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The digital dump

A new auction site helps companies sell damaged goods.

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by Elaine Pofeldt, FSB Magazine

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Beef liver was recently for sale at SalvageSale
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New gas masks were recently offered for sale on the site.

(FORTUNE Small Business Magazine) -- More than 1,000 gallons of blood plasma stored at the wrong temperature. A shipment of smoke-scented coffins. A railcar full of beef lungs. A hundred thousand damaged doorway peepholes.

It's hard to imagine who would want such things, much less buy them. But all of them have been sold on SalvageSale (salvagesale.com), an online auction site based in Houston that aims to do for the international salvage industry what eBay did for homeowners with attics full of junk.

Gallery: See surprising items for sale

The blood plasma, for instance - which became unfit for use in humans after the temperature in a storage facility fluctuated - sold for six figures in a private auction for registered blood brokers. The winning bidder needed it for lab tests that would not be affected by the problem. "In the past, they probably would have disposed of it," says Dan Parsley, 43, SalvageSale's CEO.

One man's trash

Since its site launched in 2000, SalvageSale has carved out a lucrative niche helping both insurance companies and their clients sell damaged shipments of commercial and industrial goods. When customers file a claim, insurers typically try to offset the loss by arranging sales of the items in local auctions.

If the damaged property is easily reused, such as a dented shipment of steel girders, this strategy may work. But finding local buyers can be difficult for, say, flood-damaged excavation equipment.

By helping sellers connect with bidders around the world - most of which are small companies - SalvageSale has expanded sales to nearly $70 million a year and is profitable. It expects to see growth in the near future from large corporations selling "end of life" assets such as obsolete computers through a division called CapitalAssetSale (capitalassetsale.com), which was launched in March.

SalvageSale sells more than 90% of the items it lists online by marketing its auctions to targeted groups of registered buyers around the world via e-mail, says Parsley. It has built a network of tens of thousands of potential buyers in countries from Colombia to Libya by researching members of trade groups and advertising in industrial trade magazines.

Customers around the globe

Particularly in developing countries, foreign buyers are thrilled to purchase and refurbish items that Americans might consider worn out or obsolete. In Latin America - the company's leading market outside the U.S. and Canada - and Asia, used construction equipment is in demand, as is secondhand IT equipment in Eastern Europe.

Parsley estimates that international buyer registrations are growing at about twice the rate of domestic ones. "Getting access to products in developing countries tends to be less efficient than in North America," he says.

Jerry Zak, 41, the owner of California Export - which, despite its name, is located in Prague - has bought from SalvageSale products that include metal-cutting machinery, Native American pottery, the complete furnishings of a Swedish hotel, and wristwatches.

His 50-employee company, which he says brings in $10 million to $20 million in sales annually, hires workers to fix the damaged goods for around $3 an hour. It then resells the goods for markups of more than 200% in Romania, Russia, and Poland, where new versions of these products are scarce.

In 2003 only 2% of SalvageSale's sellers were international; that number has grown to 11%. Many of the firms that arrange sales are multinational companies based in Europe.

W.K. Webster & Co., which handles marine-insurance claims for about 450 underwriters around the world, has orchestrated the sale of paper, wood pulp, industrial machinery, steel, and chemicals on the site.

According to John Redman, a London-based director in the cargo claims department, W.K. Webster lists items with SalvageSale when the claims are worth more than $25,000. Generally, he says, a sale of this size results in proceeds of $5,000 to $8,000 -around 30% more than a local sale. "There is something about the psychology of an auction that drives the prices up," he says.

Some items don't do well on SalvageSale, Redman acknowledges, citing the difficulty of moving damaged equipment from remote locations. For example, W.K. Webster was looking to sell an oil-drilling rig that ended up in a ditch in Tanzania after the truck that was pulling it crashed. There wasn't much demand for the rig elsewhere because of the difficulty of moving it to port. In such cases, SalvageSale usually suggests a local sale.

'Salvaging' funding

SalvageSale got off the ground in 1999, when venture capitalist Scott Crist, founder of Crist Ventures in Houston, teamed up with founder Charles Wilson, a salvage industry veteran. Crist was impressed by the business plan and invested an undisclosed amount.

He also recruited Parsley, a Houstonian who was previously a partner at CSC Consulting, the management and systems-integration branch of Computer Sciences, to become CEO.

Wilson stepped down in 2000, but Parsley, who received equity in the company, went on to attract $3.3 million in angel financing and another $17 million in venture funding from Securitas Ventures (a branch of Swiss Reinsurance), American Reinsurance, and Merrill Lynch Ventures.

Competing for damaged goods

SalvageSale isn't the only player in its market. eBay started selling commercial and industrial goods through its eBay Business site just three years ago, but its sales are already gargantuan compared with SalvageSale's.

eBay Business sold off about $4.7 billion worth of products last year. And besides having better name recognition, eBay charges less for each sale. The fee for a seller who unloads an outdated tractor is 1% of the sale price, to a maximum of $250.

SalvageSale's commission, by contrast, ranges from 12.5% on sales up to $300,000 to 9% for sales above $1 million. And eBay isn't the only competitor. Several rival auction sites target specific industries, such as Copart, a Nasdaq-listed company with headquarters in Fairfield, Calif., that sells damaged or recovered stolen vehicles.

But it may not matter if SalvageSale isn't the only player in the game. "It's not a winner-take-all market," points out Patti Freeman Evans, a retail analyst with Jupiter Research in New York. "The business-to-business side of online auctions is undeveloped right now. There's huge potential domestically and internationally."

A seller's market

To stand out from eBay and other rivals, SalvageSale has developed a business model to help sellers get fair market value for their goods.

While bidders on eBay can see who is bidding and how much each bid is worth, SalvageSale deliberately keeps this information under wraps, allowing bidders to see only how their bids rank. "Not knowing is a little bit frustrating," says Zak. "On eBay, you can calculate whether it's worth your while to bid."

Parsley says that obscuring that information helps sellers win fairer prices. "We've had plenty of cases where the buyer comes in and the highest prevailing price is $20,000," says Parsley. "Another buyer comes in, and the first bid he places is $30,000. On eBay, no one would bid $30,000 when he knows the current bid is only $20,000."

Adds Zak: "Most of the buyers would like to know how much the stuff was sold for." This complaint, however, hasn't been enough to keep him from shopping on the site regularly.

To give sellers an even greater chance of commanding a higher price, SalvageSale's technology also extends auctions automatically if there is a change in the first-place bidder within the last five minutes of an auction. On eBay, this practice of "sniping" has become so common that it has spawned an industry of startups such as Auction Sentry and PowerSnipe that, usually for a fee, will do the last-second bidding for you.

Since Fireman's Fund, an insurance giant, began using SalvageSale in 2001 to sell white elephants such as damaged bulldozers and industrial-sized coffeemakers, it has brought in significantly more money than when it auctioned them locally, says Scott Bowers, a claims director for the Novato, Calif., property and casualty insurer.

When contractors recently submitted claims for $1.9 million worth of equipment damaged during Hurricane Katrina, for example, the company sold it for $1.4 million on SalvageSale after rejecting a local bid of $950,000.

Fireman's Fund now recoups about 32% of the value of the salvage-related claims that its marine unit pays out annually by selling them on SalvageSale, up from around 14% before it used the site. "It's been a valuable relationship for us - there's no doubt about it," says Bowers.

Of course, if SalvageSale could come up with a way for big corporations to unload their scandal-tainted CEOs, it might find even more avid clients. But with accidents, natural disasters, and good old-fashioned American wastefulness creating an almost endless supply of smashed-up tree-stump grinders and poky Clinton-era fax machines, Parsley and his auction site should find the world market open for business.

Next: Gallery: 9 surprising items for sale.

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