The Big Picture

Dec 01, 2004 10:30 PM  By

THE TWIN CITIES OF MINNESOTA are home not only to The Mall of America but also to scores of catalogers. So Catalog Age figured that Minneapolis-St. Paul was a great place to host a roundtable discussion on critical issues affecting the industry. We met with six marketers in September to talk about such weighty topics as the economy, use taxes, and what Amazon.com and George Orwell’s 1984 have in common.

The roundtable participants

Paul Meisel is president of Meisel Hardware Specialties, a cataloger of woodworking supplies based in Mound, MN.

Brian Smith is president of Fingerhut Direct Marketing, a general merchandise cataloger based in Minnetonka, MN.

Maggie Smith is president of New Berlin, WI-based Art Source, which sells framed art to builders, property developers, and other businesses.

Heather Sutton is marketing manager of Winona, MN-based St. Mary’s Press, a publisher of Catholic Bibles, textbooks, and religious education materials.

Joe Voellinger is Internet marketing manager of Rhinelander, WI-based Doctors Foster & Smith, a $170.0 million cataloger of pet supplies.

Brian Wright is vice president of direct-to-enthusiast for MBI Publishing, the St. Paul, MN-based parent company of the Classic Motorbooks and Zenith Books catalogs, which sell books for history buffs and transportation enthusiasts.

Catalog Age executive editor Melissa Dowling and special projects manager Heather Retzlaff moderated the discussion.

Economic ebbs and flows

Catalog Age: Let’s start with a big-picture topic: the economy. Are you seeing any evidence of a turnaround in your business?

Brian Smith: Our performance has been as good as or better than expected. From an economic standpoint so far, especially in the last six or eight months, it has been very good.

Brian Wright: We sell “want to” products; we don’t sell “need tos.” So I think our business probably is pretty indicative of what type of cash flow [consumers] have. Our business has continued to grow, actually, all through 9/11. Our direct business is down a bit; our average order size is down a bit from where it was a few years ago. But we’re not noticing a difference from our retail purchases. They continue to grow.

Joe Voellinger: We continue to grow as well. We’ve been used to double-digit growth almost every year for the last 20 years, and I understand that in the last year and a half we’ve got down into the high singles or low doubles. Fortunately for us, we’re kind of an economy-resistant type of product line because people are going to spend money on their pets no matter what the economy is like, and God bless them. It’s slowed, it’s definitely slower than it was a couple of years ago, but it hasn’t been real detrimental to our business and our growth.

Maggie Smith: We’re a business-to-business marketer, and we sell a product that’s also somewhat of a luxury — although not always, because you don’t open, say, a [retail] showroom without pictures in the room. I think it also matters that we only sell things framed, so our minimum unit is maybe $100-$125 as opposed to $10. We’re driven a lot by construction. Prior to January of this year and for about two years back, people weren’t building as many hotels, they weren’t renovating their hospitals, the federal government was not necessarily expanding dorm rooms for servicemen, all of which affect our business. We have seen enough uptick in all of that since around January; we’ve had a good year this year.

I also think our industry went through some consolidation. Some competitors went out of business during the recession, which helped us. And we opened a new division: We [began selling to furniture retailers] a couple of years ago, and it’s starting to pay off. So various things that we did have helped our business, and also I think the economy has picked up. We’re seeing a lot more construction and interest in expanding construction projects.

Heather Sutton: We market to the education field, people who need books for classrooms. Obviously that doesn’t really change when the economy changes. But during the whole 9/11 thing we noticed an increase in demand for some of our products because of what they addressed — dealing with things that are difficult for kids. And teachers and other people need training, but instead of budgets allowing for people to come in for training we have to package it in a different way and put it in books instead.

Paul Meisel: We used to have really, really high growth every year, and now we’ve noticed it’s flattened out a great deal. Most of our customers are older. We sell to the hobbyist woodworker who typically has a workshop in his basement or garage. We’re kind of waiting for the baby boomers [to retire and spend more time and money on woodworking]. I’m thinking, Wow, perfect. All these baby boomers are retiring, so we’ll see growth.

Catalog Age: What would you say is the biggest issue for your company right now?

Brian Smith: Because we’re more of a start-up situation [Fingerhut had stopped mailing for nearly a year before current management bought it from Federated Department Stores in 2002], continual funding of the business is by far the most important, along with customer acquisition. We’re growing our list. Those are the most important things we’re working on.

Wright: Probably at the highest level it’s growing our profit margin. We sell a lot of our products to retailers as well as to consumers. But specific to direct mail, between printing and postage it is just a huge chunk of expense on an annual basis, and that’s a real challenge for us. Then you’ve got other costs. We try to drive orders to our Website so that the enthusiasts don’t have to pick up the phone. But you still need a 1-800 number. And to staff a 1-800 number is expensive. There are certainly outsourcing opportunities for that, but we’ve chosen not to do that at this point. But there are some big, chunky costs associated with our direct division, and that’s a real challenge to our overall company goal of growing that profit margin.

Voellinger: I would agree that increasing profitability is high on our list. We’ve kind of been focusing on the growth side of things for so long that we’re there, and now it’s like, Okay, we’re big. But as we grow incrementally, profitability is not growing incrementally, so it’s [a matter of] looking at the expenses, and part of that is the whole integration of Internet and catalog, trying to figure out basically — and I think this is something where all catalogers are in the same boat — how do we learn from the Internet? How do we use the two together effectively? How do we reduce our circulation without hurting our sales and utilize the Internet or e-mail, which is obviously a much less expensive way to communicate?

But we’re kind of at the beginning of the whole testing phase. As far as if we send fewer catalogs to Internet-only buyers what’s the effect on sales and will we be able to still generate the sales, we haven’t figured that out yet. I think that’s going to be one of the big struggles. And it comes right back down to profitability because the more catalogs you print, the more prospecting you can do, but the more expensive it is. Being tried-and-true catalogers for 20 years, I think we have a reluctance to reduce the number of catalogs that we send and to pump up the e-mail campaigns.

Maggie Smith: We have gone through 18 months of really looking at profitability and doing a whole bunch of things, one of which was outsourcing our manufacturing — getting out of the manufacturing business and becoming a virtual business — and that has seriously affected our profitability in a good way. Now we are in the process of saying, We need to grow sales, we need to grow the revenue line because the expense line is in a strong position, so if we can grow that then half of it falls to the bottom line.

One of the things we’re looking at is strategic mergers with some other companies that are somewhat noncompetitors, because we feel that our industry may be somewhat right for some consolidation. We don’t want to be left behind; we want to be one of the players. It’s a challenge to even think about how that would work, much less to bring it on.

Sutton: One of our biggest issues, and I don’t want to say it’s a challenge as much as it’s become an opportunity for us, is branding and making sure that how we look in a catalog is how we are in the trade show. We found that in keeping the brand work in front of us and making sure our customers can relate to us as a personal company and not just the product we offer them, we had a tremendous increase in our sales…. It’s really driven the profits in a way that I don’t know we really expected when we started doing a lot of branding work.

Voellinger: Branding is also at the top of our list. As I travel the country, any time there’s a group of 10 or so people I’ll proffer the question, “Who’s heard of Doctors Foster & Smith? ” And if I get one out of 10 people who’ve heard of Foster & Smith that’s average. And I’m like, Man, all we’ve got to do is increase that by one or two points. We’re the type of company that has a really loyal customer base, we have wonderful customer service, we do a lot of things right, and so it’s like, Let’s just get more people to know who the hell we are, and we’re going to really grow. We embarked on our first national television campaign, which is not something that a lot of catalogers do. One of the intents was to get our name out there, to get more people to know who we are. But branding is central to all of us — letting people know who we are and what we stand for.

Maggie Smith: Do either of you have an active PR effort?

Voellinger: I’m kind of the PR guy for the company as well, and that’s a huge opportunity, particularly for us. It’s a lot easier for us because people love pets. We don’t do a good enough job at it, because there’s just [not enough] resources, but any time you can get free ink in the consumer [publications], or in the trade pubs if you’re a b-to-b, I think that’s key. PR is a full-time job if you’re really going to pursue that effectively, and I think for most companies it’s one of the first things to go in tighter times like probably a lot of us are experiencing now. And it’s tough to measure every dollar that you spend in PR, and how you track that back to sales to justify the efforts is not an easy thing to do. I think it takes an enlightened ownership or management to really understand that there are benefits from a branding, as well as sales, standpoint in PR.

Maggie Smith: I picked up a new book by [Al Ries and Laura Ries] called The Fall of Advertising and the Rise of PR. And that’s the whole shtick, that advertising doesn’t do it anymore, there’s too much out there, we’re all just kind of ignoring it, and that PR is really the way to be going here in terms of putting your effort behind it.

Meisel: Joe said a couple of things that I totally agree with. One is what do you do between the Internet and the catalog — what’s the cocktail, as you mentioned? What’s the formula exactly? We offer a 10% discount just for ordering on the Web. We figure it will get more people onto the Web, which is less expensive for us because [to take telephone orders] you’ve got to have operators on duty all the time. And if we can lower the number of catalogs we print and get more people onto the Web, we figure that’s going to save money right there. But again, it’s figuring out the best ratio or whatever.

The other thing that Joe mentioned and I totally agree with has to do with name acquisition and new customers. How do you get new customers? Last year we mailed close to 3 million catalogs. I’m going, How many people are there in the United States? How many families are there in the United States? We do have a lot of customers, but how do you get more? There are all these different ways to do it, like getting involved with more press releases with the woodworking magazines that our customers would read, working more with tool distributors. So I think our challenge is to continue to increase our customer base through more-creative ways rather than just list rentals and mailings, mailings, mailings.

Brian Smith: I’d be curious to know what other people are doing [to get new customers], because as we started this company we were acquiring new names. Ninety-nine percent were through catalogs mailed out, and as we saturated that — not completely, but began to saturate that — we’ve gone more to search engine optimization, e-mail campaigns, affiliate marketing. In the next couple of months it looks like we’ll be up to probably, gosh, 20%-25% of our names [will have been] acquired over the Internet. We actually can see that going up toward 50% depending on how successful the programs are next year. We’re pleased with where we’re at today in terms of not just mailing out catalogs but having someone come to us who wants a catalog or wants to order over the Internet.

We offer three options. You can order over the Internet. You can get a catalog e-mailed to you, because you can produce an e-mail catalog at about $0.03-$0.05 a catalog as long as you’ve already got it on paper. Then there’s the paper catalog. We’re going to start charging new customers for it when they request it. You can get a free e-catalog, or you can pay a small fee [for the print version], but then you get a coupon for $10. So if you’re actually going to order, it’s a very good deal.

[For Internet customers] acquisition costs are dropping pretty dramatically. We’re just wondering what quality will those customers be.

Wright: We’ve tried search engine marketing and search engine optimization. It definitely generated some activity, but it didn’t come anywhere close to paying for itself. Granted that was on a one-time basis.

Voellinger: Are you talking about pay-per-click search engine optimization?

Wright: Yup. But also making sure that the Website is written so that all the spiders catch it. And that can always get better. That’s a continual thing, a baseline thing that you have to make sure your Website is written in such a way. But pay-per-click didn’t really net out for us.

One of the other things we’ve done to acquire new customers — and it’s because we sell kind of niche-oriented products — is [target] people when they join a club. For instance, if they join the Corvette Club of America, since we have 96 books about Corvettes, anybody who has dipped in his wallet and said, Here, I’m staking a claim. I want to be affiliated with this club, those are the people we want to get to. So that’s been probably our biggest customer acquisition initiative since I joined this company about a year and a half ago.

Maggie Smith: Do you buy the lists?

Wright: We will sponsor a club, a national club, where we’re getting tens of thousands of names. And because all these clubs have monthly or bimonthly magazines that they’re sending out, [we'll get] a free full-page, four-color ad in the magazines and also a link from their Website to ours, use of their mailing list, and ideally e-mail addresses. That’s done pretty well. We haven’t done a lot of list acquisitions. The two years before I came they did none, and we really did suffer from that. I think that’s a bit of why we haven’t grown in our direct group as well as we would have liked to.

Voellinger: We’ve had the opposite experience in terms of Internet marketing. We have a pretty aggressive pay-per-click-program. We offer 50,000 SKUs. Our pay-per-click program is, from an acquisition standpoint, not a cost but a profit center for us.

We are just embarking on a search engine optimization campaign for our Website, which I anticipate will increase our traffic by 300% easily. I look at the Internet as a marketer’s dream come true because people come to you to find your product. You don’t have to rent that list to go find them; they go online.

Think about the Internet. What people are primarily utilizing the Internet for these days is information or research. So if I want to buy a dog bed or a cage, and I want to learn about it, where am I going to go? I’m going to go directly to the Internet and type in “dog bed.” And you can buy a position with pay-per-click, and if your site is optimized, you appear high on the list, and you’re going to get that new customer.

I think the whole definition of what is a new customer in the catalog industry has got to change now with the Internet. We tend to think of a new customer as someone who hasn’t ordered from us in the last three years. Well, with the Internet and the loss of loyalty, I believe, among consumers, if somebody goes online, I don’t care if they’ve been a loyal customer of ours for five years or three years or whatever, if they’re going online and typing in “dog bed,” and we get them to come to our site, in my book, that’s a new customer because otherwise, why didn’t they come directly to us? So to me every new customer that comes to us through a pay-per-click program I want to consider as a new customer because they were going to go to my competitor if we weren’t there.

I don’t think e-mail marketing from an acquisition standpoint has panned out as being real profitable at this point. But I think as catalogers we are vastly underutilizing the Internet as a list source. The beauty of the Internet for consumers is if I’m into Corvettes, maybe I’m going to go online and there are 50 sites that target the Corvette buyer. Whether it’s chat rooms, discussion boards, information sites, whatever, all those people you’re targeting are segmenting themselves for you by going to these target sites. Not everybody online is collecting physical addresses, but a lot of them have e-mail newsletters so at least they’re getting those e-mail addresses.

And this is the other beauty of the Internet, if they’re online searching, there’s a greater likelihood that they’re also buying online. You prequalify them twice, not only as interested in your particular area but also as direct buyers.

So I think that the Internet is going to be, and is already, a primary acquisition tool. And your Website in general is, in my opinion, your most important prospecting tool because as those people come, if you convey a good image and a good product and a good price, they’re going to become a customer of yours. I think the Internet has become very critical.

Catalog Age: Have you found customers resistant to price increases because of rising fuel costs?

Wright: Part of it, I think, is how you communicate to your customers. You can try to get [a price increase] in under the radar screen, that’s fine for some, or you can just say, We all know the cost of goods has gone up, and as much as we hate to increase, as much as we hate to pay more for things, we just have to do that.

Maggie Smith: I’m wondering if you just do it a little tick here and there if they even notice it. I have a product that no one knows what it’s supposed to cost. You can go to Target and it costs $8, or you can go to a gallery and it costs $250, and from me it costs $125.

But shipping is something that they do mention a lot. And I have a big, heavy product that’s breakable and has to go in a box that protects it. So we charge $14 a picture for shipping, and that puts us at a disadvantage with the local guy, and that’s our primary competitor. An art gallery you can go down the street, however, he’s selling at $250 what I’m selling at $125, and I don’t charge sales tax and he does. I kind of offset it a little like that, but it’s probably shipping that people mention the most with my product.

Voellinger: One negative from a shipping standpoint, you’ll see beginning around October every year an increase in the number of catalogers and online retailers that give free shipping. I think that is very detrimental to the industry because we are conditioning the consumer to expect free shipping. I’m talking about free shipping offers for an extended period, not isolated promotions. A lot of consumers are beginning to think, Well, I’m not getting free shipping, so I’m not going to order that. And we as catalogers need that shipping [fee], otherwise there goes our profits right there, right now.

Meisel: I think I read a year or two ago about a big cataloger that tried free shipping and it didn’t really work out for them. Sure they got some more orders, but what with the added cost they weren’t going to do it again.

I sell books in my catalog, though not very many of them, mainly because they’re not very profitable. I can’t put in a thin book that’s expensive. I just can’t do it. My customer won’t be happy. I’d betray them. So I’m really, really sensitive to what they’re getting for their money, and I want to make sure it’s an excellent book before it goes into my catalog.

Catalog Age: Is anyone concerned about legislation that might affect the industry, such as use taxes?

Maggie Smith: I’m concerned about Internet sales use tax. [The lack of online use taxes is] an advantage I’d hate to see go right now. In the furniture industry, which is kind of the industry I’m in, China is a huge issue. The Chinese in the furniture business are seriously putting pressure on furniture manufacturers to lower prices.

Brian Smith: The United States furniture manufacturers are going out of business.

Maggie Smith: You go to High Point [the town in North Carolina that's the center of the furniture and home textile markets in the U.S.] and there is nothing in the papers that isn’t about the Chinese challenge.

Voellinger: I think the complexity of the tax system right now is working in our favor as direct marketers. I think the industry lobbyists better not let their guard down. Luckily the top echelon of government is supporting the direct industry and not really pushing too hard for a national sales tax and things like that. But that could change easily. And the states are also hurting big time for cash, and if they can get a piece of everything that goes into their state from afar that would alleviate a lot of concerns. There’s definitely pressure that’s being put on. But I think so far, cross our fingers and hope, we can keep those wolves at bay.

I guess I’ve always had a problem with spam in terms of rules that you can’t send e-mails to this or that person. Wait a minute! Forever we’ve been filling up everybody’s mailbox with a paper product. There’s no restrictions as to what and how much we can pack the mailbox full of, which is I think even more cumbersome to get rid of and is from an environmental standpoint killing a lot of trees, as opposed to you send out an e-mail and if somebody doesn’t want it, click.

Brian Smith: There are a lot more barriers to sending mail than there is to sending e-mail. Mail you’ve got to pay postage, and e-mail for a penny or so you can get one off, so I think that’s where abuses happen.

Catalog Age: Let’s finish with another big-picture question. Where do you see the industry in five years?

Maggie Smith: It’ll certainly be a lot more sophisticated on the Web. There’ll be much more analysis to lower our costs, many more people we can hire who are very experienced on the Web. Right now there’s not a lot of people I can hire who have a lot of experience. Certainly I think the customers will be a lot more sophisticated and a lot more comfortable in buying on the Web and buying from e-mail newsletters.

Sutton: I think there’ll definitely be a continued decrease in the amount that people print, but I definitely think that print is still going to be around. And I think that there’s going to be a greater synchronization between the channels that people use and how companies use those — you know, your Web looking a lot more like your direct mail.

Meisel: I think we’ll still see catalogs, but we’re seeing our Internet sales grow about 10% a year, so project it out five years, we’ll probably print less catalogs.

Wright: I think paper catalogs will still be around as long as the market is willing and wanting it. However, as the people who are 20 become 25, and 35-year-olds become 40, the market is going to be so much more electronic based. I bet we will all be printing a fraction of the paper catalogs we’re doing right now. I think the electronic sales tools will be so much beyond the PC. You think about cell phones and in-car digital systems and things that we haven’t even thought of. You think back five years ago, what exists today that didn’t five years ago in the electronic world? I just don’t think we can even predict the way that we’re going to be marketing and selling our products in five years.

Maggie Smith: I also think that the big generic catalog that has everything in it will be far less likely to be seen than the little niche catalog that is really kind of a teaser with a very targeted mailing directing you, if you want to see more, to go to the Internet. So you’re no longer having to produce these really big things. You’re instead producing, say, a 20-page catalog for senior pets that costs less to mail, costs less to print, and has all over it “come to our Website for more stuff.”

Wright: And I think the database tools that we all use will be that much more sophisticated, enabling us to get that information quicker as well as more economically. The Web analytic tools that are relatively young right now will be so much greater, enabling us to be so much more efficient and quicker in responding. I mean, direct marketing is direct response, and it’s not only a response from the customer to us, but us to the customer as well, that I think will grow incredibly in five years.

Voellinger: I think technology will be a driver of what happens in five years. A lot’s going to depend on how big that pipe is into everybody’s home. If everybody has a DSL or a T1-type connection at home, I think that’s going to vastly affect how we all market our products. I don’t think it’s going to happen in five years, but within 10 years as that pipe gets big I think all of our Websites are not going to be the slide shows they are today. Think about how wonderful it would be for all of us, how much more you will be able to sell if, as opposed to going to the current Internet site, you can go to whatever product page on your Website and click a button and have an actual 30-second or 60-second commercial for that product where you can say, Here’s our cage, here’s how it folds down, see how easy that is.

I think within five years, within our industry as a whole, we’re going to get more sophisticated [about] utilizing the Internet and the catalog together and figuring out how many times do we mail that person a catalog opposed to sending an e-mail or postcards to drive them online. I think we’re going to figure it out better within five years, and that’s going to increase all of our acquisition, profitability, and all the ways we prospect.

Maggie Smith: I’m sure there’ll be much more of a personal experience. We’ve all gone to Amazon.com and it’s said, “Hi, Maggie Smith, welcome back. We see you like mysteries and business books.” And you think, Yeah, Big Brother. But there is a nice thing about that, which is that I don’t have to go through the whole Amazon site. Of course that [level of personalization] takes big bucks, but it won’t always. We’ll all be doing more of that: “Oh, you’ve got a cat as opposed to a dog. I won’t show you any dog things. You get your own little site with just cat things.”