Merchandising Roundtable: Kansas City, Here We Come

What would a jeweler have to say about merchandising to a wholesaler of signage? Could a marketer of religious greeting cards learn anything about pricing from a cataloger of spa products? The answer to both questions is a firm yes.

Catalog Age’s roundtable discussion of merchandising matters, held in Kansas City, KS, in late August, featured a diverse group of participants. But when it came to matters of product exclusivity, sourcing, margins, analysis, and forecasting, they shared many of the same challenges.

Participants

John Butorac, vice president of Shawnee Mission, KS-based food gifts cataloger Wolferman’s

Dennis Flaherty, president of Creative Banner Assemblies, a Minneapolis-based wholesaler of signage and digital printing products

John Goodman, senior vice president, marketing and customer service for Helzberg Diamonds, a North Kansas City, MO-based cataloger/retailer

Roy Haas, director of sales and marketing for The Printery House, a manufacturer/marketer of religious greeting cards based in Conception, MO

Sonja Petersen, marketing manager, and Alan Share, president, of Minnetonka, MN-based New Life Systems, which sells spa products to beauty professionals

Catalog Age editorial director Sherry Chiger and former special projects manager Shayn Ferriolo moderated the discussion.

The big picture

Catalog Age: Let’s start by introducing our businesses and sharing our most pressing merchandising-relating concerns.

Alan Share: We are in the salon, spa, and skincare business. We are mainly b-to-b. My biggest concern with merchandising is always related to finding new grist for the mill. We always need new products or need to know how to reinvent the old products to make them look better in the catalog.

Sonja Petersen: I have been with New Life Systems for three months, so I am still fairly new to this specific market. The major concern for me is marketing, trying to differentiate ourselves from our competitors and find a real niche in the market. We are really working on branding right now. In terms of merchandising, we are trying to find the right products and the right margins.

Roy Haas: We are a part of Conception Abbey, and we sell religious cards and gifts. The Printery House has been in business for 50 years selling greeting cards and related items primarily through catalog distribution. My background is with Hallmark Cards for 25 years, so I understand the greeting-card business very well, but being part of a company that comes to market via a catalog was a whole new experience for me. With Hallmark, you can walk into a store and easily understand the difference between a $5 card and a 99-cent card. In a catalog it becomes more difficult to express that to a customer.

We have made great strides within our organization, but we have a long way to go. I think the biggest needs I have right now — and there are many — is ensuring that when we go to market we are getting to the right customers, and that we have the systems in place that will allow us to critique the productivity of our catalog. We are also working to fine-tune our Website and our e-mail marketing so that they interact with the catalog for one key message to our customers. We are also trying to put together a manufacturers’ rep group.

John Butorac: For those who don’t know Wolferman’s, we are the purveyors of the finest gourmet English muffin. We are primarily a gifting company, so from a merchandise standpoint our biggest challenge is to come up with other categories that would fit our catalog. We have two primary objectives: First, to retain customers. In the gifting world, people can get tired of an item, so we want to offer them other things aside from muffins. Second, to grow penetration. So we’re looking to find things that people are willing to buy from us other than just muffins but that fit in with the gestalt of muffins.

Dennis Flaherty: Creative Banner sells b-to-b, mostly to the screen-printing trade show markets. I think our largest challenge in terms of merchandising is how to merchandise products that are somewhat complicated. We are selling to dealers that are reselling our products, which aren’t as simple as a pen or a knife. And then also how do we differentiate different models [within our product line], such as banner stands. We also want to add new products, and hopefully those will bring us into new markets.

Catalog Age: Several of you mentioned finding new products as one of your top merchandising concerns. What would you say are some of your better sources for merchandising, and have your sourcing methods changed during the past two years with the Internet?

Flaherty: I think the Internet has made a huge difference. You can view things online quickly if you find a supplier, whether you are developing a product with them or they are showing you an existing product. You can have them take a photo of the product, and five minutes later you can have it in an e-mail, and you can say yes or no. It allows you to source the entire world, not just the U.S.

Catalog Age: Has it enabled you to cut back on travel?

Flaherty: We really don’t travel to source. We have never traveled other than to trade shows. We haven’t taken overseas trips, but we may be a bit different than other catalog companies out there.

Catalog Age: Do you manufacture?

Flaherty: We manufacture about half of our products, and half of our products come from vendors.

Butorac: We haven’t really changed the way we merchandise. We rely a lot on shows. There are also the [merchandise] marts around the country, where you can look around and converse with the people and assess the trends and see what’s working. But even before that you need to have some idea of what you are going after, because you can spend days looking at things. It is really setting up a course of action and a strategy of what categories you want to go after.

Analyze this

Catalog Age: What sort of analysis do you use to gauge merch performance and decide what new product and categories to pursue?

Butorac: For us it is the squinch [square-inch] analysis. If we have 75% profitability on a page or a spread — and in our case it is often 90% — there is room to grow and add more pages and look for more profitable things and at least test some things.

We also do some research with our customers and talk to them to find out what categories do and could make sense. A good example of that is within the past few years we have launched a hard-goods insert testing items such as toasters and kitchenware and things of that nature that still tie in with baked goods but actually expand penetration or additional usage from our current customer.

Catalog Age: And that came about from speaking with customers?

Butorac: Yes, from speaking with customers and also just looking at the fact that we had room to grow from a page standpoint. So what other categories can we get into because we feel that we had maxxed out? Where else can you go with muffins and scones?

Catalog Age: Where and how did you source the new products?

Butorac: We laid out what categories we would like to go into, and we wanted to stay in the baked-goods and kitchen arena. We didn’t want to offer furniture, though there are companies that do that. We looked into high-end toasters and things that you just can’t find anywhere else. Something that someone would look at and say, This is unique.

Share: In terms of how we find product, a lot of it comes to us from our customers right on the phone. We are in a very “talkie” industry, so people say, How come you don’t have this? or Can you find this for us? And we scrounge to find it wherever we can, whether it is in our competitor’s catalog or on the Internet or other places.

Another way we get information is that in every order we place a prepaid opinion card. We get an unheard-of 6% response — we get tons of them back. One of the questions we ask is if there are other things that you could be purchasing from us that you’re not. We also look through trade journals. There are so many in [the professional beauty] industry, and we will see a product and go, Wow, great product, and we get the information and start digging that way.

We use square-inch analysis. But we are in a very intuitive industry where not everything is written in stone and linear and easy to judge, so periodically we just roll the dice, and sometimes it works and we stock tons [of a new product], and sometimes it doesn’t.

Getting to know you

Catalog Age: What are some of the things that you do to initiate new vendor relationships, and how do you determine initial forecasting for new products?

Share: Our vendors in our industry are often a bunch of beach guys that said, “Let’s start making this item, and what do you think it should sell for? I don’t know, 50 bucks sounds like a good price.” Our industry is not very sophisticated in its pricing.

A lot of times vendors say, “Here’s a 30% discount, and you need to order a thousand.” And we say, “That may be fine for the way you work, but let us explain how we work.” We don’t dictate the terms, but we kind of educate them…that we are spending all of this money to produce a catalog and so they actually need to give us 60% margins, and we are only going to order a dozen at a time at will as we need and we will buy more. Most of the time they determine that it is worth them rolling the dice and giving us pricing off the discount sheet to be in the catalog.

Flaherty: We do the same thing. We start with small minimums. Some of the products that we sell are more consumable. We also spend a lot of time trying to differentiate with new products, and those are a little more risky. The fact is that we need to turn our inventory 12 times a year, and I am not going to start with a huge order. I always say to the vendor that in a year from now this discussion isn’t going to matter because either we’re both happy or neither one of us is happy. And that usually frames it for them.

Butorac: Wolferman’s is a division of a company, so we have incredible profit pressure. Going into new items and adding items is a risky and expensive venture. So with this hard-goods thing, for instance, we need to be very careful. You have minimums to worry about, like you are talking about, Dennis, and the cost is usually high, but when you are doing the forecast you assume that if it is a success, the cost will come down and you will make margin down the road.

Share: Are there price sensitivities with your catalog? Is there a comparison with other catalogs?

Butorac: I think that is why we try to find things that are unique.

John Goodman: Helzberg has 250 stores; it is 88 years old and a company that is highly regarded in the jewelry category, and that is primarily because of the service that is delivered at point of purchase. The direct effort is a part of our business strategy that has been a core part of our company for 23 years.

Our database segments all purchases in our store, and we use that tool to segment customer groups, and it drives the decision-making in our company with the catalog and beyond that as well. Our catalog is primarily a traffic driver…our main focus is to get our customers back in our stores, since ours is a niche that needs that service element that we provide in the stores.

Our greatest merchandising concern is connecting with the customer, which in turn drives traffic to our store. Creating qualified traffic is our main objective. What I mean by that is that we are targeting customers to repurchase and get the customers with the most propensity to buy.

Catalog Age: John, you sell thousands of items but can put only a few hundred in the print catalog. How do you decide what goes in the catalog?

Goodman: Our business is highly seasonal. Christmas and Mother’s Day and Valentine’s Day are different from any other time of the year. June is geared toward bridal and anniversary. For Christmas we want to portray a full assortment, and it is a wider breadth of offering as well as exclusives and core, proven sellers. We also have something that is mailed late in the season just to male buyers. So connecting product with the person and the occasion and how you thread those together becomes the primary merchandising challenge.

Exclusively yours

Catalog Age: In terms of exclusivity and using it as a branding tool, what are you doing to ensure that you have exclusive product?

Share: We started our private-label line of lotions and oils and gels and stuff three years ago. We have about 110 vendors that we are distributing for. In terms of distributing other companies’ products, you can only go so far. So we developed our own line called Lotus Touch, and we found some key differentiation points. People would call and say, Do you have a product with these ingredients or without certain ingredients? So we incorporated those and now we have a line of more than 100 products. Recently we hired a branding company because Lotus Touch is only 15% of our revenue at this point, but we think it could be 50% or much higher. And our line has extraordinarily higher gross margins.

Haas: About 60%-70% of our sales are of exclusive product until the competition takes the design and tweaks it a bit. One hundred percent of our boxed Christmas cards are new every year. We probably change 70% of our everyday cards every year. We ventured out last year for the first time and developed an exclusive ornament that is unique to Conception Abbey. That has been our first attempt to get into exclusives outside of the creative within the greeting-card part of it.

We also have one set of catalogs strictly for our dealers, strictly of products we manufacture ourselves, and then we have another catalog that we send out to individual homes with all of our cards as well as religious products that we have purchased, such as crucifixes and rosaries. Those don’t change as much as our own products.

Catalog Age: Are any of the products that you buy from vendors exclusive to you?

Haas: No.

Butorac: We try to keep most of our products exclusive. For example, our scones — it’s our formula. We found a lady up in New England who essentially produces our formula according to our specifications just for us. Our muffins are obviously very exclusive. Our crumpets — we have a machine that is one of a kind where we can actually make crumpets with fruit particles. As far as we know it is the only one in the world. I would say 80% of our products are exclusive to Wolferman’s. Others we find at shows, like certain desserts. But we try to find things that are new and unique and that you wouldn’t find at a store.

Flaherty: Exclusivity is not a word that is used a lot in our industry. The only thing we have that is exclusive are the products we’ve developed or if a manufacturer has let us private-label them. And that is mainly to protect our sourcing because our competitors may find our source. So we have a fair number of private-label products and will work more and more to do that.

In certain areas, such as consumable products, if it is a 3M product then you want 3M on it; it is important. It’s a strong brand, so you use that. If it’s a banner display stand that we have developed or someone has brought to us, we want to protect our sourcing, so we’ll name it ourselves.

Catalog Age: How do you decide what you are going to manufacture vs. what you are going to source?

Flaherty: If it’s within our core capabilities, then we would rather manufacture it. We don’t bend or cut metal, for instance, so if it’s a banner stand we wouldn’t want to manufacture it, since it is not in our core competency. Typically, you start with someone else’s product to see what the potential is and then decide whether you are going to go forward with it.

Share: Our industry used to be full of exclusive relationships. In fact we had several of them…I think some of the manufacturers we had got piggy and decided they were going to sell direct and drop the exclusive relationship. At first it was very hurtful. One of the vendors, we were selling about $500,000 worth of their stuff a year, and now they are selling to the spa right next to our office with no compunction.

But it turned out to be a great thing because it forced us to go into the market and say, The hell with these guys. It turned out that items that we had 40% gross margins on we could now import and get 400% gross margins because we decided to bring them in ourselves.

Of price and men

Catalog Age: Has anyone adjusted his merchandise pricing lately?

Haas: It’s interesting that you mention this, because we’re just mailing our new Christmas catalog next Wednesday, and we are introducing a four-tier pricing strategy for our retail customers. A year ago I looked at the perceived price-value relationship, and I decided that based on what we were giving to the customer, we were way underpriced. So we had several ex-Hallmark executives who had retired and are now consulting do a pricing and packaging study, and they came to the same conclusion that we had: We needed to offer our customers more choices from a pricing perspective as well as increase prices, so we went ahead and did that.

Catalog Age: Did you conduct competitive analysis to decide where you wanted to be slotted in terms of price-value?

Haas: Yes, we went out and bought a lot of competitive products and put them up on a board and looked at different companies and what their pricing structure was and what they had on their greeting cards to justify their prices. Then we said, Here is the gap, and here is where we can make a change. We put through a strategy that allowed us to increase prices and also introduce two price points that we had never had before. It really was taking a look at where we were and where the competition was and being sensitive to the monks at Conception Abbey — they do not want to gouge anyone and are very conservative. For them to agree was a big step for them.

Flaherty: I purposely look for products that are “good, better, best,” being aware that we are selling to someone who is reselling, and his customers are really value driven, though some are esthetically driven, and the pricing is not [always] as important as the look. Therefore, [it’s important] to have a “good, better, best.” The better may not be much better functionally than the good, but esthetically maybe it is better. It looks more high end and as if it should cost more, so therefore it does. And at times our costs are not a lot different.

Share: We look at the exclusivity factor. If it’s ours we can sometimes mark it what we want and get away with it. Competitors’ catalogs sometimes drive us nuts because we know they are buying from the same vendor and pretty much paying the same price and their price is way out of whack, generally lower, and I’m wondering why they are giving the product away when we are selling a lot of it in the market, and I’m imagining they are too.

But even though we watch other parameters, we are after gross margin and our bottom line, and we know what these numbers are. We move forward on our numbers, not on what the competition is doing. And it’s worked well for us during three difficult years.

Butorac: In the gifting world we have a little more flexibility. We can play around with price points and what you put in the gift. We try to keep our price points pretty close to what we know we can sell in the catalog and then we can design it from that point looking at a margin-by-gift analysis.

Catalog Age: In terms of product density, are you making any changes to improve profitability by, say, eliminating product categories?

Butorac: We are actually increasing the size of our catalog this year. We’ll have a larger trim size, and we’re being very aggressive this year with prospecting. We feel that it is the time to go after these customers.

Haas: We’ve done the same. In our Christmas catalog this year, we have added four pages. Plus, we have added a lot more density.

Catalog Age: Let’s end on an up note: What would you say is your best merchandising success?

Share: I have one that goes back to exclusivity. It was a $3,000 item that we were paying $2,400 for because they gave us a 40% margin. We are now paying $800 for that same item, and it still sells for $3,000. We found that we could import it from a different vendor.

Butorac: Ours would be the toppings that go on the muffins…things like preserves, honey, apple butters, and English toppings.

Flaherty: I think ours is a product line that wasn’t being sold in our industry — table throws and table covers. It is a large growth area for us, and we do a lot of customization with those. It has been a great line of products for us.

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