Be a Survivor

The most unlucky cataloger I ever knew was a food cataloger who watched helplessly in 1994 as its retail store in Northridge, CA, turned to rubble in a disastrous earthquake.

A year later, the same cataloger was again forced to watch as its retail store in Japan literally slid into the ocean in the Kyoto earthquake. Next time you think the gods have singled out your catalog for special torment, remember this cataloger.

Cataloging has seen its share of recent collapses and closures (e.g., Fingerhut, Springhill Nursery, Willis & Geiger, Balduccis). Several others have come right to the brink of disaster before pulling through.

It’s also true that, in general, catalogers have endured the recession, the aftermath of Sept. 11 and anthrax in the mail better than many industries. This is partly thanks to built-in advantages that catalogers have for surviving disasters, and partly because of specific business principles and techniques catalogers have applied.

Built-in Advantages

A small food cataloger’s first big fall mailing was set to land in-home on Sept. 10. When the aftermath of Sept. 11 wiped out sales from that first drop, catalog officials put their second big drop on hold until things settled. They waited breathlessly day after day, then released their second big drop—which arrived in-home the same day the anthrax disaster struck.

One reason catalogers do better than other industries in hard times is that their response rates are so low. Indeed, low response rates mean almost every cataloger will lose money on the first sale to each new customer. Most catalogers won’t see a profit from a new customer until the second sale six to 12 months or more after the first sale.

That means most fast-buck, funny-money financing schemes (i.e., steeply leveraged buyouts, huge debt loads, and mergers and acquisitions financed by sharp differences in price/earnings ratio between acquiring and acquired firms) seldom work in cataloging. This industry just can’t produce the fast growth and quick paybacks required.

Even in good times, most catalogers are forced to rely on conservative financing techniques. So when tough times do arrive, most catalogers already are in the kind of solid financial shape that other businesses suddenly are scrambling to achieve: solid margins and customer bases, lean cost structures, and long-term financing deals.

My best we-can-laugh-about-it-now story from last fall involved a major cataloger whose big fall drop featured product samples containing sugar.

One recipient received the sample on the morning the anthrax story broke, opened it, saw sugar on her fingertips and called 911. The anti-terror squad arrived in decontamination suits, blocked off and evacuated every home in a three-block radius, pushed the recipient and her husband into their kids’ front yard wading pool, and swabbed them down with brushes.

AOVs are Low

A second major reason catalogers weather tough times better than other businesses is that their average order values (AOVs) are so low. In general, mail-order buyers have never liked making very large purchases (e.g., cars, appliances) from a catalog, which means most catalogers stock mid- to lower-priced merchandise.

When tough times do appear, catalogers find their books already are filled with the moderately priced items ordinary people are seeking just then. This factor clearly has benefitted many catalogers during the last two years.

Printing and Postage

A third reason catalogers often have a better chance at surviving tough times is that printing and mailing are such huge parts of a cataloger’s budget. For most other types of businesses, the largest costs involve real estate, equipment and staff—all line items that are difficult to chop quickly when the economy tanks.

But for catalogers, the greatest costs of doing business (aside from cost of goods) are printing and postage, both of which are easy to cut back. So when tough times occur, catalogers seldom face gut-wrenching decisions about firing key staff, shutting factories or selling equipment ... at least, not for a long time.

Instead, they can chop print runs and circulation, with matching reductions in the call center (where staffing issues are so volatile anyway that big changes seldom raise an eyebrow).

All of that said, however, my biggest fear for tough times ahead isn’t recession, terrorism or war. It’s postage. After many years of paper and postage cost jumps, many catalogers have become just about as efficient as they possibly can be in these arenas.

So lately, when costs are rising even further, I’m seeing catalogers simply cut circulation. This can work for a while, but not forever. Housefile attrition will set in.

How to respond? One gift cataloger has begun scrambling desperately to acquire the buyers of any competitor who fails, on the theory that economies of scale are the only remaining efficiency still left to exploit.

Individual Actions That Can Help

In addition to the above built-in advantages all catalogers have in common for surviving tough economic times, there are several specific individual actions you can take.

• When cutting costs, don’t hurt your high-value multi-buyers. Last year, a national cataloger facing an urgent need to cut costs sharply reduced the quality of its new-product photography. The resulting catalog’s appearance didn’t support the company’s fairly high price points, and sales declined sharply—even sales to its best customers.

• When sinking sales compel you to choose between cutting costs or borrowing heavily to tide you over until good times return, grit your teeth and make the cost cuts. The fact that catalog sales are less likely to plunge when the economy ticks down also means catalog sales are less likely to soar when the economy ticks up. Catalogers often have a harder time than most paying off heavy debt.

• When you see what looks like an opportunity for big and fast growth, resist the temptation to finance it by borrowing. If businesses were vehicles, cataloging would be a pickup truck—solid, reliable, but no head snapper when it comes to quick acceleration. Betting on super-fast growth in cataloging is never wise. And trying to finance super-fast growth with short-term debt is even less wise. Finance growth out of profits or sell stock.

• When someone suggests that your catalog business needs a major real estate deal, duck under your desk and hide until they go away. In the last three years, I’ve watched three catalogers fail completely or skate right to the edge of solvency as a result of big real estate deals gone sour. If you must buy real estate, pay cash or issue stock. Don’t borrow!

Susan McIntyre is president of McIntyre Direct, a catalog consulting company based in Portland, OR. She can be reached at (503) 735-9515.