José M. Guardia

Internet, Media & Technology Analyst

Writer, Columnist, Commentator

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Ecuality fiasco ruins Spain's dotcom party
Net retailer aimed high but now teeters on edge of bankrupcy
By Jose M Guardia - January 10, 2001

 

Spanish Net retailer Ecuality is in deep trouble, its problems caused by a combination of management profligacy and an overly-ambitious international expansion.

Ecuality, which aimed to become the Spanish-speaking world's Amazon but looks like ending up as its Boo.com, last month suspended payments to its creditors. The company had burned more than $50 million (52.4 million) in under a year. It is now trying to renegotiate outstanding debt of nearly $25 million (26.2 million) but has had little success so far. The signs are that Ecuality is heading for liquidation within weeks.

Many are linking Ecuality's failure to the harsh dotcom environment. But a closer look produces a different picture – of management mistakes, overspending, low margins, technical glitches and logistical nightmares.

Ecuality was founded in March 1999 by 40-something friends Santos Rodríguez and Fernando Ficksman. The pair quickly raised $20 million (21 million euros) in first-round financing. Investors included Spanish building firm Acciona, the BBVA bank, technology firm Picking Pack, and investment fund Omega Capital – owned by Alicia Koplowitz, who is one of Spain's wealthiest individuals.

In the autumn of 1999, Ecuality launched its first online retail outlet, Alcoste.com, selling books, music, video and software at a discount. The strategy was to move fast and get ahead of the competition, which was expected to come from Amazon's long-predicted entry into the Spanish market and from other pure plays such as Bol.es, the Spanish subsidiary of German giant Bertelsmann. Progress was perhaps too fast for Spain's small Internet market, despite predictions of a surge in e-commerce.

Santiago Medina, an analyst at Ibersecurities in Madrid says: "Spain's e-commerce market was too small at that time, and Ecuality decided to invest very heavily in the hope of jumping in early and scaring others away.

"They were financing their losses, expecting to grow fast and make it up on volume, which at the end of the day might work for Amazon, which is selling to the strong US market as well as globally. But in the young, reduced Spanish market this was a recipe for disaster."

With fresh funds in hand, Ecuality engaged in a buying spree, paying hefty amounts for several companies. One purchase was admol.es, a barely operating online advertising company owned by Ficksman himself. Others, like the technical books Net retailer Papiros.es, had no significant volume and minuscule customer numbers.

The funding also went into a rapid international expansion: more than $14 million (14.7 million euros) was used for the launch in less than four months of local versions of Alcoste.com in Mexico, Venezuela, Argentina and Chile (under the name Alcosto.com) and Brazil and Portugal (under the name of Superoferta.com). It didn't apparently matter too much that less than 8 per cent of Latin America's population was connected to the Internet or that e-commerce spending there was minimal.

At that moment, corporate expenditures jumped. The company moved its headquarters to a glass, cube-shaped building in the middle of a luxurious office park in Madrid and opened plush offices in several cities. One of these was in New York, even though the company didn't have any operations in the US and was backed mainly by non-US investors. There were also reports of lavish spending, with perks that included top range Mercedes cars, first-class travel and five-star hotels. Potential investors are said to have been flown in using chartered jets.

But two of the most stunning business decisions came shortly after, when Ecuality launched two new online shops.

First, Alcosteurgente.com promised the delivery in under four hours of an extremely narrow part of Alcoste.com's range of books, music, videos and software to addresses in Barcelona and Madrid. Instead of relying on centralised warehouses and delivering by messenger or van, the products travelled around in a fleet of Smart micro-cars that, because of their small size, could only offer a choice of five books, five CDs, five videos and five software products. Needless to say, the cute little cars didn't burn much petrol, and have ended up as little more than street advertisements.

In contrast, the second site, Diver-sia.com, sold a ludicrously wide selection of Alcoste.com products. It was supported by an expensive marketing push that included perhaps the first TV ad campaign by a Spanish pure-play Internet retailer. In a bid to acquire customers, Diversia.com offered the equivalent of $17 (18) in products to anyone who registered. The result was that thousands of users entered their data several times, with the company unable to do anything about it. The promotion was a success in terms of traffic, with more than 60,000 people entering their details in five weeks. But after they got their presents, only a few came back.

Lourdes Moreno, an executive at Solero & Solero, the ad agency in charge of Alcoste.com and Diversia.com's launch campaigns, says: "They claimed it was a method of generating customer loyalty, but all they were doing was simply buying customers.

"We told them that it had no economic or marketing logic, but we couldn't change their mind."

The popularity of the promotion helped put Ecuality's expensive technical platform under enormous strain. At one point, according to a former employee who spoke anonymously, more than 60,000 customer orders were simultaneously in backlog, and delivery was a disaster. "Orders were piling up on the floor with no classification, so nobody was able to know which product was for whom," he said.

Ecuality was rolling out its new sites without sufficient testing because it badly needed to show that its model was working before a new round of financing, scheduled for May 2000.

But by the time the second round of financing was being prepared, Ecuality's problems were serious. On top of the general change in climate in the sector, investors began expressing disappointment – sometimes publicly – about the company's poor performance. Some of them – such as Omega Capital – announced that they wouldn't go into the second round and another, Picking Pack, put its stake up for sale.

The second round of financing – which Ecuality badly needed not for expansion but to pay the bills – was in doubt. After desperately looking for more funds among current investors, and trying to find new ones both in Spain and the US, less than 50 per cent of the second round was covered.

With no more cash, at least for the time being, creditors began looking for payment and employee morale began to deteriorate. That in turn led to defections, notably of VP for marketing Manuel Sanchez. In September, Acciona – Ecuality's biggest shareholder – agreed to up its stake from 13 per cent to 31 per cent, injecting some $11 million (11.6 million euros) into the company in exchange for full control.

Acciona demanded that all the founders resign their executive posts and installed Isabela Muro, a former banking executive who had for some time been Ecuality's managing director, as top executive with the task of restructuring the company.

The first decision was to close the operations in Mexico and Venezuela. Simultaneously, one third of the company's more than 200 employees were laid off, often abruptly.

"I somehow knew I was fired when this guy from the moving company came in and wanted to take my desk away," says one.

Muro resigned in November and Acciona put economist and turnaround specialist Juan Luque in charge.

At a turbulent meeting in December, a majority of Ecuality creditors refused a proposal to cut what they were owed by 65 per cent. The company was left with no choice other than to suspend payments to buy some time to come up with a plan to save the company from liquidation.

Three court-appointed administrators were named immediately. They have been keeping the company ticking over for the last few weeks. Their main task will be to evaluate the company's assets and try to reach an agreement with the creditors to prevent the company being dismantled.

However, according to Francisco Guirao, a lawyer at Ernst & Young in Barcelona, the suspension of payments under Spanish law is more often than not a mask for complete bankruptcy.

"As the theory goes, its purpose is to allow the company to recover without the burden of creditors banging on the doors, but the truth is that only 10 or 15 per cent of traditional companies which suspend payments end up lifting the situation successfully. And in dotcom companies, I guess that chances are half of that," he says.

The truth, as so often with dotcom companies, is that Ecuality has no tangible assets, since it leased all its equipment, infrastructure, and offices.

It has reportedly been shopping its Diversia.com site around for quite a long time, offering it to such bricks-and- mortar retailing giants as France's Carrefour and Spain's El Corte Inglés for around $80 million (84 million euros). It has had little success so far.

In the end, an unsuccessful online shop with no assets has little to sell. As one observer asked: "Who would pay $80 million for a few Web pages?"

 

 

© 2001 Jose M. Guardia, Barcelona -- All Rights Reserved