‘Alloy is establishing itself as a Martha Stewart Omnimedi a for teens’
What started out as a snowboard apparel Website five years ago has evolved into an $80 million multichannel marketer of teen apparel. And the founders of Alloy Online have even bigger plans.
“Like ESPN, CNN, and MTV, we want Alloy to have a strong media reach on its brand,” says Matt Diamond, CEO and cofounder of the New York-based company. “We’re building a media brand.”
The MTV model seems to be a recurring theme with Alloy. For instance, when discussing the reported fickleness of today’s teens, Diamond says: “They might be less loyal to brands, but they’re loyal to a product’s distribution or medium. For example, teens might not be loyal to a rock band, but they’re loyal to MTV.”
If that is the case, Diamond believes Alloy has an advantage over other apparel marketers. “We’re not private-labeled,” like catalogers such as Abercrombie & Fitch or The Gap, he says. “We sell merchandise from a number of brands. We funnel merchandise in and out as its popularity rises and falls.” This is the important part of the Alloy model, Diamond says, adding that, like MTV, “we’re reflecting rather than dictating trends.”
Trial and error
Alloy didn’t start off with this model. In January 1996, a few months before the planned launch of its snowboard apparel catalog, the company started a Website to gather the names of prospects. “We asked visitors to the site how old they were and if they liked to snowboard,” Diamond recalls. “And the answers were overwhelmingly ‘15’ and ‘no.’”
Those answers opened the eyes of Diamond and the other Alloy cofounders, chief financial officer Sam Gradess and chief operating officer Jim Johnson.
“We realized that we were reaching a much younger and much broader teen demographic than just kids who liked to snowboard,” Diamond says. “It was an enormous opportunity for us to reach the whole teen demographic.” So the partners broadened their merchandise focus to include a range of apparel for teens of both genders.
In 1997, the year Alloy relocated from Allston, MA, to New York, the catalog’s annual circulation was less than 1 million. By 2000, it reached more than 40 million. At the same time, the number of registered users on the Website has grown to more than 3 million.
What’s more, while the site offers plenty of quizzes, contests, chats, and other nonsales content, Diamond estimates that nearly 20% of online visitors have made at least one purchase. (The print catalogs also include celebrity features, quizzes, and other editorial content.) The average order for the print catalog and the Website is $80-$100.
Providing content as well as commerce on its site and in its print catalog not only wins over its target audience, but it also provides Alloy with another revenue stream. The company sells ad space online and in print, as well as sponsorships of its e-mail newsletters.
“They’ve built their business on a convergence media model that uniquely blends offline and online assets, including the three Cs that have received a lot of press lately: content, community, and commerce,” says Derek Brown, analyst for San Francisco-based investment firm WR Hambrecht & Co. “Alloy generated $2.9 million in ad revenue in 1999, and that jumped to about $14 million for 2000. We’re forecasting it to reach $28.4 million for fiscal year 2001.”
As of mid-February, the company was expecting to post its first profit, for the quarter ended Jan. 31. It projected revenue for fiscal 2000 to reach approximately $80 million, more than double the $31.2 million in sales it reaped in 1999. “The catalog and the Website together generate a tremendous reach,” Diamond says.
To maintain and expand that reach, Alloy has struck numerous marketing and media partnerships. The company has joint marketing deals with music retailer Sam Goody and publisher Scholastic Books, and a partnership with Penguin Books, which will produce an AlloyBooks imprint. And within the past year it acquired the assets of book publisher Girl Press and bought 17th Street Productions, a New York-based publisher of young adult books, including the Sweet Valley High and Roswell High series.
“Alloy realizes the importance of offline brand impressions to maintain brand equity and traffic building,” says Jeff Klinefelter, senior analyst for Minneapolis-based investment firm U.S. Bancorp Piper Jaffrey. “With its acquisitions and partnerships, Alloy is establishing itself as a sort of Martha Stewart Omnimedia model for teens — with an online and offline reach, as well as books and other media.”
And investors have taken note. Engelwood, CO-based Liberty Digital, an Internet investment firm spin off of Liberty Media, acquired about a 15% stake in the company for about $19 a share in March 2000, Diamond says. “That investment was not only cash, which helped us with our CCS acquisition, but it also gave us a great link to another distribution channel.” Diamond says Liberty has interactive television holdings, which provides Alloy with a possible chance “to have access and conduit to new demographics.”
Saying “no” to retail
One channel Alloy won’t pursue is retail, Diamond says. “Our growth is from reaching customers and prospects online and en masse by catalog.”
Alloy’s decision comes as more direct marketers, including fellow teen marketer Delia’s and women’s apparel cataloger J. Jill, are making significant retail pushes. But Klinefelter, for one, thinks Alloy will continue to thrive even without a brick-and-mortar presence, in part because its strong branding efforts have generated significant catalog sales. “Alloy is a success compared to other start-ups [such as Pets.com] of the past few years because it has a substantial catalog business,” he says. “More than 50% of Alloy’s sales are from the print catalog.”
Alloy is expanding its horizons in other, nonretail ways. It already has a Japanese-language Website and mails into Japan. It’s also starting to mail into the U.K. and Germany, and plans to launch sites there as well. Diamond estimates that about 5% of Alloy’s customers are overseas.
Domestically, Alloy is trying to expand as well, to capture a larger portion of the teen male market. Only about 20% of the catalog buyers are boys, though boys account for about 35% of the Website’s traffic.
So in July, Alloy bought San Luis Obispo, CA-based California Cheap Skates (CCS) catalog of skateboard and snowboard apparel and gear. “We’ve been able to marry up our database with theirs, and take some of the guys out of the Alloy database and give them to CCS,” Diamond says. The Alloy house file is about 6.5 million; prior to the acquisition, CCS mailed 5 million catalogs a year.
Not safe from stock volatility
Such investments haven’t protected Alloy from the volatility of the stock market. On Feb. 16, the company’s stock was trading at 13-1/8 a share, down from its 52-week high of 20-1/4. But WR Hambrecht’s Brown says that the decline in stock value has more to do with the public’s perception of the business as a start-up than with the strength of Alloy as a company.
“In some respects, Alloy’s lack of boundaries as a result of its convergence media model worked against it,” Brown says. “In 1999, the catalog was viewed as a limitation, because people were looking for Internet revenue. In 2000, business-to-consumer companies were falling out of favor, just as many players in online commerce started to fall apart.”
Still, Brown says, Alloy is a pioneer in its field: “I think many other companies will look like Alloy in a few years.”