THE CATALOG AGE 100

Aug 01, 1999 9:30 PM  By

Acquisitions and the Web: These two issues have been driving the catalog industry for the past couple of years, so it’s no surprise that they’re key to the growth of the companies in Catalog Age’s exclusive ranking of the top 100 catalogers of 1998.

Just within the past year, a number of companies “bought” their way onto the Catalog Age 100 or into an appreciably higher position in the ranking. For instance, office products superstore Office Depot had 1997 catalog sales of roughly $632.5 million – nothing to sneeze at, but less than 10% of the company’s total revenue of $6.72 billion. But after merging with catalog giant Viking Office Products in August 1998, Office Depot’s catalog sales for that year soared to $2.7 billion, nearly one-third of the company’s total revenue of $9 billion, and high enough to land the company the number-four spot in this year’s ranking.

Office Depot’s merger with Viking followed another mega-merger in that category: the May 1998 acquisition of office supplies cataloger Quill Corp. by office supplies retailer Staples. The Quill purchase also tripled Staples’ mail order sales, from approximately $270 million in ’97 to roughly $825 million last year.

“There are a whole series of industries that can benefit from owning a catalog business and possessing the ability to sell direct through e-commerce and paper catalogs,” notes Mal Appelbaum, a principal in New York-based private equity investment firm Wand Partners. Indeed, last year’s rage among retailers to buy into cataloging wasn’t limited to office products marketers. Department store chain Proffitt’s snapped up Saks Fifth Avenue in September 1998, and while the cachet of the upscale Saks brand certainly provided much of the motivation for Proffitt’s (the company subsequently shed its name and assumed that of its acquisition), Saks’s growing catalog division sweetened the deal. Also, in July ’98 Saks had purchased men’s apparel cataloger/retailer Bullock & Jones to round out its mail order division, which sold women’s apparel and home decor.

Fellow department store titan Dayton Hudson Corp. acquired a foothold into cataloging with its April ’98 purchase of $190 million multititle gifts mailer Rivertown Trading; the deal enabled Dayton Hudson to debut on the Catalog Age 100 at number 73. Since the department store behemoth, whose retail chains include Target and Marshall Fields, expressed no desire to launch print catalogs for its brands, many observers concluded that the company was in actuality buying Rivertown’s ability to take and fulfill online orders – even though the cataloger at the time was not an online merchant.

“Companies can either buy other companies with the capability to fulfill orders or they can build those capabilities on their own,” Wand Partners’ Appelbaum says. “So even smaller catalogers that have the capability to fulfill orders and provide customer service will be attractive to e-merchants, retailers, and other bigger companies that traditionally wouldn’t look at them.”

Case in point: $4.78 billion toy manufacturer Mattel’s July ’98 purchase of dolls and books manufacturer/cataloger Pleasant Co., which had 1997 sales of less than $300 million. Mattel is using Pleasant Co. – and the mail order expertise of its founder, Pleasant Rowland, who is now vice chair of Mattel – as a springboard for an entire direct marketing strategy. It launched a catalog for collectors of its most famous property, the Barbie doll, and by the holidays it intends to launch four more titles. By using Pleasant Co.’s three call centers and 1.5 million-sq.-ft. distribution center, rather than building its own catalog fulfillment and order-taking back-end, Mattel expects to make back the $700 million it paid for Pleasant Co.

Mattel’s growth strategy exemplifies what Craig Battle, managing director of Princeton, NJ-based investment banking firm Tucker Alexander, calls “a shift toward strategic acquisitions. We’re seeing more thoughtful acquisitions, not the craziness in the ’70s and ’80s, when companies felt they had to make acquisitions just for the sake of growth. Now companies are interested in strengthening the market segments they’re already in.”

The b-to-b food chain

Such is also the case among business-to-business catalogers, many of which profited last year primarily by snapping up their smaller competitors.

Medical, dental, and veterinary supplier Henry Schein, for instance, acquired five competitors last year, while industrial metalcutting tools cataloger JLK Direct Distribution and maintenance and repair supplies cataloger Wilmar Industries each bought four companies.

And two months after spinning off from U.S. Office Products and going public, and one month after acquiring two specialty marketers, educational supplies cataloger School Specialty purchased its largest rival, $180 million Beckley-Cardy Group.

Other catalogers looked beyond our borders for expansion opportunities. Just as many retailers and manufacturers prefer to acquire a back-end rather than build one from scratch, a number of catalogers would rather buy their way into overseas markets than create their own infrastructures. Computer cataloger Insight, for one, chose to enter the U.K. market by acquiring British direct marketer Choice Peripherals in April ’98. In December, the cataloger broke into the German market the same way, buying German cataloger Computerprofis Computersysteme and Burokommunikation. Insight estimates that overseas sales accounted for 8% of the company’s total revenue of more than $1 billion.

Computer networking equipment cataloger Black Box took a different tack with its acquisitions. Instead of buying overseas marketers (international versions of the Black Box catalog already accounted for nearly half of the company’s annual sales last year), Black Box bought two cabling installation and maintenance providers: Pennsylvania-based ATIMCO in January ’98, and Florida-based ANSI/Wahoo in June ’98. Black Box expects to acquire additional service providers so that it can ultimately offer technical support across the United States.

The acquisitions champ

No discussion of acquisitions would be complete without referring to Fingerhut Cos. Last year the low-end general merchant – a veritable sleeping giant – woke up. It gobbled up multititle apparel mailers Arizona Mail Order and Bedford Fair, and J. Crew Group’s Popular Club Plan, which like the core Fingerhut book targets lower-income shoppers who prefer to buy on credit. With these acquisitions, Fingerhut illustrated the trend of buying companies to boost share in a core market segment. But it also bought minority interests in four online catalogers: PC Flowers & Gifts; promotions site FreeShop.com; outdoor sporting goods marketer the Zone Network; and Roxy Systems, an online marketer of digital communications and entertainment systems.

One of the first big-name catalogers to invest in independent Internet merchants, Fingerhut had anticipated another acquisition trend. “We’re going to see more and more investment in Websites,” Battle says. “Just as there’s a land grab among e-commerce companies trying to claim a niche like [online bookseller] Amazon.com did, you’re going to see catalogers scrambling to make deals” with online merchants.

But wait, there’s more. Having grown its database to 31 million names and bolstered its investment in the Internet, Fingerhut was itself acquired, this past March, by Federated Department Stores, whose properties include Bloomingdale’s By Mail and Macy’s By Mail. At the time of the acquisition, Federated spokesman Jim Sluzewski noted that “Federated’s growth strategy includes building our nonstore retailing through the catalogs and Internet businesses.”

Federated’s investment in Fingerhut and Fingerhut’s investment in online-only merchants show that a number of the big players are betting on the Internet as a growth vehicle. And while “most catalogers believe that no one is really making money online yet except for some niche catalogers,” Battle says, a number of the members of the Catalog Age 100 are posting significant Web sales.

‘Net sales go mainstream

As one would expect, the computer catalogers racked up the biggest online revenue: roughly $3.3 billion in Internet sales for IBM; $2.5 billion for Dell Computer Corp.; nearly $187 million for Micro Warehouse; and a total of $125 million for CDW.

But while the computer marketers may be reaping the most online revenue, noncomputer catalogers are catching up in terms of the percentage of total sales that come from the Web. While nearly 9% of PC Connection’s, 8% of Micro Warehouse’s, and 7% of CDW’s sales were attributable to the Internet, an impressive 10% of entertainment giant Walt Disney Co.’s direct marketing revenue, 9% of credit card firm American Express’s catalog sales, 7% of American Blind and Wallpaper Factory’s revenue, and 5% of sales for adult entertainment marketer Adam & Eve were attributable to the Internet.

Considering the growth of the Internet, the decision of general merchandiser J.C. Penney – as good a bellwether of middle America as any – to spend $75 million to promote its Website this year makes perfect sense. The “early adapters” are giving way to the masses, so if you want to reach them, time is running out.

Several companies among the Catalog Age 100 are going so far as to invest in the Web at the expense of their print catalogs. Computer retailer CompUSA, for instance, announced this year that it was phasing out its catalog altogether. Multititle consumer cataloger Hanover Direct plans to reposition three underperforming titles – women’s apparel book Tweeds, men’s apparel title Austad’s, and housewares book Colonial Garden Kitchens – as online-only catalogs.

And the former Genesis Direct is making the ‘Net the linchpin of its new marketing strategy. The multititle mailer, which in less than three years bought or launched nearly three dozen catalogs, this past February changed its name to Proteam.com and announced that it was remaking itself into an online marketer of sports-related merchandise – although it would continue to mail its nine sports catalogs, such as Manny’s Baseball Land and Hot Off the Ice. In the meantime, the firm was selling or shutting its nonsports properties.

Granted, Genesis’s strategy may speak less of the Web’s potential than of the company’s inability to make a success of its core business proposition: to buy up disparate titles, many of them tiny or unprofitable, and try to create the economies of scale to make the venture a success. “Genesis was not only consolidating the call centers and the databases and the physical fulfillment, but also the creative,” Appelbaum says. “And that’s dangerous.”

Genesis’s downfall brings us neatly back to the trend of strategic acquisitions and the decision to zero in on a core market. “The larger catalogs are beginning to focus on their core titles, their core brands, and what’s made them distinctive in the marketplace,” Battle says. It’s a trend that he expects to continue at least to the year 2000.

Take housewares cataloger/retailer Williams-Sonoma’s sale of its $22 million Gardeners Eden catalog to Brookstone: “Williams-Sonoma is really all about the Pottery Barn and Williams-Sonoma brands,” Battle explains. “By selling Gardeners Eden, it shows that it wants to focus on the brand equity of its core titles and devote its resources to committing to the Web.”

While selling a successful title may seem like an unconventional move for a major cataloger, given the trend toward acquiring, Appelbaum, for one, thinks that more major catalogers need to reexamine their growth strategies. Divesting properties to free up funds to invest in alternative channels like the Internet may prove the most profitable strategy in the long run. “You traditionally think of larger businesses as being slow to react,” he says. “The ones that aren’t encumbered by the traditional way of thinking are the ones that are going to succeed.”

For most of the companies in the Catalog Age 100 that saw a sales drop in 1998, the dip in revenue was, if not planned, at least expected – and in some cases beneficial to the bottom line.

For instance, although catalog sales at general merchant Spiegel (#10) (which includes apparel books Eddie Bauer and Newport News) fell more than 8%, the company ended the year in the black for the first time since 1994. The company attributes much of its $3.3 million in net income to reducing its circulation and mailing smarter.

Hanover Direct (#24) also reduced circulation among its 12 titles, though less than 1%. But the company attributes its 2% drop in sales, to $546.1 million, to the poor performance of its Tweeds, Austad’s, and Colonial Garden Kitchens catalogs.

Likewise, general merchant Damark’s (#33) decision to slash circulation 18% didn’t account for its entire 18%-plus drop in sales. Response rates tumbled “dramatically,” the company admitted in its annual report, resulting in a net loss of $19.6 million, compared to net income of $6.3 million in ’97.

Circulation had nothing to do with the 58% plunge in annual sales at Moore Medical (#95). In late ’97, the b-to-b medical supplies cataloger stopped selling wholesale drugs, which had accounted for more than half of its revenue. Fierce competition and low margins characterized that portion of the medical market, Moore had claimed, making it unprofitable – and 1998′s results bear the company out. After losing $2.9 million in ’97, Moore posted net income of $2.8 million in ’98.

Industrial electronics cataloger Newark Electronics (#25) blamed the continuing Asian crisis and a market glut for much of its 9% slide in revenue, to $521.7 million. But an attempt to cut discounts to its larger customers hurt the company too. The cataloger has reinstated the discounts and is now planning to boost circulation and prospecting as well as grow its merchandise selection to return to growth mode.

Apparel cataloger/retailer J. Crew (#40) ended ’98 in divestiture mode. It sold $180 million general merchandise catalog Popular Club Plan to Fingerhut in November and, after failing to find a buyer for $74 million women’s clothing book Clifford & Wills, announced it would close that title within two years.