Drs. Foster & Smith, Inc

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Drs. Foster & Smith, Inc.

2253 Air Park Road
Rhinelander, Wisconsin 54501
U.S.A.
Telephone: (715) 369-3305
Toll Free: (800) 381-7179
Fax: (715) 369-9419
Web site: http://www.drsfostersmith.com

Private Company
Incorporated: 1983
Employees: 600 (est.)
Sales: $170 million (2002 est.)
NAIC: 453910 Pet and Pet Supplies Stores

Based in Rhinelander, Wisconsin, Drs. Foster & Smith, Inc., is a leading seller of pet supplies through catalogs and a Web site. Founded by practicing veterinarians, the privately owned company has established a niche in the marketplace by providing professional advice and informative articles to help customers educate themselves about pet care. The Drs. Foster & Smith catalog, now mailed to 40 million addresses, contains an unusually large amount of editorial content. The company's Web site also contains a storehouse of educational material. Moreover, Drs. Foster & Smith funds the award-winning Web site PetEducation.com, which contains more than 1,500 in-depth articles written by the company's in-house staff of veterinarians. The site is used by pet owners and professionals around the world and is even accessed by some universities as a research resource for students and faculty. Originally devoted to medicines for dogs, Drs. Foster & Smith now offers a full range of products for dogs, cats, fish, birds, wild birds, reptiles, and small pets such as rabbits, guinea pigs, ferrets, and chinchillas.

Company Grows Out of Veterinarian Practice in the Early 1980s

The actual Drs. Foster and Smith were Dr. Marty Smith and Dr. Rory Foster, who ran four animal hospitals in Minocqua and Rhinelander, Wisconsin, located in a resort area of fishing lakes close to the Upper Peninsula region of Michigan. In the early 1980s, Foster was approached by a dog breeder asking for guidance on administering booster shots he bought from a mail order vaccine catalog. Because Foster and Smith were looking to supplement their income, due to a slowdown in business during the winter months, they seized on the idea of either publishing their own newsletter geared towards dog owners interested in home veterinary care or producing their own mail-order catalog selling dog medications. Although there were a number of catalogs serving the same market, they thought they could find a niche by being the only catalog produced by veterinarians. Not only would their business have credibility, it would be able to sell professional and pharmaceutical products that other catalogers would be unable to provide their target audience of breeders and kennel operators. Foster and Smith were already mailing a newsletter to their clients, so at first they simply dropped in a sheet of mail-order medications for sale. It was also during this time that Rory Foster was diagnosed with amyotrophic lateral sclerosis (commonly known as Lou Gerhig's disease) and had to give up practicing veterinary medicine. In 1983, Foster's brother, Race Foster, a recent graduate from Michigan State University, joined the practice.

The Foster brothers and Smith produced their first full-fledged mail-order catalog in 1983. It was a two-color, 16-page, digest-sized affair with simple production values. The partners wrote the copy and took all the photographs. From the outset they wanted their catalog to have a national distribution. For the first offering, they compiled their own mailing list by enlisting the help of family members. They scoured specialty dog magazines and wrote down the names of potential customers: breeders, kennel owners, fellow veterinarians, and hunters. After the addresses were all tracked down, the address labels were individually typed and applied to approximately 16,000 catalogs, which were then mailed out in February 1983. To answer the telephone and fill orders, the doctors employed two people, using a clinic waiting room as a makeshift warehouse and distribution center. Going up against 47 other pet catalogs, Drs. Forster & Smith generated $30,000 in sales during its first year.

Rory Foster Dies in 1987

To spur further growth, the partners began to rent mailing lists and advertised in publications that reached their target audience. As a result, the catalog business grew steadily, so that two years after its launch the operation outgrew the clinic space. With a loan from M&I Bank, they bought a separate building to meet their needs. Rory Foster died in 1987, leaving his brother Race and Smith to carry on both the veterinary practice and the catalog. In 1988, they expanded the catalog in several ways. It went from digest size to an 8½-by-11 inch format, doubled in length to 32 pages, and was now produced in full color, becoming the first four-color pet catalog. In addition, cat supplies were added and the target audience was shifted to ordinary pet owners. As a consequence, the catalog moved beyond medications and now featured toys, beds, furnishings, and other pet accessories. A limited number of horse products were also included.

Drs. Foster & Smith's catalog business enjoyed such steady growth that in 1989 the company added a partner, Mike Scrivener, to serve as chief financial officer. In the early 1990s, the partners decided the time had come to construct their own building to serve as headquarters, call center, and a locale for distribution and warehousing. Construction began in 1992 at a site located near the Rhinelander airport. (Additions followed over the course of the next ten years, increasing the size of the complex from 50,000 square feet to 240,000 square feet.) By this point, the catalog business overshadowed the veterinary practice, and Foster and Smith decided to cut back on their daily practice in order to grow the company. To reach the next level, however, they felt the need for a seasoned business partner with retail experience. They found it in John Powers, a former merchandising executive with the Boston-based Docktor Pet Centers chain (founded by Milton Docktor). The connection with Powers was actually a matter of chance. It was while visiting a Massachusetts kennel to buy an English setter that Dr. Smith met Powers, who happened to be there at the same time. They chatted and were impressed with each other, laying the groundwork for bringing Powers on board and taking advantage of his impressive knowledge of the pet industry. Powers would become Drs. Foster & Smith's chief executive officer and guide the company to even greater heights.

In 1993, the company launched the Drs. Foster & Smith brand of pet-care products, which after a year included more than 30 items, including dog beds and cat furniture, flea and tick shampoo, and dietary supplements. The next significant step in the company's development was the decision in 1997 to added more veterinarians to the staff to offer customers more advice and educational materials. The company was so committed to providing advice to customers that for some time both Dr. Smith and Dr. Foster regularly manned the phones. With the development of the Internet, Drs. Smith & Foster found an ideal way to store educational materials, in addition to giving customers another way to order the catalog products. Out of that endeavor came the creation of PetEducation.com to provide a commercial-free site. The company's commercial site also continued to include a great deal of information that would help customers to choose appropriate products for their pets.

The year 1998 was also important to the pet supply industry because it marked the founding of Pets.com by Julie Wainwright. The idea of selling pet supplies via the Web attracted the attention of investors, who were lured by the size of the market, some $15 billion, into believing that an Internet retailer had only to capture a small share in order to become a profitable business. However, Pets.com, Petopia, and other attempts to sell pet supplies over the Web, became cautionary tales, emblematic of an era of irrational behavior surrounding e-commerce. Pets.com spent millions in advertising, managing to make a sock puppet famous, but in reality the business model was flawed at its core. What these Internet entrepreneurs failed to take into consideration was that half of the pet supply market was low-margin dog and cat foods that were relatively expensive to ship as small orders to remote locations. Moreover, while companies such as Pets.com may have been virtual supermarkets, they soon learned that clicks still needed bricks: even e-commerce ventures required a warehouse and shipping capabilities. Either they had to build their own system at great expense or contract someone else to do it, which cut deep into the bottom line. A year after going public, Pets.com went bankrupt.

Drs. Foster & Smith did not succumb to the temptation of trying to compete with Internet retailers on their terms. The company spent no money on advertising and continued to view its Web site as a mere adjunct to the catalog business. In addition, unlike their virtual competitors, Drs. Foster & Smith had established a reliable warehousing and distribution operation, allowing the company to be the first in the industry to promise that orders would be shipped within 12 hours. Furthermore, the business was not burning through venture capital with the vague hope of one day posting a profitable quarter. Drs. Foster & Smith earned a profit quarter after quarter, and when the dot-com pet supply stores went out of business, it enjoyed a spike in its Internet business, the result of others spending countless millions to promote the idea of buying pet supplies online. Many online customers of Pets.com and other sites redirected their business to catalogers like Drs. Foster & Smith who survived the Internet shakeout. Business also continued to grow on the catalog side, with the company now mailing more than 20 million catalogs each year. To meet this rising demand, Drs. Foster & Smith engaged in an on-going expansion project. A state-of-the art telecommunication center was added, as well as a new conveyor in the Order Fulfillment area.

Company Perspectives:

Over the years we have worked very hard to develop and maintain a reputation for providing world-class customer service. You have our commitment that we will do everything we can to ensure that your every experience with us will be a positive one.

Pet Warehouse Acquired in 2001

As Drs. Foster & Smith took their business into the new century, management began to consider expanding beyond cats and dogs into fish and birds. There was no thought to accomplishing this goal through acquisitions, but the company was presented with an opportunity for external growth when it was approached by two firms—LiveAquaria.com, specializing in fish supplies, and Pet Warehouse, which in addition to fish specialized in birds, reptiles, and other niche pet markets. Dayton, Ohio-based Pet Warehouse, like Drs. Foster & Smith, was a catalog operation, launched in 1986, and survived the Internetimplosion in the pet supply category. The company generated annual sales in the $25 million range, compared to Drs. Foster & Smith $125 million. Pet Warehouse was then folded into the Rhinelander operations, with many of the company's employees making the move from Ohio to Wisconsin. Another 53,000 square feet was added to the warehouse to handle the increased number of stock-keeping units (some 7,000 new items) and increased order volume. An 18,000-square-foot call center was also added. For the time being, the Pet Warehouse catalog continued to be mailed. Integrating Pet Warehouse and LiveAquaria.com was not without difficulty, however. Drs. Foster & Smith quickly learned that fish owners were highly demanding consumers. Tropical fish owners, for example, were typically young males, technologically oriented and given to asking difficult questions of the company's telephone representatives, who were simply not prepared to provide answers. In order to maintain its reputation for having a knowledgeable staff, the company invested in a training program to shore up the phone representatives' knowledge of fish.

Another major step in the evolution of Drs. Foster & Smith came in July 2002, when the company signed the first advertising contract in its history, an effort to maintain an impressive five-year stretch of growth. Drs. Foster & Smith settled on Chicago's Martin/Williams, a shop with experience handling the account of another catalog merchandiser, L.L. Bean. The company also consolidated its catalog and Internet divisions and coordinated marketing efforts. Now featured catalog products were highlighted as well on the Web site. The databases of catalog and Internet customers were also integrated. In 2003, the company introduced it own dog and cat food, a premium blend created by its veterinarian staff. Unlike Pets.com, Drs. Foster & Smith charged an appropriate amount for shipping heavy bags, but another innovation allowed customers to receive free shipping. Early in 2003, the company initiated an auto-replenishment program. Customers who signed up would have products they regularly bought—such as food and certain medicines—shipped automatically. An e-mail reminder would be sent a few days before a product was scheduled to ship. Also of note in 2003, Drs. Smith & Foster aired its first television spot, buying time on such cable networks as Animal Planet and Lifetime. At this point, Drs. Foster & Smith mailed more than 40 million catalogs a year and enjoyed a growing Internet business, recording annual sales of $170 million. It seemed likely that the four partners who owned the business might eventually seek an exit strategy, either through a sale or an initial public offering, but with the economy in the doldrums, that step appeared to be a distant possibility.

Principal Subsidiaries

Pet Warehouse Inc.; LiveAquaria.com.

Principal Competitors

PETCO Animal Supplies, Inc.; PetMed Express, Inc.; PETs-MART, Inc.

Key Dates:

1983:: A catalog business is established by Drs. Rory and Race Foster and Marty Smith.
1987:: Rory Foster succumbs to Lou Gerhig's disease.
1989:: Mike Scrivener becomes a partner and CFO.
1992:: John Powers becomes a partner and CEO.
1998:: The company launches a Web site.
2001:: Pet Warehouse is acquired.