The vibes for 2001 Jun 1, 1998 12:00 PM
, Paul Miller
JobZone
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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
