Numbers Game Left Online Food Distributor Hungry for Sales

Two years ago, as David Fox was planning to spin out an online division of his 10-year-old food-distribution business, he found himself starting to believe what he now calls “the Internet hype.” Instead of focusing on accomplishing the same goals that brought success to L.A. Foods, his bricks-and-mortar business that grossed $23.5 million last year, he was caught up in a numbers game, counting clicks and sign-ups. It took a visit to his attorney’s office to bring him back to reality--just in the nick of time. Fox was interviewed by freelance writer Karen E. Klein.

Although I have been in business for 17 years, I have learned more with this company in the last year than I ever expected to. The No. 1 thing I’ve learned is the importance of distinguishing reality from hype.

The dot-com industry fed so heavily on hype early last year that it was easy to get caught up in our own preaching. But we found that even though you do have to be a bit of an Internet evangelist to run a business like this, you also have to be true to the basic principles that apply across the board in business.

Our other company, L.A. Foods, is a distribution firm that sells manufacturers’ surplus food products to local, state and federal government agencies, such as schools and prisons. Starting in mid-1999, we decided we needed to take the company online. It seemed like a natural evolution, and the need for the technology was obvious. Our customers loved the idea, and the federal government immediately embraced the plan. I started flying all over the country, doing presentations for customers and manufacturers, showing them what the site would look like and how the software would work.

In December 1999, we established Direct2Government.com as a separate company at which institutional food buyers could source product that would meet their specs online. The idea was to match up supply and demand, and our company would make a 7% markup for providing the service and processing the orders.

On May 1, we opened the Web site for business. We made a lot of news within the industry because we were the first real online distributor out there. Customer sign-ups started coming in: 35 in the first day, 100 in the first week. Manufacturers who wanted to list their products on the Web site were signing up in droves.

We quickly got caught up in maintaining the frenetic pace of increasing the numbers of members and suppliers on the site. By July, we had signed up 250 customers, and we had 180 requests from manufacturers who wanted to become vendors.

The problem was, we had virtually no sales. We shipped only 25 orders in the first month. We were signing people up so fast that we didn’t know who the suppliers were or what they were selling or even if their prices were competitive.

Because my partners and I were using $1 million of our own funds to build this business, we could not afford to make the mistakes that somebody who just raised $8 million of someone else’s money could. I believe that fact is absolutely why our company is still alive: It was our money and our company on the line, and we had to make the business real.

I went to my attorney’s office and told him what we were doing. He advised me straight out to stop the numbers game and pointed out that if we were running L.A. Foods like this, it would never work. His words hit me like a stone. L.A. Foods has one-third the number of active customers as Direct2Government has, but it’s many times more successful. My lawyer suggested we begin trying to get the customers we had to focus on buying the products our manufacturers were putting on the site.

Although it sounds incredibly simple, it was a revelation. It spurred us to get down to business and sell product. I immediately took all our new-account solicitors and familiarized them with our catalog of items. Then, I had them phone, e-mail and fax our members with lists of product highlights.

We took the employees who had been focused on soliciting manufacturers, and we had them go back to the manufacturers we had already signed up and rework their catalogs to sharpen their pricing.

Sales started to double every month, and we attracted manufacturers such as Hunt’s, Chiquita Brands, General Mills and Agrilink Foods. And as we built up our market, we found that the customers and the suppliers came to us without any effort on our part. Even though we do not spend any time finding them, we now have 455 institutions as members and 65 suppliers on our Web site.

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At a Glance

* Company: Direct2Government.com

* Owner: David Fox, Max Gold, Mark Davis

* Nature of business: Online food sales to government agencies

* Location: 7301 Topanga Canyon Blvd., Suite 200, Canoga Park

* Founded: 1999

* E-mail: dfox@direct2government.com

* Web site: www.direct2government.com

* Employees: 8

* Annual revenue: $900,000

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Recent Learning Curve columns are available at https://www.latimes.com/curve.

If your business can provide a lesson to other entrepreneurs, contact Karen E. Klein at the Los Angeles Times, 1333 S. Mayflower Ave., Suite 100, Monrovia, CA 91016, or at kklein6349@aol.com. Include your name, address and telephone number.