Small Catalogs Forum: The Right Time to Finance

Certainly the economy is one major factor in determining whether the time is right to invest in growing your business. Common sense dictates that if people are tightening their belts when it comes to buying widgets, now is not the time for Joe’s Widgets catalog to double its prospecting efforts and its page count.

Besides, in a slower economy, it may be more difficult to raise the capital to grow your business. Right now, for instance, “The financing marketplace is really tight, particularly in the small-catalog arena,” says Larry West, president of New York investment consultancy West Cos. “Softness in Internet marketing and direct marketing hasn’t encouraged investors to take risks.”

Nonetheless, other factors such as your catalog’s performance may lead you to decide that now is the right time to try to raise funds to fuel growth.

Good times or bad?

We all know the saying “you need to spend money to make money.” Jim Kelley, owner of Spices Etc., believes that if you aren’t making enough money, it’s time to start spending.

“If you are not satisfied with your sales, you may need to put capital into the business to boost response rates,” Kelley says. “To improve your average order size, you may need product development, which requires an infusion of capital.”

That was the rationale for Kelley’s August 2000 acquisition of Mo Hotta Mo Betta. By investing in an additional title, he acquired a new merchandise line — sauces and other condiments, which have a higher price point than the spices that are the primary merchandise line of his Savannah, GA-based Spices Etc.

Mike Shoup, the owner of the Brenham, TX-based rose cataloger Antique Rose Emporium, follows a different motto: Get ahead when business is good. “For catalogers who are also their own manufacturers, additional money should be sought in times of growth,” Shoup says. Between 1988 and 1996, his company enjoyed an average annual sales growth of 15%. And during that time he kept puttting additional money into the business, particularly to grow more roses to meet and encourage increased demand.

Since 1996, however, sales for Antique Rose have been flat, prompting Shoup to get (the business) “leaner and meaner” and to cut back on investment. Whereas Spices Etc.’s Kelley might have invested in expanding his product line to try to spur demand, Shoup feels that stagnant sales don’t justify investing in inventory.

Jack Schmid, president of Shawnee Mission, KS-based consultancy J. Schmid and Associates, also recommends investing in your business primarily when things are going swimmingly. If your business is doing poorly, he advises entering a strategic partnership, or even selling off parts or all of the business instead.

“The key timing for investing additional capital is if you have gone through several promotions and the response is very positive, for instance,” Schmid explains.“It shows potential for growth” — very important if you’ll be needing to hit up outsiders to fund your investments.

“If your break-even per [prospect] is $1.50 and you are getting $2 or $3, that would be an indicator that you have hit your limit with your current pool of prospects,” he adds. “Of course, small catalogers usually have fairly limited house files, so it is even more pressing to invest if you are getting that strong of a reaction from rented lists and other prospecting methods.” Another sign that you might want to invest in growing your business, he says, is if your average order is much higher than your average price point.

Any time at all

Then again, for some catalogers, such as Mark Purtee, executive vice president of Porto Banus, it’s always the “right” time to invest. “We are always reinvesting in the business,” says Purtee, whose Marietta, GA-based women’s apparel catalog surpassed the $10 million sales mark last year.

From the time the company was founded in 1996, the Porto Banus philosophy has been to invest the bulk of capital into its database for aggressive prospecting and growth. Granted, the company was unprofitable until 1999.

But within the past four years, the cataloger’s sales have grown 400%, Purtee says. What’s more, the Porto Banus house file increased 60% between January 2000 and January 2001 alone — providing a solid base for even greater top-line and bottom-line growth in the future.

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