What Went Wrong With Red Envelope? (REDE)

| About: RedEnvelope, Inc. (REDEQ)
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Online gift retailer Red Envelope (REDE) has embarked on a dramatic rethink of its business, centered on a narrowing of its taraget customer base and product selection. I'm fascinated by this business and what went wrong.

Gift giving should be a natural fit for the Internet, because gifts often need to be sent, and it's just easier to have them sent by an online retailer than to buy them, wrap them and ship them yourself. Moreover, Red Envelope offered personalized gifts, which should have freed it from some of the pressure faced by other online retailers who compete only on price, such as Overstock.com (NASDAQ:OSTK), whose stock has been creamed.

So what went wrong? Rising PPC ad costs and the entry of offline retailers to the online market contributed. And it seems that poor execution -- fatal in the cut-throat online retail market -- was a signficant factor. But I must admit, I'm still not totally sure why this business model wasn't more successful.

Here's the extract from Red Envelope's conference call where the new CEO Ken Constable outlines his turnaround strategy:

Historically, RedEnvelope has tried to be all things to all people, by offering an extensive product assortment, ostensibly suitable for any and all recipients, occasions and price points.

This broad but shallow strategy has diluted our customer value proposition on driven complexity and cost into our business. Therefore the second move in our two-step approach to profitable accelerations is to simplify our business. We plan to achieve this by concentrating our target focus as follows: our target customers will be women in their relationship nurturing years, which range from 23 to 65 years of age. Our core audience is 30-50 years old. This does not exclude our valued male customers, but simply ensures that we focus strongly on our core female customer base.

Our target recipients will be women’s closest personal relationships. That is to say, their inner circle of friends and family. Our target occasions will be the most meaningful and recurring dates in women’s closest personal relationships, such as birthdays, anniversaries, new babies, holidays, valentines day, mother’s day and father’s day. Our target categories will be the gift categories that women prefer for celebrating these target occasions with their inner circle relationships. This includes several of our core product categories, such as Jewelry, Home, Men’s Accessories and Baby. We believe this tight focus will enable us to employ a deeper pressure product strategy.

Comments and suggestions appreciated.