How Diapers.com Solved the Chicken-and-egg Problem in the Early Days
Beating a competitor at its best game is extremely difficult, especially when your enemy is a 800-pound gorilla like Amazon. Therefore, when Amazon acquired Quidsi, the NJ-based e-commerce startup behind Diapers.com, for $540 million in 2010, many people were amazingly impressed because it felt like Amazon was defeated in some ways.
This small startup was competing with not only Amazon but also big box retailers to supply a low-margin commodity — diapers. Besides, the CPG (Consumer Packaged Goods) industry as a whole is slow moving, risk-averse and not startup friendly. For example, the founders were told that companies like P&G didn’t sell wholesale to businesses that were less than two years old. So how did they solve this chicken-and-egg problem and convince big CPG brands to work with them eventually?
They proved their business concept in a very creative way.
Unable to buy from the major manufacturers, Lore and Bharara forged a practical solution. When an order came into the website, DePaola (a college friend of Lore’s) would run down to the local BJ’s Wholesale Club in her minivan to pick up diapers. Then she would ship them out. Orders started to come in almost as soon as the site went live. By the end of the first week, she was shipping 20 to 30 packages a night. The partners lost money on every shipment but learned that there was a market for diapers on the Internet.
In fact, they didn’t mind losing money because selling bargain diapers is only a hook to build a long term relationship with mom. From that relationship, they would eventually evolve the business into selling everything for baby — including all the high margin products.
After the first successful experiment, they didn’t stop there.
After a one-line item ran in babytalk magazine, about six weeks in, DePaola was shipping 180 packages a night and could no longer fit all the diapers she needed into her minivan — so she got her father, who had a GMC Envoy, to help…Eventually she had to start renting trucks from U-Haul and clearing out the entire store. Then she bought from Costco and BJ’s stores farther away. (Strangely, losing money on each shipment increased their cash flow, as they were buying on credit cards with standard 30-day billing periods and selling for payments that came through in two days.) “Pretty soon,” says Lore, “we would clear out all the stores in a hundred-mile radius.”
Around five months later, because of the growing sales volume, P&G figured out that they are for real and gave Diapers.com (it was called 1800diapers.com at that time) a wholesale account.
Over the next five years, their team were able to raise $59 million from investors, hire 300 employees, expand to other categories and bring in $300 million in 2010. With this kind of growth rate, it was obvious that Amazon has lost the diapers war, causing them to eventually acquire Quidsi for $540 million.
Source: What Amazon Fears Most: Diapers
Thanks for reading this! If you love it, I’d really appreciate it if you recommend this post (by clicking the ❤ button) so other people can see it!.
Startup War Story has a free bi-weekly stories digest. It comes out on Sundays and offers the week’s most awesome startup stories. Like?
Subscribe here to get them via email.
