Damark takes the long view

Mar 01, 1999 10:30 PM  By

What better way to retain customers than to make them members of a buyers club. At least, that was Damark International’s philosophy when it began refocusing its business on membership services last year. And although the strategy resulted in a fourth-quarter loss of roughly $10 million, some observers say that Damark’s long-term prognosis makes up for such short-term setbacks.

The Minneapolis-based marketer introduced eight membership clubs in the past three years. Four of the clubs-ValuePlus, which offers members the steepest discounts of all the Damark clubs; Gift Gallery, which sells inexpensive gifts; Budget Savers, which offers members grocery and product coupons, insurance discounts, and gasoline rebates; and Buyer’s Guard, which provides product warranties, low-price guarantee coverage, and product repair rebates-were launched in 1998. Damark’s other clubs offer discounts on travel, lodging, entertainment, and merchandise. All told, the $484 million company has 1.7 million club members who pay annual fees of $49.99-$109.99.

Calls to Damark went unreturned at press time, but according to the company’s 1997 annual report, club members averaged $8.18 in sales per catalog, compared to $3.38 for nonmembers. Combine that with increased competition from retailers, other catalogers, and Web merchants, says Walter Morris, managing director at Milwaukee investment research firm Robert W. Baird & Co., and it’s no surprise that last year Damark “cut down on its prospecting and made a strategic decision to concentrate on and grow its membership base.”

While membership fees provide an additional source of revenue for Damark-in 1998, they accounted for $89 million of total revenue-converting nonmember catalog customers to members costs money, with Damark relying in part on outbound telemarketing. Of a first-year membership fee of $49.99, acquisition and operating costs account for nearly 70%. And so last year’s emphasis on recruiting members is biting into the bottom line. In 1998, Damark lost $19.6 million, compared to net income of $6.3 million in 1997.

But the payoff comes in the second year of membership: Acquisition costs are eliminated, and Damark claims operating costs account for a mere 9%. Keeping that in mind, “Damark’s numbers aren’t as bad as they seem,” Morris says. “It needed to make a substantial up-front investment to build its membership programs. The growth will come from the membership side of the business.”-SO