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The Monster Trends

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Direct and TV Convergence

We are about to enter upon what may bet greatest Monster Trend ever to emerge in all of the history of commerce: the convergence of the Internet and television and the television viewing experience. Think of Internet channels and you will begin to see what I am talking about. The remote will be replaced by the mouse. And inane TV programming will be replaced by the limitless programming of the Internet. Let’s just think about this . . .

Private Equity

The private owners of catalog companies are almost gone. The industry has grown up and become large—very large. Most of the largest catalog companies are, or are part of, public corporations. A large number of non-public catalog companies are now owned by private equity groups, leveraged buy-out firms. And, as you expect, there are reasons for this.

First, the multi-channel direct marketing company is attractive to financial buyers and operators because it is formulaic and consistently predictable. There may be no better business and financial model (except for a hot dog stand), than a catalog company. There is little risk in a solid direct marketing organization once you understand how they work. As we used to say back in the Golden Age of Catalogs (1970s and 1980s), “Just put a lot of stuff in the mail and people send you money!” It’s even better now: “Just put a lot of stuff on the web and in the mail and in the email and in stores, and even more people send you even more money!”

Second, the multi-channel ‘space’ as the private equity MBAs call it, is expanding. The rate of expansion is better than almost anything else (except hot dog stands). In fact, the multi-channel/catalog space consistently beats the rate of expansion of the U.S. economy, and that of most any other economy except for China, and that’s where we get all of our stuff!

Third, private equity groups have a gaztrillion dollars to invest. They get the money from really wealthy people who want a twenty percent return on their money (or better) which is a lot more attractive than Certificates of Deposit or savings accounts. And, here is the really interesting part: the private equity groups can’t find enough multi-channel direct marketing companies to acquire. You see, the fund managers have to invest the money or the really wealthy people ask for a refund. And so, the prices they pay go up. And what does that mean? Private entrepreneurs sell out. That’s why the private owners of catalog companies are almost gone. Oh sure, there a lot of $2 million and $5 million catalogs out there, but there are darn few $50 million and $75 million and $100 million catalogs left. There are, however, a fair number of $20 and $25 and $15 million catalog companies, and the private equity groups are turning their laser-like attention to these mid-size catalog companies.

First, the private equity groups buy a ‘platform.’ That’s a catalog company with a lot of customers, a lot of proven products, stable demand, scalability, good operating systems, under-utilized fulfillment systems, a savvy and seasoned management team, and the ability to absorb two to five ‘add-on’ acquisitions. Over a period of two to seven years, the private equity groups ‘add-on’ several $15 to $25 million companies with reasonable synergies. They pump up the prospecting, build great websites, expand the customer base, and drive the combined revenues up two to three times. And then they sell the resulting mega-group for four or five times what they paid for it to another, larger private equity group.

At some point, logic dictates that one enormous private equity firm will own all of the multi-channel catalog companies and will then merge with Wal-Mart. At that point, we will reach the end of life as we know it.

This is becoming a Monster Trend that changes the structure and the philosophies of direct marketing forever. We have seen a twenty-year trend to management by next quarter’s operating profits. Current earnings are now more important than customer service or satisfaction, or perhaps even long-term lifetime value. But, perhaps most disturbing is the shift from a customer-oriented, long-term relationship to a financial ‘model’ of operation. With all of the ‘Mom and Pop’ style of customer relations wrung out in the service of fast profits and multiples of earnings, the future is uncertain. This industry cannot exist only on financial modeling. It requires quality that goes beyond formulas. We got here by being good at what we do, not by managing for short-term gains.

If you will review the just completed year’s acquisitions, you will see that the investments are now moving down to the $25 to $100 million range. In another year or so, those companies will be ‘add-ons’ to the ‘platforms’ and the focus will be on the $15 to $50 million companies, and then the $10 to $25, and then the $5 to $15 . . . and then the industry is something else altogether.

Mega-Retail Dominance

It is clear to me that not only large investment groups, but the mega-retailers have set their sights on the direct marketing channels. Future competitors now include Home Depot, Lowe’s, Wal-Mart, and major department store consolidators. Fewer and fewer individually owned direct marketing businesses will thrive in this ever-consolidating environment.

Retail must battle for control of the share of pocketbook. The overbuilt malls and the boring retail structural complex are in danger of becoming Cites of the Dead at any significant economic downturn. Only the direct marketing channels offer a business model without the expense of the incredibly expensive retail locations. This monster trend is almost purely economic; however, increasingly convenience and customer service is driving the demand for direct marketing businesses by traditional retailers.

Retail must also invade the direct channels in order to stave off the flood of customer defection to the online channels. The just-completed holiday shopping season was rife with double-digit gains in the online channels and flat performance in the retail channel. That spells doom for the future unless the hemorrhage is stopped.

Creative Mediocrity

One of the insidious monster trends to emerge in the past few years—and one that is growing relentlessly—is the mediocrity of all forms of creative. Whether it is television programming, gaming, space advertising, long and short-form infomercials, catalog design, copywriting—even photography—the technological embedding, digitalization and all-important web functionality have supplanted true creative excellence with the drear grayness of creative expediency.

Direct marketing—a discipline that thrived and reached heretofore unachieved success in commerce—did so on the power of creative originality, innovation and mastery of the creative disciplines, as well as exceptional customer service. With the rise of technological disciplines, creative has lost its cachet, its prominence and its importance. Those who seek to maintain the highest standards of creativity will gain more than those who allow creative vigor to wane and become rote, flat and automated. We live in the dangerous “Gray Period” where only technology is admired and beauty has become abstract.

Copyright © 2006 by Donald R. Libey. All rights reserved. May not be reproduced by any means without permission of the author. Contact Libey LLC; www.libey.com or call 877-903-9448.

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