B-to-b reigns again; consolidation slows somewhat
As in 1997 and 1998, the strength of the business-to-business sector was the big news among the companies that make up Catalog Age’s exclusive ranking of the top 100 catalogers for 1999. On the other hand, many of the consumer catalogers on the list suffered slow – or nonexistent – sales growth.
In fact, while the 100 companies on the list averaged 21% catalog sales growth over the previous year, the b-to-bers enjoyed a more impressive 27% growth in sales.
Sales at perennial chart leader Dell Computer jumped 39% in 1999, to nearly $25.27 billion, enabling the company to increase its staff nearly 50%. But while Dell outpaced its nearest competitor, IBM, by more than $17 billion, IBM’s catalog unit enjoyed nearly as large a sales growth: 36%, according to estimates.
Other big winners among computer catalogers included CDW Computer Centers, which increased sales 48% while making productivity gains, partly through a 28% increase in its field sales force. PC Connection, which produces the PC Connection and Mac Connection catalogs, achieved 44% sales growth in 1999, so that sales are now nearly double what they were just two years ago.
And Black Box Corp., which sells computer networking supplies, grew its sales 40% largely through an acquisition binge. The computer connectivity marketer has bought more than two dozen service-related companies over the past two years to help it branch out around the country.
Among noncomputer b-to-b companies on the list, Aramark, the uniform and food service giant, achieved 31% growth in its catalog business, which includes business clothing catalog WearGuard and public safety supplies mailer Gall’s.
But perhaps the most dramatic success story is office supplies superstore Staples, which bought Quill Corp. in 1998 to bolster its fledgling catalog unit. In ’99 the company watched its direct marketing revenue soar nearly 60%. Not only did sales from both the Quill and Staples catalogs grow, but the company saw a considerable boost in contract sales made over the Internet. Just as important, Staples also boosted the bottom line by achieving efficiencies of scale with its facilities integration.
Consumer leaders sluggish
On the consumer catalog front, despite the continued strong economy and healthy levels of consumer confidence, some of the bigger mailers experienced only small sales gains.
The catalog sales of general merchandise cataloger/retailer J.C. Penney, the top-ranked consumer mailer on the list, inched up less than 1%, indicative of a companywide softness. Outdoor gear and apparel cataloger L.L. Bean had a minuscule 3% sales increase as its core catalog continued its three-year search for renewed vim and vigor.
Hanover Direct’s sales nudged up less than 1% – but that wasn’t such bad news for the multititle mailer. For one thing, the company turned 1998′s $12.7 million loss into a $10.4 million profit in ’99. For another, Hanover’s Internet sales bounded from $8.3 million in ’98 to $32.8 million in ’99, accounting for more than 11% of total sales. Hanover Direct reports that its 10 print catalogs were instrumental in driving customers to the company’s respective Websites.
Apparel cataloger Lands’ End couldn’t boast of even a single-digit sales gain. The company, which has suffered from management shakeups and inventory problems, and a lack of new product categories over the past few years, saw sales fall slightly – 3.8%. The company did, however, plan for 1999 to be a transition year, in which it reduced unprofitable mailings, cut expenses, and liquidated excess inventory to prepare for a more aggressive approach this year. Although sales dipped, net income increased 54% to $48 million.
Things could have been worse, though. At multititle horticulture and children’s products cataloger Foster & Gallagher, revenue plunged 23%. While some of the shortfall followed the company’s July 1999 sale of food gifts title The Popcorn Factory to Paragon Holdings, the company’s sluggish children’s division also contributed to the loss of roughly $110 million in annual sales. (Foster & Gallagher put the children’s group on the block this past spring.) Likewise, having discontinued mailing its Clifford & Wills women’s apparel book for more than a year before selling it to Spiegel in December, apparel cataloger/retailer J. Crew saw its catalog sales tumble almost 20%.
Some of the large consumer catalogers did manage double-digit sales growth, however. For instance, led by its resurgent flagship book, The Spiegel Group’s catalog unit – which also includes the Eddie Bauer and Newport News catalogs – enjoyed 16% sales growth over 1998. The company has now just about come full circle to its 1997 sales level, following a few years of circulation cutbacks.
Williams-Sonoma continued to ride its hot Pottery Barn brand, enjoying a 34% catalog sales increase. The multititle cataloger/retailer, which also mails the considerably slower-growing Hold Everything and Chambers catalogs, had perhaps its greatest success in 1999 with its Pottery Barn Kids spin-off title. The company continues to capitalize on the strength of Pottery Barn this year, with the spring launch of a Pottery Barn Bed and Bath book.
Among other consumer catalogers, multititle holding company Cornerstone Brands (which includes the Ballard Designs, Frontgate, and Garnet Hill home goods catalogs) had a whopping 47% sales gain. The strong economy has certainly helped the company, whose catalogs cater to upscale customers. And food gifts mailer Swiss Colony grew its sales 32%. According to president John Bowman, over the past few years the cataloger, which has traditionally done the lion’s share of its business in the fourth quarter, has worked to strengthen its spring sales by mailing more catalogs throughout the year – a move that has clearly paid off.
Acquisition frenzy ebbs
In recent years, major deals such as Office Depot’s 1998 merger with Viking Office Products and Staples’ purchase of Quill the same year – not to mention the multiple purchases of such companies as Cornerstone Brands, Genesis Direct, Fingerhut Cos., and Wilmar – dramatically shaped the Catalog Age 100. But the major catalog deal of the past year involved two already-jumbo mailers: Federated Department Stores, the parent company of Bloomingdale’s by Mail and Macy’s by Mail, and Fingerhut, which Federated acquired in February ’99. (Note that in this year’s chart, Federated’s 1998 sales reflect the sum of the then-independent Fingerhut’s ’98 sales as well as those of Federated Direct Marketing). In the other major catalog deal of 1999, a private investor group bought $2.44 billion computer mailer Micro Warehouse in December.
But beyond these deals, and the aforementioned acquisitions by Spiegel and Black Box, the year was relatively quiet on the consolidation front. Medical products distributor Henry Schein, which had snapped up five companies in ’98, bought only two last year. Metalcutting tools marketer JLK Direct Distribution, which had acquired four companies in ’98, sold one of those (Strong Tool Co.) last year. And maintenance repair and operating supplies marketer Wilmar Industries, which also bought four companies in ’98, made just one major deal in ’99, buying the $75 million J.A. Sexauer catalog.
The relative lack of mergers and acquisitions among the top 100 catalogers reflects a slowdown in wheeling and dealing within the industry at large. According to the investment bank Gruppo, Levey, & Co., 92 catalog deals were made in 1999, down 16% from 107 catalog transactions the previous year.
One reason for the decline, say some observers, was that investors were more skeptical. “There was less interest among investors, more questioning, and thus less investor pursuit of catalog companies,” says Larry West, president of New York-based M&A consulting firm, West & Co.
“The pure b-to-c consolidators, such as Cornerstone Brands and Genesis Direct, are no longer in the market buying,” adds Mike Petsky, CEO of New York-based investment research firm Winterberry Group. “While there are still a few active consolidators out there – namely Potpourri Collection – some consolidators [such as the now-defunct Genesis Direct] haven’t proven that the acquisition strategy works. And in b-to-b, consolidation has already taken place in many of the most attractive catalog segments,” such as maintenance, repair, and operating supplies, and office products. What’s more, Petsky notes, many private equity buyout funds have steered their interests toward Internet pure-plays.
More M&A on the way
But many believe that the mergers and failures among the dot-com marketers will spur more M&A activity within the catalog industry over the next few years. As Don Libey, president of Philadelphia-based investment banking firm Libey-Concordia, sees it, “Right now, retailers and major big corporate money are bottom-fishing. But huge consolidation is going to occur once the dot-com shakeout has settled. At that time, catalogs will have enormous value and will trade well above their current multiples and stock prices ,based on their solid fulfillment recognition, powerful operating systems, experience, and people.”
And as catalog companies become increasingly attractive to investors, it’s highly likely that more firms will be looking at them more seriously. “There are more buyers out there than there have been in a long time, including classic direct marketers and financial firms,” West says. “We’re also seeing more `lookers’ – most of whom are e-commerce and brick-and-mortar retail ersin nature. They tend to move much slower. But the acquisition activity will get more intense as they realize that it makes much more sense in this industry to buy rather than build.”
In fact, Petsky sees a merging of e-commerce, direct marketing, and catalog businesses, “with either catalogers looking actively to acquire pure-plays or the surviving pure-plays acquiring catalog companies.”
Petsky’s comment is backed by a recent study conducted jointly by management consulting firm McKinsey & Co. and accounting firm Salomon Smith Barney, which says that multi-channel marketers – which use catalogs, Internet, and stores – stand a considerably better chance of surviving the likely dot-com shakeout than “pure-play” or other single-channel companies.
Several catalogers we researched in compiling the 2000 Catalog Age 100 came oh-so-close to making the list. In fact, many of them expect to reach or blow past the $100 million revenue mark in 2000, and that could land them on next year’s 100 list.
Although total sales for San Francisco-based gadgets marketer The Sharper Image exceed $300 million, retail sales account for more than two-thirds of the company’s revenue, with 1999 catalog sales reaching just $66 million, and Internet sales accounting for $28.5 million. But senior vice president of finance/chief financial officer Jeff Forgan expects Web sales to reach $65 million this year, with catalog sales bypassing $70 million, making The Sharper Image a likely entrant into next year’s Catalog Age 100.
“We’re increasing catalog circulation this year 20%-25%,” Forgan says. “Our catalog continues to be our primary advertising vehicle. And our technologically advanced Website combined with the demographics of our customers, who are early adapters to computer technology, will help our Internet sales come close to catalog sales this year.”
The company has built up a well of new products through its own proprietary merchandise development initiatives, Forgan says, “and when you have the merchandise and a great Website, you can grow more quickly.” The company also plans to promote its site, catalogs, and stores more aggressively this year through radio, magazine, and newspaper advertising. “But the catalog still represents, far and away, the vast majority of our advertising dollars.”
Among other likely entrants into the Catalog Age 100 next year are the catalog/ Internet division of Northbrook, IL-based home furnishings retailer Crate & Barrel, which launched its fast-growing Web business only this past April. The company’s catalog division, which just a few years ago had sales of less than $15 million, has grown rapidly over the past two years. Also keep an eye out for school textbook mailer Delta Education and store merchandising signs cataloger Hubert Co.
- Foster & Gallagher: Sales at the multititle gardening and gifts mailer tumbled 22.9%. Although some of this was due to the July ’99 sale of the food catalog The Popcorn Factory to Paragon Holdings, disappointing sales from its division of children’s products catalogs (which include HearthSong, Troll Learn & Play, and Magic Cabin Dolls) were also a factor. Foster & Gallagher responded by putting the $68 million children’s unit up for sale this past April.
- J. Crew Group: Sales for the casual apparel cataloger dropped 19.6%, as the company sold off women’s apparel title Clifford & Wills after suspending publication for months. This came just a year after Crew unloaded the general merchandise Popular Club Plan catalog to Fingerhut Cos. Founded as a pure cataloger, the company’s future focus appears to be more heavily on retail than catalog.
- Andrew Corp.: Sales for the communications equipment marketer ebbed 3.9%. Product innovation, employee productivity, and market share gains were more than offset by pricing pressure, volatile global economies, and changes in customer spending patterns. The ’99 sales dip mystified management, and for good reason: Early 2000 sales have rebounded in a big way. Second-quarter sales jumped 41% over the same period last year, while net income vaulted 138%, making it unlikely you’ll see Andrew in this sidebar next year.
- Lands’ End: Sales for the apparel mailer fell 3.8%. Core catalog sales were flat, but the smaller corporate sales, children’s, and linens titles took off. The retrenching did pay off in net income, which jumped 54%.
- Multiple Zones International: Sales for the multititle computer cataloger were down 2.7%, as the company sold several international units. Sales were also hindered because an increase in central processing unit sales as a percentage of total sales cut into margins.
- Staples: Sales for the catalog division of the office supplies retailer leaped 59.5%, to a whopping $2.0 billion, as the company added 400 new trucks to its direct delivery fleet, and opened a Quill catalog division in the U.K.
- CDW Computer Centers: Sales for the computer cataloger were up 47.8%. Commercial sales soared 65%, largely aided by 28% growth in CDW’s field sales force. Commercial sales, in fact, rose to 93% of total company sales. And sales per active commercial account increased 40% in the fourth quarter alone.
- Williams-Sonoma: Sales for the catalog division of the multititle home goods marketer increased 34.2%, as it rode the rapidly building Pottery Barn wave into a red-hot kids’ furnishings spin-off that’s expected to reach $100 million this year, with a retail rollout expected by year’s end.
- Black Box Corp.: Sales for the computer networking equipment cataloger increased 40%, as the company acquired more than a dozen companies to branch off around the country.
- IBM Direct: Catalog sales rose approximately 36%, according to our estimates, although the company wouldn’t comment for this story. The company is shifting to higher-margin businesses and more efficient operations this year, which could boost the catalog business even more.