If you are a non-profit, would you consider this to be a great deal? A 5% royalty from each item sold and a commitment to contribute $1 million a year to your cause. Just think, no longer do you have to worry about marketing to your customers, selecting and sourcing merchandise, maintaining an e-commerce site, and running operations with a call center and warehouse. For many non-profit companies you’d be silly to walk away from a deal like this. But as Howie Mandel on NBC’s Deal or No Deal says, “Did you make a good deal?”

What happens to your business when the parent company of the service provider, in this case BlueSky Brands, closes the doors? The monies that were budgeted and expected in the fiscal year won’t be available, not only for this year but possibly future years as well. For many non-profits, this type of loss directly impacts their bottom line which in turn impacts their ability to support their programs. The purpose behind direct-to-consumer sales for many non-profits is to generate revenue; in most cases unrestricted revenue which can be used within the non-profit organization in any manner they prefer. Losing revenue, particularly in the case of National Wildlife Federation, of $1 million a year, has to be devastating. A similar situation has happened with Winterthur except the revenue impact is unknown.

Not only is the money lost, what happens to future business? BlueSky Brands and AB&C Group are shut down at this time. Customers can’t place orders, the website has a message posted that it can not process orders at this time and to please check back for updates. Essentially, National Wildlife Catalog is at least temporarily out of business until further notice. Will customers hang around for National Wildlife Catalog to recover? In today’s economy and given the competition for consumer dollars it is not likely.

If you are a non-profit, is this a path you would have taken? It certainly looked good, a company willing to pay royalties and contribute $1 million a year, take over your whole catalog and operation while your company focuses on its core competencies. In an article in Catalog Success dated 11/17/06 by our good friend Larry West:

“Although payment terms were undisclosed, expect a lot of money flowing from BlueSky to the nonprofits. For such organizations, a fairly predictable cash flow without real investment risk is a Godsend, especially since it has become tougher for both nonprofits and for-profits to generate respectable profits and ROI in recent years”.

The article referred to the licensing deals of Winterthur and NWF catalogs to BlueSky Brands. In 2006, all indications were this was a great deal.

Does this mean that all licensing and third party fulfillment deals are doomed for failure? Absolutely not. In fact a number of our clients use third party providers successfully, particularly non-profits. The rule of thumb here is regardless of a great deal in place, you still must be on top of your business and service provider.

What do you think? Deal or No Deal.

Tocky Lawrence a Vice President of F. Curtis Barry & Company, a multichannel operations and fulfillment consulting firm with expertise in multichannel systems, warehouse, call center, inventory, and benchmarking; Learn more online at: http://www.fcbco.com.

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Like CommercialWare being acquired by MICROS Systems/DataVantage (now known as MICROS-Retail) and Ecometry being acquired by Golden Gate and merged with GERS and Blue Martini to form Escalate Retail, this is one more major software provider that has sought venture capital. The order management marketplace has become really competitive, between acquisitions and the enterprise wide system vendors attempting to penetrate the multichannel market.

Dydacomp has been around a long time, and they have thousands of customers, which are largely startups and small companies. We hope that this new capital will lead to Dydacomp redesigning its system to be more effective for moderate sized companies. The multichannel business world needs some new effective competitors.

Check back on this blog for more updates on this topic, as we plan to get an interview with Berkery Noyes.

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ST. PAUL, Minn., Dec. 6 /PRNewswire-FirstCall/ — Gander Mountain Company (Nasdaq: GMTN), the nation’s largest retail network of stores for outdoor lifestyle products and services, today announced that it has acquired Overton’s, Inc., a leading Internet and catalog marketing company targeting recreational boaters, from Linsalata Capital Partners, a Cleveland-based private equity firm.

With 2006 revenues in excess of $90 million and over 15 million catalogs distributed annually, Overton’s is an established Internet and catalog marketer with a strong, trusted brand name. Headquartered in Greenville, N.C., Overton’s operations include a fulfillment center and call center offering available capacity to support new Gander Mountain Internet and catalog marketing opportunities.

“The acquisition of Overton’s enables Gander Mountain to greatly accelerate our strategy to be an integrated, multi-channel retailer featuring Internet, catalogs and retail stores,” said Mark Baker, Gander Mountain president and CEO. “Overton’s is a unique opportunity for Gander Mountain, providing an excellent management team, a proven platform and infrastructure, and the capacity to handle substantial additional volume with minimal incremental investment.”

“Gander Mountain was the first major catalog company in our industry,” Baker continued. “Moving back into the catalog and Internet marketing arena will leverage our retail network of 115 stores across 23 states, and create national awareness for our brand as we grow into new retail areas. It also should provide better balance to our seasonal sales profile with the majority of Overton’s sales in the first half of the year, and help us to improve our margins and lower our selling costs.”

Mark Metcalfe, CEO of Overton’s, said, “The entire Overton’s team is tremendously excited by the opportunities this new ownership brings. We believe we can significantly contribute to the growth of Gander Mountain’s Internet and catalog efforts, as well as increase the distribution of Overton’s catalogs and drive sales of Overton’s products in Gander Mountain’s retail stores.”

The purchase price for the acquisition was approximately $70 million in cash which included the repayment of Overton’s existing indebtedness at closing. The purchase price was financed through the issuance of $24 million in Gander Mountain common stock at a purchase price of $5.90 per share, a $40 million term loan from Bank of America and borrowings under the company’s revolving credit facility. The common stock was purchased by GRATCO LLC, an affiliate of David Pratt, Gander Mountain’s chairman, and Holiday Stationstores, Inc., which is an affiliate of both Ronald Erickson, Gander Mountain’s vice chairman, and Gerald Erickson, a director of the company.

Overton’s will continue to operate under the “Overton’s(R)” brand and as a wholly-owned subsidiary of Gander Mountain. Between Gander Mountain’s and Overton’s capabilities and resources Gander Mountain will be able to feature a full complement of Internet and catalog offerings.

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For one thing, Macy’s is spending relatively little on ads related to e-commerce—$4.5 million for “Internet spending,” but not including “spending on online search marketing or rich media ads that include video,” according to a TNS Media Intelligence report. That’s interesting. We would hope that the media not included in that TNS figure amounts to significant ad expenditures elsewhere that will grow with more experimentation and use to support Macy’s e-commerce channel.

Meanwhile, the brick-and-mortar Macy’s is weathering another storm. A front-page New York Times article this past week pronounces that Macy’s CEO Terry Lundgren has been forced to backtrack on at least some of the strategy to reinvent the brand and revitalize the 800+ department stores that now bear the Macy’s name. Supposedly, a move to reduce the number of shopping coupons stores issued to customers (for stores in some regions the reduction was around 60%) and to eliminate midprice brands (the article cites Levi’s and Dockers) has left customers unimpressed. In fact, they have been downright unwilling to shop. Macy’s is actually blaming its coupon cuts for “four consecutive months of falling store sales this spring.” Although comparable discounts are still available for customers who use a Macy’s charge card, the results have been nowhere near as positive as coupons have been historically.

And don’t forget Marshall Field’s, now the State Street Macy’s store in Chicago. Feelings there run high about the change in name, the quality of goods sold, and many say, in service. Macy’s Chicago store announced last month that toy store FAO Schwarz will open a 4,000-sq.-ft. store inside the Macy’s store for the holiday season (Schwarz closed its Chicago store in 2003 as part of a bankruptcy filing). But even that news has failed to impress some diehard Field’s customers. One observer sums it up thus: “[Macy's] has run the stores straight into the ground and most certainly will end up selling the Field’s name and the State Street store to a quality retailer like Neiman-Marcus or Harrod’s. Most Chicagoans will never shop at Macy’s. Never.”

–

Curt Barry is president of F. Curtis Barry & Co., a multichannel operations consulting firm� with expertise in the selection and implementation of warehouse management systems. Learn more at: http://www.fcbco.com.

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What would such an acquisition mean for a retailer the size of Macy’s? Will there be a breakup and sell-off of some of the assets and stores that are not performing? Closing non-profitable stores?

Meanwhile, Macy’s has launched a major new ad campaign based on celebrities—Martha Stewart, Sean Combs, Jessica Simpson—in an attempt to develop a coherent image for the giant Macy’s family of department stores created by the acquisition of May Co. The going has been rough. Macy’s sales were down 77% for the second quarter this year (although same-store sales were up 2.4% in August); and protesters showed up earlier this month at Macy’s Chicago State Street store demanding that the store be returned to its historical identity of Marshall Field’s. To make the new ad campaign more interesting behind the scenes, two senior marketing executives have jumped ship this year, Macy’s Chief Marketing Officer Anne MacDonald, who left in June, and just last week, Brad Jakeman, the executive vice president of marketing.

Extrapolate all this activity to the direct-to-customer, multichannel business world—does this kind of venture capital acquisition/consolidation represent the wave of the future for catalogers to become profitable? We’re thinking here of recent acquisitions by such VC firms as Golden Gate Capital, which owns Haband, Catalog Holdings (which owns Spiegel, Newport News, Carabella, AB Lambdin, Norm Thompson, Solutions, Sahalie, Appleseed’s, Draper’s & Damon’s, and The Tog Shop), and Sun Capital Partners (which owns Lillian Vernon, Sharper Image, and Hickory Farms). What are the implications of this kind of ownership? How long will the VC companies hold on to these catalog titles, and just what does it mean for the companies that have been acquired?

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As I discussed in Part 1 of this article, it is important that you find a company that suits your needs. A company that provides due diligence services in the multichannel retail arena will help you investigate the feasibility of, or provide support for, mergers, acquisitions, and/or investment opportunities. My firm, F. Curtis Barry & Company, helps potential investors conduct multichannel acquisition due diligence evaluations of the operational areas related to warehouses and contact centers and their related facilities, systems, staffing and processes.

Improving Portfolio Companies: Post-acquisition Due Diligence

Once an investment has been made, issues similar to those covered in the Pre-acquisition Due Diligence stage need to be addressed. Unless the investor intends to keep the business running just as it did before the investment, it will be necessary to develop plans for change and improvement. F. Curtis Barry & Company helps clients maximize the value of their portfolio companies by conducting an operational audit that will help them discover potential problems and implement improvements.

The first step in this audit process is to conduct a thorough and methodical evaluation of all of the operating areas within the business to develop a list of potential improvements. This list should then be defined to include the cost, savings, risks, timelines, and any other related factors that can be used to prioritize potential changes. This “Discover and Fix It” list, which should focus on reducing costs and improving service levels, can be built on work done during Pre-acquisition Due Diligence or as an independent step. If it is an independent step, all of the areas covered in the Pre-acquisition assessment should be looked into again as the list of prioritized potential improvements is developed.

Investors should develop plans that reflect the needs for future growth with a 3–5 year horizon. Decisions about which ideas to implement should be based on justifications using both current and future sales volumes. It will most likely not be possible to do everything at once, so pick and choose your battles wisely. Maximizing the current operation should come before investing in change. Basing justifications for investment on a sub-optimized current operation is counterproductive. The best use of the time available after an investment is rather to make the most of what you have, look for the “low-hanging fruit,” and concentrate on getting the basics right. For instance, if an investment involves putting two or more companies together, one obvious place to look for improvement is in the elimination or reduction of duplicated efforts.

Implementation Plan

A final step in the process is to develop a transition or implementation plan that details the steps that are required for implementation, the person accountable for completing the plan, and a timeline. Without such a plan, all of the prior work can be wasted. It is also vital to provide a single accountable resource to project manage the implementation.

With the future financial well being of those involved in the investment process, it is imperative that you do all of the homework required to make a wise decision. After the investment, it is equally important to maximize the return on the investment by discovering potential improvements and implementing them.

About the Author
Bob Betke is a vice president of F. Curtis Barry & Company, a multichannel operations and fulfillment consulting firm with expertise in assisting multichannel businesses with pre- and post-acquisition due diligence. Learn more online at: http://www.fcbco.com

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Begin by finding a company that provides due diligence services to potential investors in the multichannel retail arena to investigate the feasibility of, or provide support for, mergers, acquisitions, and/or investment opportunities. My firm, F. Curtis Barry & Company, has been working in this market for many years. Our perspective is one of operational consultants for multichannel retail businesses —companies that operate some combination of direct-to-customer sales (catalog and e-commerce), retail (brick-and-mortar), and/or wholesale channels.

Investment decisions should be based on the best information available. A mistake in the initial evaluation process can be costly in the long run, even fatal, to successful investment. Most investment activity is based on the belief that improvements can be made to a business that will warrant the expenses incurred. An operational assessment evaluates a business’s potential, pinpoints ways to reduce current operating costs, identifies inherent risks, and estimates the costs that would be required to make improvements.

The financial aspects of a potential investment rightly receive the most emphasis. However, many other areas, if not addressed, can have a negative effect on the overall financial picture. F. Curtis Barry & Company applies its multichannel business expertise to focus on that part of the due diligence process relating to the operations of the target enterprise. In the context of the multichannel retail industry, the term “operations” refers all activities related to fulfilling customers’ orders and meeting their expectations. This includes merchandising, marketing, information technology, warehouse operations, and call (contact) center functions.

We conduct an operational assessment as part of due diligence to evaluate investment potential, determine the necessary costs to make improvements, and identify any inherent risks. As required, F. Curtis Barry & Company also provides operational evaluation of completed investments to support the improvement process.

Pre-acquisition Due Diligence: A Checklist

F. Curtis Barry & Company helps potential investors conduct multichannel acquisition due diligence evaluations of the operational areas related to warehouses and contact centers and their related facilities, systems, staffing and processes. The following are considered:

1. Determine Cost Per Order and Measures of Productivity
In order to evaluate the effectiveness of the operation under study, we develop a calculation of the cost per order. The cost per order is a good benchmark to determine how productive an operation really is. It can include direct and indirect labor, facility costs, and packaging materials for the warehouse, with the addition of other specific costs for the contact center. Comparing the company’s cost per order to that of others in the industry or to past internal trending costs gives a good picture of which direction the business is headed and also how it stacks up against the competition.

Because factors such as wage rates and productivity levels affect costs, they must also be considered in an assessment. In order to reduce potential bias and misinformation caused by varying wage rates when comparing cost-per-order benchmarks, we also suggest that true measures of productivity using some unit of measurable work and the corresponding man hours involved be included. True productivity measures of warehouse and contact centers can give a good picture of how the operation really compares to others and whether there is any room for improvement.

We always recommend external benchmarking as a starting point for comparing operations, but the real key is to research true internal productivity measures comparing actual activity over a time period against some level of standard of performance expectation. This internal measure is as important as the external one, in that it points out trends as well as opportunities for further study based on changes in performance or failures to meet expectations.

2. Evaluate the Facilities
A second area for evaluation is physical facilities. Analyzing how efficiently a facility is used and determining its true operating capacity help in evaluating potential improvements and the business’s ability to meet the demands of growth. Both the contact center and the warehouse should be evaluated in terms of how well the space is utilized and how effective the overall layout appears. A review of the flow of materials through the warehouse can tell a lot about efficiencies and future opportunities for change. The level of automation employed and its appropriateness to the business is another indicator of performance.

The operational assessment should also consider how many facilities are needed and what functions they should perform. The way work is being completed at existing facilities and comparisons of the processes and practices used to industry best practices may identify areas for potential improvement that can yield major savings.

3. Identify Future Growth Needs
Can the target company meet future growth demands? Due diligence can discover pressures that will be placed on facilities, staffing, systems, etc., so investors can make sure no major problems will arise through supporting future growth.

4. Assess Customer Service Capabilities
Most Pre-acquisition evaluations should also include customer service levels. A good hard look at service level standards and actual performance against these standards is a critical piece of an overall assessment of how well a company is performing. Metrics such as order turnaround time, call abandonment rates, e-mail response times, and returns processing order accuracy are all measures of how well a multichannel business is actually doing.

5. Review Business Systems & Software
In order to rate the operating level of a potential investment, F. Curtis Barry & Company explores the infrastructure system support available to the business being considered. A review of the software and the corresponding functionality provided is a good measure of the ability of the business to support current needs, and more importantly, its ability to support future changes. A system that is inflexible or does not meet current operating needs is a warning flag that indicates significant investment in time and money might be required to match business needs and implement the assumptions of productivity improvements and cost reductions. The rapidly changing nature of the multichannel world, especially the e-commerce channel, makes flexibility mandatory. Make sure you are investing in a platform and software for order, inventory and warehouse management systems that can meet tomorrow’s needs.

6. Evaluate Inventory Details
The largest single asset of multichannel businesses is inventory. Accordingly, we review basic inventory measures such as turns and ageing in order to gauge how well inventory is being managed. We suggest a review of the top 10% and bottom 10% of SKU sales to measure how effective the forecasting process is. We also review any liquidation practices along with a measure of cost recovery.

7. Meet with the Staff
The final process in evaluating a business is a relatively soft one, but still critical: The staff should be interviewed to gauge the work culture. Unless the business is going to be closed or moved, it is unlikely that the current culture will be easily changed. Talking with employees at all levels of the operation, allows us to determine what degree, if any, of difficulty an investor might encounter when implementing required changes. Don’t underestimate the importance of the human factor in the evaluation process and in determining the value or potential of an organization.

In Part 2, I will discuss Post-acquisition Due Diligence and what to consider in an Implementation Plan.

About the Author
Bob Betke is a vice president of F. Curtis Barry & Company, a multichannel operations and fulfillment consulting firm with expertise in assisting multichannel businesses with pre-acquisition and post-acquisition due diligence. Learn more online at: http://www.fcbco.com

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