The acquisition of The Children's Group by 1-800-Flowers.com is a match made in direct marketing heaven, according to deal maker Larry J. West.
West is president of New York-based West Cos., a consulting intermediary for catalog and e-commerce deals. He represented Foster & Gallagher, the former title owner of The Children's Group.
The move by the two very profitable companies, he said, should encourage other catalogers to look seriously at how acquisitions could help to bolster business.
“There haven't been many deals of this size completed in our industry in the last 12 months,” said West, who began working on the acquisition earlier this year. “The issue is buyers may have the equity but have trouble raising the debt financing portion of the consideration, and this has stopped a lot of deals.”
Multichannel retailer 1-800-Flowers.com had all the necessary financing and did not have to borrow funds in an already tight market, he added.
With interest rates continuing to decline, direct marketers are looking for avenues to reduce expenses — especially customer acquisition costs — and acquisitions could become more appealing.
“We hope it gets better as banks become more open and understand how catalogs and e-commerce together offer a lower customer acquisition [cost],” he said. “When businesses are as synergistic with each other as HeartSong and Plow & Hearth are, you secure not only lower cost per new customer, but economies of scale in order processing, merchandise importing and catalog production.”
The Children's Group gives 1-800-Flowers.com access to a database of more than 2 million customers. 1-800-Flowers.com has a database of 10 million names.
“Our lists have worked extremely well for one another over the years,” said Peter G. Rice, president of Plow & Hearth, a subsidiary of 1-800-Flowers.com. Rice will oversee The Children's Group operation and anticipates no job loss because of the purchase.
The Children's Group consists of two brands: HeartSong, which specializes in wood and natural-material toys and education-themed crafts and books; and Magic Cabin Dolls, which sells natural-fiber soft dolls, doll clothes and accessories. Both brands target gift-giving for children age 3 to 12.
“HeartSong is one of the best-performing lists for Plow & Hearth, and the research we have [shows] it's a category that fits nicely with what we do,” Rice said. “It's [also another] way to sell more products to existing customers and become more valuable to our customers.”
The acquisition not only provides a synergy of related lists, but it also provides a 200,000-square-foot distribution center in Vandalia, OH, which sweetened the deal, he said.
This fall, the multichannel retailer will conduct catalog tests that will include co-endorsements for all catalogs. Because the companies share similar demographics, they will gauge which customers are more likely to want The Children's Group titles and vice versa, Rice said. The new division also could see a 15 percent increase in circulation, now that it has access to 1-800-Flowers.com's customer database.
Currently, 1-800-Flowers.Com circulates 50 million catalogs for its combined titles, while The Children's Group circulates 17 million.
The companies will test cross-selling opportunities among the catalogs with an eye toward product demand and order size.
1-800-Flowers.com will test how well children's gifts and catalog transactions are received and will mine the databases to get additional names.
“Obviously, we're going to test, and we'll be selective,” Rice said. “We should be able to get some good test counts from the database.”
Demographics for both companies are similar. 1-800-Flowers.com's 75 percent female customers are age 30 to 60, educated and have an average annual income of $50,000. The Children's Group customers, however, are somewhat younger.