What is to Become of Single Title Catalogs? – Part 3 – Options to Consider

Although catalogs struggle throughout the year, every January seems to bring news of yet another catalog that has succumbed to the inevitable, and will be closing their doors.  The news that Delia’s was closing came in early December. I expect there will be more in the next few weeks.

In case you missed them, I’ve written two prior posting on the future of single title catalogs, focusing on the common traits of single titles (low margins, high costs, etc.) and common problems (lack of talent, lack of structured leadership, etc.)

What Is To Become Of Single Title Catalogs? – Part 1

What Is To Become of Single Title Catalogs? – Part 2

Let’s be clear – there are some single title catalogs companies that are doing well. They have great margins, are in a product category with little competition, their products are good, and they have loyal customers.  An example is Dakin Farm, a small food catalog located here in Vermont selling Vermont cheese, smoked meats, and of course, maple products. I’ve been a customer for almost 30 years, and they have been a Datamann client for many years.

The company has been run by Sam Cutting since the early 1980s (and by his dad for 20 years prior to that), and as Sam has described many times before, it is no picnic. The logistics of shipping thousands of perishable smoked hams and turkeys out of VT in the weeks before Christmas and Easter is daunting. But, Dakin Farm continues to grow – little by little – every year. Every so often the USDA and the state of VT throw a regulatory curve ball at Sam, but Amazon is not going to start dropping smoked VT hams from drones anytime soon. One thing Sam has in his favor is there will always be a demand for high quality, moderately priced, regional food specialties. That’s what keeps so many of his customers returning year after year. (His house file response rates are astonishing). Could you roll out Dakin Farm’s model on a grander, national scale? No. Has Dakin Farm provided the Cutting family with a sound business, that continues to grow, and which could survive another 50 years? Yes.

For every Dakin Farm, there are equally many single title catalog companies that are weak because they are getting hammered by competitors, they have poor margins, and their merchandise has dropped in quality. One mailer, commenting on one of my prior posts stated that in general, most single title catalogs simply do a lousy job of being a catalog. “It is no longer enough to know a lot about a product niche.  Today you have to apply data and knowledge to make it work, and frankly, there is a dearth of real catalog science out there today.”

So, let’s assume that you’ve reached the point of where you have either decided to sell your business, or want to bring in some additional funding to grow the business. Let’s further assume that regardless of the scenario you choose, you plan to stay with the company, that you are not simply looking to sell and walk away. (This is an important caveat, because it means you are looking for the best business solution for the company, not just the highest bidder). Where can a single title company go for help?

Private Equity: Private equity is not necessarily the answer, as in many cases the catalogs that are struggling are already being run by private equity that has little practical knowledge of running a catalog company and makes numerous errors. These catalogs are two and three purchases removed from the original owners/founders.  Brookstone (which filed for bankruptcy in early 2014) has had six different owners, and one spell as a public company, since having been sold by the original owners. Moreover, in some cases, these private equity-owned companies are not single titles, but multi-titles. Size is no guarantee of success.

It’s the same old story. Shareholders increasingly demand short-term results to drive returns, and innovation and investment too often suffer. As a result, there is no real innovation, certainly none in merchandise. From my experience, the emphasis is always on building out more channels, because that’s what’s sexy.

Online: Seeking partnerships or even selling out to successful online companies is not really an option either. Why would an online company want to acquire a catalog? Most successful online companies have an attitude of “what existing company/industry do we need to destroy with technology and new ways of selling, to enrich ourselves and our investors, and what is the best way for creating a customer need that will facilitate that quest”?  Linking up with a paper catalog is not part of that business mentality.

ESOPs: Here in Vermont, which is quickly becoming the most liberal state in the union (some would say “most socialist”), employee buy-out plans are a popular topic. But in my opinion, ESOPs simply take an existing problem (determining the best way to run a company in a deteriorating industry) and spreads that problem from one owner out to 100+ owners. ESOPs don’t change the ability to fix the underlying problem and weaknesses.

Existing Conglomerates: Selling out to an existing successful catalog conglomerate (Cornerstone, Orchard Brands, Potpourri Group) may seem like the most viable solution, but those companies have gotten very good at analyzing what catalogs are good investments, and which would be a viable acquisition from the perspective of synergy with their existing titles. In general, they know that the bloom is off the rose, otherwise, why would you want to sell? Moreover, they are not going to buy something that is beyond salvation.

Many years ago at a DMA Catalog Conference, I heard a speaker from Foster & Gallaher, when F&G was still in the mode of acquiring new catalog titles, discuss  how they typically received about 150 inquiries a year from companies wishing to be acquired. They whittled that down to 15 companies that they took a serious look at, then got really serious with three or four, and usually acquired one. Of course, F&G’s eventual implosion doesn’t make them a good case study for how multi-title companies should grow. But one lesson I remember from his presentation was that the most successful acquisitions they had made started years before, with casual conversations between F&G management and the owner of the other company.

The bottom line is that the M&A market has dried up in 2015, with very few truly successful transactions occurring anymore. In my opinion, the acquisition by Cornerstone of Chasing Fireflies in 2012 was the last good catch of a successful title. But it was one good company buying another good company.

If private equity, or selling out to online companies or other catalog conglomerates are all off the table as viable options, what does that leave?

Create You Own Mini-Conglomerate: Prior to the recession, every time I visited a client, either the CEO or VP of Marketing would pull me aside and say in hushed tones “We are looking to acquire another title. Let us know of anything that is for sale”. What I always found funny was that they always thought they were the only ones asking me this. Yes, it is tempting, even today, to think in terms of either acquiring another title – oh, and it always has to have a peak season different from yours – or starting your own second title.

Clients will cite the advantages presented to LL Bean, Lands’ End, and Cabela’s of having separate titles for men’s, women’s, home, kids, hunting, etc. They start thinking in terms of “if they can do it, we can too”. They overlook the tremendous advantage these companies had, such as already doing at least $1 billion in sales, or having started those titles more than 10 (even 20) years ago, when the cost of entry was so inexpensive.

Acquiring another title is always the preferred catalog growth strategy because it is perceived as quicker. Plus, human nature always tells us that our superior management skills will allow us to not only find a hidden gem that others have overlook, but that we’ll acquire it at a huge discount because we are such great negotiators. Or that perhaps divine providence will shine on us to allow these two things to occur.

But let’s face it, even if you could get someone to loan you the money to buy another title today, what would that get you? In my experience, 95% of the time you would discover the newly acquired title either had far more problems than what you expected (which is why it was being sold in the first place), or there was absolutely no synergy with your existing customer files because both were too distinct. If there is no synergy between the customer files, what is the purpose of acquiring another title? This is what happened when Brookstone acquired Gardener’s Eden, and discovered that the two customer files had absolutely no synergy. (You would have thought they might have checked that BEFORE they made the acquisition, but why let common sense stand in the way of a good deal?) Gardener’s Eden stopped mailing a few years later, and became a huge write-off mistake to Brookstone.

Where does that leave you for a survival strategy? That’s where I’ll pick up with Part 4 – the Road to Redemption.

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by Bill LaPierre

VP – Business Intelligence and Analytics

Datamann – 800-451-4263 x235

blapierre@datamann.com