the store taking a commission and/or fee on each sale, sometimes both. Some of the businesses operate independently; others all connect to a central hub. Interestingly, AuctionDrop has raised $6.5 million in venture capital funding, specifically from Mobius Venture Capital and Draper Associates. It currently operates four stores in the San Francisco Bay area. The first store opened in March 2003 and by the end of December, AuctionDrop announced sales of 1.6 million, with at least $300,000 of that amount being sold in the month of December alone.
   QuikDrop has opened franchise stores in Texas, California, Alabama, Montana, Virginia, and South Carolina. Reminiscent to this reporter of the heyday’s of the dotcom boom, some big names are getting into the action. iSold It is backed by the management team behind franchise operator Wetzel’s Pretzels, and has announced it is offering franchises nationwide. We wonder when New England will see its first iSold It stores.
    AuctionValet says it intends to open several more retail locations throughout Southern California over the next 18 months, while AuctionDrop plans to add company-owned store in the Los Angeles area. A January 16th Reuters article by Lisa Baertlein quoted Randy Adams, chief executive of AuctionDrop as saying, “Only 8% of our customers have ever sold on eBay, so it’s totally incremental for them.”… Adams, a so-called “serial entrepreneur”, sold his start-up Internet Shopping Network to the Home Shopping Network in 1994.  Baertlein also stated in her article that AuctionDrop has plans to expand its West Coast hub, then expects to open an East Coast hub in New Jersey or New York, and a Midwest hub in Chicago. Later plans call for hubs in Dallas and Atlanta to support local stores in both those areas.
    So what is the downside? Well, we agree with Ina Steiner. The well-respected expert on online auctions from AuctionBytes (www.auctionbytes.com)  remarked, “You can’t believe how much interest these drop-off stores are generating. I remain skeptical.”
   For starters, getting “started” isn’t cheap with the franchises. iSold It charges a base price of $15,000, plus has a long list of anticipated start up costs on their website at http://www.i-soldit.com
   We found the anticipated costs realistic and it should prove to be a good starting point for anyone looking to go into a brick-and-mortar business. Click on the Open Your Own Franchise button on the home page. What we didn’t anticipate was that iSold It would also be collecting a royalty of 5% of sales, with an additional 2% of sales collected into a joint store-advertising fund. That means an additional 7% of sales goes back to headquarters before a franchise owner even begins to make a dime!
   Fees to the seller aren’t cheap either. Fees at the privately held AuctionDrop vary depending on which of 2 levels a seller chooses. The basic service consists of a 7-day listing with a $1.00 opening bid and no reserve, a “Gallery” photo and bold type to help your item stand out The fee is strictly commission, 38% of the first $200; 30% of the next $300; 20% of the remaining amount (over $500).
    For the Premium Service - $19.99 Prepay* you get all the benefits of Basic Service, plus:
* you can set a higher opening bid than $1.00
* your listing will run for 3 additional days (10 days total)
* you have the option of selling your item quickly with a fixed “Buy It Now” price
    Prepay is credited towards AuctionDrop’s commission if the item sells. A chart on the Auction Drop website outlines precisely how much a seller could expect to receive for an item in various price ranges. This would appear to be a selling mechanism aimed at higher priced items. An item selling for $50 would only reap a seller $29 after the $19 AuctionDrop fee and the $2 eBay fee. At that level, why bother? But a $500 item would gain a seller $319.63 after the $14.36 eBay fee and the whopping $166 AuctionDrop fee!
   Then there is the problem with name recognition. One would think that a firm with the name of QuikDrop would actually have the name QuickDrop ? but a glance at the website at http://www.quickdrop.com reveals a private investment firm. Hence the “quick” spelling of QuikDrop to correspond with the available website www.quikdrop.com The fees charged to a seller at this franchise firm are identical to those at the privately owned AuctionDrop. In this reporter’s opinion, the QuikDrop website isn’t as slick as some of the others we viewed. For example, the homepage contained the following sentence: “Once an item or vehicle has been sold, payment is collected and it’s shipped it to the winner.”
  We particularly found amusing the section on franchise fees: “The QuikDrop opportunity is one of the hottest in the franchise industry today, not only for its exciting product line of eBay services, but for low investment and start-up costs compared to other franchise companies.”
   Oh, really?
   The cost of opening a QuikDrop store will vary depending upon size and location. Based out of Costa Mesa, CA, QuikDrop already has stores in Texas,  California, Alabama, Montana, Virginia, and South Carolina. According to the website, “An applicant needs a minimum of available cash in the amount of $35,000 to open an average QuikDrop store. Larger stores in higher priced locations could require a minimum available cash in the amount of $55,000. These figures include the current franchise fee of $15,000 and the QuikFlow software license fee of $1,995. Master Franchises are available for developing an entire country,”      Yes, the sentence at the end just ended with a comma. Clearly this firm needs to hire a proofreader with sentences like the following under the description for the firm’s Vice President, Griff Hamlin: “Hamlin obtained is Ph.D. from the University of North Carolina in Computer Science.”
    There are some typos that Spell Checker just doesn’t pick up.

Is there a downside?

  Of course, there are some aspects to the QuikDrop system that are intriguing.  Behind all of these businesses is the concept of customers bringing in merchandise, leaving it off for sale at auction (for a fee or commission)… sound like anyone you know? Like your local consignment store? Or, as in your local auctioneer…
    All the systems have the potential for fraud. What if you don’t get paid as a consignor?  What if your merchandise disappears? What if there is a fire? What if one day you drive by and the store is no longer there?  Let’s be honest. This has happened in the “real” auction world as well as for consignment shops and antique and collectibles group shops.
   Dealers and consignors to the auction firms in states that license auctioneers, like NH, ME, VT and MA, allegedly have recourse, usually by filing against the auction firm’s bond (usually $10,000). In the big cases we’ve covered in the past 15 years, where firms handling millions of dollars in consignments filed bankruptcy, the consignors usually received nothing, or pennies on the dollar. In the cases involving shops, dealers typically ended up working with the local police department. Some ended up in small claims court… that is, if they were lucky enough to locate the “missing” shop owners. And of course, there is the argument are these new “drop-off” stores acting as an auction firm, should they be licensed or regulated? If it walks like a duck and it quacks like a duck…
     The QuikDrop model states:
Cash Receipts and Disbursements
   QuikDrop franchise owners do not need to worry about processing credit cards or sending out checks to customers. Why? Part of the success of QuikDrop’s franchise model is attributed to the centralized QuikFlow system.
   Many small businesses fail simply because they do not have a sophisticated enough financial management system. As a QuikDrop franchisee, your business will have the billing and disbursements streamlined. The QuikFlow software includes a centralized billing module where all of PayPal transactions, credit cards transactions, check and money orders are processed, and checks mailed to your customers without you even having to lick a stamp. Handling the billing and payments centrally is just another way the QuikDrop model allows you to concentrate on getting more customers, making more money, and keeping current clients happy.”
   I don’t know about you, folks, but if I was running this business I’d want to handle my own money, not leave it up to some centralized “billing module”.
   Auction Wagon (www.auctionwagon .com), based out of West Hollywood, seems to be one of the smaller firms. With a straightforward 20% commission base (plus applicable eBay and Paypal fees). in the same scenario as mentioned earlier, a $50 item selling with Auction Wagon would net the seller $31.25. There is a $15 minimum fee, so despite the claim on the Auction Wagon website that states: “Garage sales used to be the only way to cost-effectively sell all that unwanted stuff sitting in your closets. However, who really wants to devote their weekend to putting up signs, setting up in the front yard, and arguing with strangers over price? Today’s online marketplace allows your goods to be seen by millions of shoppers who can compete for your items over the course of multiple days. We take care of everything, and you’re free to enjoy your weekend.”
   Despite their claim, we suspect there are only so many “garage sale” items that would be worth listing at a $15 minimum fee.
   Some of the smaller entries into the eBay drop-off stores include NuMarkets and Auction Wagon. Auction Wagon, based in Lake Forest, CA, could also use a spell checker. Not meaning to be picky, but if you’re going to launch a website to promote your business to the world, read it over, have your friends read it over, then have a lawyer, accountant and finally a proofreader look it over. Sentences like “Best Sellers - Need some ideas an what you could sell?” just don’t cut it. OK, no doubt I’ll receive a zillion emails on typos in this article J   http://www.myauctionvalet.com
     NuMarkets (www.numarkets.com ) based out of Tennessee, has bold plans to expand their presence.
     According to their website: “Will you be expanding your locations to my area? Yes NuMarkets is rapidly expanding locations and will deploy over 50 location in 2004. Watch for a NuMarkets to open in your city.” Interestingly, like several of the other smaller stores mentioned in this article, NuMarkets offers free pickup if you have numerous items… sounds like a housecall to me.
   This firm answers one of the questions that none of the others did…what happens with returns? According to their website: “Product may be returned if not satisfied within 10 Days. Buyers pays shippings and handling and a $25.00 restocking fee.”
   No folks, those are not OUR typos, but theirs…We couldn’t make this stuff up.

Getting Enough Merchandise

   The big question would appear to be, how much merchandise do you need to sell in order to not only support the overhead required by one of these drop-off stores, but to actually turn a profit?  It’s an intriguing question. When eBay first started, and the prices being realized for many antiques and collectibles were soaring online (and most items were selling), a number of people around New England tried implementing the “drop off” idea, either at an existing antique shop they owned, or out of their homes. Most of those businesses have since closed.  With an average sell-through rate of less than 50% on eBay, that means you need double the merchandise just to hold the line…not to mention that most dealers are complaining that prices on eBay are dropping, not rising.
   A January article by Chris Taylor (eBay for Dummies) for Fortune magazine online,  asked, “Will it work? Some longtime industry watchers are skeptical. After all, PostNet and Auction Drop are not the first players in this space. Two predecessors, TIAS.com and MyEZSale.com, had 14 and seven drop-off locations, respectively, at the height of the dot-com boom in 2000. MyEZSale had to shutter its doors for lack of funding, while TIAS now simply sells antiques and collectibles on its website. “Consignment companies don’t have a lot of control over the inventory,” says David Steiner, president of Auctionbytes.com, a news website for online sellers. “They’re at the mercy of whatever comes through the front door.”
   “For now, at least, Auction Drop doesn’t have a problem with intake Adams (Auction Drop creator Randy Adams), is eager to hire 140 new staffers on top of the 60 he already employs and still expects to post a profit this year. Neither TIAS nor MyEZSale had a hub-and-spoke model, let alone a well-oiled one. And Adams is no dot-com spring chicken. His years as a serial entrepreneur—one of his companies failed, the other five left him a multimillionaire—will provide invaluable experience as Auction Drop goes nationwide.”
  Adams is quoted as saying, “Our goal is clicks and mortar on every corner.”
   Of course, these new drop-off stores are meant to sell everything from computers to coins, TV’s to your grandmother’s diamond ring. And how about that digital camera you got a Christmas. Gee, isn’t your local pawnshop where most of these items would have gone in the past?
    Since pawnshops are heavily regulated to prevent stolen merchandise being pawned and sold through them, we went to Steve Mack,  President of SuperPawn and Greg Westover, VP of Logistics, to get the bigger picture.
   Steve is the third generation in his family to be involved in the pawn business … but on what a scale! With headquarters in Nevada, SuperPawn is the largest privately owned pawn company in the United States. Mack was actively involved 25 years ago in writing Nevada’s laws governing pawnshops, but sees no threat from the new eBay drop-off stores. Indeed, they are embracing the concept. SuperPawn has been selling its merchandise on eBay for years. SuperPawn operates 45 Stores with 450 employees in 5 Western States, and has a feedback rating of over 27,000. Now that’s a Power Seller!
   Working with eBay’s API, SuperPawn has developed a fully integrated software system that has cut the costs of listing and selling items on eBay to a fraction of what it costs other businesses. “SuperPawn is proud to be a certified eBay developer,” said Greg Westover. “eBay has recognized that SuperPawn has the necessary infrastructure to achieve this honor. eBay’s API  has helped lower our operating costs in all facets of managing an item listed on eBay and the immense savings are passed on to our customers.”
   Because of their specialized in-house software, eBay buyers of SuperPawn merchandise must pay for it on the SuperPawn website www.superpawn.com which at this time does not support Paypal. Payment must be by credit card and only one issued by a US bank. Still, the system  has lots of pluses. It enables the company to post for sale thousands of items daily on eBay, with much lower costs than other brick-and-mortar sellers. This is not something Mack said he has seen so far in any of the proposed drop-off stores. Westover said he didn’t believe the other businesses had the systems in place to handle the type of volume required to be profitable.
   Both men agreed that these new business models seemed to be in a grey zone; not a pawnshop, not a true consignment shop…sort of a hybrid, but are they acting as auctioneers? Steve Mack also mentioned they believe these businesses should be required to follow the existing laws governing pawn, consignment and auction firms. Record keeping and 7 day holding period were just a few of the laws mentioned. Otherwise, drop-off stores could become a haven for stolen merchandise. Mack said in the long term he was sure they would be required to comply with existing laws.
   With so much competition, I asked Mack if he thought it conceivable there could be a “shortage” of merchandise to sell in the future, and he replied, “We are a disposable society,” adding that only 12% of what is “out there” for potential merchandise is recycled.
    We emailed all of the eBay drop-off businesses the same question: we were wondering if your firm has run into any problems with “state licensing” issues; i.e., specifically any state auction licensing boards.
  Andrea Roesch, spokesperson for AuctionDrop wrote back,

Hi Kathy,

I checked and have been told that we haven’t had any issues regarding “state licensing”.

Best,
Andrea

Daniel Cowles of AuctionValet also wrote back to say,

Hello Ms. Greer,

Our current plans call for a West coast expansion in the near term.  As for your question about licensing, we will only enter areas where it makes financial sense.  We will have to take the licensing issue on a state by state basis.  In states where the licensing doesn’t cause a great financial or clerical burdon, then we will expand in those states.  In the other states, we will probably delay any expansion plans there.

Sincerely,
Daniel Cowles
CDC Partners, LLC
auctionValet
23591 Rockfield Blvd, Suite F
Lake Forest, CA 92630

A Level Playing Field?

  In February, 2002, eBay announced its “Trading Assistant” program. In two years time, 30,000 members signed up. eBay has made no bones about wanting, no needing to grow… and to grow, it needs more sellers.  Hani Durzy, eBay’s spokesman said eBay embraces the “offline” drop off store concept and has no plans to open stores of its own. “We need more sellers,” he said.
   At the end of January, 2004 eBay announced it has created a new marketing program called “Trading Posts” and has signed on with two drop-off storefront businesses, allowing them to use the name and eBay affiliation. How this agreement with AuctionDrop and Postnet will shake out in the next six months should prove to be interesting, at the very least. According to AuctionBytes Ina Steiner, “Postnet offers a host of copying- and shipping-related services in its stores. [Ed. Note: think Kinko’s] Under an agreement with eBay, Postnet is allowed to set up “eBay Trading Posts” in its franchise retail centers. eBay is giving Postnet a head start, promising it will be the only “mailing services” (or pack-and-ship) business allowed to use the Trading Post for eBay branding. The exclusive deal expires after the first two quarters of 2004, after which eBay may bring in other pack-and-ship services to the program.”
   Steiner wrote in her Jan. 28, 2004 AuctionBytes newsletter, “Postnet stores had participated in an eBay consignment service several years ago under an agreement with MyEZsale. Steve Greenbaum, CEO of Postnet, said he learned lessons from that venture. MyEZsale had provided computers and training to pack-and-ship stores, which sold items on eBay on consignment basis under the MyEZsale moniker. Greenbaum believes MyEZsale failed because they put a financial burden on the stores with large upfront costs.”
    Steiner reported,  “Greenbaum said Postnet already has computers and Internet connections since they provide Internet services to their customers. There are 850 Postnet locations in 44 states and abroad, and Postnet has an aggressive expansion plan. Postnet charges a $2.99 listing fees to consignors ($14.99 if they want to set a minimum bid). Postnet takes a 40% commission for items under $500, and 25% of the price for items that sell for $500 and up. Postnet store employees create the auction descriptions and take the photographs of the item. Postnet headquarters does the actual listing and customer service for the auctions, although the item stays at the store location.”
   “Postnet stores share the 40% commission with Postnet headquarters,” Steiner wrote, adding “The stores also benefit by charging for packing services when they ship the item. And they benefit from volume discounts from UPS and other shipping companies.”
   As for AuctionDrop’s plans. Spokesperson Andrea wrote to say, “We plan to open a hub in New Jersey with satellite stores in the surrounding tri-state area. Each hub will process (professionally photograph, research, write an accurate and detailed listing, post on eBay, answer customer inquiries for both sellers and buyers, warehouse, process payment, pack and ship) the items that come into the surrounding AuctionDrop stores.
    Having all our listing specialists at our hub in the San Francisco Bay Area has helped us provide more accurate and informative listings for our customers as each item goes to the listing specialist most versed in that area (i.e. antique silver or consumer electronics). Our professional photographers are also at the hub and this aids in maintaining our high standard of quality while also making the process more efficient. We pride ourselves in excellent quality and service at every step of the online auction process.”
    As we went to press, the latest entry into the eBay brick-and-mortar drop-off stores announced Picture It Sold would be launching soon:
www.pictureitsold.com
     In the meantime, eBay continues to grow. They announced they had a successful fourth quarter in 2003 with gross profit for the last three months of 2003 a record $532.9 million.  eBay said it may reach $3 billion in net revenue in 2004, a year earlier than anticipated.