Purveyors of Creature Comforts

This is the tale of how two veterinarians went from selling mail-order pet vaccines from a back room in their clinic, to being the nation’s largest pet supply cataloger.

Drs. Race Foster and Marty Smith have spent the last 20 years engineering a company known for remarkable customer service, high-quality merchandise, efficient fulfillment operations and sound fiscal responsibility. Today, the veterinarians-turned-merchants own six catalog titles and four Web sites, and say they’ve never had an unprofitable quarter.

Moreover, these two catalogers show no signs of slowing down, even in this difficult economy. If anything, business is booming for the Doctors Foster & Smith (DFS) catalog operation. One could even call this a lesson in survival of the fittest. This year, the company launched its own line of branded pet foods and unveiled the country’s first veterinarian-owned mail-order pet pharmacy — two ventures that took years to set up — and it’s expanding its Rhinelander, WI-based headquarters.

“We’re not a ‘me-too’ company,” says Foster. “We found an unfulfilled niche, and we’re serving it. Our products slip in between the high-priced pet products people buy at their vet clinics and the low-cost items found in a big box retail store. We’re licensed veterinarians, and that means we take our customers’ trust very seriously.”

Joe Voellinger, Internet and public relations manager at DFS, says the doctors started selling pet products in the early 1980s simply because they wanted to help their clients buy the quality products their pets needed at affordable prices. At the time, he says, many veterinarians were putting high mark-ups on the products they sold from their clinics.

“Marty and Race had many clients who said, ‘I’d like to buy these products, and I know my pet needs them, but I simply can’t afford them.’ So they started [selling products] out of a back room in their clinic, and now they’re the largest direct-commerce pet supply merchant in the country. But it all started because they wanted to make pet care more affordable to more people.”

Today, DFS sells a wide variety of pet-related merchandise, including food, medications, grooming supplies, live fish, aquarium merchandise, pet treats, cages, leashes, dog beds, training aids, books, videos and much more. From a desire to supply value-priced, high-quality pet products to a mail-order business that enjoyed $156 million in sales in 2002, the path DFS has taken in the last 20 years may offer insights for other merchants who want to expand their operations while retaining the core business values that propelled them into the catalog industry in the first place.

Steady Growth, Smart Acquisitions

As noted, DFS distributes six catalog titles. The main catalog (pictured on page 30) includes a wide variety of dog and cat supplies, and the specialty titles offer products for cats, fish, reptiles and small animals, birds, and backyard-pond enthusiasts. The cat-products catalog is a spinoff from the main title, and the other four were acquired in the last two years (see “A Company’s Chronology,” on page 30).

Its biggest acquisition — the one that received much press attention and helped to propel the quiet doctors into the catalog industry’s spotlight — was Pet Warehouse in 2001. An Ohio-based cataloger of pet supplies, Pet Warehouse was a competitor to DFS, and its acquisition signaled that the Wisconsin company was now a force to be reckoned with in the pet-supply industry.

In quick succession, DFS bought four other pet/pet-supply companies: Hornbeck’s, eTropicals, LiveAquaria.com and Flying Fish Express. Why acquire titles?

“About two years ago, we talked about getting into the aquatics and bird business,” Foster explains. “Some customer surveys indicated that our customers wanted to see more fish and bird products, because many dog and cat owners also own these animals. We determined that a fish title probably could add a few million dollars a year in sales, but we had to decide what is the best way to achieve that. Is it to start that business from scratch within our own catalogs, or to buy another title that already specializes in it? Obviously, we went with the latter.” Foster says all of the acquired titles combined so far have added about $30 million a year in sales.

All of the acquisition opportunities to date came to the doctors either individually by the catalog owners or through brokers. “We didn’t seek out any. They all came to us,” says Foster. When asked what they look for in such opportunities, Foster notes: “The products have to be part of our core business, which is household pets. And the timing has to be right. For example, if we’re going to borrow money to finance the deal, the prevailing interest rates have to be low enough to make the deal attractive.”

Potential operational efficiencies also come into play, says Smith. For example, DFS now enjoys greater volume discounts on its printing and paper purchases. Additionally, it now co-mails titles, which has helped reduce overall postage costs from what the catalogs’ previous owners were paying. Prospecting and housefile segmentation has become more efficient, as well. “We can overlay our lists, take those names and add buyers to each list,” says Smith.

Finally, staffing efficiencies have been realized. “We have all catalog designers here in-house. In fact, we didn’t have to hire more people to take on these acquisitions. We’ve just grown more efficient overall.” All operations for the acquired titles were moved to Wisconsin, except for live fish distribution centers in Florida and California, which were left in place to capitalize on their proximity to ports.

While such operational efficiencies always are welcome, especially in a challenging economy, the acquisitions didn’t come without their share of headaches. “When we moved Pet Warehouse from Ohio to Wisconsin, it was disarray for two months,” says Foster. “We had backorder rates that were higher than we were comfortable with. But we learned a lot, which helped us with the subsequent acquisitions.”

One lesson learned was to spend more time on preparing its contact center staffers to answer questions asked by the acquired title’s customers. “We had to get our agents up to speed on the new products, and some of the animal health issues involved with those products are complicated. People called to ask, for example, ‘Can I use this product on a pregnant cat or dog?’ Our reps have to know the answers. We brought in trainers, vendors, manufacturers — anyone who could help us get up to speed.”

The fish titles were particularly challenging to integrate, says Foster, mostly because the core customer demographic, men ages 20 to 35, is different from that of its main catalog title, women ages 35 to 50.

“Customers of fish titles are a demographic that places high demands on a call center and will deride your company online if they think you don’t know what you’re doing,” says Foster. “It was a culture shock for us. We had to train our contact center associates on fish knowledge and get them to understand the complexities of the questions people had regarding, for example, salt and freshwater fish, equipment, aquariums and such. It was extremely difficult.

“Then something dawned on us,” Foster continues. “For many fish and aquarium buyers, we were the only place for them to get information. So we made it a priority with our agents to get them the information they needed. And we brought some people from Pet Warehouse to our site to help. The challenge to any acquisition, of course, is to manage all of the inventory moves and staff training, and to do it all profitably.”

In addition to the six titles, DFS has four Web sites: DrsFosterSmith.com, PetEducation.com, LiveAquaria.com and eTropicals.com. All Web operations are administered from the Wisconsin headquarters, and 25 staffers now work on Web design and print catalog creative.

Web sales account for a whopping 35 percent of sales. Interestingly, the doctors credit the failed online pet-supply merchants such as Pets.com with driving pet owners into the e-commerce space. Although the big dot-coms failed, DFS was able to hang in and capitalize on the new sales channel pioneered by its now-defunct competitors.

Education = Brand Loyalty

This cataloger has a good handle on how to keep customers coming back. From its inception, DFS has focused on customer education. In fact, one could call this strategy its USP — Unique Selling Proposition. No doubt, it’s one of the primary ways in which the cataloger builds and retains customer loyalty.

In a typical DFS print catalog, 12 to 15 percent of square inches are given over to educational articles that help customers better understand their pets and how the products sold assist pet owners in taking better care of their animals. The articles are written either by the doctors themselves or by one of the many veterinarians and vet technicians they keep on the catalog’s staff. Dubbed “The Doctors’ Information Series,” recent article topics have included, for example, “Questions and Answers About Behavior Control,” “Treat Pet Stains Too Tough for Normal Carpet Cleaners,” and “Oxygen and Pond Health.”

Some of the articles are designed to help sell specific products on surrounding pages, but others are written obviously for customer informational purposes only. At the end of each article is an icon that directs readers to PetEducation.com, the doctors’ Web site devoted primarily to information on pets and pet ownership.

The catalogs are so full of information, in fact, that Voellinger says many first-time customers call and say: “I received your magazine, and I’d like to order some products.” Indeed, the catalogs have the look and feel of magalogs.

Customer education doesn’t stop at the print and online channels. Licensed veterinarians take customers’ calls on Tuesdays and Thursdays, either answering queries themselves or through contact center staffers. DFS touts this service throughout its catalogs.

Additionally, CSRs get extensive training on the products and their usage — up to 14 days per employee, in fact. They learn about the informational resources available to help them answer unusual questions, in addition to the order management system currently in use.

No doubt, keeping highly educated vets and technicians on staff, and offering extensive CSR training, adds significantly to the cataloger’s costs. Yet they claim they’ve never added it all up to see if the return on investment has been worth it in strictly financial terms. “The editorial supports our overall brand image as a company run by licensed and experienced veterinarians,” says Voellinger. “The articles represent who we are and what we stand for, which is high-quality, value-priced merchandise sold by pet experts.”

Foster agrees, adding, “The articles help to legitimize us and give our company substance and credibility in the customer’s mind. Our customers look to us with trust. We try to give them the tools they need to make better buying decisions. We’d never put a dollar figure on this service. It’s all just part of our pet owner educational process.”

A Sharp Eye on Operations

The doctors learned early in their cataloging careers that, while they may know a lot about pet health, they needed to tap the expertise of recognized merchants to help strengthen the operation. To that end, they took on two minority partners: John Powers, a pet retail-industry veteran, and Mike Scrivner, a certified public accountant. Foster oversees the contact center and Internet operations, and Smith supervises catalog operations.

It’s hard to define each man’s job, however, because they don’t use recognized titles. “We hire people and empower them to make decisions,” says Smith. “If we didn’t do that, employees would spend a lot of time running around trying to find out what to do in a given situation. If they make a mistake, they’ll learn from it. We have a very relaxed, unstructured culture here, and that has helped us to grow.”

That casual culture also helps the cataloger remain flexible and able to make quick decisions based on changing business and economic conditions. When asked how many catalog campaigns DFS was set to mail this year, Smith says, “We understand that some catalogers know how many campaigns they’ll mail in any given year, but we don’t. We wait to see how sales from certain catalogs are doing, what products are selling. Then we’ll decide what steps to take from there. For example, we were working on our January catalog in November.”

No doubt, one key to maintaining flexibility is the cataloger’s unusually high in-stock inventory rates. On average, DFS stocks 95 percent of its product line at any one time (some larger items are drop shipped). Current warehouse operations are spartan, says Voellinger. “We do simple pick-pack operations right now, not very high-tech — yet.” By August, DFS is scheduled to have installed a state-of-the-art materials handling system. The company runs three shifts in the warehouse. Returns run to less than 4 percent, and backorders average only about 1 percent. The huge inventory also enables the cataloger to ship most goods within 12 hours of an order.

In January, DFS started a new program, Automatic Reship, in which customers sign up to have certain products, most notably consumables such as pet treats and food, automatically shipped to them on pre-set schedules. The impetus to this was the unveiling of the cataloger’s new private-label brand of pet food. When determining a marketing strategy for the new line, Voellinger says, “We saw that some competitors were selling the bottomless-bowl concept. We thought we should offer that, too. People are signing up like crazy for it. In fact, sign-ups have gone well beyond our expectations.” Thus, although the cataloger gets bigger with each passing year, it never loses sight of its main mission: To serve customers so well they’ll never want to shop anywhere else.

Challenges Ahead

The company’s brand-new mail-order pharmacy service, scheduled to launch this month, is an exciting new opportunity, but one that came with plenty of hard work and due diligence.

“Right now, pet owners don’t have many choices in where they buy their pet pharmaceuticals,” says Foster. If a veterinarian prescribes a certain medication, the client can fill the prescription right there at the vet’s office — and pay a high markup, of course. “We aim to change that,” says Foster. The new DFS pharmacy will enable pet owners to buy pet prescriptions by mail order, similar to how some human prescriptions are sold today.

Sounds like an easy business model for a couple of licensed veterinarians, doesn’t it? It’s not. The doctors and their staff have spent the last two years working through all of the pertinent pharmaceutical laws and regulations in all 50 states so that they can fill and send prescriptions anywhere in the country.

“We’re putting a lot of resources into this plan,” says Foster. “This will be a true niche for us, a real brand-differentiator. Some other company may come in and start selling pet food, but it will be extremely difficult for it to open a pet pharmacy that’s fully licensed in all 50 states.”

In addition, the pharmacy program requires a separate computer system, warehouse and order-management procedures, but they all have to tie together for seamless integration. “It’s been a real challenge for our MIS department,” Foster admits.

But two challenges that aren’t taxing DFS, believe it or not, are the current economy and international unrest. DFS has seen booming sales. “When the war in Iraq started, we thought, like other catalogers, I’m sure, that our business would slow down while customers were distracted by the news,” Smith recounts. “But our phones rang off the hook that week! We were so busy we had to put people on overtime. I don’t know why that was.

“We’ve survived two recessions so far,” Smith continues, “and I guess we’re surviving this one, too. But you know, a business owner in a poor economy has two choices to make: He or she can ride out a downturn and hope for the best, or get aggressive and pick up market share from failing competitors —market share that will help them rise during the upturn.”

Indeed, that tactic — acquiring otherwise good properties during a downturn — coupled with smart selling and back-end strategies, and a carefully maintained focus on customer satisfaction has propelled the Doctors Foster & Smith catalog to the top of its industry.

Company Chronology

1980 Veterinarians Marty Smith and Rory Foster form a business partnership. Later Rory’s brother Race joins the practice.

Early 1980s The veterinary practice expands to five clinic locations in northern Wisconsin.

1983 The doctors collect names from ads in trade journals, compiling a mailing list for 1,600 catalogs to sell pet vaccines primarily to kennel owners and other pet industry professionals. They fulfill the products from a 12-by-12-foot room behind one of their clinics.

1984 Rory Foster is diagnosed with Lou Gehrig’s disease and leaves the partnership.

1985 The catalog business is moved into its own facility in Rhinelander, WI.

1987 Rory Foster dies of complications from Lou Gehrig’s disease. (To date, the company has donated about $20,000 to foundations for A.L.S./Lou Gehrig’s disease.)

1989 The doctors give up clinic practice to concentrate on product development for their burgeoning catalog operation.

1991 24-hour phone service for the catalog is established.

1993 The doctors begin selling their own line of branded products.

1995 The two vets release the first of four books for pet owners.

1998-99 DrsFosterSmith.com and PetEducation. com are launched.

2001 The doctors buy Pet Warehouse, an Ohio-based cataloger of pet supplies, and LiveAquaria.com. The acquisitions make Doctors Foster & Smith the nation’s largest pet cataloger.

2002 They buy Hornbeck’s, a bird supply cataloger, and eTropicals.com, a merchant of live aquatic life. Corporate-wide annual sales reach $156 million.

2003 They purchase Flying Fish Express; unveil their own line of dog food; expand their headquarters from 240,000 square feet to almost 300,000 square feet; and open the nation’s first veterinarian-owned mail-order pet pharmacy.

About Doctors Foster & Smith
Headquarters: Rhinelander, WI
Products: pet supplies, food and medications; live fish and aquarium products
Number of catalog titles: six
Number of Web sites: four
Sales channels: print catalog 63%; Web 35%; retail 2%
Ranking on the Catalog Success Top 200 list of catalogers (as measured by housefile growth): 148
Number of employees: 650
SKUs: 12,000 to 14,000 (about 5,400 unique products)
2002 sales: $156 millio
Projected 2003 sales: $174 million
Number of catalogs mailed in 2002: 41 million
Number of catalog requests in 2002: 300,000
Catalog printer: R.R. Donnelley and Sons
Growth even in a down economy: Officials at DFS spun off a title for cat products (above, far left) and bought five other pet/pet-supply companies in the past two years, including Pet Warehouse.

At a Glance:
Doctors Foster & Smith
12-month housefile: 890,000
Average order value: $80
Primary customer demographic: women, ages 35 to 50, $75,000+ household income
List rental cost: $95/M
Package Insert Program: $60/M
List manager: Dorothy Crider, Rubin Response, (847) 619-9800