No more buyer’s Remorse

Mar 01, 2006 10:30 PM  By

It’s no secret that many of top multichannel merchants have created tremendous economic value through successful acquisition programs. For instance, Cornerstone Group, whose titles include Frontgate, Ballard Designs, and Garnet Hill, was built via acquisition — and last year it was bought by IAC/Interactive Corp.’s Home Shopping Network for a stunning 11.5 times EBITDA. Crosstown Traders is another example of a multititle mailer that, going back to its days as Arizona Mail Order, grew largely via acquisition. It too was acquired last year, by retailer Charming Shoppes, and its actual valuation including certain normalizing adjustments was also unexpectedly high.

But acquiring — or being acquired by — a company is not without its risks. We’ve all seen acquisitions gone bad. Sometimes the parent company loses the magic of the brand it acquired, which then ceases to have its reason for being in a crowded marketplace. And sometimes the acquisition was made solely to generate synergistic cost savings but the lack of a demographic overlap failed to provide any marketing benefits.

When approaching an acquisition, you should keep two tenets in mind: The acquisition should be primarily revenue focused, not cost focused. And it is essential to retain the heart and soul of the acquired business.

PLANNING THE ACQUISITION

The best way to ensure that your acquisition doesn’t turn sour is to be sure that you’re buying a company for the right reasons. The number-one goal of an acquisition should be to build sustainable revenue growth and to achieve incremental revenue benefits — not just for the acquired business but for the parent company as well.

If the demographic fit is right, an acquisition will provide new, highly productive names for your existing titles; conversely your existing database will provide productive names for the acquired business. These new names are much less expensive than rental lists, and the internal database of names should hold a wealth of information such as detailed purchasing and offer history not available from outside files. Potpourri Group coined the term “sister-name value” to describe the database synergies across multiple titles.

The second goal of an acquisition is to improve marketing and merchandising muscle. As your business grows through acquisition, you can afford to invest more in marketing and merchandising talent and technology. These investments will improve intelligent decision-making, all the while bringing down costs as a percent of sales. With these more sophisticated tools and talent, you can generate more contribution from every database name and every catalog square inch. Higher contribution then enables you to mail deeper into available names, driving further revenue growth.

The third goal is to develop the most efficient cost structure possible. Because of continually rising expenses, profitability requires a continuous cycle of cost reduction. Acquisitions can be the catalyst to tremendous savings: Greater volume leads to purchasing power and the ability to negotiate lower prices on everything from printing to merchandise. Combining the mail streams of the acquired title with those of the parent will also yield incremental postal discounts. Consolidation of contact centers, information and accounting systems, catalog and Website production, and even the merchandising and marketing organizations can yield lower overhead. If you have surplus warehouse capacity and product compatibility, you can save significantly by consolidating the new title into your fulfillment center.

Selecting the right acquisition is the most important decision and often times the most difficult, and here is where discipline is essential. Demographic fit is the key: You can take advantage of the sister-name synergy only if the acquired company matches the demographics of the parent firm. Historically, the most successful multititle businesses have excelled at this discipline. Cornerstone Brands, for one, strategically focused on its middle- to upper-income demographic when acquiring companies. Likewise, Crosstown Traders focused on acquisitions catering to middle- to lower-middle-income women, with a significant proportion of customers looking for plus sizes — a demographic that Charming Shoppes targets with its Fashion Bug, Fashion Bug Plus, Catherines Plus Sizes, and Lane Bryant retail chains.

Size is another pertinent factor. The company you’re considering should be appropriate to the size and capabilities of the parent business. A $200 million company, for example, should not underutilize its management resources to acquire a $5 million catalog. Conversely, overreaching on the size of an acquisition could result in financial risk and an inability to integrate or invest in the new company.

Finally, operational compatibility is critical if you aim to realize distribution center synergies. The size and the type of product should be compatible for integration into your fulfillment infrastructure. A gifts merchant that sells small items that can be easily picked and shipped should carefully study the issues around acquiring a furniture business, which would have a higher proportion of drop-ship and a very different picking configuration.

MAINTAINING THE SOUL OF THE BUSINESS

A successful direct marketing business will have some key factors that make it special: a merchandising philosophy, a unique style, an organizational culture that is reflected in everything from product selection to the page flow of the print catalog. It is often seen in the personal enthusiasm of those interacting with customers and in the vibrancy and innovation of special products that are not just individually unique but also work together to create a compelling lifestyle esthetic. Such a business builds a dedicated following by inspiring its customers in multiple and reinforcing ways.

The perfect outcome is for the acquired company to flourish in the lower-cost yet more advanced marketing and merchandising structure that a larger company can provide without sacrificing the special culture that made the company successful. Many times there is a founder, a merchant, or other managers who have a passion for the product or the business’s concept who were key to the company’s success; it is important to keep these individuals on the team wherever possible.

In fact, if a significant part of the reason for the acquisition is the strength of the company’s management, it may be imperative that these individuals remain and be highly motivated to continue to succeed. For that reason, one should be very, very careful about relocating the business, especially the merchandising and creative divisions, after you’ve acquired it. That’s why when Oshkosh, WI-based gifts cataloger Miles Kimball acquired frame and photo album merchant Exposures, it kept the latter’s merchandising team in Connecticut for years.

You need to delicately integrate the front-end functions of merchandising and creative. At Potpourri Group, for instance, all merchants or merchant teams report to a centralized supervising merchant to ensure that the company’s standardized product metrics form the backbone of each title’s planning process. In addition, centralized coordination ensures that best practices get cross-fertilized among the nearly dozen titles. But individual merchants have enough autonomy to maintain the spirit of the business. When Potpourri does not have the acquired company’s merchandisers, it hires a devoted merchant or team who lives and breathes the product, intuitively understands the “gestalt” of the title, and maintains a strong relationship with the brands customers.

Because merchants work closely with the creative functions, generally creative should be integrated only to the same extent as merchandising. At Potpourri, each title has an art director who works with the merchant/manager, gets to know the property, and works as part of the brand’s team. That person generally is wherever the merchant team is located. But the execution of some production functions, such as photography or prepress, generally can be integrated for significant savings in cost and time.

Growth of a multititle direct marketer through acquisitions is a proven method of building value. The key is to stick to your target demographic, be careful and deliberate with integration, and be very sensitive to maintaining what is unique about the companies you acquire. When looking to increase profit — the ultimate goal of most every business — you should focus on enhancing revenue before you look to cut costs.


Jack Rosenfeld is chairman of Chelmsford, MA-based $160 million Potpourri Group, whose catalogs include Back in the Saddle, The Stitchery, and Young Explorers; David Solomon is a managing director with the investment banking firm Goldsmith Agio Helms in New York and head of its specialty retail and direct marketing group.

SPEAKING FROM EXPERIENCE: Potpourri Group chair Jack Rosenfeld

Jack Rosenfeld

When deciding to integrate a catalog title into Potpourri Group, we strategically plan the integration of each function separately. We give each its own integration date and time line — marketing, production, warehouse, and contact center functions.

To create cost-efficient marketing, Potpourri successfully integrates marketing/circulation planning for almost all acquired titles under a centralized team immediately after acquisition. Every title is subject to the same break-even mailing policy, and each title benefits from the same list management and planning tools.

There will be occasions with an acquisition of a large title when marketing should not be integrated, because there are minimal savings in manpower. As with creative, even in nonintegrated, noncentralized environments, major synergies can be realized by sharing best practices and outside vendors such as database services. The integration of contact centers has also been executed fairly soon after acquisition. Our call centers are highly automated, and it is easy to handle orders from multiple titles at the same center.

On the other hand, we waited four years after the acquisition of our largest company, Catalog Ventures Inc. (CVI) to integrate our two warehouses in Whitinsville and Medfield, MA. During that time, we continually evaluated capacity, lease, and systems issues and decided to integrate only when it was clear that the savings outweighed the costs and risks involved. We planned the move about a year before it took place. We put the necessary people and systems in place, and the integration went well. By the second year after integration, the combined warehouse was more efficient than either facility prior to the integration.

To get the maximum cost savings from an acquisition, the acquired company should be on the same software platform. But installing a new system involves significant cost and potential risk, including a learning curve for key employees. In many cases, such as our acquisition of CVI, we operated on separate systems for several years before consolidating. If the acquired company has a robust, effective system, it may not make sense to save a few dollars and retrain an entire organization.