The leading promotional products distributor is moving online with a big-bucks deal
When a leading business-to-business marketer drops 500% in market value within a year, slips badly off its revenue track, and is swamped by startup competitors, how does it stage a comeback?
By spending $240 million – more than a third of its annual revenue – on a year-old dot-com company with the improbable name of Starbelly.com. And by crossing its fingers.
At least, that’s how Ha-Lo Industries, the sales leader in b-to-b promotional products, chose to jump-start its business after two years of financial woes. And within this “brick meets click” saga lies a cautionary tale for b-to-b catalogers of every size: If you’re going to stay in business, you’d better think about the Web.
Make no mistake: In the b-to-b world, the Ha-Lo/Starbelly nuptials was a big deal. “It sent a shock wave through this business,” says Neil Sexton, former president of the Successories catalog and now CEO of Corporategreetings.com, which launches in June.
First, consider the two partners. For 28 years, Ha-Lo has relied mostly on a large group of field reps, armed with catalogs from 250 suppliers, to sell apparel, luggage, key tags, and other promotional gewgaws to corporate clients. (Ha-Lo also produces catalogs of premium and promotional items on behalf of such clients as Coca-Cola and Ernst & Young.)
Meanwhile, newcomer Starbelly.com (named for a rotund creature in Dr. Seuss’s The Sneeches) has been creating Websites of promotional products (known as Star Stores) for clients such as Foote, Cone and Belding. Starbelly also enables clients to custom-design and order product online.
Now consider the industry. Ha-Lo, founded by former high school coach Lou Weisbach (who started the company by selling T-shirts from a car trunk), is a $650 million distributor in a land of mom-and-pop T-shirt and trophy shops. “It’s the 800-pound gorilla in that space,” says Alexander Paris Jr., analyst with Barrington Research, a Chicago-based investment research and brokerage firm. With the addition of Starbelly’s technology, Ha-Lo will be able to develop “virtual stores,” customize product instantly from a database of items and logos, and speed up its sales and fulfillment process. (See “Starbelly’s master plan,” page 78.)
In short, an Internet deal of this size is proportionally akin to the Time Warner/AOL merger. “We see Starbelly as giving us tremendous first-mover advantage,” says Mike Linderman, president of Ha-Lo’s promotional-products division. “It’s going to take years for anyone to catch us in terms of the size we bring as a dot-com.”
Finally, though, consider the financials. Ha-Lo’s sales last year were 17% below analysts’ expectations; profits fell from $32 million to $4.5 million. Most of that resulted from restructuring costs and sales force turmoil following an acquisitions onslaught. Last year, the company’s stock collapsed from a high of about $25 a share in the winter to a low of about $5 a share in the fall. (It’s now about $10 a share.)
With its Starbelly deal, Ha-Lo is rolling all the dice on the ‘Net (albeit with a site that won’t be fully live until later this year). In March, Ha-Lo’s board named Starbelly founders Brad Keywell and Eric Lefkofsky president and “chief integration officer,” respectively, to oversee the e-transition. Linderman’s division, which accounts for 75% of the company’s revenue, took the name Starbelly.com. Four months earlier, Weisbach had kicked himself up to the chairman’s office, giving his CEO post to e-savvy John Kelley of Upshot, a promotions marketing company Ha-Lo bought in 1998.
The message: Ha-Lo has gone dot-com, big time. And surprise: Nobody thinks it’s a bad idea.
“If Ha-Lo hadn’t bought Starbelly.com,” says Ken Silverman, senior vice president of Chicago-based ABN Amro, a global investment banking firm, “it’s not difficult to imagine that half of Ha-Lo’s sales would go away over three years because clients would move to an Internet solution.”
“Ha-Lo made some tough decisions, but it did what it had to do,” says Paris. “It wanted to transform the core, stodgy promotions business, and it did with one fell swoop.”
No question, the ‘Net has transformed the promotions industry. That’s largely because 18,800 companies – according to Promotional Products Association International (PPAI) – currently play the promotional products game, ranging from T-shirt hawkers to Bob’s Trophy Shop to nationwide catalogers like Successories. “It’s a multibillion-dollar racket, and it’s not a winner-take-all,” says Sexton.
In principle, then, the Web levels the playing field for everybody. Search the ‘Net for “promotional products,” and you’ll now find everything from two-person embroidery shops to multimillion-dollar luggage manufacturers. “On the Web, a $250,000 distributor with the right setup and look can compete with a $300 million distributor,” says Arn Bernstein, news director/executive editor of The Counselor, an industry publication.
The Web, too, is a good deal for the industry’s clients. Instead of waiting five weeks for customized T-shirts from a local sales rep, Bob’s Dry Cleaners of Poughkeepsie, NY, can now tap a Website such as 4imprint.com and get 24-hour product delivery.
For that reason, “we all want to be the one-stop shopping point,” Sexton says. Don Libey, of Libey Inc., a Philadelphia-based mergers and acquisitions firm, agrees. “The battle for Web presence is under way,” he says. “This whole market woke up and said, `Whoever is going to be the Amazon.com of the promotions industry is going to be the winner.'”
Nobody, though, wants the crown more badly than Ha-Lo. “Look,” says Linderman, “it’s clear that the business-to-business economy is moving toward the Internet model. There was $43 billion in Internet business-to-business sales in 1999. The experts think it’s going to be $1.4 trillion by the end of 2003.” If Ha-Lo hadn’t made the move, he says, “we would run the risk that some of these Web start-ups would be taking business from us. So, yeah, it was an important move for us. But it was an easy decision, frankly.”
Why not build its own Starbelly? “We thought that would take too much time,” says Linderman. Besides, he admits, Ha-Lo is a brick-and-mortar business. “There’s no great example of an old-economy company developing a ‘Net solution on its own. Look at Time Warner – it spent a lot of money on its Pathfinder Website before buying AOL. We knew where we needed to be for the future, and so we went looking for a merger partner.”
Analysts agree that Ha-Lo was smart to pick Starbelly. Though it had few customers, Starbelly.com’s Web potential was solid enough to fetch $8 million in venture capital from Chase Capital and Flatiron Partners of New York. Had it gone public, analysts say, Starbelly likely would have snagged tens, if not hundreds, of millions of dollars more. “Starbelly had a head start and terrific backing,” says Silverman. “If Ha-Lo had said, `We’re going to build our own thing,’ it would have found itself competing with Starbelly.”
And that’s not a pretty picture to contemplate. Recently, Crain’s Chicago Business described Starbelly’s Chicago headquarters as “buzzing” with salsa music and impromptu meetings. Ha-Lo’s Niles, IL-based headquarters, meanwhile, is a yellow brick box in a sea of asphalt in a bleak neighborhood of strip malls and apartment blocks. There’s no salsa music buzzing anywhere and the chief decor in Linderman’s office is a wall-size photo of the Cincinnati Reds dugout, with the prominent red-and-white Ha-Lo logo on display behind the players. (Bulls fans also see the logo on chair backs during United Center home games.) All told, Ha-Lo Industries looks about as high-tech as a push-button phone.
Down the hall from Linderman is Ha-Lo’s nerve center, a showroom of glass cases spotlighting pens, vases, plaques, and crystal, alongside displays of T-shirts, shelves of baseball caps, and racks of tote bags and backpacks. Throughout the day, clients with expansive bellies and windbreakers walk the halls talking ball caps and “decorations” – the industry word for logo imprints.
Linderman, with a headful of cropped gray hair and comfortably clad in a knit polo shirt, has the look of someone who’s swacked more than a few golf balls with clients. At one point, he reaches into a black filing cabinet against an office wall. Instead of corporate files, you see piles of promotional giveaways: foam plastic “stress-busters,” lime-green notecard holders, and bright pink bendable worms. Linderman scoops out a handful of pink and green pens with the Starbelly logo and hands them to a reporter. “I love this business,” he says.
A merger of the old and the new
Sitting among scores of logoed mugs and T-shirts, it’s tough to picture an old-boy enterprise like Ha-Lo cutting it in the Web world. And, in fact, the high-tech merger hasn’t been easy to digest – not even for a company that’s swallowed a dozen other businesses in the past few years. “You see all those books?” Linderman points to a couch in his office, where three binders of documents form a stack about 18 inches high. “That’s about half of the material that’s been generated on this consolidation,” he says. “This represents our operation people and Starbelly’s operation people talking about the future state of the company.”
Certainly, the stakes on that future are high. In the $240 million deal, Ha-Lo paid $19 million cash and the rest in Ha-Lo stock. Among Ha-Lo’s competitors, “the reaction was, `Wow, someone got taken to the cleaners,'” says David Verchere, the CEO of Corporategear.com, a company that helps promotional distributors build Websites.
Some observers also say Ha-Lo’s timing was off, given that scores of promotional-products purveyors already occupy Websites of their own. And these aren’t just parking-lot hawkers trying out e-commerce. New competitors include former catalogers, like Sexton of Successories. And Branders.com, a Web company with no promotional-products background, launched in January with a high-tech gimmick: Customers can upload a logo onto the site to see how it will look on polo shirts and luggage. “We plan to be purely an Internet player,” says its president/CEO, Jerry McLaughlin. “We believe we built the best Website out there.”
“Ha-Lo, I think, was late to the Internet party,” notes Dick Nelson, CEO of 4imprint.com, formerly Nelson Marketing. Nelson’s company, which mails 1 million catalogs annually and has 130,000 clients, has been live on the Web since September. Starbelly’s site, by contrast, is still not fully live.
Psychologically, the Web transformation may also prove a big adjustment for a company that got its start in a car trunk. As a basketball coach, Lou Weisbach began selling T-shirts and hats in parking lots in 1972, then gradually expanded his product line and customer base. Through a network of product suppliers and salespeople, Weisbach penetrated the national market, building his company to $22 million in sales by 1992, the year of its IPO. (The name Ha-Lo originated from Weisbach’s mother, who named her Ha-Lo art supply store for her two sons, Hal and Lou.)
Since that IPO, however, Ha-Lo has been practically Napoleonic in its quest for industry dominance. By February 1999, for instance, the company had bought nearly 30 companies selling promotional products and services. Its conquests included not only product distributors, but also brand marketing companies, which improved Ha-Lo’s leverage with high-end corporate clients.
Ha-Lo’s expansion was well timed. The ’90s economy, points out PPAI spokeswoman Angie West, swelled corporate budgets and fed demand for more expensive tchotchkes. In the past, most promotional products were “trinkets and trash”; later, wealthier bosses began doling out Coach briefcases and leather jackets. As the promotions industry boomed 125% between ’93 and ’98, according to the PPAI, Ha-Lo’s sales exploded, reaching nearly $600 million in 1998.
But then Ha-Lo the conquerer began scaling back its operational infrastructure. In consolidating its acquisitions (six in December 1998 alone), Ha-Lo had to merge back-end operations, close 10 sales offices, shutter a warehouse, and lay off 200 people. It also changed its commission structure. Previously, all the field salespeople worked freelance, earning 50% of gross sales; Ha-Lo brought the reps inhouse, cutting commissions to 45% in exchange for benefits.
The result: “Some unhappy salespeople,” Silverman says. Dozens either quit or were fired, taking clients with them. Meanwhile, Market USA, a telemarketing business acquired in 1996, failedto produce the sales promised to shareholders. In July 1999, Ha-Lo lowered its annual revenue estimates from $780 million to $725 million, and announced a $30 million restructuring charge. By year-end, sales reached only $650 million, and profits fell 86%.
“In my view, the company grew out of hand,” Paris says – and the rest of The Street agreed. The stock tumbled from a high of $25 a share in January 1999 to a low of $5 a share in October. After recovering to about $12, Ha-Lo’s stock took another 22% dive on Jan. 18, the day that the pricey Starbelly.com deal was announced.
Since then, though, analysts have adopted a more sanguine view of Ha-Lo’s latest conquest. Most now agree that without a Web presence, the industry gorilla could have shrunk to chimp size.
“I raised my rating to a long-term buy in January, because management’s bold action was encouraging,” says Paris. “Ha-Lo is willing to make the difficult decisions and take the risk to participate in the new economy and new distribution methods.”
The question now is whether Ha-Lo can keep its gorilla reputation in that new economy. So far, size is in its favor. In an industry where only 2.5% of the players gross more than $2.5 million in annual revenue, Ha-Lo’s grand entrance on the ‘Net will no doubt make an impression.
On the other hand, some think Ha-Lo might end up out-Webbed. Companies like Nelson Marketing, Libey points out, have had more success in mail-order sales than Ha-Lo, which has primarily relied on its sales force. That experience, he says, might prove advantageous in moving clients to the Web. “Nelson has a big edge in technology and ability and history,” he says. “No matter what, you cannot beat history and existing profits.”
And going dot-com means Ha-Lo – like every other publicly traded ‘Net company – now has to show investors strong top-line growth for the next few years. The bigger the company, of course, the tougher it is to push the top line. “Last year was a difficult year for Ha-Lo, and 2000 is going to be a year of transition,” Paris says. “It has to deliver high revenue growth. If it doesn’t grow very fast, all bets are off.”
Mention all this to Linderman, though, and he shrugs. Already, the company projects that Web marketing will nearly double Ha-Lo’s revenue to $1.2 billion in 2002. The way he sees it, only Ha-Lo has what the other dot-coms would kill for: years of promotional-product distribution experience, long-time vendor relationships, and most important, a customer base.
“We know there are a lot of dot-coms out there with front ends, and that’s the end of their story,” he says. “And let me tell you something. If you think that just by having some front-end capability you’re going to be able to win business, you’re underestimating client needs. [Selling promotional product sales] is a complicated business, it’s a very demanding, very expensive business, and we didn’t develop this business overnight. For us to convert clients to the electronic catalog, to Star Stores, things of that nature – that’s the easy part.”
In Dr. Suess’s book The Sneeches, a crafty huckster wheedles Sneeches into thinking they need stars on their bellies. He makes a fortune. Ha-Lo Industries, with its own Starbelly.com machine, can only hope for the same result.
With its newly acquired Web division, Ha-Lo intends to make it easier and cheaper for its 20,000 business customers to design and receive corporate tchotchkes. Currently, Ha-Lo’s salespeople use catalogs to locate and order custom-decorated premiums. The Web won’t replace the sales reps, but it will likely replace much of their catalog use.
First, Ha-Lo plans to use Starbelly.com technology to build an online database of every one of its 100,000 products, every custom order, and every one of tens of thousands of clients’ business logos. That would let, say, Key Bank check out whether its logo looks better on the red or the green umbrella – something that can’t be done by flipping through a catalog.
The database would also speed up product searches. “If you want to find a left-handed widget in the shape of California, you could do it,” says Mike Linderman, president of Ha-Lo’s promotional products division (now known as Starbelly.com). Without the database, “you’d have to identify the widget’s manufacturer and then search through catalogs.”
Second, Starbelly will make it easier for Key Bank’s customers to buy those golf umbrellas. Currently, Ha-Lo prints catalogs of Key Bank premiums for the bank’s own use. With Starbelly, Ha-Lo can build Key Bank’s own online “Star Store” of polo shirts and carry-on bags.
Third, Starbelly should eliminate paperwork. Eventually, Ha-Lo wants corporate clients to go to the Website, rather than to a sales rep, to handle mundane matters like changing a mug color or checking on order status. That should free up Ha-Lo’s sales reps to spend more time closing sales and less time filling out forms. “We believe that once Starbelly is implemented, salespeople can spend 85% of their time selling, as opposed to the 35% they spend today,” Linderman says.
The snag: In business-to-business, sales reps and Websites traditionally mix like 8-tracks and CDs. “Ha-Lo’s going to have to deal with channel conflict,” says Neil Sexton, CEO of Corporategreetings.com. So far, all of Ha-Lo’s sales have closed through a field rep. In promotional-products distribution, “every salesperson is worried about online ordering,” says Alexander Paris Jr., an analyst with Barrington Research, a Chicago-based investment research and brokerage firm. “It threatens to disintermediate them.”
Linderman, though, claims that won’t happen, since most corporate promotion executives don’t want to waste time plowing through a database of product choices. He calls the Web a “productivity tool”: Sales reps can use it to find the right product quickly for their clients, shoot the order and artwork over to suppliers, and “blast through” paperwork.
What’s more, he says, the Starbelly.com acquisition gives sales reps a new product to sell. “We’ve had a positive reaction from our sales force,” Linderman claims. “There wasn’t one presentation I made where a salesperson didn’t say to me, “Gee, I’d like to sell one of those Star Stores right now.'”