Damark International, Inc.

views updated

Damark International, Inc.

7101 Winnetka Avenue North
Minneapolis, Minnesota 55428
U.S.A.
(612) 531-0066
Fax: (612) 531-0481
Web site: http://www.damark.com

Public Company
Incorporated: 1986
Employees: 1,336
Sales: $500 million (1995)
Stock Exchanges: NASDAQ
SICs: 5961 Catalog & Mail-order Houses

Damark International, Inc., a leading national direct marketer, was established in 1986 as a mail-order company selling closeout name-brand merchandise. “The Great Deal Company” rapidly added current items and promised “quality products, great prices, and hassle-free shopping.” The single most important aspect of Damark’s business is its customer benefits program. Preferred Buyers’ Club members contributed 46 percent of sales in 1995 and are pivotal to the future of the company.

Roots in the Closeout Market

Damark was founded by Mark Cohn and David Russ in 1986. Russ—whom Cohn called “the quintessential American entrepreneur” in a 1994 Twin Cities Business Monthly article by Clark Froebe—had started his first business by the time he was 17 years old. Cohn, a native of Long Island, New York, arrived in Minnesota as part of a deal with his father. Cohn wanted to go to California but did not have the money for the move. He agreed to take a job with a Minneapolis subsidiary of his father’s employer; if the position wasn’t a fit, the move west would be financed. Cohn left the company but stayed in Minneapolis and worked for a VW Bug conversion kit company where Russ was the national sales manager.

When C.O.M.B. Company, a retail store and mail-order business that sold discount and closeout goods, recruited Russ, he brought Cohn over to the company. The rapidly growing enterprise allowed Russ and Cohn a lot of freedom in decision making. But that changed when financier Irwin Jacobs bought 40 percent of the company in 1983. Theodore Deikel came on board and tightened up the operation. Cohn and Russ left C.O.M.B.

About a year later, Cohn joined Russ in another business venture. The two purchased some gold-plated German flatware for a fraction of its retail price and offered it to their former employer, C.O.M.B. The product took off, and Russ and Cohn earned North American distribution rights for the line. When the men tried to expand their wholesale business, they found that C.O.M.B. was the only company interested in the flatware; growth would have to come through adding new products.

Cohn and Russ found what they believed to be an ideal product for C.O.M.B., a Seiko computerized watch. It had retailed for $300; the men paid $50. C.O.M.B. rejected the watches, and Cohn and Russ had to sell the product themselves, with the help of some C.O.M.B. employees and an ad placed in the Wall Street Journal. Sales for the watch C.O.M.B. had rebuffed four different times soon reached $600,000. But the successful venture had some fallout in the form of an ultimatum from C.O.M.B.: Cohn and Russ had to decide between being suppliers or competitors. They decided and incorporated Damark International, Inc., a name derived by combining their first names.

In the early days of business, Cohn and Russ searched trade shows for closeout merchandise; later, manufacturers began approaching them with their products. Damark first sold through ads in national magazines and newspapers such as Popular Mechanics, Popular Science, and USA Today. A two-page new merchandise flier was shipped with each order. Damark employed eight people in 1986, and Cohn’s garage and basement served as the company warehouse. But the number of products, names on the mailing list, and the length of their merchandise flier grew steadily.

The Catalog Business Begins, 1987

In 1987, the first Damark catalog was mailed out. Sales for that first full year of business were $5 million, but the company lost money due to expansion costs. In 1988, 12 million Damark catalogs were sent out and brought in the majority of business. Still, over twenty percent of sales were made via newspaper and magazine advertisements. According to a 1989 Catalog Business article, Damark spent $1.5 million on ad space in 1988. The typical Damark customer, whether garnered from an ad or catalog response, was an educated, young, professional male, and computers and consumer electronics topped his purchase list. Damark products, which came from large volume purchases, closeouts, distributors overstock, and discontinued merchandise, were fully warranted. Slow moving products were marked down and re-advertised until they were sold. Revenues for 1988 grew to about five times that of the previous year.

Cohn explained to Catalog Business contributor Dee Henry that the key to the company’s success was America’s obsession with the new and improved. Products rapidly became obsolete as manufacturers added features, thus allowing Damark to offer brand-name consumer goods at greatly reduced prices. Cohn, already president and chief executive officer, assumed the position of chairman of the board at the end of 1989. Sales that year were $110 million.

Damark’s rapid growth was aided by a general expansion of the mail-order business in the 1980s. In a 1990 Star Tribune article, Susan Feyder cited “toll-free phone numbers, 24-hour phone service, greater use of credit cards, and quicker shipping” as contributing factors for more Americans shopping from home. But according to Feyder, Damark grew at an even faster pace than the industry: the privately-held company had a compound annual growth rate of over 300 percent from 1986 to 1989. By 1990, Damark was sending one catalog each month to proprietary customers and another to prospects from rented lists. Brand-name electronics, household goods, hardware, and jewelry were offered at discounts of 60 to 70 percent off retail prices. And by then, catalog sales accounted for 90 percent of Damark’s business.

The Drama of Rapid Growth in the Early 1990s

Early financing, engineered through a progression of small investors, proved troublesome for Damark. Froebe wrote in 1994: “Desperately seeking funds landed Cohn and Russ in a fix at one point, when a Wichita, Kansas-based vendor gained 51 percent of Damark in exchange for $1.5 million.” The vendor intended to downsize and move the company to Kansas.

Russ and Cohn saved the company at the last minute with a $2.5 million line of credit from another private investor. In 1989, Damark bought out its last private investor by means of its first institutional financing.

Damark endeavored to become the nation’s largest closeout catalog marketer by making a bid to buy C.O.M.B. in 1990. The purchase was complicated by an anti-trust law suit Damark filed in 1989 against C.O.M.B.’s owner, CVN Companies. Damark claimed the television shopping company had tried to prevent manufacturers and distributors from doing business with them. Ultimately, Fingerhut Companies, lead by former C.O.M.B. executive Theodore Deikel, purchased the mail order assets of C.O.M.B. from CVN’s new owner, QVC Network Inc.

The year 1991 proved to be a mix of good and bad for Damark. The year began with the receipt of about $12 million in venture capital funds and the addition of new board members, who added strength to the company. And while many retailers staggered under an on-going economic recession, Damark profited from its “good value” image among increasingly cost-conscious buyers. But Damark made headlines early in the year when seven software makers filed a piracy suit against the company. Midway through the year David Russ left the company he helped found. Froebe reported that Russ’s departure was partly due to a shift in Damark’s product mix away from closeout to current items. The men also differed regarding the company’s financial goals: Cohn emphasized earnings, and Russ advocated growth.

Late in 1991, Damark hired two professional business executives. Barry Marchessault, who had been with Disney’s and Bloomingdales’ catalog divisions, was named company president; Tasso Koken, formerly with Nobody Beats the Wiz, a large New York consumer electronics retailer, assumed the role of vice-president of merchandising. The year ended on a positive financial note: net sales reached $217.5 million, and net profits neared $1.0 million. The Damark mailing list had grown to 2.5 million names from less than 50,000 in 1987.

In February 1992, Damark announced plans to double the size of its year-old headquarters facility. In March, the company made its first public stock offering: 2.72 million shares of common stock starting at $12.50 per share. Purchases by institutional investors quickly drove the price up to $14.25. The initial public offering (IPO) brought Damark $23.7 million in new capital. But by mid-year, Damark stock had fallen to less than half the offering price. Computer price wars had driven down Damark’s quarterly earnings estimates, as computer sales were one of the biggest contributors to the company’s revenues. To make matters worse, stock prices of mail-order businesses were generally depressed by a pending Supreme Court action regarding the taxation of mail-order merchandise, and Cohn became a national media figure around the issue. Christopher Palmeri noted in Forbes magazine that “Mark Cohn suddenly seemed to pop up everywhere,” with comments on the ruling which denied states the right to impose sales tax on out-of-state mail-order companies. Cohn’s visibility became a sore spot for the company in light of the post-IPO downturn.

Company Perspectives:

The Company’s overall business strategy is to be a membership-driven national direct marketer offering its customers “one stop shopping” for many of their shopping needs, including discounts on DAMARK products, and discounts and other valuable services from third party marketing partners on travel, hospitality, entertainment, health & fitness and convenience as well as other retail services. This marketing strategy includes, among other things, effectively targeting its name acquisition efforts in order to broaden its core customer base and to offer value pricing or “great deals” on brand name and other quality merchandise and services.

In October 1992, Cohn resumed the position of company president; the recently-hired Marchessault and Tasso stepped down. An overlap of responsibilities and differences in management style were cited as reasons for the change. Despite the shakeup, Lee Schafer reported in Corporate Report Minnesota: “A few days after the shakeup, Cohn struck a confident tone when announcing third quarter results.” The company’s earnings and sales estimates were up compared with the same period in 1991, and the future appeared to be bright. Two weeks later, however, Cohn backpedaled, issuing a brief statement saying the company was “not comfortable with fourth-quarter Street estimates,” Cohn was uncharacteristically silent following the announcement, and Damark lost the support of the investment community. Damark stock fell to $3.75 per share. Net sales were $270.3 million, up 25.2 percent from 1991; net income was $1.64 million, up 55.5 percent from the previous year, but the company lost 44 cents per share. In spite of all the year’s drama, Cohn retained the support of the board of directors.

From Products to Membership

Damark credited promotional marketing strategies such as free shipping and handling and free Federal Express delivery for boosting 1992 sales. Damark’s membership program was also enhanced that year. The Preferred Buyers’ Club (PBC) annual fee was increased to $50, and a 10 percent discount on purchases was added to the benefit package. The company club concept had originated in 1987. The first club membership fee was $25 per year and benefits included one catalog a month with exclusive product offers and price markdowns, a toll-free customer service line, and a 60-day lowest price guarantee.

In 1993, Damark bought C.O.M.B. from Fingerhut and gained assets of about $100 million and an active buyer list of 1.4 million—including 185,000 buyers’ club customers. The typical C.O.M.B. customer was less affluent, more likely to be female, and made more household purchases than Damark’s customers. Bolstered by a positive response from investors regarding the C.O.M.B. purchase, Damark planned a two-million-share stock offering; Damark stock was trading in the $20 range at the time of the November announcement. Revenues for 1993 were $364 million; earnings were $5.8 million—up 252 percent from the previous year. The $28.8 million netted on the stock offering was used to repay long-term debt related to the C.O.M.B. acquisition and to support business growth.

In 1993, Damark continued to work to gain increased customer satisfaction and loyalty in the profitable club segment of its market by adding third-party, non-competitive retail and service discounts to its benefit program. Due to the success of installment and deferred payment plans implemented late in 1992, a private-label credit card was issued in 1993. In 1994, PBC benefits were expanded and included discounts in eight categories: convenience, retail, entertainment, travel and hospitality, manufacturers, direct marketing, services, and health and fitness. About forty percent of telephone customers were being converted to club members. And the renewal rate among existing members had risen to 65 percent.

Damark reorganized operations in 1995, dividing into a membership group and a retail group. Merchandising, marketing, advertising, and planning functions were integrated in order to reduce shipping costs and turnaround times, and increase profitability in the catalog business. The restructuring facilitated increased support of the club aspect of the company and accelerated Damark’s move toward becoming a membership-driven business. Price increases amounting to 14 percent for postage rates and 55 percent for paper rates resulted in $4.6 million in additional costs in 1995. Even though net revenues for 1995 increased to $500 million, the company experienced its first net losses since going public: $1.9 million or 20 cents per share.

The growth of club membership and plans for expanded marketing boded well for the company’s future. A record number of new Preferred Buyers’ Clubs members—600,000 of them—were added in 1995; club members continued to be the most profitable, predictable, and loyal customers. Damark’s use of sophisticated customer tracking techniques helped the company accumulate more than 8 million names on its proprietary customer list by the end of 1995. In 1996, Damark added two new clubs to its membership program. The Vacation Passport Club, the first Damark club solely based on non-merchandise services, offered benefits such as hotel discounts, airline frequent flyer miles, car rental discounts, and travel agency services. The Insiders Club upgraded the level of services already offered by the PBC. Damark club membership passed the one million mark in 1996. According to a 1996 article by Sally Apgar, Cohn planned to continue to introduce new clubs appealing to specific markets and to move gradually into sales over the Internet.