Welcome to Value America, the Internet retailer that is expanding so fast it even stuns its founder, Craig Winn. The company is now selling the products of 3,000 brands in 30 different consumer, office and technology categories through its online store. Shoppers can click on any item in the store to get a multimedia product "demonstration" or description of its features, a kind of infomercial right at the point of purchase. For now shoppers can sign up for a free membership, which gets them a discount on all items in the store. Orders are sent to the manufacturers, most of whom ship the product directly to the customer the next day.

Winn says he developed the concept for Value America 23 years ago — a concept he now calls "convergence commerce." It brings together the telephone, television, PC and print to help customers shop and spend. In the meantime, he helped revolutionize the retail environment in another sphere — by working with Sol Price on the concept behind the Price Club.

Now, though, there’s a little office park off U.S. 29 where Value America is bursting at the seams. Employees park their cars bumper to bumper along any available stretch of legal space. One-person offices hold three people. Impromptu meetings are held anywhere there’s room.

Two years ago, Value America had a staff of a dozen. The company has grown so fast, its employees — 500 and growing as of the fall — now occupy 12 buildings in central Virginia.

Despite the crowded quarters, people still want to work here. They sense they’re in on the ground floor of something big. Soon, they might actually have a big ground floor when the company builds a new headquarters, slated to open later this year, on 95 acres in Albemarle County.

Winn, a California boy, looked around the country and selected the Charlottesville area as the home for his new venture. He brought his family, as did several West Coast colleagues who followed. "Small-town America is a catalyst for being able to build esprit de corps. You can’t do it in a big city," he says.

"He’s a walking billboard for the community," says Aubrey Watts, director of planning for the city of Charlottesville. Best of all are Winn’s testimonials. "He’s going around the country saying he left California to come to Charlottesville. That’s giving us name recognition and identity."

Virginia and Value America benefit from Winn’s vision and his ability to surround himself with intelligent and dedicated employees, certainly, but there’s no question, whether by luck or design, his timing is right. The company has been riding two waves — a soaring consumer willingness to buy products via the Internet, and a red-hot economy that is making consumers willing to spend.

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Winn has an announcement: "We’re closing the digital divide." It’s one example of Value America-speak. So are phrases like "convergence technologies" and "friction-free commerce." Perhaps they’ll make it into business lexicon, but for now Winn explains their meanings.

Friction-free commerce exemplifies the philosophy underpinning Value America’s relationship with manufacturers. Retailers seeking the highest possible profit margins try to get manufacturers to lower their cost. Value America does it differently, Winn says. It gives manufacturers a direct line to customers, essentially handling the back-end e-commerce for manufacturers.

Because Value America keeps no inventory, it has lower overhead and potentially higher margins. Winn notes that even the tightest inventory management contributes about 10 percent to a business’ expenses because of warehouse space, staffing and the cost of inventory itself. Value America also provides product manufacturers better display space through its product "demonstrations" and gives them direct access to buyers.

So why isn’t everyone adopting this inventory-free system? "Ultimately it’s much more difficult to create a solution that links a consumer directly to the manufacturer," Winn says. Value America sunk a lot of money into developing the concept. With more than 600,000 members signed up, the numbers are starting to look good: Revenues for the third quarter of 1999 were $57.6 million, up 269 percent from the same period a year earlier and a 61 percent increase over second-quarter revenues. While the company has yet to show a profit, its gross margin increased from 3.6 percent in the second quarter to 6 percent in the third quarter, and operating expenses as a percentage of sales fell from 82 percent in the second quarter to 64 percent in the third.

The trends may look good, but from there the picture gets fuzzy. In April 1999, Value America raised $115 million in an initial public offering. The company went public with an offering price of $23 and shares opened the first day of trading at $63. As of mid-December, though, the stock was trading at $10.50.

Recent actions also point to a management shakeup. The company doesn’t offer substantive answers, and observers don’t want to talk. Just before Thanksgiving Glenda Dorchak was named chief executive officer. She replaced Tom Morgan, who after about nine months left for "personal reasons," according to a Value America release. Only weeks earlier, Winn had said in a conference call that his company’s growth is linked in part "to the strength of our management team led by Tom Morgan" and that Morgan "had the focus necessary" to build a Fortune 100 company.

And while Winn still owns more than half the company, Wolf Schmitt, retired chairman and CEO of Rubbermaid Inc., replaced Winn as chairman of the board. Winn, who remains chairman of the executive committee, did not respond to Virginia Business’ queries regarding the management changes.

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Value America wants to open its online store to a new kind of shopper, Winn says — the one who hasn’t been able to buy a computer and get online. In August, Value America launched its first "convergence presentation" on television. The 30-minute spot showed viewers how the store is set up and how to get around in it. In addition, the presentations featured a call-in offer: Buy a multimedia PC with Internet connectivity, a one-year warranty, 24-hour tech support and a bunch of peripherals with no money down and financing through a Value America partnership. Pay $24.95 per month for 39 months, or buy it outright for $699.

It was a gangbuster in terms of success, says Winn. On the first weekend, the company generated $25 in revenue for every dollar spent on advertising. The company has always devoted a lot of money to newspaper advertising and has become one of the nation’s biggest spenders in that medium. Newspapers reach an affluent and educated audience, but they don’t get to the larger market that Winn covets, those millions of consumers who haven’t joined the Internet age. That first weekend, Winn says, the company sold a couple of million dollars worth of computers — 80 percent of them to people with no or low credit.

Winn, the businessman, can talk like a champion of the disadvantaged. He speaks passionately about the "digital divide" between the haves and have-nots of computer owners. "It’s that digital divide that will keep the disadvantaged dependent."

Value America was among the first companies to advertise offline to drive customers to the Web. The company spent $16.2 million on all media advertising in the third quarter alone, and its effectiveness at advertising continues to grow. In the second quarter of this year, the company generated $2.30 for every dollar spent. In the third quarter, it grossed $3 per dollar spent. The company says it is getting more efficient with its advertising dollars. The third-quarter report notes that electronic direct mail is driving repeat purchases among existing members. Winn expects the return on advertising dollars will climb higher when the company transitions to direct marketing in the second half of the year.

That’s done through an affiliate program, which allows charities, religious groups, schools, trade unions, universities, community groups and other organizations with Web sites to sign on for free. The group displays a Value America spot on its own Web site and receives a 3 percent to 5 percent commission on any purchase that link generates. Value America has more than 40,000 affiliates participating.

In November the company an-nounced a marketing agreement with Federal Express Corp. that will give access to the superstore on the shipping company’s Web site. As part of the deal, FedEx couriers delivered 500,000 "FedEx MarketPlace Presents Value America" catalogs to its customers. The site and catalog will feature 300 items FedEx will ship free of charge.

Value America’s strategy is a relatively new way of doing business, and it’s extremely effective, explains Patricia Travaline, vice president of marketing and communications of Be Free, the Marlboro, Mass.-based company that provides the back-end infrastructure that makes these arrangements possible. She explained that the first Internet evolution was that retailers wanted to be on the Web. "The feeling was, ‘If we build it, they will come.’ But that wasn’t the case. You have to drive traffic to your site. So retailers started buying advertising space on the Web, but couldn’t track how effective those ads were." Enter Be Free, which allows the retailer and the affiliate to check on the progress of sales, change the spots that they want to feature and still maintain direct contact with each other. For the retailer, it means they can precisely measure how effective their ads are and what works where. For the affiliated organization, it’s free money.

And for product manufacturers, it’s a safer bet. Winn notes that vendors would rather provide co-op advertising money for direct-mail advertising than for Internet-based advertising. So this fall, Value America will negotiate special deals for its affiliates’ members, obtain the mailing lists of these members and let them know what’s in the store. Winn anticipates at least a $5 return, and possibly a $10 return on every advertising dollar spent this way.

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You’ve got to hear the sermon. "Craig Winn is a little like an evangelist. After you hear him talk, you almost want to give him money," says Alfred C. Weaver, a computer science professor at the University of Virginia.

Some have done just that. Co-founder Rex Scatena, an environmental lawyer, provided start-up funding and now serves as vice chairman and general counsel. Ken Power, Value America’s creative director, says that within the company, they have a name for this intoxication: "drinking the Kool-Aid." He’s among the imbibers.

Power first met Winn about four years ago in California while working as an independent graphic designer. Power recalls being summoned into a client’s conference room, where Winn had just been hired as consultant. All the company’s graphic work was laid out on tables. "He didn’t seem pleased, and I had the feeling he was interviewing me just because he was being thorough," Power said. So Power said the only thing he could: "I’ve done some of my worst work for this company." That confession intrigued Winn. Power explained that the company’s executives had tinkered with his designs after he was through. Winn also was satisfied that Power knew good graphic design, and the two worked together on this and other projects.

In late 1995, Winn called Power and said he was planning to start a new company. He brought over the business plan and after reading it, Power was amazed. Again, the two worked side by side developing the logo for Value America and then the look and feel of the "store." Together they hashed out the copy, explaining — more to product manufacturers than to potential buyers — that this concept would allow them to stress their quality and not just sell on price.

By this time, Power was enthralled. Winn enticed him to become part of the company with a salary offer and "a wheelbarrow load of stock options, which weren’t worth anything at the time." Even when the bargain involved moving away from California to a place he’d never heard of, Power had enough confidence in Winn to pull up and come east.

Does everyone buy into the Value America concept this easily? "They do when they hear Craig Winn explain it," Power says.

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Winn calls his company "radically different" from any competitors — online or traditional. Is it? U.Va.’s Weaver, director of the 12-member Internet Technology Innovation Center established by Virginia’s Center for Innovative Technology, says that in its totality, it is. "Individually, you can find companies that are doing some piece of it. But collectively, he’s done more than anyone else I can name. He could fairly claim the totality is unique."

People tend to search for superlatives when they describe Value America. Weaver calls it "certainly the boldest, brashest attempt at e-commerce that we’ve seen." And, "He’s been spending boatloads of money on traditional advertising in order to generate online revenues, and he’s been more successful at that than anyone else I know."

Whether that excitement will remain high is tougher to gauge, says Weaver. "Since the Internet is a pretty democratic environment, the question is whether he’ll be able to install brand loyalty for Value America."

But Winn explains it differently. "We don’t believe anyone owns the customer," he says. "It is essential, in our view, to serve the brand so we are empowered to serve the customer."

If the strategy works, Winn expects the company could have revenues in the tens of millions of dollars this year to perhaps a billion dollars two years down the road. When asked how big Value America could get, his response is: "How high is up?"

Forrester Research Inc., a Cambridge, Mass.-based research firm, puts Value America fourth in its ranking of general merchandise e-commerce sites, behind Amazon.com, Wal-Mart and QVC. Forrester noted in October that the company’s "low prices compensated for numerous site design problems."

Amazon.com spokesman Bill Curry says the company doesn’t comment on the effect any other company has on e-commerce. "Our philosophy is to keep our attention focused on customers rather than competitors. ... If we please our customers, it really doesn’t matter what others do." Curry adds that the retail market is huge and there’s room for competition.