Web Firm Embraces Old Economy Model.

ONCE was a time when working at eHobbies was luxurious. Comfy Aeron chairs, company-sponsored lunches, free membership at Santa Monica's Spectrum Club, weekly massages, an in-house concierge and fine views from the Water Garden office project.

Today, pampering at eHobbies amounts to pizza on Fridays.

The new eHobbies is exactly like the old eHobbies, if you're talking about the business the company does. It's nothing like the old eHobbies if you're talking about how it does that business.

"One of the reasons we're still here is because the idea, the concept, is a viable one. It's just the way it was executed was poor," Ken Kikkawa, co-chief executive said of the leaner, meaner eHobbies.

Although they are bound by confidentiality agreements, the pair said the deal also involved an ongoing licensing fee to Sherwood on its retail transactions.

Kikkawa, former vice president of merchandising in the company's previous incarnation, and his partner Seth Greenberg, who was vice president of marketing, started Hobby Hub Inc. to acquire the assets of eHobbies from Sherwood Partners, a restructuring firm. They are believed to have paid $200,000 just as eHobbies was about to declare bankruptcy in May, financing the acquisition by dipping into savings, taking out a second mortgage and, in part, by selling the 30 used Aeron chairs, which retail for $700 a piece.

"It's the era of the small deal and the small company' said Rafe Needleman, a columnist at trade magazine Red Herring, who tracks Internet startups. "You cut costs as much as you can and you hope there are enough people out there willing to buy your product and pay your salaries."

"Repatriation," as he called the act of reviving viable Internet brands as viable businesses, is the future of c-commerce, he said, adding that the slimmed down eHobbies makes sense. Startups will hit the Internet with smaller budgets and less opulent operations.

The new model is not for everyone, Greenberg said, which is why he and Kikkawa only picked a handful of colleagues to come along for the second effort. "A lot of people were spoiled in the old days," Greenberg said. "Our salaries were healthy and the perks were amazing."

More, faster

EHobbies was created to sell remote-controlled vehicles, trains, models, telescopes and other hobby items to hardcore enthusiasts over the Internet. The way to do that, and make a profit, was where the first iteration of eHobbies missed the point.

Consider: eHobbies launched in 1999 and, at its height, was a 175-employee company funded by $30 million in venture capital. The company's strategy, other than treating employees like royalty, was getting the name out and getting product on the trucks -- budget be damned.

"Cost wasn't an issue," Kikkawa said. "It was always 'speed-to-market."

Greenberg said the old mentality was classic dot-com.

The old company spent liberally to promote itself, including prestigious commercial time during "ER" and a $400,000 national radio campaign during the 2000 Christmas season. It ended up running Out of money.

Now, new strategies abound. Cross docking, a process through which eHobbies waits for orders before acquiring product from the manufacturer, is the order of the day. That means less cash going out and less inventory sitting around. Kikkawa said 50 percent of eHobbies' business is done via cross docking. The old company had just begun experimenting with the concept when everything blew up.

Kikkawa said the company also is doing some consignment sales, again limiting the initial cash outlay by not paying a manufacturer for product until it is shipped.

Though he wouldn't give specific numbers, Greenberg said the new operation has allowed eHobbies to slash overhead to just 5 percent of the level of the company pre-collapse.

There are other ways the company has become a model of austerity. The seven-employee business operates out of a cluttered office and 10,000-square-foot warehouse in La Mirada. Greenberg and Kikkawa haggle over nickels when buying boxes and switched the old operation's long-distance and 800 phone service from AT&T to Qwest. The old 25-person tech department? All handled for $50 per month (plus 10 cents for unit listed) on a contract with Yahoo.

The business remains fully Web-based, though it will take phone orders and allow buyers to pick up the product at the warehouse if they are in the neighborhood.

"We don't have the visions of grandeur the old company had," Kilkkawa said. "We see ourselves as a giant online hobby company and we're running it like a hobby shop by conserving our cash and spending it wisely."

No mare 'funny money'

As they navigate their first holiday season, Greenberg and Kikkawa have confidence that their new model is working and think they're ready to promote the business.

"We're starting to make commitments for future advertising," Greenberg said. "It's a little different when it's money coming out of your pocket versus funny money."

EHobbies already has worked out one deal that Greenberg said will pay huge dividends. Through a partnership with City-search Inc., a subsidiary of Ticketmaster Online, eHobbies is promoting a national contest on citysearch.com that will award a $120 radio controlled Lexus. The contest will reach 20 million people, Greenberg said, and the deal only cost eHobbies the car and a couple of $100 gift certificates.

What they're doing is not new thinking. In fact, Greenberg said he tried to get the old company to recognize ways to scale down.

"You can't make a horse drink," he said. "I kept running around the office saying this place could be run with seven people and a Yahoo stor."

For Greenberg and Kikkawa, the new eHobbies is not only cheaper to run. It's easier, too. Changes that used to take weeks, if not months, to negotiate clunky bureaucracy at the old company now can be done in hours.

"I feel so much more in control," Greenberg said. "We would have to politic and jump through hoops to get things done at the old eHobbies."

An example of that facility is a deal Greenberg worked out with a Yale professor who has become known at eHobbies.com as Dr. Doug.

Greenberg was searching the Internet for descriptions of a new remote controlled truck eHobbies had just ordered. He stumbled onto a hobbyist site ran by Dr. Doug, AKA medical researcher Doug Gelowitz. He called Gelowitz and by the end of the day had talked him into letting eHobbies use the content. It was a transaction that would have taken weeks and several lawyers to do at the old company, Greenberg said.

"We basically talked over the phone and I never signed anything," Gelowitz said. "I said he could have my content m exchange for some product. I trusted him. I gave him a chance."

RELATED ARTICLE: PROFILE.

Hobby Hub Inc.

Year founded: 1999

Core business: Retail hobby products such as radio-controlled vehicles, train sets, models and telescopes.

Revenues in 1999: $950,000

Revenues in 2001: $5 million (estimated 6/1/01 through 5/31102).

Employees in 1999: 175

Employees in 2001: 7

Goal: To reach $5 million in revenues.

Driving farce: Taking a realistic, ground-up approach in growing a business whose original idea had merit and wasn't executed properly.