Same Principles Govern Web, Catalogs
Last year was hugely successful for e-commerce and catalog companies, but a few bumps on the Web-related operations and fulfillment side have put the industry on alert. The subsequent dot-com investment washout has not helped, though it has, in fact, strengthened the industry.
It is, however, fair to say that the investment community will be watching closely the execution and financial performance of the e-tail world this holiday season; the new investment and reinvestment of enormous amounts of capital in the immediate future will be determined in the next 30 days to 45 days.
If there is one inescapable fact that should have been learned in the past two years, it is that there is no hurry.
The "first to market" advantage that we hear constantly means nothing if that first e-commerce company to market is a failure. Almost every start-up or extension activity that we have observed and that has been founded on the first-mover advantage has met with difficulties, primarily strategic and financial. Simply put: poor strategy and no earnings.
Rushing a concept into existence is exceptionally risky; success comes only when there is a knack for this style of execution, a knack that comes only after numerous small, successful attempts.
During the past two years, the most common sage advice has been, "Don't do that. Test your way into the market."
Unfortunately, few e-commerce entrepreneurs can accept such advice because they are infected with the fatal first-mover virus: They are in love with their e-commerce idea. Time and discipline almost always ensure an environment for success; speed and obsession almost always precede failure.
It has been said this is the golden age of e-commerce, that it never will be better or that there never will be such opportunity again. Another view that is equally stimulating to the entrepreneurial mind: This may be the most opportune time ever to create a catalog business based on the long-proven catalog foundation principles that are missing from those e-commerce companies that are failing.
To fully consider that opportunity, you must fully accept that the Internet and the catalog are, in all likelihood and to a degree, inseparable. The catalog and the Internet may function better together than separately.
The Internet is many things, only one of which involves purchasing products and services.
If the Internet is viewed as a sales channel rather than a stand-alone medium, then it is logical to consider the Internet as an adjunct to other selling channels. It is not a matter of one or the other, rather the creation of multiple, effective, symbiotic sales channels.
E-commerce and e-tailing have been prevalent for about four years, and they have produced for catalogers about 12 percent of their orders. The last significant channel change in cataloging also produced about 12 percent of the orders after four years; that was the fax machine. The difference is that catalog companies did not go public based on their fax orders. Keep it in perspective.
Another strategic realization is that there is a defined food chain in the e-commerce world. For investment monies to flow into anything - oil exploration, pharmaceuticals or new technology - there first must be nutrients. The nutrition for e-commerce has come from the demands created for infrastructure. The dot-coms have served their purpose as nutrients, and they now are being converted into energy, thereby creating a second era of investment.
That neo-investment phase will be enormous, and recipients of the investment largess will be the survivors of the primordial e-commerce soup. That's just the way it works. The catalog world went through the exact same Darwinian evolution.
In the 1960s there were numerous "new-tech" catalog start-ups, business-to-business and consumer. A few of those catalogs are still around, and they are very big operations.
In order for the investment world to spawn a catalog industry, it was necessary to breed early nutrient companies so that the learning process could occur using other people's money. Nothing new there. The important aspect to recognize as a nutrient company is that all future funding derives from immediate, maximal earnings. No earnings, no future funding.
Why has that been so difficult to understand? What conjunction of the planets, moons and sun changed that primary law of the universe?
The fourth strategic understanding that follows the birth of an era is that it is more than probable that the same rules will apply. In the frenzy of the "new thing," it is believed that the old governing principles no longer work, that new rules have to be made and new benchmarks and metrics have to be invented.
Rules do change, but slowly and only after economic proof. Until then, the old rules determine the game.
So, for online as well as offline catalogers, the cost to acquire a customer and the net potential earnings before interest, taxes, depreciation and amortization of that customer are still the two most important and governing metrics.
And if you look at cardinal metrics for catalog operations, they apply to e-commerce equally. That ineluctable fact has taken our industry several years to realize. Those who understood it from the outset had the advantage; they are the survivors of the nutrient-rich, primordial e-commerce soup.
A fifth strategic element is that over-capitalization does not compensate for an undersized universe. I don't care how much money you can raise, only a very few people care about doggiediapers.com.
The catalog world learned years ago that a really great idea for products was, more often than not, actually a line extension or a new product line; rarely was it a whole new business. If there is no universe, there is no business. And e-commerce did not understand that touchstone of direct marketing.
To fall in love with a concept is to begin to feast upon one's own flesh. You fall in love with universes, and then only those that can produce sustainable earnings.
The sixth and most important strategic element emphasized in the past two years is that value has a constant definition. The value of anything may be up or down, but it is never ambiguous. The value of a catalog company is whatever someone will pay for it, but the amount of that value is always defined by earnings.
The world revolves on earnings, not potential; on sustainable profits, not projections; on tangibles, not ethereals. In our enthusiasm for riches, we forgot the one constant: Real earnings come from real customers buying real products from real companies.
In the e-commerce and catalog world, the real companies remember the six strategic imperatives:
• There is no hurry. Success takes time, discipline and testing.
• The Internet and the catalog are symbiotic and, therefore, inseparable.
• There must be nutrients to survive. One must eat and not be eaten.
• The same rules apply - always.
• Overcapitalization does not compensate for a small universe or a "great concept."
• Value has a constant definition: earnings.
• Donald R. Libey is co-founder of Libey-Concordia Catalog Investment Bankers, Philadelphia, an investment banking firm to the catalog industry.