Gazelle in 2012 - Experts Mindsecure.expertsmind.com/attn_files/398_Case- 2012_Gazelle.pdf ·...

9-711-446

R E V : A P R I L 1 , 2 0 1 3

________________________________________________________________________________________________________________

Professor Andrei Hagiu and James Weber, Senior Researcher, Global Research Group, prepared this case with the assistance of Faculty Assistant Tal Reback. Certain data have been disguised. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2010, 2012, 2013 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

A N D R E I H A G I U

J A M E S W E B E R

Gazelle in 2012

Our vision is nothing short of redefining consumption, changing the way people buy, sell and recycle electronics.

— Israel Ganot, CEO Second Rotation1

ReCommerce is the next evolution of retail — Company document

In late February 2012, Israel Ganot, co-founder, president, and CEO of Gazelle was reviewing his

company’s performance during 2011. Gazelle, based in Boston, Massachusetts, was a pioneer in the

industry it had named “reCommerce.” Its business involved buying used consumer electronic

devices from individuals – either through its website, Gazelle.com, or through retail partnerships –

and reselling those items through eBay, wholesalers and other channels. In addition to providing

monetary value to individual sellers, Gazelle hoped to leverage consumers’ seemingly growing

preference for environmentally friendly “green” commerce.

Gazelle had done well in 2011, reporting $21.3 million in revenue for 2010 and $35.5 million in

2011, but Ganot felt it was at an inflection point. In July 2011, he had successfully completed the

Series D round of funding round for his company, which had brought in a fresh $22 million, bringing

the total raised to $46.4 million.2 Gazelle had formed partnerships with several large electronics

retailers, both offline and online (Costco, GameStop, NewEgg, Office Depot, walmart.com), in an

effort to expand the pool of individuals willing to sell their used electronics. While such deals could

give a tremendous boost to Gazelle’s growth, the downside was that retailers controlled the

relationship with consumers. In this context, Ganot wondered what the best growth path for his

company would be. Should Gazelle step up its direct marketing efforts to convince consumers to sell

their used devices through Gazelle.com or should it invest heavily in its partnerships with retailers?

Was there an opportunity for Gazelle to also become a branded seller of used electronics? And if that

was the case, should the company sell under the same Gazelle brand or should it keep the buy side

and sell side under separate brands? Finally, from a longer-term positioning perspective: should

Gazelle plan to move away from its current model of buying and reselling goods itself, and towards a

For the exclusive use of P. Sun, 2017.

This document is authorized for use only by Pang Sun in Competing in Technology Industries taught by H. Dennis Park, Drexel University from January 2017 to June 2017.

711-446 Gazelle in 2012

2

marketplace model, in which it would enable independent sellers and buyers to conduct

transactions? How would such a marketplace model work?

Company Background

Ganot and co-founders Rousseau Aurelien and James McElhiney independently conceived of the

idea that became Gazelle based on their personal experiences of dealing with their used electronic

devices. (See Exhibit 1 for biographical information on Ganot.) For Ganot, he did not want to throw

away a used Blackberry (smart phone). He visited a local retailer that offered an electronics recycling

service, but was surprised to learn they were going to charge him to recycle it. Having worked at

eBay, Ganot knew the phone had value and could be sold. He walked away thinking, “this is never

going to work, consumers are not going to pay to recycle.”

Ganot continued to think about the potential value in used consumer electronics and over time he

developed a motivation to build a business around rewarding consumers for smart consumption. A

few years later he moved to Boston and connected with Aurelien and McElhiney; they had begun to

develop a similar plan. The two entrepreneurs launched Gazelle in early 2006 with the vision to

redefine the consumption of consumer electronics.

Together, they launched under the name “Second Rotation.” The founders’ early plan was to

approach major retailers, such as BestBuy and Wal-Mart, and convince them to offer a trade-in

service that paid customers for turning in their used, but still working electronic devices. Second

Rotation would buy the devices from the retailers and sell them on the used market. The first year

was difficult. They approached retailers, but the retailers were not ready to move.

At the time, both believed that a green movement was underway and some consumers were

beginning to question their overall impact on the environment and might consider ways to reduce it.

They came to realize, however, that few business services aimed at taking advantage of this

movement had evolved. The idea of Second Rotation seemed to be ahead of its time.

In 2007, after returning from yet another meeting with a major retailer that rejected their idea, The

three founders decided to strike out on their own. They decided to go directly to consumers: develop

a website to solicit used electronics from them and then sell those devices themselves on eBay.

Second Rotation launched the website later that year and soon had products coming in the door. In

mid-2008, Second Rotation created the name “Gazelle” for branding and operational purposes: its

legal name remained “Second Rotation” while customers only saw “Gazelle.”

Gazelle had initially launched with funding from angel investors. In 2007 and again in 2008 the

company had received venture capital funding totaling $12 million.

The Business Opportunity

Macro Trends

In recent decades there had been a significant increase in the number of consumer electronic

products sold. Devices such as computers, cell phones, and digital cameras which essentially had not



Gazelle in 2012 711-446

3

existed in earlier generations had become ubiquitous by 2010. (See Exhibits 2 and 3 for historical sales

data on consumer electronic devices.)

Historically, consumers used their electronic devices for a period of time, but when they finished

using them they either threw them away in the trash or stored them in their home. Very few devices

were recycled or transferred to another consumer to use. Gazelle had identified four major

macroeconomic forces that were leading consumers to look for other options for the disposal of the

consumer electronic devices they no longer needed.

Financial The downturn in the general economy which began in 2007 and accelerated in 2008

had caused consumers to be more careful about how they spent and managed their money.

Unemployment levels in the U.S. increased significantly and many employed individuals feared

losing their jobs. This led to an environment of belt tightening in which it did not make sense to store

or throw away a device that could be sold for cash. Further, the acquisition and use of used products

was increasingly seen as socially acceptable.

New Product Introductions Technological advances following Moore’s Lawa and

developments in broadband wireless communications infrastructure enabled manufacturers to

introduce a wide variety of new consumer electronic products at an ever increasing pace (e.g.

smartphones, netbooks, tablets). The latest generation products came with new features and faster

performance. At the same time, the previous generation products remained highly functional with

significant remaining useful life. Consumers who valued owning the latest devices looked to

upgrade soon after new product launches. Other consumers were content to use nearly new products

that could be purchased for a lower cost from consumers who upgraded earlier.

Responsible Consumption The idea of “responsible consumption” seemed to be taking hold

in the consciences of consumers as they were increasingly concerned about the environment and with

making sustainable choices in their lives (doing the “right thing”). Consumers, for example, wanted

to know what happened to their old products when they recycled them or threw them away. It also

made trading in an old product more desirable because doing so might eliminate the need for a

manufacturer to make a new one. This trend was closely related to the proliferation of collaborative

consumption business models (e.g. apartment sharing through Airbnb and HomeAway, car sharing

and peer-to-peer renting such as Zipcar, RelayRides, Getaround and Wheelz, etc.).

Space Requirements Finally, consumers simply had too much stuff. The increased variety of

consumer electronics products available on the market, the higher household penetration of those

products, and the shorter time interval between purchases of new products left consumers with

significantly more unused devices in their homes. A decade ago, a household might have one cell

phone. By 2010 many households had a cell phone for every family member. Where there was once

one old, no longer used, phone in the drawer there might now be four or more plus a camera, a

camcorder, a laptop, an MP3 player, and maybe a GPS device. Consumers were reaching a tipping

point where they could no longer store unused electronics. (See Exhibits 4 and 5 for data on

consumer electronic devices that were no longer used by their owners.)

a Moore’s Law referred to Intel Corporation’s founder Gordon Moore’s 1965 assertion that the number of transistors that manufacturers could place on a single integrated circuit chip would double every two years. The rate of technological advances had generally followed Moore’s Law into 2010.



711-446 Gazelle in 2012

4

No Easy Options for Consumers to Sell

While Gazelle believed that consumers were increasingly willing to consider selling their old

devices, there were no easy options for them to do so. Perhaps their best option was eBay. eBay was

an Internet-based entity that was the world’s largest marketplace for used goods. It existed as a

marketplace in that it did not own any products and did not directly buy or sell them. It provided a

means by which independent sellers and buyers could connect and conduct their own transactions.

Ganot explained, “eBay opened up the global marketplace for used goods, and we take advantage of

that. There are plenty of people looking to buy used goods.”

eBay got its start in the mid-1990s as a way for individuals to sell a few items online. In its early

days, many of the goods sold were collectibles or otherwise used items that were not readily

available in retail stores. In some ways it was similar to an online yard sale and many consumers

used the site as much for the experience as for seeking out bargains. eBay operated as an auction site

where items were sold to the highest bidder. Sellers tended to be individuals or small operators who

were not looking for a primary source of income. Buyers and sellers were nearly anonymous to each

other and it was a fairly level playing field. The site’s success depended largely on the honesty of

sellers and buyers.

To help improve the site, eBay introduced a feedback system through which buyers and sellers

could write feedback and rate each other on their transactions. The rating system also included

information on how many transactions individual sellers had completed, the dollar volume of those

transactions, and whether the seller was in compliance with eBay’s policies.

eBay’s rating system enabled some eBay sellers to grow beyond the individual operator phase to

become full-fledged businesses. eBay referred to large sellers with high rankings and good feedback

as PowerSellers. PowerSellers enjoyed premium listing placements and discounted transaction fees

compared with ordinary sellers on the site and they came to dominate many categories of products

on the site. In 2009, Gazelle estimated that approximately 3% of eBay users were active sellers while

the rest were buyers.

As a consequence of the rise of PowerSellers and corresponding concentration on the seller side of

the market, individual sellers were increasingly at a disadvantage on eBay. Individuals could still try

to sell their devices through eBay, but Gazelle believed it had become more difficult for these one-

time sellers to find willing buyers. Ganot explained:

Imagine you want to sell your iPhone on eBay so you register with eBay and list your

phone for sale. You have a brand new eBay account, you have no customer feedback, you have

no rating from eBay, you are just some guy with a phone. The customer comes on, searches for

iPhones and finds he can buy from you, or he can buy from us. We have hundreds of phones

for sale, we have 100,000 customers that have said we are a trusted seller, and we have a five-

star rating from eBay across different categories of measurement. Who will the customer buy

from? It is hard for a single person to compete with PowerSellers.

Beyond difficulties of selling on eBay as a non-PowerSeller, individual sellers faced other hurdles.

One significant hurdle was erasing personal data from their devices. Personal computers and cell

phones in particular frequently held data that sellers would not want to turn over to buyers. It was



Gazelle in 2012 711-446

5

not easy for the average user to effectively erase all this data and the news media frequently ran

stories describing the recovery of data that owners presumed to have erased. Another hurdle was

making it all happen. An individual seller needed to figure out how to sell on the site, how to arrange

payment and shipping, even finding a box could be problematic. These hurdles led many potential

sellers to just put the device into storage.

What Happened to a Used Cell Phone

Gazelle believed that the macroeconomic factors it had identified were creating an environment of

change in consumers’ behavior and a desire to obtain more value from their devices. That, combined

with the difficulty individual sellers had in selling used devices, created the company’s business

opportunity. Gazelle estimated that while consumers were upgrading their products more quickly,

few of their old products were resold. Cell phones provided a clear example.

Gazelle estimated that average cell phone users began thinking about upgrading their phones

only 12 months after their initial purchase and that by 18 months only 21% of consumers were still

using their phone. While this meant that 79% were no longer used by the original owner, only 13%

had been resold. Over time, the percent of original owners still using their phones declined. (See

Exhibit 6 for Gazelle’s estimates of the lifecycle of a cell phone.) Gazelle’s opportunity came from

gaining a share of the “resold” segment, but more importantly, convincing consumers from the “idle”

category and potentially the “trashed” category to instead resell their devices through Gazelle.

Other consumer electronic devices followed similar lifecycle patterns. Gazelle estimated that

product lifecycles varied by product category. These upgrade lifecycles ranged from 18 months for

cell phones to five years for flat panel televisions.

Gazelle's Business Model and Operations

Acquiring and Selling Goods

Gazelle purchased over 22 categories of widely owned consumer electronic products including

cell phones, computers, MP3 players, digital cameras, camcorders, GPS navigation devices,

calculators, satellite radios, flat panel monitors, external drives, video gaming consoles, video games

and movies. It regularly considered adding new categories. With different models in each category

Gazelle was willing to purchase more than 250,000 different types of devices. Gazelle did not

purchase all types of devices. For example it did not deal in cathode ray televisions or monitors, due

to their heavy weight and low resale demand, nor did it carry printers or fax machines. In 2011, cell

phones made up 75% of the inventory bought by Gazelle, followed by laptops (3%).

Device sellers wanting to trade-in or sell a used consumer electronic device visited the gazelle.com

website and entered their device into a search feature. An iPhone seller, for example, could either

enter the exact model number or search through a list of iPhone model descriptions with pictures.

(See Exhibit 7 for a section of Gazelle’s search page.) Once she identified her phone on the website,

the seller then answered a few questions about the condition of her phone and any accessories she

was including. The website then quoted a price that Gazelle would pay to buy the device. (See

Exhibit 8 for a section of Gazelle’s offer page.) Site users could easily and quickly enter several



711-446 Gazelle in 2012

6

products without needing to enter any personal data or complete a registration process until they

decided to actually sell the phone to Gazelle.

Gazelle had created a “pricing engine” to determine what price to offer the seller. This pricing

engine consisted of software that scanned secondary markets such as eBay and Amazon to determine

what the item might sell for. It also looked at Gazelle’s own selling data. Ultimately, it determined a

price that Gazelle thought was high enough to entice the seller and low enough to enable a profitable

resale on eBay. Ganot added:

Right now the engine calculates what we call the "accurate price." We know what we can

sell the item for, we know what all our touch costs are (Gazelle’s internal handling costs), and

we know how much margin we want to make, so we offer you a single price that flows into the

P&L in such a way as to give us what we need. When we make you an offer we have

tremendous visibility into what that item will sell for and when.

In some ways, the pricing worked similar to that of used cars. In both cases, consumers paid for

convenience. Ganot explained:

With cars, car owners know they can sell their old car for more than the dealer will give

them as a trade-in, but by trading their old car to the dealer they get cash right away and don’t

have to deal with the hassle of selling it themselves.

After a seller decided to accept an offer, Gazelle made arrangements to help with the shipping

process. For some products Gazelle sent customers a free box through the U.S. Postal Service and for

other products customers needed to provide their own box. In all cases, Gazelle provided a pre-paid

shipping label to attach to the box so the customer did not have to pay for shipping. Providing a box,

Gazelle believed, increased fulfillment rates—a higher percentage of customers who received a box

actually sent their items to Gazelle than customers who did not receive a box.

As of December 31 2011, Gazelle employed approximately 89 people. Its entire operation resided

on one floor in an office/light-industrial building the company rented in the Innovation District in

Downtown Boston. Until mid-2011, Gazelle was receiving and handling all products in-house. By

early 2012, however, the company had outsourced all of its inventory handling to a third-party

operator’s Dallas, Texas facility (the operator was Teleplan, a Netherlands-based company).

When a product arrived at the outsourced facility, it first went to receiving where a receiver spent

3-4 minutes to review the contents of the box and log the item into Gazelle’s tracking system. This

process automatically generated an email to the seller to confirm receipt. After receiving, the item

next went to a technician who performed several key functions. The technician inspected the product

for physical condition, ran several functional tests to confirm operation, and gave the item a quick

cleaning. During this process the technician entered data into the tracking system regarding the

product’s condition and any included accessories. (This data later formed the basis of what Gazelle

posted on eBay when it came time for Gazelle to sell the item.)

The technician also erased any personal data the original owner had stored on the item. While

many items did not store such data, phones and computers could contain many personal data files.

The technicians used a variety of methods to erase data including the use of software developed for

the U.S. government for erasing classified data from its own systems. Gazelle’s promise to erase data



Gazelle in 2012 711-446

7

made some product owners more willing to sell devices through Gazelle that they might not sell on

their own. The entire inspection and data erasing process typically took anywhere from five minutes

to 20 minutes depending on the device. Following the inspection/erasing process the item went to the

packaging area where it was readied for shipping.

Boxes arriving from sellers often included several items and Gazelle could mix and match items

from different sellers to increase the value of the products it sold or make otherwise unsalable goods

into salable goods. For example, one seller might send in a laptop computer with no battery while

another seller might send in an iPhone along with an extra laptop battery. Gazelle knew that it was

difficult to sell a laptop without a matching battery and that it could sell a laptop with a battery for

significantly more than one without. Gazelle’s outsourced facility had a ready supply of used

batteries, battery chargers, and cables to combine with devices as necessary.

Part of the inspection process involved verifying that the item received from the seller matched

how the seller initially described the item on the gazelle.com website. If it matched, Gazelle paid the

seller the quoted amount through one of three seller selected payment methods: check sent by mail or

online payment using PayPal or Amazon.com Gift Card. Roughly 80% of the items received by Gazelle

matched the seller’s description closely enough so that Gazelle paid the quoted amount.

Occasionally, sellers sent in items that were in poorer condition than indicated or failed to include an

accessory that was included in the description. When this happened Gazelle informed the seller and

offered a lower price. If the seller accepted the lower price the deal went through. If the seller chose

not to accept the lower price, Gazelle returned the device to the seller at Gazelle’s expense. Somewhat

rarely, customers send an item to Gazelle that was worth more than the original estimate. When this

happened, Gazelle simply sent the seller the higher value payment.

Much of Gazelle’s efforts to date had focused on the acquisition side of their business

(gazelle.com) – developing the pricing engine and operations to receive and inspect products — and

not as much on the selling side of their business. “The channels to sell used goods are well

established. eBay remains a great innovation for selling high quality used goods,” Ganot stated. “We

believe that the innovation really needed to be made on the buy side to move consumers from a state

of inertia to action.” By leveraging eBay to take care of the sell-side (the average inventory life of an

item at Gazelle was 11 days and approximately 90% of items sold within 30 days), Gazelle was able to

start by focusing on innovations in the buy-side.

Gazelle’s brand was driven by a customer-obsessed culture providing the premier experience in

the industry. Ganot explained, “We have put a huge amount of effort into building a customer

experience that we are proud of.”

In 2011, Gazelle sold roughly 40% of the items it acquired from individuals as a PowerSeller on

eBay and 60% through wholesalers (the percentages had been 75% and 25% respectively in 2010). As

an eBay PowerSeller, Gazelle paid reduced listing and selling fees (it did not use the Gazelle brand

when selling). Gazelle sold its products using eBay’s “Buy it Now” pricing method, i.e. it listed a set

price for each item. It generally shipped items it sold within one business day. Buyers of Gazelle

products received a 30-day money back guarantee, generally free shipping, and an opportunity to

purchase a third-party warranty.



711-446 Gazelle in 2012

8

Expanding Sales Channels

Gazelle had started by selling the majority of its inventory through eBay but wholesalers had

rapidly grown to become its main distribution channel. For example, in October 2011 when Apple

announced the release date of the iPhone 4s, Gazelle was offering up to $300 for consumers to trade

in their used iPhones (previous models). As a result, Gazelle acquired more than 100,000 iPhones in a

60 day period. Selling such a large quantity of devices one by one would have been a daunting and

expensive task. Instead Gazelle leveraged the demand from wholesalers to buy iPhones in bulk and

was able to sell large quantities at once while avoiding listing fees and shipping costs, resulting in

overall higher margins.

Opening up new distribution channels led to a virtuous cycle, which Ganot called a

“compounding effect”. Broader distribution channels allowed Gazelle to extract more value from the

products it was selling, which in turn allowed it to offer higher prices (and better service) to its

sellers, thereby attracting more inventory, which then made Gazelle more attractive as a source of

supply for distributors. And so on and so forth. An instance of the compounding effect occurred

when Gazelle started selling to companies which offered extended warranties for electronics

products. This new channel enabled Gazelle to sell broken items (e.g., laptops) for a positive price:

extended warranty companies placed value on such items because they typically needed just one or

two functioning parts in order to refurbish the items that made the object of their customers’ claims.

In turn, Gazelle was able to start offering positive prices to sellers of broken items (previously, these

items had no value).

Used Electronics and Used Cars

The leadership team at Gazelle oftentimes drew parallels between their business and used cars.

The frequent use of this analogy was due to Gazelle’s Chairman of the Board: Austin Ligon, the

founder and former CEO of CarMax, the largest car dealer network in the United States. Referring to

his tenure as CEO of CarMax, Ligon had once said: “we have always made money on the buy side”.

Ganot thought the same was true of Gazelle – with some differences:

Unlike the used car market, consumer electronics do not have the equivalent of a Kelly Blue

Book. There are no commonly accepted or established prices and there is little transparency

around values of used goods. This puts us in the position of operating in a very inefficient

market on the buy side. Things are different on the sell side: there is a lot of transparency and a

lot of price information is readily available. On that side of our business we are in a very

efficient and competitive market.

CarMax had been founded in 1993 by Circuit City and by 2009 had become the nation’s largest

retailer of used cars and a Fortune 500 company. The concept for CarMax had been proposed by

Austin Ligon as a retail opportunity to extend Circuit City’s growth into a sector with no significant

competition.3 The foundation of CarMax’s business model was the focus on the consumer value

proposition: low prices and no haggling; broad selection; high-quality, certified vehicles; and

customer-friendly service without the “sleaze” factor.4 CarMax benefitted from the fragmentation of



Gazelle in 2012 711-446

9

the used car dealer market: in 2005, no single dealership had more than a few percentage points share

in any region.5 During 2010, the company sold approximately 660,000 used cars and 8,000 new cars,

generating $9 billion in revenues and $1.3 billion in gross profits.

Established in 1926 by Les Kelley and known for its blue-bound guides, Kelley Blue Book (KBB)

was the best-known car valuation reference guide, trusted by both consumers and the car industry.

KBB had launched its website, kbb.com, in 1995 and by 2012 the company was conducting the

majority of its business online. Prior to its move online, KBB had always generated revenue from the

sale of its annual report guides. In 2002, kbb.com had launched the Fair Purchase Price tool for new

cars, which provided users with a price estimate for buying or selling cars based on data gathered

from thousands of dealerships in the United States. At one point the company attempted to charge

$3.95 per price estimate, but met with strong customer resistance. As a result, KBB adopted the radio

station business model: providing the information free of charge online and generating revenue from

advertisers and sponsors. Kbb.com’s 2011 revenues stood at $26.4 million.6

In October 2010, KBB was acquired by AutoTrader for over $500 million.7 Founded in 1997,

AutoTrader.com was the largest automotive classifieds website in the US, with a monthly average of

3 million used vehicle listings during 2010.8 AutoTrader.com had started with listings of cars for sale

that came exclusively from certified used car dealers. Over time, it had expanded by adding listings

from individual consumers. AutoTrader.com’s 2010 revenues were estimated at $720 million.9 Its

KBB acquisition sought to increase advertising revenues through kbb.com’s 17 million monthly

visitors.10 As a consequence of the deal, AutoTrader.com’s classified listings became available on

Kbb.com and in return Kbb.com customers gained access to AutoTrader.com’s Trade-In tool.

Retail Partners

Ganot had not given up on his original business idea of partnering with established retailers to

have these retailers offer their customers a trade-in service for their old electronics devices when they

purchased new devices. The trend towards responsible consumption was gathering steam and

retailers were taking notice.

Online partnerships

In July 2009, Gazelle signed its first partnership agreement with the warehouse club Costco.

Several similar partnerships followed: walmart.com (October 2009-present), Sears/Kmart (November

2009-2010), NewEggb (October 2011-present), Staples (November 2011-present). These partnerships

worked roughly in the same manner. For example, Costco customers went to Costco’s website to

purchase a new electronic device. Costco placed a link on their site saying “Costco.com Trade-In

Program powered by Gazelle” near the place where customers would purchase a new product. The

link led to a trade-in program site (http://costco.gazelle.com/) that looked similar to gazelle.com but

was branded “Costco powered by Gazelle”. This site performed the same functions as the

gazelle.com website through which customers could sell their unwanted electronic devices. There

was one important difference however: at costco.gazelle.com customers received a gift card valid

b NewEgg was the largest online reseller specialized in consumer electronics.



711-446 Gazelle in 2012

10

only at Costco, instead of cash at gazelle.com. Items were shipped to Gazelle, who inspected them,

reported the price at which it acquired them to Costco and could then sell them right away. At the

end of each month, Costco sent an invoice for the reported value of all products traded in that month

and Gazelle paid Costco.c

These partnership agreements held great potential to increase the number of devices traded in to

Gazelle. The retail partners also benefited from the arrangement. First, they could offer, at a very low

cost, a new service to their customers to help those customers get value from used devices. Second,

while device sellers that went directly to gazelle.com received a cash or cash equivalent payment

from Gazelle, sellers that entered Gazelle’s site from one of the retail partners received a gift card

valid only at that retailer. Thus the customers Costco sent to Gazelle remained Costco’s customers.

The partners knew that, as with many gift card programs, a customer with a gift card often spent

significantly more than the value on the card. They also knew that a percentage of gift cards were

never used. In addition, although Gazelle processed the transaction, and had all the customer data,

the agreements prohibited Gazelle from marketing directly to customers who came to them through a

partner. Finally, the partners had little operational involvement or financial risk in the process.

Gazelle collected the used device and sent the seller a gift card on behalf of the retailer. The partners

never saw the device or directly paid for it. Gazelle got paid only when it sold the device on eBay.

Gazelle also ran a short-lived partnership experiment with eBay. Specifically, eBay relied on

Gazelle and C-Exchange (one of Gazelle’s competitors) to fulfill its eBay Instant Sale program.

Consumers sold their products to eBay Instant Sale, who passed them along to either Gazelle or C-

Exchange. Consumers were paid via PayPal. eBay insisted that its recommerce partners function as

white labels for its Instant Sale brand. Seeing no opportunity to develop the Gazelle brand through

such a partnership, Ganot decided to pull out after two months (leaving C-Exchange as the sole

recommerce partner for eBay).

In-Store Experiments

Gazelle also pursued growth opportunities by getting its trade-in program directly into retail

stores. For instance, after several small experiments, Gazelle ran a three week program in April 2010

with Office Depot, a chain of over 1,000 office supply stores. Under this program, Office Depot

employees accepted trades of used laptops and digital cameras towards the purchase of new laptops

or digital cameras. The store employees paid customers with a store gift card and then shipped the

items to Gazelle. The price was determined by Gazelle’s pricing engine, but the company had built a

buffer into the price it would pay for a given item. Customers received roughly 20% less in these

stores than they would if they went directly through the gazelle.com site. Gazelle did this in order to

cover the higher risk of paying customers before fully inspecting the product.

c The arrangement was slightly different for retailers who did not have their own gift card program, such as Wal-Mart online. Wal-Mart online relied on a third-party issuer of debit cards co-branded Wal-Mart online and Gazelle. Gazelle was subject to a pre-funding requirement, i.e. had to keep a minimum balance on its account with the debit card issuer. The account was debited whenever a customer used the debit card, which was funded based on the value of the items the customer traded in.



Gazelle in 2012 711-446

11

Competition

Ganot believed that Gazelle was the largest direct to consumer player “by a good margin” in the

reCommerce business (Exhibit 9 contains summary data on Gazelle’s main competitors, which are

described below). The industry was however still in its infancy and its evolution was uncertain.

CExchange was a pure-play B2B intermediary in the consumer electronics buyback market.

Unlike Gazelle, CExchange operated as a white label (i.e. unbranded) on its buy side: it exclusively

acquired products through partnerships with branded retailers or platforms, most notably eBay’s

Instant Sale program and RadioShack. Consumers sold their products to eBay Instant Sale or

RadioShack, who passed them along to CExchange. Unlike Gazelle, eBay Instant Sale did not send

consumers a box. In case of a dispute, eBay Instant Sale absorbed the cost of shipping and sent the

item back free of charge at the customer’s request.

EcoSquid was known as the “Kayak.com” of the consumer electronics buyback market. It did not

provide a repurchasing or recycling service. Instead, it provided a comparative search engine that

aggregated price quotes and recycling options from various other sites. EcoSquid also promoted a

points redemption program for every transaction or referral made to its site. In 2011, EcoSquid was

acquired via an all stock merger11 by uSell, which owned a similar website listing buyback and

recycling offers from third-parties.

NextWorth was the electronics recycler whose business model was most similar to Gazelle’s (in

addition to also being based in the Boston area). Like Gazelle, it resold a large portion of the devices

it acquired as a PowerSeller on eBay. On its buy side, it had a branded website and had also

developed partnerships with large retailers, most notably Target and Amazon.com. Similar to

Gazelle’s partnerships with Costco and Walmart, NextWorth’s partnership with Target and Amazon

granted customers either a Target or Amazon.com gift card that was redeemable immediately.

Launched in 2009 by Simon Rothman, the founder of eBay Motors, Glyde.com provided an online

portal for buyers and sellers to conduct transactions involving used smartphones, tablets, DVDs,

games and other products. On its website, the company claimed that “Glyde is a new kind of

marketplace that combines the great deals of a person-to-person online market with the ease of a

retail store.”12

Sellers paid nothing to list their items on Glyde.com. They were only charged when their items

sold: 12% on the first $100 of the item's sale price and 8% on the rest. Glyde also provided sellers

with a shipping kit, which contained pre-stamped and pre-addressed packaging – sellers were

charged a fee ranging from $1.00 to $3.50 depending on the item for the shipping kit. Items shipped

were insured by Glyde at no extra cost to sellers. Finally, when sellers listed certain items for sale,

Glyde offered them a “Speed Sale” option, which ensured the sale of the relevant item within a few

days, at a guaranteed (typically lower) price.13

Buyers were charged no fees by Glyde, except in the case of repeat returns: corresponding

shipping cost (roughly $5) was then split between buyer and seller. Upon receipt of an item, buyers

had 48 hours to return it; if they decided to keep it, payment was released to the seller.14



711-446 Gazelle in 2012

12

International

In 2011, the electronics re-commerce market in the UK was ahead of the one in the US. The two

largest players in the UK were Mazuma Mobile and Envirophone. Together they held 70% market

share and had intermediated roughly 200 million pounds (roughly 310 million dollars) in total

transaction value during 2010. Both companies focused mainly on the resale of mobile phones.

Mazuma had started off with a charity model that did not pay anything to “sellers.” After a brief

period of partnership with mobile phone operators, the company launched a vast TV advertisement

campaign to build its own direct-to-consumer brand. Ganot regarded Mazuma as a promising model

that Gazelle could emulate. One key difference that remained: Mazuma sold 100% of its inventory

through wholesalers, compared to 60% for Gazelle.

Looking Ahead

Ganot was happy with how far the business had come. Gazelle was arguably the strongest

competitor in the industry and well positioned to continue its rapid growth. The success of its last

round of funding seemed to suggest that investors felt the same way. As he thought about his

company’s future evolution, however, Ganot identified two strategic issues which required careful

analysis: the relationship with retail partners and the economic model of the business.

Working with retail partners (online and in-store) provided instant access to the huge customer

bases of those retailers – Gazelle would be hard pressed to achieve the same level of customer reach

through its own direct marketing efforts. On the other hand however, Ganot recognized that relying

too much on large retail partners involved some significant risks. Indeed, partners’ priorities might

shift over time or they might attempt to extract too much value out of the partnership. For instance,

after the implementation of the joint program, a large retailer had asked Gazelle to start paying for

placement on the retailer’s home page, arguing that all brands paid for the privilege and that its

home page was sending traffic to the Gazelle co-branded page (this argument failed to take into

account that the joint program with Gazelle generated more traffic and consumption by the retailer’s

customers). Moreover, retail partnerships had implications for Gazelle’s brand: the more it depended

on partners, the more difficult it became to control its brand image in the eyes of consumers. With

these considerations in mind, Ganot had to find the right balance between investing in further

developing the retail partnerships and investing in Gazelle’s own consumer-facing efforts (building

its own brand and enhancing Gazelle’s proprietary pricing technology).

While the retail partnerships essentially extended Gazelle’s initial model of buying products

through Gazelle.com and selling them to wholesalers or on eBay, Ganot was wondering whether he

should envision more radical business model changes in the medium to long-term. In particular,

should (and could) Gazelle aim to move towards a different intermediation model, in which it would

no longer take inventory of goods, but instead connect individual sellers with third-party buyers?

How exactly would such a model function and what would be the implications for Gazelle’s

respective relationships with eBay, wholesale buyers and retail partners? How would the economics

of this model compare with Gazelle’s current model? (See Exhibit 9 for a stylized economic model of

transactions originating on Gazelle.com, i.e., not through retail partners.)



Gazelle in 2012 711-446

13

Exhibit 1 Biographies

Israel Ganot

At age 18, Israel enrolled in NYU planning to join the ranks on Wall Street, but upon graduation,

professors suggested he instead pursue a PhD. He applied to Harvard's DBAprogram and began

working, writing business case studies for a Harvard professor. His first assignment took him to

Seattle to visit an emerging company and its leader, and to study the business' future potential. The

company? Microsoft. And the man? Bill Gates. This meeting changed Israel's career path and

precipitated his passion for technology.

Israel now brings 19 years of e-commerce and offline retail experience to Gazelle, having spent six

years at eBay and PayPal, where he was instrumental in the company's international expansion in

Europe, Latin America and Asia. Israel also served as Director of Finance & Operations at eBay UK

Ltd., where he helped scale the local business to $300 million. He began his career as a retail analyst

with Goldman Sachs.

As a leading authority on e-commerce and reCommerce, Israel has been interviewed by top news

outlets, including The Wall Street Journal, Forbes, New York Times, CNN and FOXNews. Israel holds an

MBA from Harvard and a Bachelors degree from New York University's Stern School of Business.

Source: Company documents.



711-446 Gazelle in 2012

14

Exhibit 2 U.S. Unit Sales of New Consumer Electronic Devices, 1980-2011

Source: Adapted from company documents and CEA (Consumer Electronics Association), Trends in CE Reuse, Recycle, and

Removal, March 20011.

Exhibit 3 Number of Consumer Electronic Devices Owned per U.S. Household, 1975-2011

Source: This data is derived from data from CEA's Annual Household Ownership & Market Potential Survey March 2011.

0

50

100

150

200

250

300

Th

ou

san

ds

of

Un

its

Television

PCs

Cellphones

0

5

10

15

20

25

30

1975 1980 1985 1990 1995 2000 2005 2006 2007 2008 2009 2010 2011

Households spent an average of $1,179 on CE gadgets in 2011

Households spent an average of $833 on CE gadgets in 2000



Gazelle in 2012 711-446

15

Exhibit 4 Percent of Unused Consumer Electronic Devices in the Home

Source: Adapted from company documents and CEA (Consumer Electronics Association), Trends in CE Reuse, Recycle, and Removal, March 2008.

Exhibit 5 Number of Unused Consumer Electronic Devices in the Home (millions)

Source: Adapted from company documents and CEA (Consumer Electronics Association), Trends in CE Reuse, Recycle, and Removal, March 2008.

0%

5%

10%

15%

20%

25%

Cell Phone Desktop Laptop Monitor TV VCR

2005 2008

0

20

40

60

80

100

120

140

160

2005 2008

VCR

TV

Monitor

Laptop

Desktop

Cell Phone



711-446 Gazelle in 2012

16

Exhibit 6 Gazelle’s Estimate of the Lifecycle of a Cell Phonea

Source: Adapted from company documents.

a Graph estimates the progression of cell phones over a 4-year period, based on company analysis of the 2008 used cell phone market. Eighteen months after first sale, 13% of cell phones had been resold, 36% were still owned by the original owner, but were not being used (idle), 10% had been recycled, 20% thrown away, and 21% were still being used by the original owner.

Resold

Idle

Recycled

TrashedNew:

1st use

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0 6 12 18 24 30 36 42 48

Months from 1st sale

13%9%

100% 44%

20%

10%22%

36%

25%

21%



Gazelle in 2012 711-446

17

Exhibit 7 Gazelle’s Search Page

Source: Company document.

Exhibit 8 Gazelle’s Offer Page

Source: Company document.



711-446 Gazelle in 2012

18

Exhibit 9 ReCommerce Competitors

Key Partners Number of website visits during Jan 2012

Gazelle Walmart.com, Costco, Kmart, Staples 849,694

eBay Instant Sale N/A 299,468

NextWorth Target 9,870

CEXChange Radio Shack, eBay, Amazon 58,526

Ecosquid Best Buy 12,555

Source: Data adapted from Quantcast web traffic analytics.

Exhibit 10 Stylized Economic Model for Gazelle.com Transactions

Revenue – Gazelle’s sale of used devices 100%

Product Cost – Purchase price Gazelle paid sellers 50%

Processing Cost – Shipping costs and all product touch costs (operations) 25%

Gross Margin 25%

Transaction Cost 10%

- variable merchandising, eBay fees, and financial processing (credit card fees)

Direct Marketing 10%

- the cost to acquire product sellers, marketing, search engine advertising, public relations

Contribution Margin 5%

Source: Based on company document (actual numbers have been disguised).



Gazelle in 2012 711-446

19

Endnotes

1 Marc Gunther, “Cash for (Electronic) Clunkers,” Greenbiz.com, August 18, 2009, http://www.greenbiz.com/blog/2009/08/18/cash-electronic-clunkers, accessed March 10, 2012.

2 Gregory Gomer, “Gazelle Raises $22 million in Series D Funding,” Boston Innovation, http://bostinno.com/2011/07/21/gazelle-raises-22-million-in-series-d-funding/, accessed March 10, 2012.

3 http://www.carmax.com/enus/company-info/about-us-timeline.html , accessed March 10, 2012.

4 Peter Galauszka, “The Book of CarMax,” Style Weekly, July 7, 2010, http://www.styleweekly.com/richmond/off-the-lot/Content?oid=1377257, accessed March 10, 2012.

5 Rajiv Lal and David Kiron, “CarMax,” HBS No. 505-080 (Boston, MA: Harvard Business School Publishing,

2005), p. 3.

6 Kelley Blue Book, Inc. company overview, Hoover’s Database. http://subscriber.hoovers.com/H/company360/overview.html?companyId=114243000000000, accessed March 10, 2012.

7 Richard S. Chang, “Kelley Blue Book Sold to AutoTrader.com,” New York Times, October 26, 2010, http://wheels.blogs.nytimes.com/2010/10/26/kelley-blue-book-sold-to-autotrader-com/, accessed March 10, 2012.

8 Urvaksh Karkaria, “AutoTrader may be eyeing stock offering,” Atlanta Business Chronicle, August 19, 2011, http://www.bizjournals.com/atlanta/print-edition/2011/08/19/autotrader-may-be-eyeing-stock-offering.html?page=all, accessed March 10, 2012.

9 Nick Zulovic, “AutoTrader Projects 2011 Revenue Will Exceed $1 Billion,” Auto Remarketing, March 10, 2011, http://www.autoremarketing.com/content/technology/autotradercom-projects-2011-revenue-will-exceed-1b, accessed March 10, 2012.

10 “Kelley Blue Book's kbb.com Now Offers Aftermarket Automotive Industry Advertising Opportunities,”

iStockAnalyst, August 4, 2011, http://www.istockanalyst.com/business/news/5336334/kelley-blue-book-s-kbb-com-now-offers-aftermarket-automotive-industry-advertising-opportunities, accessed March 10, 2012.

11 http://www.istockanalyst.com/business/news/5314273/usell-and-ecosquid-merge-to-form-a-leading-cash-commerce-platform

12 http://glyde.com/about, accessed March 29, 2013.

13 http://glyde.com/transaction-policies#seller_card, accessed March 29, 2013.

14 http://glyde.com/transaction-policies#buyer_card, accessed March 29, 2013.



Gazelle in 2012 - Experts Mindsecure.expertsmind.com/attn_files/398_Case- 2012_Gazelle.pdf ·...

Documents

Transcript of Gazelle in 2012 - Experts Mindsecure.expertsmind.com/attn_files/398_Case- 2012_Gazelle.pdf ·...