Case Study: Damark Successfully Marries Membership Clubs, Catalogs

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Damark International, Minneapolis, was founded in 1986 by David Russ and Mark Cohn, formerly with COMB. Working initially as vendors to COMB, the pair was finally forced by COMB to either remain as suppliers or become clear-cut competitors. The entrepreneurs responded by launching the Damark catalog, went public in 1992 and in 1993 acquired COMB.


Damark offers "great deals" through value prices-plus membership clubs that provide discounts on travel, hospitality, entertainment, and merchandise. Brand-name merchandise is sold in six categories: computers, home office, consumer electronics, home decor, home improvement and sports/fitness. Most of the business is to consumers. In 1987, the company introduced the Preferred Buyers' Club (PBC), offering members special catalog mailings and sneak previews of "Great Deals."


In 1997, Damark achieved record revenues, operating income, net income and earnings per share -- in spite of the UPS strike and higher-than-anticipated call center costs that affected third- and fourth-quarter results. Net revenues were $594.6 million, up 15.7% from 1996, and membership-related revenues grew to $66.4 million, up 31.2%. Net income increased to a record $6.3 million, or $.74 per share, up from $6.1 million, or $.70 per share.


On a full-year basis, membership enrollments increased to nearly 1.4 million, up 30 percent on the previous year, and membership renewal rates climbed to the highest level ever. To expand membership, Damark launched test marketing relationships with large, list-owning clients and worked to secure relationships with financial services industry leaders. Growth in overall membership programs was driven by expanded use of outbound telemarketing services and the appeal of new club concepts introduced during the previous 18 months.


Damark has approximately 1,900 employees.


Products and markets: Damark sells a wide range of primarily male-oriented consumer merchandise, striving for prices at or below the lowest available from dominant discount stores and catalog retailers. Products include "continuity" goods (primarily new and mid-life-cycle products) and "opportunity" goods (products at the end of their life cycles, discontinued and overstocked items and remanufactured goods.


Damark customers are 69% male, ages 25 to 44, with median family income of $48,000. Home computers are the leading product category (30.7% of net sales), followed by consumer electronics (18.3%), home improvements (16.1%), home office products (14.5%), home decor (14.3%), and sporting and fitness goods (6.1%). Gross margins average about 19.5% for hard lines and 36% for soft lines, but hard goods provide higher actual dollar margin contribution per unit.


According to Damark, the PBC provides important competitive advantages. For a $60 annual fee, members get a 10% discount on all merchandise, plus discounts on third-party products from Damark's marketing partners in travel, entertainment, hospitality, retail, health and fitness and other areas. PBC members are among the most loyal customers, shopping twice as often and spending three times as much as nonclub customers.


According to Damark, a customer who joins the PBC on the first transaction produces four times more product and membership profits during the first year of membership than a non-PBC customer. This profitability ratio for renewing members improves to almost a fivefold advantage.


The success of the PBC has led to additional club concepts offered in


partnership with third parties. There are more than 1.2 million members in five clubs, including the PBC, the Insiders club, Vacation Passport, Great Deal Pack and Essentials for Home, a new club offering discounts on contemporary home furnishings. A goal of this club is to expand market share by appealing to female shoppers and attract other marketing clients seeking to leverage their customer list assets.


Key competitors include department, discount and specialty stores, plus cable shopping networks and mail-order catalogs. Damark divides the competition into "value marketers" (Best Buy, JC Penney, CompUSA, Staples), "convenience marketers" (Lands' End, Spiegel, Williams-Sonoma), and "relationship marketers" (Cendant, Signature, and American Express).


Damark's experience with loyalty marketing has been leveraged to enhance company profitability, the company is in the midst of a "major strategic transformation," where success will be measured not by the volume of products sold but rather by the loyalty of the customers.


Data mining: The success of Damark is based on its ability to understand and target both its customers and the products it markets. It seeks a deep understanding of customers' lifestyles and buying habits in order to tailor products and catalogs to specific customer groups.


The company has implemented a real-time system that provides name-value analysis on the fly, while the customer is on the phone with a customer service representative. In addition to allowing the representative to sell related items and express shipping upgrades, the system also scores and approves credit with Damark's financing partner, updates the database and selects an appropriate club membership to offer.


The Damark mailing list now has more than 12 million names (7 million of which are actively mailed). Damark can ship up to 80,000 packages per day, shipping about 90% of in-stock, credit-approved orders within 24 hours of receipt. Product returns run approximately 14.1%. Damark had 7.1 inventory turns in 1997.


Outlook: Most people, including catalogers and the investment community, are confused about what Damark really is. Basically it is a membership-services firm, like Cendant, which uses catalogs as its primary selling vehicle. As such, it is a bit of a hybrid and is neither a traditional cataloger nor membership service provider. However, when it comes to getting more share of wallet, the marriage seems to be working -- at least based upon the results to date.


Damark's customers appear to be satisfied and willing to join a club and enjoy its privileges. For investors, there will be a longer struggle as they wrestle first with understanding cataloging and then the marriage with membership services.


Bill Dean is president of W.A. Dean & Associates, San Francisco, a catalog consulting, publishing and research firm.
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