On the Right Track?

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NordicTrack's plans to dispense with its DRTV marketing department, telemarketing operations and a manufacturing plant again demonstrates the challenges facing any company that derives a substantial portion of its income from infomercial sales.

It is commonly said that one out of 20 infomercials is successful today, meaning its TV-generated sales margins are large enough to perpetuate sustained expenditures on media time, an infomercial's equivalent of retail space. Given that level of risk, it's not surprising that more companies are happy to break even on TV and drive sales at retail stores.

Many people in the infomercial industry pointed to NordicTrack as a company that not only sold millions of units through TV, but also built a widely recognized brand through infomercial marketing. Its sales once had rocketed to the $545 million a year mark - the company is now in the $340 million range - and led the company to build up an infrastructure to manage DRTV campaigns, handle inbound telemarketing and manufacture more products.

Its rise and fall and restructuring are eerily similar to the experience of other companies in the infomercial industry, most recently National Media Corp., that went on an acquisition binge when it was flush with cash from sales of the Ab-Roller exercise device. Label it a certain arrogance that results from making a lot of money in a short period of time or another case of mismanaged growth. The lesson remains that infomercial marketers should avoid investing in infrastructure that cannot be sustained. Infomercial marketing has its own curious economics, driven by the broad reach of television and the fickleness of fads.

Beyond the infomercial industry, there is a broader trend among companies to divest any segment of operations that can be outsourced, which is what NordicTrack intends to do with its DRTV operations. We see commercial banks such as J.P. Morgan turning its management information systems over to Andersen Consulting, for example. Wall Street darling HFS Inc. owns almost no fixed assets, but its control of the franchise rights to Coldwell Banker, Century 21 and a litany of hotel chains generates a continual stream of cash. Meanwhile, Sara Lee Corp. announced recently that it would join the ranks of companies that are divesting factory operations in favor of licensing brands to manufacturers.

NordicTrack can run a successful business in developing new products and outsourcing its DRTV operations to specialists, but we think the company should never write off DRTV entirely. At the very least, the company should attempt to liquidate its media expenditures and reach as broad an audience as possible. The infomercial audience does not consist of high end consumers that NordicTrack wants to reach. As the table on page one shows, the average infomercial sale is $271, while the average price for a NordicTrack device is in the neighborhood of $700.

While the company may cut back on infomercial marketing, it should still consider marketing through DRTV spots, which are said to be the best way to boost awareness, drive retail sales and save on media costs.

It will be interesting to see how well NordicTrack can weather its restructuring and avoid joining the growing number of defunct companies in the infomercial dustbin.

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