Smooth Sailing in Choppy Waters

Mar 01, 2004 10:30 PM  By

Technology Market: CDW Computes a Profitable Sales Equation

Perhaps no industry has felt the economic slowdown more than the technology sector. According to Framingham, MA-based market research firm International Data Corp., overall IT spending on hardware has been flat for the past two years at $125 billion.

But Vernon Hills, IL-based CDW Computer Centers nonetheless has managed to increase sales 21% since 2000, to $4.66 billion last year. And though its net income for the year ended Dec. 31 was $175.2 million, compared with $185.2 million in 2002, the company had spent $14.3 million to acquire rival Micro Warehouse during the fourth quarter of 2003. This acquisition made CDW the largest reseller of Apple computers in the country.

Whereas many computer resellers chase after a relative handful of multimillion-dollar customers, CDW has traditionally targeted smaller and midsize companies — those with no more than (and usually far fewer than) 500 employees. Although the average lifetime value of smaller companies is generally less than that of Fortune 500 firms, there are of course many more of them. And while technology spending by large companies fell 5% last year, purchases by smaller companies rose nearly 2%, according to International Data Corp.

To cater to these smaller buyers, CDW markets its know-how as much as its merchandise. “Many of our clients don’t have IT departments, so they look to us for expertise,” says chief financial officer Barbara Klein.

To provide the requisite knowledge, CDW’s nearly 2,000 account managers must attend 11 weeks of training, called the College of Sales, before they make a single sales call. The College of Sales is part of CDW University, where the curriculum includes product training as well as drilling in sales techniques, such as upselling. CDW also has reps trained in specialties such as telephony and mobile wireless. By providing free tech advice and custom configurations, CDW instills loyalty among what are traditionally very price-conscious shoppers.

What’s more, customers can — and do — easily access CDW’s expertise without even speaking with reps. This past year, CDW surpassed the billion-dollar mark for unassisted Web sales. And fewer CSRs handling phone orders means lower transaction costs.

Part of the credit for driving many of its customers online, says Klein, goes to CDW’s extranet sites, which can be configured to meet the specific needs of a business. For example, a company can set up an extranet site to authorize only the sale of Hewlett-Packard products. Businesses can also designate which employees are authorized to buy products. CDW has more than 170,000 such active accounts.

According to Klein, account managers still monitor what their clients are buying, even if the customer bypasses the account manager to purchase directly online. To avoid channel conflict, CDW credits the account manager with the sale even if the client purchased directly from the Website.

Another secret to CDW’s service success: speedy delivery. CDW ships 93% of products the same day orders are received, thanks to a just-in-time inventory model and a 450,000-sq.-ft. distribution center stocked with an exhaustive array of components.

“Our customers usually want product pretty quickly,” Klein says. “And having the inventory we do, we can get product quickly to our customers rather than drop-shipping.”

CDW’s success has impressed observers. “The rest of the computer market is flat because they do not execute as well as CDW, period,” says Amtower & Co.’s Mark Amtower, whose company helps marketers sell to the government. “Market segments can go down, but if a company performs head and shoulders above its competition, it can grow market share at the expense of competitors. This is exactly what CDW has done.”
Mark Del Franco

Keys to Success

Providing expertise to smaller, resource-strapped companies Creating company-specific extranets to drive Web business Shipping 93% of orders the day they’re received

Hospitality Market: American Hotel Makes Itself at Home

Founded in 1865, just as the Civil War was coming to a close, American Hotel Register Co. has survived both World Wars, not to mention the Great Depression. So James Leahy Jr., president of the company his family has ownedsince the early 1900s, was fairly confident that the distributor of supplies for the lodging industry would survive the effects of the 9/11 terrorist attacks.

And there’s no doubt that decline in travel following 9/11 has hurt hotels and the companies that serve them. In 2002, lodging industry revenue fell to $102.6 billion from $103.5 billion in 2001, according to Hendersonville, TN-based Smith Travel Research.

Meanwhile, sales at Vernon Hills, IL-based American Hotel grew from $300 million in 1999 to $350 million in 2000 and 2001, then to $375 million in 2002 and a little beyond that mark last year.

Its annual catalog — now 2,000 pages — remains American Hotel’s backbone. But whereas the company once distributed more than 300,000 copies a year, it has sent out less than half the amount during the past two years. “Our big catalog has become too expensive to mail to so many customers if they’re not giving us enough business,” Leahy says. During the past few years, most of the company’s growth has come from its national contract business, conducted by field sales reps working directly with the largest national hotel chains, such as Marriott and Starwood.

“We became aware that in our biggest purchasing areas, both geographical and concentration of buying power, we weren’t having any great growth,” Leahy says. Since the large chains preferred to deal with vendors “face to face, we learned about field sales and national sales and brought in a sales force.”

Started in the late 1990s, the field sales staff has nearly 50 employees and is expected to gain more this year. One group of the sales force calls on individual properties of independently owned operations, such as the franchise holders of Days Inn and Quality Inn properties; the other visits the centralized management companies of chains such as Marriott, Hyatt, and Hilton.

The chains will work out specific manufacturing arrangements for such commodities as shampoo and soap for its guest rooms, then American Hotel will ship the products to each individual hotel. With seven warehouses around the country, American Hotel is able to ship inexpensively — a major selling point for customers, Leahy says. “We run up to 20 of our trucks between each distribution center each day, depending on volume,” he notes.

Not only do the larger hotel chains want to receive the goods inexpensively, but in recent years they’ve been looking to receive fewer deliveries to their individual hotels, Leahy says. The more shipments they receive, the more staffers they need to process the shipments. “So if we’re able to put one month’s supply of all their items together on one shipment — things like linens, soaps, shampoos, cleaning supplies — the hotel’s operating costs go down,” Leahy says. In effect, American Hotel has taken on some of the logistical challenges for its larger clients.

Contracts with about two-thirds of the nation’s largest hotel operators now account for roughly half of American Hotel’s sales. But Leahy knows the cataloger can gain more business beyond capturing more hotel chains. So during the past few years it has started marketing to cruise operators and the healthcare market.

The cruise line business “is just a sideline to the hotel industry,” Leahy notes. And although American Hotel publishes a separate catalog for the healthcare market, it’s not a “significant” portion of the business yet. But the company has brought in a “heavyweight” consultant, Leahy adds, to build up the healthcare side of the business “and give it the attention it needs.”
Paul Miller

Keys to Success

Adapting to customers’ changing logistical and service needs Adding a field sales team to serve largest accounts Branching out into complementary markets

Gardening Market: Johnny’s Selected Seeds Blooms in Arid Market

You wouldn’t think that a 30-year-old seed cataloger based in Winslow, ME, could fend off the likes of Lowe’s and Wal-Mart. But although backyard victory gardens started from seeds have largely gone the way of Patti Page records and Look magazine, Johnny’s Selected Seeds is anything but past its prime.

Sales at the $15 million company have increased about 8%-10% during the past three years, although overall market share for gardening mailers has declined. According to the Elkridge, MD-based Mailorder Gardening Association, mail order sales in 1996 accounted for 9% of the $22.5 billion lawn and garden market. But in 2002, they shrank to 7% of the $39.6 billion market.

“Consumers would rather go down to the local garden market for their plants and flowers,” says Bruce Harrington, director of sales and marketing for Johnny’s Selected Seeds. “They are moving away from seeds. So we’ve got a stagnant market.”

So with the tenet “if you can’t beat ‘em, join ‘em” in mind, Johnny’s began selling to the garden centers and other retailers who were winning over the consumers. Introduced in the mid-1980s, Johnny’s 154-page commercial catalog now brings in two-thirds of the company’s sales.

One of the biggest challenges, Harrington says, was developing the Johnny’s brand. It took time to gain the trust of commercial customers. But the investment paid off: Harrington says the average order value is three and a half times that of the consumer customer.

Johnny’s has invested in extending its product mix too. It began offering plants as well as seeds and then branched out into gardening tools and accessories. Today sales of fertiliziers, books, gloves, pruners, and the like bring in 12% of the company’s revenue.

But as Harrington says, “you can’t grow sales and earnings if your house file is slipping.” So Johnny’s continues to prospect to businesses as well as to consumers — primarily women 45-65 years old with household income of up to $75,000. About 30% of its consumer books go to prospects.

“Our use of co-op databases has gotten much more focused in the profile of the prospect we are trying to reach,” Harrington says. The company has also fine-tuned its advertising, placing space ads in a small number of publications, such as Fine Gardening, Horticulture, and Mother Earth News and in card decks, which Harrington says still perform well for Johnny’s.

The Internet has gained Johnny’s new customers as well — both in the U.S. and abroad. “Where we’re growing significantly is our international efforts,” Harrington says. “About 8% of our sales come from international. Close to 30% of our overall sales come over the Internet. And the company has seen particular growth from commercial retailers in Canada and the U.K.”

Shipping seeds internationally is fraught with hurdles. Regulations vary by country, so a dedicated rep calls the overseas customers to discuss any potential problems. In some cases, Johnny’s must fill out a phyto-sanitary certificate, a document issued by the plant quarantine office in the country of origin declaring that the incoming seeds are free from pests and disease.

Harrington sums up Johnny’s as “an old company that still does things the old way. But it also embraces the new technology.”
MDF

Keys to Success

Adding a business-to-business division Fine-tuning its prospecting methods Adding ancillary products to boost order sizes

Industrial Market: C&H Manufactures a Growth Plan

It’s not a great time to be targeting U.S. manufacturers. According to the Washington-based labor organization AFL-CIO, manufacturing employment fell to 14.5 million jobs in December 2003, its lowest level in 45 years, and capacity used in manufacturing dropped to 74% in 2002, the lowest it’s been since 1983.

Milwaukee-based C&H Distributors acted upon the economy’s shift from a manufacturing-based economy to a service economy more than a decade ago. In the early 1990s the cataloger of tool carts, industrial safety supplies, and other factory shop and materials handling equipment began selling bookcases, cafeteria furniture, filing systems, and other furnishings that president Phil Areddia calls “front end” products. The company launched its C&H Business Furniture Essentials catalog, which it now mails in addition to its main title, C&H Buyer’s Guide.

But in an ironic twist, the very market that C&H entered to offset the slowdown in manufacturing is now itself a flailing market. Purchases of office furniture in the U.S. dropped 17.4% between 2000 and 2001, and 19.0% between 2001 and 2002, to $10.33 billion a year, according to the Grand Rapids, MI-based Business and Institutional Furniture Manufacturers Association.

But C&H isn’t panicking. Rather, “we’re constantly growing,” Areddia says, pointing to the company’s increasing global presence. C&H was acquired in 1998 by Kaiser + Kraft America, a division of Stuttgart, Germany-based TAKKT, a conglomerate that went on to acquire office furniture cataloger Topdeq in 1994, occupational safety products marketer Conney Safety Products in 1998, and food service supplier Hubert Co. in 2000.

In 1993, C&H expanded into the Canadian market by selling its products through Avenue Industrial Supply, which is also owned by TAKKT. And in January 2003 it began mailing C&H Productos into Mexico.

C&H’s main goal remains keeping its service standards high. Last year it created committees of 10-12 employees from all levels of the company to pinpoint areas in need of improvement and to offer solutions. The service committee, for example, tries to find ways of making order-taking more efficient. The new ideas committee is responsible for investigating all suggestions for improvement.

Areddia says the most helpful strategy for C&H has been trying to look at its operations through the eyes of its customers. “I would put myself on the other side of the desk, and ask, ‘If I were a customer, would I be a repeat customer?’ Once you change your view, things look a little different.”
Margery Weinstein

Keys to Success

Increasing its reach to include front office as well as factory Expanding beyond U.S. borders Challenging employees to suggest improvements

Travel Market: Backroads’ Comeback Journey

Just about every travel-related business suffered a drop in sales in the months following Sept. 11, 2001. Even two and a half years later, when discussing business forecasts, executives at travel companies typically add the disclaimer “as long as there isn’t another 9/11.”

One travel company that has fared better than average is Berkeley, CA-based Backroads, a catalog provider of biking, camping, and hiking trips. Founded in 1979, Backroads’ sales increased every year for the first 22 years of its existence, reaching $37 million in 2001. Then revenue slid to $35 million the next year and to $31 million in 2003. But this year, based on early bookings, founder/president Tom Hale is confident that sales will increase nearly 25%, to $40 million.

Almost immediately after 9/11, the company’s guest count dropped 25%, as the company offered refunds to guests booked on trips for the rest of 2001. In response, Backroads looked to improve its offerings. “We focused on all the details that contribute to our guest experience,” Hale says.

Seeing that family-related camping trips were becoming more popular, the company upgraded its offerings — bringing in luxury tents, adding assistants to build and disassemble the tents for campers, hiring childcare specialists for family trips to provide activities for the kids and more free time for the parents.

In the year since Backroads implemented the changes, guest ratings rose a “significant” degree, Hale says. So far, bookings for the domestic family camping trips are up 60% this year, he continues, while European trip bookings are up 12%.

In addition to modifying the amenities, Backroads has changed the destinations of its trips. According to the U.S. Office of Travel and Tourism Industries, only 58 million U.S.-based travelers journeyed abroad in 2001, down 5% from 60.9 million in 2000. In 2002 the number of Americans traveling abroad dropped another 3%, to 56.4 million.

Last year, Hale says, the war with Iraq “drastically reduced travel, and it killed travel to the countries that were unsupportive of that effort, particularly France.” The company cut the number of departures to France by 50%, from 114 in 2002 to 77 last year.

Increased circulation is no doubt contributing to Backroads’ sales hike as well. The company is mailing more than 1 million catalogs this year, up from a little less than 850,000 last year. It has doubled its prospecting following a longstanding two-step process of mailing a direct mail piece that requires prospects to fill out some questions and send in a self-addressed stamped envelope to receive a full catalog. Backroads rented names by modeling them through Equifax then using the Lifestyle Selector rental list with a few additional selects. Backroads’ target market is highly educated professionals residing predominately in major metropolitan areas.

To pay for the increased mailing, the company cut costs in other areas. Through negotiations with its printing broker, Backroads cut its printing and paper costs 15%-25% for this year’s catalog, says Ken Husband, Backroads’ manager of public relations and marketing partnerships.

Backroads saved another $50,000 by eliminating finger tabs from the catalog and $10,000 by dropping the reservation insert — the travel catalog equivalent of a catalog order form, Husband says. Backroads receives 70% of its bookings through customers calling them in, 10% online, and 20% via travel agents.

What’s more, the company has scaled back its office staff by 40% during the past few years, from 130 in 2001 to the current count of 80, by automating its customer relations platform. In the past, employees would phone each guest prior to his or her trip with predeparture information such as weather conditions and items to pack. Now that task is automated and the information sent via e-mail.

Hale is predicting that Backroads will be “quite profitable” this year. “We grew 23 years in a row,” he notes. “We then had to be nimble and plan around variable scenarios of shrinking and growing. Now we have to position ourselves for a much higher rate of growth than ever — though on the other hand, we may shrink too.”
PM

Keys to Success

Responding to customers’ changing travel preferences Slashing catalog production costs Reducing staff 40% by automating customer service