A Chat With February’s Profile, Mike Stopka, President/Owner of Design Toscano

Catalog Success: How did you break into the catalog business?

Mike Stopka: It’s kind of a romantic story. Now we’re going back almost 20 years. Professionally I was a consultant and I traveled all over the United States in the 80’s, when I was in my 20’s and early 30’s — working in financial institutions, doing feasibility studies. Very strong on the spread-sheet skills. With that said, with all that travel I had free tickets, so we used to go to Europe every year. This is when the dollar was strong. It was like cheaper than going to vacation in Wisconsin for an Illinois person. We got the free tickets, we took the family out since my son was a infant and then the rest of the kids. And we’d go out to Europe every year. We really enjoyed the European experience — going through castles, museums and other monuments. The whole European experience. I told my wife [Marilyn Stopka, co-owner of Design Toscano], ‘There’s a market to market European exotic products to the American public.’ You just stashed that away.

Well it came to 1990 and I had a friend in the Chicago-area who was in the statuary business from Italy. And they had all these statues that they brought over, over 100 years ago. Be it Venus de Milo, pure garden and home statuary, etc. I asked Fabio, the owner, ‘Can I take your wholesale catalog and re-cover it and market your products?’ That was just at the point I’d finished graduate school so I was looking for, for a better term, a hobby. What I did was take their catalog, literally in the kitchen, rip off the cover, put a new cover on it, put a price sheet in and we’d advertise in the back of magazines. So in 1990 we advertised, like a lot of catalogers, I think Helen Ballard started the same way and Steve Leveen did the same thing, in the back of these publications. A multistep process. Now remember getting the first label back, because you had catalog sections and mailing it out. At this point, in it for four years, I still was doing my, for lack of a better term, my day-job, my real job, and in the evening we’d do the business logistics. We hired a local art gallery to be the phone center. Everything was drop-shipped from the statuary company. So for three years we used their media, with some flyers we developed, and grew the business through space advertising. Then we got up to about $4 million in sales and I told my wife, ‘It’s probably time for me to quit my other job and really run Toscano as a full-time enterprise.’

CS: What year did you commit full-time to Toscano?

MS: 1993. In ’93 we started the business, and everything was at that point statuary. Gargoyles and dragons got very popular at that period, so that was another boost that we had. But at that point I realized we needed to diversify our merchandise. I started going to the gift shows and bringing in different products, mostly European-inspired tapestry, jewelry, gifts, etc. We developed our first true catalog for Design Toscano that wasn’t from the statuary business in 1993. I think the first mailing was about a quarter million. And it was the first time we ever rented lists. Prior to that was all space advertising. The catalog during the mid-90’s was statuary and domestic products. We were using a consultant at the time, John Semmelhack, who’s president of Personal Creations now and was the president of Hammacher prior to that. He gave us the analytic background of cataloging, which I had the skill set because that’s what I did. In this process John said, ‘You know you’re selling European products, why don’t you go to the European gift shows?’ I sort of hit myself and said, ‘Why don’t we do that?’

We started going to the gift shows in New York and then Europe, and the catalog became much richer, not just with statuary, but be it brass from Italy and pewter from Italy and gift items from the English gift shows and French tapestry. The product offering during the mid-90s, going into ’96, ’97, became broader. And then we realized in ’99 that the move to Asia was starting. We started to move our statuary production to China and that really changed the leverage of the business — going from 50 percent gross margin and moving it up to 70 percent gross margin changed what you could do. And we started to mail the hell out of the catalog then going through the late 90’s. During this period too, I think we made Inc.’s Top 500 growth companies three years in a row. A far cry to where we are now. At that point, to profit wasn’t as major an issue, much more risk taking. We grew the business quite fast during this period because I got all this extra margin, so I could mail and get the housefile up [today’s level of 180,000 12-month housefile]. I was able to build this war chest of names by being aggressive, but not really emphasizing profit at this point.

Then 2001 came along and I was overmailed and overextended. I realized I needed to work the balance sheet instead of just trying to grow the business. The top line’s fun to grow, but I realized you have to make money. We slowed up prospecting, kept it flat, and started making some decent money. During this period we’ve been quite good at going to Asia. Since we were working so closely with the statuary company in Chicago we were pseudo-manufacturers. We’re not like a normal cataloger where they just pick merchandise. A lot of our products were developed from scratch. We had to help them run the factory because we were maxing them out. So when we went to China it wasn’t that we were just picking. We could develop products, we could develop furniture from Indonesia and China because we were pseudo-manufacturers and developers. When I say China, it also included Indonesia, Philippines, Vietnam, Thailand, but of course China’s the bulk of your imports at this point. We had a much more unusual spin than most catalogers in that we had this capability which made the products. By de facto we’re about 90 percent exclusive. Out of that exclusive, probably 30 percent of those products have been developed by us. The other percentages we find vendors who aren’t in the U.S. market, they’re in Europe or they don’t have U.S. reps. So you won’t find our products in anybody else’s catalog or Web site.

Of course during the early period there was no Web, or very limited. And now you look at where we are and what’s important is the Web. Where we’re leveraged nicely is the product and the exclusivity. We know that it’s difficult to find prospects. The cost of the catalog, with paper going up as much as it has, postage going up, your prospecting comes down. The big if is can you replace all of that or more of it with names generated through the Web. If you sell a commodity, let’s say books, it’s much more difficult to compete on the Web. Or if you just sell, let’s say carpets, it’s difficult because you have all these people competing with you. If you look at truly how Toscano started back in niche marketing, in the back of magazines, you were selling niches. Helen [Ballard] was selling a table, I think the dolphin table originally. Steve Leveen was selling a pen. It was a niche that you were marketing to. As long as that niche is big enough, and you have multiple niches, I think the prospects for the Web in search is pretty amazing.

So if you take our categories, you can look through the catalog, how searchable are they, how competitive are they and do you have a good position in it? And if you look at our products, we’re sitting very nicely on it. I’m just going to open our catalog … animals. Nobody sells more garden or home statues of animals. It’s one of our best searches and one of our best products. If you’re looking for classic animals — statuary or gifts for the garden, home or even furniture — we’re very strong there. If you’re looking at garden and different types of garden, I mean garden has classic, religious, we own it. We’re looking at having more initiatives in Christian statues, Catholic statues. We have so much and the breadth of that, so we should search out well and price out well. So if somebody wants to compete with me selling Madonna’s for the garden, we should win that category. It’s not a huge category, but it’s big enough. Fountains, a little more competitive, but if they come to the Web site we should do quite well because people come to Toscano for statuary and gardens. For historical furniture, we don’t sell something that you find in IKEA, there has to be a reason why it works. It’s either heavily carved, it’s based on history or it has a novelty component, be it a book table or an animal resin table base. You look at those components. An area we’re good at, but it won’t be good as well for the search, is wall art. We sell canvas transfer, which are really higher end of prints under glass. But that’s much more competitive. That’s going to do well for us, but it’s not going to do great because there’s so much competition. You look for Egyptian as an example, which is a very strong category. We have so many Egyptian products, be it gift, furniture. So if someone types in Egyptian and they’re looking for Egyptian statues or museum statues, we’re going to come to the top. Medieval, medieval being suits of armor or historical furniture, goblets, swords, etc. Same thing. There are people that are out there, but nobody has the size that we do and the buying channels that we do for those components. Just walking through the pages … you have fairies for the garden and collectibles. If someone types in that they’re looking for a garden fairy, looking for a garden gift of a fairy or looking for a fairy that hangs on the wall, we have that. Nude statues. We sell a lot of classic Greek and Roman statues, both male and female. A lot of people avoid it, we don’t. So if you’re looking for nude statues, classic art, we’re going to rise to the top. Angels are very strong, both for collectibles and the garden. Stained glass, a little more competitive, so if someone’s searching for stained glass we still should do well given our size and breadth and our contacts and our margin, but you’re going to have a little more price comparison you have to be worried about. I’m giving the components that we’re into.

What made direct marketing and cataloging strong back when we started and catalogs started, is what’s going to make paid search, organic search, natural search work well. People have interest on a category, they’ll search on it. As long as we’re doing our job well, we should float to the top. As the catalog business is in a flat maturing business, the search and Web and affiliate business should be on the way up. And the question is what has the faster slope? That’s the question that everyone should be asking. The competition for that first page for a general book is going to be so high. That’s sort of the philosophy moving forward with Toscano. Given the breadth and depth of our collection and our sourcing, we should do well.

CS: What was your biggest initial challenge breaking into the catalog business?

MS: Money. I started the business with $6,000 and grew it up to $30 million. In the beginning I had no cash. Literally. I used the credit from the vendors for advertising. When I got to printing, using the printer’s credit to grow the business. Till the point that we got large enough that we could start bringing traditional bank financing in. The bank’s not going to give you a $2 million line [of credit] until you’re making some money and have some assets. The most difficult thing was getting the capital. Literally when I started the business I started with zero. And ran the business for years with zero.

CS: How did you overcome this challenge?

MS: We had to work the balance sheet — show the bank that we were worthy of credit. Once we had bank credit it made it a lot easier. Especially when you start going to Asia, because in Asia they’re not going to give you net 30. For a container you’re going to basically have to pay upfront.

CS: What have been the keys to success at Design Toscano?

MS: There’s another thing, not just search, affiliates and organic search. It’s sort of come 360 degrees. During the 90’s and early 2000’s there was a mad dash to Asia. You needed size, the Chinese don’t like to buy one or two products, you go to buy some quantity. With the Web now you have some presence, you could go back to drop shippers. You could get the components that you’re not deep enough in and put them on the Web and still make money because it’s such an important part of the business. For example, we could buy bronzes from Thailand, but you need a certain amount of quantity. So what I’m looking for is a drop shipper who is in the bronze business, a B-to-B company that I could put onto the Web and drop-ship. It’s almost going back to the roots of adding things to the Web site that aren’t in the catalog, that you don’t have to take a big position in and risk, so people find it. Books, I’d like to find a vendor. If you’re looking for books on Greek and Roman, if you’re looking for books on dragons, fairies, historical furniture, history of statues and art, that would be a nice segment. Carpets, for what it’s worth, Home Décor and Touch of Class sort of own carpets and rugs for catalog. And it’s very difficult to offer carpets, because you know people are going to go to them because they’re such a high mass. But you can’t say that if you have a good drop shipper you can’t add carpets and rugs to the Web site, because you don’t have that economic cost and risk that’s in the catalog. If you can find vendors or products that you can add that reduces your risk and makes the Web site even broader.

Stain glass is an example for us. We’re very good at stain glass, we have maybe 20 products, but I worked out a deal with the vendor where I can bring in lower quantity on the stain glass, maybe 10 or 15 pieces, and they’ll let me put it on the Web. Furniture, furniture is the type of thing that sometimes you don’t need large quantities to work with the vendors. You could put additional furniture items on the Web with lower volume. You need that margin of 70 percent-plus, at least we do. If you can find vendors who still have that margin that will let you have lower quantity, because remember the Chinese want quantity. Some of this makes it difficult, except for the larger catalogers, and given our size we’re doing quite well with the vendors we have. I call them our ‘boutique’ vendors. Vendors who are big factories, but they’re not too big. If a factory’s 10,000 people, they’re not going to want to work with you in low quantity. But if you have a factory that’s somewhere between 200 and 1,000 people in it, you’re a big fish for them. And they’re willing to produce less quantity to make it work.

CS: What factors contributed to the success and growth of Design Toscano in its formative years?

MS: It sounds like a cliché, but working 24/7. Just working hard and making good decisions. My analytical and system skills definitely helped in this industry. Having staff who understood the merchandise, knowing our niche. Many companies veer too far away from their niche and they lose what they’re good at. Some people say, ‘Why don’t you go up to $100 million in sales?’ I say, ‘You can’t. This is the size niche that we’re at.’ You can define the niche differently, but by definition a cataloger is a niche business. If it wasn’t a niche business it would be a brick-and-mortar, a chain. But it’s not. You’re looking for niches in cataloging and now the Internet.

CS: What do you see as the biggest challenge for catalogers in the coming years?

MS: I talk to a lot of presidents and we exchange notes, and the tsunami of what’s going on in China right now is pretty horrific. Most people don’t even realize that the Chinese retrieve and barcode change has raised Chinese prices up 15 percent. There’s labor shortages, the price of inflation into China is so high right now. So all of the prices are moving up. One that’s hot right now, and it’s going to sound totally bizarre, but they put in the strictest and most liberal labor laws on Jan. 1. So right now there’s strikes all across China for the workers because of the new laws they put in. Such things as … remember China they’ve always had overtime, but it was straight time or maybe time and a quarter. Right now if you work overtime it’s 200 percent. And if you work on a weekend it’s 300 percent upcharge for overtime. Things like if you work in a factory in China, and you’re there for a year, there’s automatically two-months severance pay if you let that person go. Every employee that you hire has to have a contract for a fixed period of time. So these things are amazingly restrictive to factories and it’s all being played out right now. There’s many factories that are closing in China, so where we as consumers in the United States expect the Chinese products to be priced well and a good supply (i.e., Wal-Mart). The supply chain is really going through some stresses right now. That’s why I’m flying out to China, because I have to talk to vendors. Vendors are having a hard time shipping, having a hard time meeting lead times. And if I’m having this, everyone should be having it. If there’s guys that use middlemen, let’s say you’re a cataloger and you’re buying through the Atlanta gift show or the Las Vegas gift show, they’re having the exact same problems if they’re buying from China. There’s two big tsunamis’ that happened this year [2007] — the postal increases and what’s going on in China, because prices are going way up.

CS: How did Design Toscano handle the May 2007 postal increase?

MS: We cut circulation and tried to co-mail with RR Donnelley. With some success and not some success. It’s difficult to get people to co-mail.