Growing pains

Oct 01, 1998 9:30 PM  By

It’s no coincidence that many entrepreneurs call their catalogs their “babies.” Like their human counterparts, no two catalogs ever seem to grow up in the same way.

Some catalogs, like astronomy equipment marketer Orion Telescopes & Binoculars, have cooked along for 20 years with moderate sales and comfortable profit margins. Some, like teen clothing catalog Delia’s, have roared through infancy, making the transition to multimedia conglomerate within a handful of years. Some have taken more than a decade to start clocking off consistent profits; others, like J. Crew and even L.L. Bean, hit major snags after years of corporate greatness.

What they’ve all had in common, though, are growing pains. Some catalogers call them “lumps.” Some call them “stair steps.” “I call them knotholes,” says Donald Libey of Libey Incorporated, a direct marketing consultancy and acquisitions intermediary. Whatever they’re called, these transition stages are the points at which catalogers generally require investment: leasing new catalog warehouse space, hiring a senior vice president of marketing, overhauling a database management system. And generally speaking, the financial investment tends to precede the sales boost needed to pay for it. “Your revenue has to catch up with these major decisions,” says Ruth Owades, president/CEO of flowers catalog Calyx & Corolla. (Or, to quote the old saw, you have to spend money to make money.)

Transition stages aren’t the same for everybody. It’s not the case that every $20 million catalog has a chief financial officer, that every growth-oriented catalog needs an “angel” investor, or that every $40 million cataloger needs inhouse fulfillment. Niche catalogs can expect different growth potential from that of general merchandise books; catalogs with seasonal products have different systems needs than do catalogs that sell evenly throughout the year. “People love rules of thumb,” says catalog circulation consultant John Lenser, “and I think rules of thumb are dangerous.”

What’s clear, however, is that “you can’t get stuck in the in-between place,” says Harry Rosenthal, president of the Sundance gifts catalog. “If you do, you die.” Invest too slowly, and you may lose market share or stay stuck in inefficient systems. Grow too fast, and “fulfillment can’t keep up, product development can’t keep up, customer service can’t keep up,” Libey says. “If you’ve got two elements that are weak, you’re out of control. And if you’re out of control when you hit a knothole, you’re dead.”

As Coy Clement, president of gifts catalog The Paragon, puts it, “The people who have been successful have found ways to not get too far ahead of themselves.” Clement’s own motto during his first year of acquiring the profitable, slow-growth Paragon was simply, “Don’t mess it up”-which isn’t a bad idea for catalogers at any stage of growth. Generally speaking-very generally-here’s how the stages look.

STAGE ONE: Goo-goo, Ga-ga (annual sales of less than $5 million) To new entrepreneurs, there’s little more endearing than seeing one’s first catalog come off the press. For Helen Ballard Weeks, CEO of home decor catalog Ballard Designs, it was a two-page, black-and-white flyer. For Lucinda Heekin, president/CEO of clothing/accessories catalog The Last Best Place, it was a 36-page, full-color book. For both, it was pretty much a one-person show, involving managing everything from writing copy and picking out merchandise to putting labels on orders.

Nobody doubts that start-ups are hard work. But, like a new kid, they’re also a kick. After all, new catalogers haven’t yet exhausted their prospecting channels, and most can carry out fulfillment on a PC-based system. Accounting, customer service, picking and packing, and merchandising functions are all in the manual stage, easily handled by the entrepreneur and a couple of part-time employees. Even as revenue creeps up to the millions, “the company is still very entrepreneurial in nature,” says Libey. “It’s seat-of-the-pants, it’s still a good idea, and it’s fun.”

PITFALL: Lack of attention to the early trouble signs The giddiness of filling orders can sometimes blot out recognition of slipping response rates or lack of repeat buying.

STAGE TWO: Crawl or Walk (annual sales of $5 million-$10 million) Before long, one of two things happens to a budding catalog: Either customers and prospects keep responding strongly, or they slack off. If it’s the latter, catalogers at this stage must adjust their marketing formula, fast. Many tiny start-ups can crawl to $5 million in sales, but, says The Paragon’s Clement, “between $5 million and $10 million is the place where you learn whether you have a [long-term] valid business concept.”

In other words, catalogers at this stage often need to refine, or even change, their strategies in areas such as list selection, creative, and merchandising. (Delia’s, for instance, didn’t really take off until it began aiming its products at high-school girls, rather than college kids.)

For the most part, such refinement requires professional expertise. “You’ve got to start building [staff] in the various disciplines,” says Craig Battle, managing director of Tucker Capital.

Fulfillment can also be a challenge. PC-based systems generally can’t handle businesses of more than $5 million in sales, which means the cataloger must either invest in an inhouse system ($300,000 and up, plus staff) or give up control by sending fulfillment out-of-house.

PITFALL: Overeagerness Many young catalogers spend this period throwing a lot of books in the mail to see which customers stick. That’s an expensive mistake. “Concentrate on building a good business model,” Clement says.

STAGE THREE: Those Terrible Teens (annual sales of $10 million-$20 million) Much like a kid hitting puberty, a catalog company in its revenue “teens” starts experiencing major strains around the joints. Tried-and-true prospect lists no longer pull the way they used to. Overwhelmed employees may start having trouble coping with increased customer service complaints, usually due to poor inventory forecasts. The catalog’s call center starts to jam up; newly hired workers fall over each other in packed office space. The company’s founding employees, once happily handling calls and packing boxes, have no clue how to act as cogs or levers in a much bigger machine.

At about $20 million, a catalog starts to truly grow up. It requires sophisticated financial analysis, talented staffers, and systems to manage the bigger flow of orders. Chances are, it also needs more warehousing and office space. All of that, of course, spells major capital investment-which tends to make the investors nervous. (At co-op gifts and home cataloger The Good Catalog Co., for instance, several founding partners fled at this stage. “It got a little too exciting for them,” says Bill Nicolai, himself a founding partner and senior vice president of marketing.)

PITFALL: Scrambling for volume in order to catch up with your investment “There are times when people take greater risks because they feel they have to spread their fixed expenses,” Clement says. “When you get to a point where that investment in fixed overhead drives you, rather than a sense of opportunity, then you’re making a serious mistake.”

STAGE FOUR: Young Adulthood (annual sales of $20 million-$40 million) In a sense, catalogs at this stage have made it through the business equivalent of graduate school. More than likely, they’ve got their concept nailed down. They know their customer. They’ve evolved their list selection capabilities and minimized their customer acquisition costs. Now comes the time to face the responsibilities of being an “adult”: namely, leveraging the assets for future gain.

In other words, here’s where catalogers tend to invest less in basic “needs” than in “wants.” If they haven’t done so by now, they’ll likely bring their fulfillment and order-taking inhouse. They’ll refine their database capabilities to better target customers and create spin-off books. They’ll ramp up customer service levels and invest in customized operations. When her company recently reached $25 million in revenue, for instance, Owades said she decided to “step back and say, ‘How would a headquarters space look if it were designed specifically for Calyx & Corolla?’”

At this point, too, catalogers begin contemplating hiring top-notch talent-usually high-priced outsiders-to take the company to a higher ground of professionalism and profitability. Weeks, for instance, hired a president for Ballard Designs at this stage, while The Good Catalog Co. lured a circulation director from a much larger catalog company. Here’s where the last vestiges of mom-and-popness start to dissipate.

PITFALL: Blinders Founding catalogers who continue running everything themselves often sacrifice their companies to their egos. Owners who think their old catalog management systems are “good enough” often sacrifice customers to back-end problems.

“Most catalogers in general wait until things get critical before they add additional executive talent,” says acquisitions consultant Jim Alexander. Particularly at this stage, it’s better to hire talent too early than too late.

STAGE FIVE: Stepping on the Gas (annual sales of $40 million-$60 million) It happened at apparel and gifts cataloger Coldwater Creek. It’s happening at women’s clothing cataloger DM Management. It happened at L.L. Bean in the early 1980s. Now, says Nicolai, it’s starting to happen (a bit early) at The Good Catalog, currently at about $30 million in revenue. He calls it “going nuclear.” “Companies get to a point where they can tremendously expand the number of catalogs they mail without having the dollar yield per name go down,” Nicolai says. “That is magical.”

The magic happens when all the right elements are finally under control: customer service, fulfillment, inventory control, creative, merchandising, production, and overhead costs. Moreover, catalogers at this size have enough critical mass to negotiate better terms with vendors, printers, and paper manufacturers.

Unless a catalog has maxed out its audience (a Corvette supplies catalog, for instance, has a more limited universe than a women’s apparel book), this is the stage where maximum growth can come at minimal cost.

PITFALL: Not knowing your endgame At this stage, catalogers generally have two choices. They can stop growing and milk the profits. Or they can keep growing by hiring top managers, investing in more sophisticated systems, acquiring new catalogs, or spinning off into new product categories.

Those who choose to milk a cash cow, Battle says, will have “nothing to show prospective buyers in terms of growth potential.” Buyers, he notes, “don’t care what you did with the catalog. They want to know what they can do with it.”

On the other hand, catalogers who decide to keep growing need additional capital-lots of it. “That’s why,” says Battle, “we see a lot of catalog companies of this size sell.”

STAGE SIX: The Executive Suite (annual sales of $60 million-$100 million) Once a catalog company hits this level, it’s likely not just a catalog anymore. Chances are, it’s a multititle public corporation with a CEO who’s “spending 70% of the time valuating stock, making analysts happy, and keeping them informed,” Libey says. “It’s an entirely different game.”

At this stage, it’s also a game few founders know how to play. There aren’t too many entrepreneurs who move from start-up to corporate monolith in one piece. Those who have-The Sharper Image’s Richard Thalheimer, Lillian Vernon, Coldwater Creek’s Dennis Pence-”went through all the transitions,” Libey says. “They knew where they were going, they did strategic planning, and they hired the right talent at the right time. They put everything in place three years before they needed it.”

PITFALL: Up-and-comers As L.L. Bean has learned, other catalogers like nothing better than knocking over the king of the hill. Unless catalogers keep tapping into the freshness that made them great, they’ll end up with little to show but a big warehouse of overstocks.

Of course, lack of attention is a danger at just about any stage of the game. “Some players keep doing the same things rather than taking a look around them and seeing how the landscape has changed,” Alexander says. “They lose touch with what’s happening in their particular segment.”

The good news, however-for the industry, at least-is that whatever the category, there’s always a new entrepreneur with the next Big Idea waiting behind the curtain. In fact, it’s a safe bet that somewhere today, an entrepreneur is giving birth to another “baby,” and the cycle is ready to begin again.

Growth in the nick of time. “For us,” says Harry Rosenthal, president of the 10-year-old, $50 million Sundance catalog, “1995 was really the year we hit that transitional period.” At that point, the Southwest-themed apparel and gifts catalog was a $25 million business, with an established concept, a loyal audience, and a strong balance sheet. It was also a business operating out of 30,000 square feet, including a warehouse. An outdated fulfillment system meant that each catalog package shipped was costing the company more instead of less; to handle service problems, Sundance needed almost as many customer service representatives as order-takers. “We had people doubled up in every office, and there was nowhere to hold a meeting,” Rosenthal says. “We had outgrown everything, and the only answers were throwing more people at it.” Even prospecting was a problem, since Sundance had tapped its strongest lists. “We needed the statistical modeling tools to be more creative to find new ways to mail the file,” he says.

Ironically, the means were right at hand. The company had purchased land for a new building in 1995, possessed the internal capital for investment, and had begun a software search for its fulfillment system. But bureaucracy held up the building for another two years, and the 18-month software search ended with an unworkable system. Finally, the company moved to its new quarters in 1997 and last June went live with a new operating system-purchased after a second, year-long search. Having created its own inhouse catalog production department in 1995, Sundance at last seems to be cooking along with the right-size infrastructure. “It used to be that you could hold out on major investment until you were a $30 million or $40 million company,” Rosenthal says. “But we should have done it three years earlier than we did.” The object now, he says, is to keep growing, particularly since the company invested $4 million cash in its building alone. “When you’re investing that much money in infrastructure,” Rosenthal says, “you’re running as [an aggressive] growth company.”

Going nuclear? “Years ago,” says Bill Nicolai, senior vice president of marketing at gifts cataloger The Good Catalog Co., “Leon Gorman was quoted as saying that the key to L.L. Bean’s rapid growth was to get the systems in place before the business came.” That explains the cautious steps taken at the $30 million, nine-title Good Catalog. When launched six years ago by Barbara Todd, the firm “hired” the best talent possible by making its five managers partners. “We wouldn’t have been able to afford salaries for those skill levels,” Nicolai says. Next, the partners decided to sell catalog space to vendors, thereby cutting overhead costs.

Finally, the cataloger played close attention to list selection. Many new catalogers “invest” in customers via heavy prospecting, then try to convert samplers into repeat buyers. But repeat buyers are often tough to find in the general merchandise category. Good Catalog wanted to make money up front, on prospecting. And via careful list selection, the company did just that, beginning to make money its second year. It kept fulfillment operations inhouse, investing this past year in a new $500,000 computer system. It’s also continued to hire management above its level, recruiting one vice president, for instance, who’d been running an operation five times the size of The Good Catalog.

During ’97, just after it hit $20 million in sales, The Good Catalog reined in its mailings to maximize profits. “We also had to get our systems figured out and get our IS department up to speed,” Nicolai says. But this year, he says, “we’re able to step on it.” With systems running at maximum efficiency and with a proven merchandising/marketing formula, The Good Catalog has been ramping up circulation and still making the same amount of money per book.

To sell or not to sell. About 15 years ago, Helen Ballard Weeks, just out of college, started placing ads in the backs of decorating magazines for architectural reproductions. “I saw what Lillian Vernon had done,” she recalls. “I thought I could do that. I never thought it would be a $60 million company.” For several years, Ballard Designs wasn’t even a six-person company. Weeks ran the start-up with three people for its first three years. The infrastructure grew slowly, adding managers one by one to head circulation, customer service, and accounting. That left Weeks able to focus on her strength: product development and presentation. Only five years ago, when the company was taking in about $20 million, did she make major upgrades to the company’s inhouse operating system and hire a president, Stewart Tarkington.

Like other cautious executives, Weeks worked from a strategic plan, outlining strategies she wanted to incorporate over two to five years. Despite a few bumps-rising paper prices, overstaffing three years ago-growth has kept pace with investment, requiring no outside financing. Because of its “unique product,” Weeks says, Ballard Designs has made money from the start. Not surprisingly, then, Weeks played hard to get in the buyer’s market, finally selling to The Cornerstone Group in April ’97, when the company was $40 million. “We were at that point where we felt we needed them to go to the next level,” Weeks says. By consolidating print buying, list management, and other services with other Cornerstone catalogs, “we could skip over a lot of headaches.” Besides, says Weeks, even though she sold her company, she has stayed on as CEO. As she puts it, the ability to consolidate overhead while keeping control is “a no-brainer.”

Spreading its petals. While most start-up catalogers fulfill their baby catalogs from their basements, Ruth Owades, founder/president/CEO of 10-year-old flowers catalog Calyx & Corolla, didn’t have that option. In starting a business that drop-ships fresh flowers from growers to customers, Owades had to build an elaborate operations structure first-and then send out the catalogs. Little wonder that one of her founding partners was a vice president of operations (another was vice president of marketing). Little wonder, too, that the company, now at $25 million, required strong financial backing from investment partners from the start.

Fortunately, revenue apparently kept up with the investment level. When the company’s sales reached $5 million-$10 million, Calyx & Corolla added layers of executive management, including a director of circulation, a chief financial officer, and a new-business development vice president. The company also bought new Hewlett-Packard hardware during its sixth year, and new investors, including Capital Cities/ABC, came on board in 1996, when the company reached about $15 million.

Finally, when the company reached $20 million last year, it treated itself to new, custom-designed office space. And at this point, Owades is investing in a new operations system that will take the company to $100 million in sales. “We’ve gone through the stage of start-up and growth,” Owades says. “I wouldn’t say we’re at maturity. I consider us a fast-growing, medium-size company on its way to being a large company.”

Size matters. “Your customers are never willing to wait for you to get bigger,” says Lucinda Heekin, president/CEO of apparel and accessories catalog The Last Best Place. Although her nearly five-year-old company has only 18 employees and $10 million in sales, the catalog, as Heekin is well aware, competes with Godzillas more than 10 times its size, such as Coldwater Creek. But Heekin, formerly a civil litigator, doesn’t shrink from a challenge.

Having started off with two part-timers working out of a basement, Heekin says her ultimate goal is to create or become part of a larger, specialty catalog/retail organization, appealing to consumers with an interest in distinctive “American” home goods and apparel. To get there, she’s added on investment partners, enabling her to hire “some very strong people with great merchandising and retail backgrounds.” Heekin has also focused on improving merchandise mix and presentation, moving from a 36-page 10-3/4″-wide catalog to a 60-page standard-size book.

Improved list selection in the past year has cut customer acquisition costs (“that’s really the heart and soul of this game”), and Heekin hopes to bring fulfillment inhouse during the next growth phase within the next two years. Gifts mailer Swiss Colony currently handles The Last Best Place’s order-taking and shipping. “Our goal is really to grow this thing,” Heekin says. “We do not see this as a little company that started in one basement and will end in another. A catalog business can be as big as your imagination, and hard work can let it be. There are no rules.”

* Hire talent before you need it.

* Invest in open-ended software systems that accommodate growth.

* Offer stock options to employees so that everyone’s pulling for the same goal.

* Practice open-book management.

* Don’t isolate. Employees often see trouble signs-customer complaints, backorder problems-sooner than you do.

* Roll out circulation slowly. Keep down your customer acquisitions cost, and don’t stress your infrastructure.

* Know your personal limitations. Stick to your strengths, and hire professionals to do what you can’t. Says The Good Catalog Co.’s Bill Nicolai, who nearly went bankrupt with an earlier launch, “One of the ways I avoided problems this time was that I didn’t become president.”