The vibes for 2001

Well-capitalized catalogers have just about every reason to look toward the future with optimism. Based on current conditions and economic projections, it’s hard to find much wrong with the catalog business-and the good fortune is expected to hold through 2001.

For instance, catalog sales growth, which has outpaced retail sales growth for years now, is expected to continue to do so. “Over the past five years, the catalog business has grown up to 10% a year, while traditional retail has grown only 5% a year,” points out Derek Leckow, an investment analyst with Chicago-based Barrington Research Associates. For the near future, he says, “I see that trend continuing.”

Other positive trends More good news: Consumers will undoubtedly continue to have less time to shop at retail, further highlighting the convenience of catalogs. Moreover, it’s hard to imagine that many catalog costs will rise significantly by 2001. The two biggest cost worries, paper and postage, seem to be under control. Paper experts anticipate some minor increases, but certainly no price hikes anywhere near the almost 80% hikes during the paper crisis of ’94-’95.

And catalog growth will be aided by the steady growth of the U.S. economy. Earlier this year, a group of 18 Wall Street economists organized by the Bank of America predicted that the economy would continue growing at relatively the same pace through 1999, with the gross domestic product increasing roughly 2.4% next year and inflation increasing at the same rate. The long-term sustainable growth rate for the U.S. economy-themaximum rate of growth that an economy can sustain long-term without accelerating inflation-is 2%-3%, according to Federal Reserve vice chairman Alice Rivlin.

And what of the Internet? Add to all this good news the advent of electronic shopping. By 2001, most catalogers are likely to offer an Internet shopping option. And consumers will be even more comfortable using this medium. “Catalogers, with the fulfillment in place, are in a natural position to take advantage of the Internet,” says Barrington Research’s Leckow.

Still, most industry observers doubt that Internet shopping will be a significant portion of the catalog industry’s revenue by 2001-nor will it have any dramatic impact on the use of the printed catalog. “My expectation for online catalogs is they will be insignificant for the near future,” says consultant Dick Hodgson.

Similarly, catalog consultant John Lenser believes that the Internet “will hurt regular Main Street retailers more than it will direct mail catalogers.” The Web won’t become a place where you browse, he says, but rather where you go for what you already know you want or need. “I see it as a major way for people to place orders, in addition to toll-free numbers,” he says.

A tougher climate So is there any bad news? Some, most experts agree. First, smaller, underfinanced, and startup catalogs will struggle more in the future. (See “As for those small guys…,” p. 76.) Second, despite all the favorable signs for continued sales growth, it will be even tougher for catalogers to make a profit. Consumers will likely continue to receive more and more catalogs, and the current trend of flattening response in a number of catalog market segments is expected to continue. And while the cost of doing business is not expected to soar, any increase will put a strain on a business in which profit margins are already slim (typically far below 10%).

As a result, catalogers will have to keep searching for greater efficiency-mainly via consolidations (see related chart, p. 74). “I see no reason this industry should differ from banking, airlines, and other industries in which there are so many economies that come with consolidation,” says Darrell Ross, president/CEO of $190 million jewelry and tabletop cataloger Ross-Simons. (His company made its first acquisition, the Geary’s gifts catalog, this past October.)

Peter Canzone, president/CEO of $1.3 billion multititle apparel mailer Brylane, says his firm, which over the past few years has snapped up Chadwick’s of Boston and King-Size, will “look for acquisitions that lead to profits. We’re looking to grow profitably, not growth for growth’s sake.”

Likewise, Don Steiner, manageing partner of multititle company International Cornerstone Group, says, “We have clear potential to reach sales goals not only by getting significant growth from our existing catalogs, but also if we can find acquisitions that meet our [profit] criteria.” The five-year-old, $200 million-plus Cornerstone owns Frontgate and Ballard Design, among other titles-all of which are reportedly profitable.

But while strategic consolidations should improve the overall financial health of the industry through 2001, observers note that one problem-the labor market shortage, particularly in the fulfillment area-is not likely to improve.

“When you’re at a full economy as we’re at now, you can’t find anybody for $7 an hour,” says fulfillment consultant Curt Barry, president of F. Curtis Barry & Co.

“One of my clients, a $200 million-plus mailer, has run help-wanted ads for weeks and can’t get anybody to answer them. And this is only the spring. What is this company going to do when its volume is four times greater this fall? I don’t really see the problem diminishing until people need jobs as the economy cools off. But the economy isn’t showing any signs of cooling off.”

Unfortunately, the factors that will encourage growth among the more solid catalogers over the next three years-steady costs, a solid economy-won’t necessarily help the smaller players.

For one, investment capital continues to pour into the coffers of larger catalogers, such as $100 million-plus conglomerate Genesis Direct and $60 million gifts mailer The Paragon. Smaller catalogers, such as many of the nearly two dozen that Genesis has bought over its three-year history, have faced and will continue to face financial crises as investors back away. For instance, children’s apparel mailer Biobottoms almost went out of business two years ago before it was finally bought by Diplomat Corp. (Diplomat subsequently sold the book to Genesis Direct in April.)

And entrepreneurs had better have a truckload of money if they want to enter the catalog business in the future. Catalog consultant Dick Hodgson says it currently costs at least $1.5 million to launch a viable catalog business, a figure that’s not going to shrink over the next several years.-PM

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