Anatomy of a Startup

The Cataloger’s Story

Can an established retail and Internet merchant profitably start a catalog in this era of rising postal and production costs? Some catalog industry experts say the risks are too great and the ideal time to launch a new print catalog has passed. But is that really true?

John Hambleton aims to find out.

Hambleton sells surf-related apparel and accessories via two beach shops in Florida — Islanders in Fort Walton Beach and Pensacola Beach — and the Web at IslandSurf.com. His Internet sales have convinced him that selling remotely is a viable option for his merchandise offering. And so, like other e-commerce merchants before him (e.g., Amazon, eBay), Hambleton wants to launch a catalog that would drive sales to his site. He’s already enjoying results from his efforts in search engine marketing and affiliate programs. But would a print catalog give him the revenue lift he seeks?

Here is Hambleton’s story followed by advice from three catalog industry veterans.

“A Shop Became Open”

In 1980, a store near Hambleton’s home became available, and he and a partner started selling T-shirts, flip-flops and sunglasses. In 1985, Hambleton bought out his partner and began growing a retail chain. At one point, he had five beach shops in Florida, three of which were self-funded.

“I opened them more to remain competitive, because our profits were starting to erode at the time,” Hambleton recalls. “I later discovered that’s a questionable technique to grow a business.”

Once his Web sales took off, he closed three of the stores. “I began to cut off the branches that were unproductive,” he explains.

His Pensacola Beach store suffered severe damage from Hurricane Ivan last fall, but it may have been a blessing in disguise, he says. “It now gives me the time and resources to start a catalog.”

IslandSurf’s target demographic includes teens and young adults; females account for about 60 percent of sales. Hambleton has eight full-time and three part-time employees year round — more in season.

Products and Prospecting

IslandSurf’s lineup includes about 300 products from brands such as Billabong, Roxy, Quiksilver and DAKINE. Hambleton admits these brand-name products also are available from his competitors. He sells some private-label merchandise and says he’d like to grow that business. During the years, his percentage of sales from sunglasses and apparel categories have been increasing.

When looking at the size of IslandSurf’s potential market, one can look at sports participation levels as a guideline. Surfing, for example, was up 11.1 percent in 2003, to just more than 2 million people, according to the Sporting Goods Manufacturers Association (SGMA). And wakeboarding participation was up 6.8 percent, to 3.3 million. But other sports are registering drops, including dirt biking and skateboarding, down 13.4 percent and 14.7 percent respectively, according to SGMA statistics.

In all, about 30,000 people have bought from IslandSurf.com in the last four years. Hambleton says that if even half of those names and addresses are still valid, he has a ready-made customer list of 15,000 to which to mail a catalog.

“We’ll also mail a catalog with every Internet order, of course,” he says. “But I admit that I don’t know much about list rentals, co-op databases and the like. I’m hoping a consultant can help me.”

Risk Tolerance

Hambleton seems analytical and methodical by nature. In college he studied mechanical engineering, but he never worked in the field. “Engineering training gave me a disciplined approach,” he recounts. “But I realized early on that I have a personality that’s more suited to entrepreneurship.”

He calls his tolerance for risk “pretty high,” and says he actually enjoys taking calculated risks. “If the catalog can break even for three years, we can survive,” he notes. “But if the catalog has us hemorrhaging money, then no, the business won’t last.

“My other concern,” he continues, “is that, while I can quantify the financial results of a catalog, I can’t do so for the intangibles. If the catalog takes up too much of my time and attention, for example, that also is a cost I’ll have to watch.”

As noted, he wants to launch a print catalog to drive Web sales. And he cites other reasons: to profitably grow revenues, retain talented employees, and enhance IslandSurf’s brand and market share.

Looking more broadly at his business, Hambleton notes: “I want a business that has talented people on the team, and that can support their healthcare, mortgages and kids’ college expenses. And I want those things for my own family, of course.” He also says he wants to be able to support philanthropic groups, such as those caring for the environment and the nation’s youth.

Hambleton says his biggest challenge this year is building a team to execute his plans.

—Donna Loyle

Consultants’ Advice

—Stephen R. Lett, president, Lett Direct
I admire Mr. Hambleton’s entrepreneurial spirit and tolerance for risk — key ingredients to building a successful catalog. Another key ingredient is deep pockets. Retailers usually aren’t emotionally prepared for the catalog expenses coming so far in advance of making the sale. Here’s my advice.

Understand the dynamics of a catalog business. For example, it’s unlikely you’ll be able to prospect at or above the incremental break-even point. The catalog business depends on repeat purchases. Keep expected response rates realistic. Mr. Hambleton won’t get 3 percent or 5 percent from prospects. There are differences between a retail customer and a mail order catalog buyer. He should start the catalog with 300 SKUs. The number of SKUs and the page count will be important considerations. He’ll need to learn more about the key ratios of a catalog business.

One can have the right merchandise and still fail. Common reasons startups fail:
1. They tend to lack adequate financing.
2. They often lack a strong financial person and marketing/circulation expertise.
3. Spending tends to get away from them, and funding runs ahead of schedule.
4. The product and “reason for being” isn’t unique from that of its competitors, and the startup is merely a “me-too” business.

Develop a five-year circulation and financial plan. Said another way, is Mr. Hambleton willing to lose money for at least three years while building a housefile (customer list)? I strongly suggest he create a five-year circulation plan, forecast and pro-forma by year. This should detail expected response rates, selling expenses, gross margin and customer return ratios. The plan will show him how much money to invest and expected results by year. He should update the plan at least annually as results become available.

Join a cooperative database and model Internet buyers. Being able to join a co-op such as Abacus and NextAction will depend on his current privacy policy (as stated, for example, on his Web site). If it says IslandSurf doesn’t share information with third parties, joining a co-op could be a problem. If it says it does share information or is silent about the matter, the co-ops probably will work with him.

Having a file of 30,000 Internet buyers who’ve made a purchase is a real plus. The names should be modeled by one or more of the co-ops for prospecting purposes. Selecting prospect names from a co-op that best match the profile of IslandSurf’s current buyers will increase response, thus building its housefile at a faster rate.

Don’t try to grow too fast, and test everything. For instance, test outside lists, prospect lists selected from a co-op database, Internet buyers, etc., to determine the greatest opportunities. Test various promotional offers, too. As its housefile develops, IslandSurf should maintain a balance between mailings to its customers vs. prospects.

Start capturing the names and addresses of retail customers. While recognizing that retail customers may not be mail order (or Internet) catalog buyers, they still represent potential. Encourage them to fill out a card to be added to the mailing list.

Install mail order software. Invest in an off-the-shelf mail order package that can help process orders quickly, control inventory and run the business more efficiently. Having the right software also will enable the merchant to capture marketing and merchandise data critical to its business.

Stephen R. Lett is president of Lett Direct, a catalog consulting firm specializing in circulation planning, forecasting and analysis. He can be reached at (302) 537-0375, or by e-mail via his Web site: www.lettdirect.com.

Chuck Howard, president, Howard Consulting

Can IslandSurf create a successful catalog business? Following are the hurdles Mr. Hambleton will have to first overcome.

His idea that he may break even for the first three years most likely won’t happen. At best, it takes three years for most startups to near profitability. All the business plans I’ve written have confirmed this. Years ago, many companies were started by their founders around kitchen tables. Given current costs and today’s much more competitive environment, a very significant investment is required.

Unfortunately, too many start-ups look only at the cost of producing and mailing a catalog. Mr. Hambleton must look at how much investment it’ll require to get him to a positive cash flow. As noted, this will take about three years.

I see few catalog companies below $10 million in annual sales that are on a growth path and have achieved profitability. Mr. Hambleton must expect that at least $1.5 million in investment capital will be required to get

him over the hurdle. Even this amount leaves little room for error.

Plan the first catalog very carefully. It should contain at least 250 products and be at least 48 pages. As he gains sales history, successive catalogs should include more products and have higher page counts to house the increased product mix. It will cost the same postage to mail a 24-page book as it does 48 pages; and 250 products would average 5.2 products per page in a 48-page book.

The same density in 24 pages would yield only 125 products. By today’s standards, even at 250 products, this means he will be under-merchandised compared to industry norms.

Have the greatest number of products geared toward the female audience. Teen girls tend to buy more through the mail than teen boys. It also opens up female apparel lists that aren’t niche to this market, but which would have age select availability. For example, Mr. Hambleton could not mail the entire Victoria’s Secret file, but he may be able to target its teen female buyers.

Understand the costs for a typical test catalog. Assuming a test catalog of 48 pages, I’d recommend a test mailing of 100,000 catalogs spread among Internet buyers and at least 12 rental lists (15,000 people from its housefile and 85,000 from rented lists). These lists probably will have to come from magazines and broader market apparel lists, as it’s doubtful direct competitors will provide access.

Following are some costs to consider:
Fixed creative costs to produce a quality presentation generally run $1,000 per page or higher. At $1,000/page, or $48,000, this equates to 48 cents per catalog. For more costs to consider, see the chart, below.

As the internal buyer file increases, higher response rates, lower list rental costs and increased efficiencies all combine to improve productivity and profitability.

Mr. Hambleton can have a successful catalog business, but it will require a significant investment, and profitability probably will take at least three years.

The good news: Adding a print catalog to his existing retail and Internet business will close the loop whereby all channels benefit from one another.

Chuck Howard is a consultant specializing in strategic catalog planning with a heavy emphasis on merchandising, marketing and catalog production. Contact him at (301) 309-6700, or e-mail: howardconsulting@aol.com.

John Kinsella, president, Kinsella Partners

Fortunately, IslandSurf is operating from a position of success. The key is to leverage its strengths to reinforce the brand, extend into a new channel and increase profits — all without derailing the existing organization. Following are my recommendations for Mr. Hambleton.

Develop a unique offer and market position for the catalog. To define IslandSurf to new customers, clearly articulate the brand message. Also articulate the IslandSurf heritage, authority in the business and commitment to customer service. Use powerful images and copy, establish a unique creative design, and avoid vendor photography. Give strong creative space to push customers to the Web and stores.

Strategically assort the catalog to test merchandise. Push the private-label products to extract higher margins and reinforce the uniqueness of the brand. Limit brand-name products to those that fully support the brand, and secure advertising allowances to offset design costs. Start with a small test mailing with a duplicate remail. Such a strategy will help manage inventory flow and order volume through the fulfillment operations.

Conduct a rigorous analysis of sales performance on the initial mailing by focusing on the most profitable spreads, products and layouts. Analyze the most effective catalog treatments that drove Web traffic. Then re-assort and redesign subsequent mailings in season to optimize sales and profits.

Perform similar analyses on housefile and rental list performance. Ensure they’re tracking multichannel sales and customer behavior. Set up the catalog tests to accurately track the mailing’s impact on the stores’ and Web site’s sales. This will yield the correct data to develop effective marketing plans for future mailings.

Hire expert consultants for catalog marketing and creative. This is money well spent to develop a new catalog concept. Mr. Hambleton will kick-start his initial mailing with the industry’s best approaches. And he will avoid overly burdening his existing staff with the new channel.

Expertise in the Web or store channel doesn’t necessarily translate immediately into catalog management. The advice and direction from experts also will help yield the most information from early results to improve future mailings.

Variable catalog costs for a 100,000 mailing would include:
-printing, paper, etc., $17,000, or 17¢/catalog
-postage, $24,000, or 24¢/catalog
-merge/purge on lists, etc., $5,000, or 5¢/catalog
-list rental, 85,000 x .01¢/name = $11,475, or 11¢/catalog
Total variable costs = $57,475, or 57¢/catalog
Total creative and mailing costs: $105,475

John Kinsella’s expertise includes strategic planning, operations management, leadership development, marketing and organizational development. Contact him at (707) 776-4665 or jhkinsella@aol.com.