Cybershop.com Eyes DRTV Buy
The company this month acquired a direct response print company, The Magellan Group, Rowayton, CT, but its founder and CEO wants the company positioned to direct market through all media, including television, which is expected to converge with the Internet during the next five years.
"It's very important to consider that as Internet bandwidth improves up to the point where video is compelling," said Jeffrey Tauber, chairman and CEO, Cybershop.com, "it will revolutionize the Internet." He foresees the development of broadband Internet connectivity as having a major role in the convergence of television and the personal computer.
The company, which sells discount apparel and hard goods on its Web site, was launched four years ago and went public 15 months ago, following an early investment by GE Capital. It posted losses last year of $7.9 million on sales of $4.8 million. Its current market capitalization is in the range of $49.3 million, which gives it bargaining power to acquire other companies through stock swaps and other arrangements.
Cybershop.com acquired Magellan in a $14-million agreement this month because Magellan reaches 275 million people a month through its direct response print ads in such major publications as People, Parade, Time, US News & World Report, Smithsonian and Life. The company does not buy print space directly, but instead forms partnerships with publishers to give them a portion of product sales. Magellan sells hard goods under the brand "Tools for Living," which includes a Web site at www.toolsforliving.com. It posted net revenues last year of $5 million.
Magellan was founded about 25 years ago by Ian Phillips and Howard Kuntz, who will continue in managing the integration of the two companies. Phillips did not return a call for comment, but one print buyer praised his marketing strategy.
"Ian Phillips is a very smart marketer," said Marianna Morello, president of Manhattan Media Services Inc., a direct response print buyer in New York. "His company sells travel-oriented and home-oriented things you wouldn't normally find in a store."
Following the acquisition of Magellan, which gives it a strong presence in print media, Tauber decided he should consider the possibility of acquiring a DRTV marketer to strengthen its presence in cable and broadcast media.
"We thought that if that acquisition made sense for a lot of reasons," he said, "we ought to look at other channels, including direct response TV."
He recognizes that one challenge in making a DRTV acquisition is in finding a company that is liquid and has maintained profitability long-term. The infomercial industry is littered with companies that rapidly grew based on the success of a handful products, but could not sustain profitability.
Tauber plans to brand all Magellan's print ads with Cybershop.com's logo and Web address to leverage print exposure into stronger Web traffic. He also wants to avoid paying a premium to place banners on highly trafficked Web directories.
"We decided we can't just fork over millions of dollars to these Internet portals and pray for the best," he said. "The beauty in this deal is that it enables us to reach millions of people at a very low rate. We can get remnant space on occasion, but they guys we bought have relationships to buy media at very low rates."
He also sees the possibility to improve his company's bottom line.
"Magellan is quite successful," he said. "We bought a business that would dramatically improve our revenues and profit equation." Tauber previously worked as a merchandise manager at Bloomingdale's before joining a decorative towel company. He formed Cybershop.com in 1995 after researching opportunities to market online.
As an Internet startup, Cybershop.com is investing the proceeds from its initial public offering in systems, equipment and warehouse facilities that allow it to fulfill orders within 24 hours. It has 15 seats in its call center, with the ability to handle overflow throughout the office. Although the company is posting net losses because of its investing activities, Cybershop.com's chief operating officer sees a strong business in its gross profit levels of about 25 percent.
"We have a profitable gross margin, but we're really pushing the promotional levels to get our name out there," said Jeff Leist, COO, Cybershop.com. "Magellan has a strong business with profit levels of 53 percent. They'll help us promote our brand with their reach of 275 million readers a week."
Leist joined Cybershop.com after working for Rupert Murdoch's News Corp. for 25 years. One of his projects there was managing Internet development for TV Guide, a former News Corp. property that merged with Prevue Networks.
Magellan does not have its own call center or fulfillment center and plans are underway to determine cost-efficiencies from combining operations, Leist said. Cybershop.com has about 1,000 different items now, but expects to triple that number for the holiday buying season.
The acquisition of Magellan follows an acquisition on March 29 of Dealaday Inc., an online retailer of off-price branded women's and children's apparel. Cybershop.com also owns a joint venture with Tops Appliance City, an electronics retailer in the New York area, to sell hard goods through the site, www.electronics.net. The company is also an anchor tenant on America Online's shopping mall.