Gaiam, Inc.

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Gaiam, Inc.

360 Interlocken Boulevard, Suite 300
Broomfield, Colorado 80021
U.S.A.
Telephone: (303)464-3600
Fax: (303)464-3700
Web site: http://www.gaiam.com

Public Company
Incorporated: 1988
Employees: 295
Sales: $60.6 million (2000)
Stock Exchanges: NASDAQ
Ticker Symbol: GAIA
NAIC: 454110 Electronic Shopping and Mail-order Houses; 512110 Motion Picture and Video Production

Gaiam, Inc. markets products designed for ecological sustainability, holistic well being, and personal growth. The product line includes energy-efficient light bulbs, solar panels, gardening products, alternative healthcare and fitness products, apparel, and household products. Proprietary products include a line of organic cotton clothing and bedding, under the Gaiam Organix brand, and health and fitness videos, produced by its subsidiary, Living Arts, Inc. Gaiam markets through mail-order catalog, its web site, through wholesale distribution to 17,000 mainstream retail outlets, including Borders, Target, and Discovery Channel Stores, and through retail boutiques within larger stores such as Whole Food Markets. Gaiam also provides consulting services to businesses interested in reducing their negative impact on the environment. Gaiam takes its name from “Gaia,” the ancient Greek goddess of the earth who represented the idea of the earth as a living system, and from “I am,” evoking a sense of human interconnectedness with the earth.

Gaiam Founder a Czech Horatio Alger

Gaiam’s founder, Jirka Rysavy, traveled to the United States with a vision of starting a business offering products for the consumer interested in natural health and ecological sustainability. With very little money in his pocket, Rysavy left Czechoslovakia in 1984 and never returned. He chose to live in Boulder, Colorado, a community known for being socially progressive, and took a job at a print shop for $3.35 per hour. After three months, Rysavy had saved $600, which he used to start Transformational Economy, or Transecon, a recycled paper distribution company. In its first year the company earned $100,000 in pretax profits.

In 1985 Rysavy invested $30,000 to start Crystal Market, a natural foods store, earning $2.5 million the first year. Rysavy intended the store as a prototype for a multiunit chain, but he was sidetracked by the opportunity to purchase an office supply store in downtown Boulder. Seeing the possibility to have a greater impact on the environment by providing ecologically sound products to businesses, Rysavy purchased the store and assumed $15,000 in accounts payable liabilities. He discovered the strength of the company to be in serving corporate customers who purchased large quantities of supplies. He sold Crystal Market (which became the first store in the Wild Oats chain of natural food grocers) and transformed Corporate Express into a worldwide corporate supplier of office goods. In keeping with Rysavy’s vision, Corporate Express initiated the Earth Saver line of more than 1,000 products made from recycled or renewable resources.

While Corporate Express grew at a phenomenal rate, becoming a Fortune 500 public corporation, Rysavy maintained an interest in healthful lifestyles and providing products for that market. He started Gaiam, a direct mail catalog company offering recycled paper products, as an affiliate to Transecon in 1988. Transecon took its first step toward significant growth in 1995 when the company acquired the catalog business from Seventh Generation.

Seventh Generation produced and sold its own brand of ecologically sustainable products, such as recycled paper products for the home, nontoxic household cleaning products, and recycled plastic bags. Published four times per year and distributed nationwide, the Seventh Generation catalog offered more than 300 products, including energy-efficient light bulbs, solar-powered radios, recycling bins, gardening tools, games, books, and organic cotton linens and clothing produced without the use of chemical dyes or preservatives. With the acquisition of the Seventh Generation direct mail business, Gaiam became the main source of revenue at Transecon, growing from $229,000 in sales in 1991 to $8.4 million in 1995. The following year Transecon ranked 34th in Inc. magazine’s list of the Fastest Growing Private Companies with sales at $14.5 million.

Rapid growth required investment in the infrastructure at Transecon, including new operating systems. In conjunction with Corporate Express, Transecon relocated from the back room of the original office supply store in downtown Boulder to the Interlocken Business Park in nearby Broomfield. Construction of the building involved the use of renewable materials, energy-efficiency lighting and cooling, nontoxic paints, and untreated wool carpet. The company also opened a 64,000 square foot order-processing and fulfillment center in Cincinnati. They chose that location because that city was at the crossroads of major highways and within 30 minutes of Airborne and United Parcel Service airport hubs. Overall labor and facilities overhead made Cincinnati a low-cost base for shipping customer orders.

1996 Study of “Cultural Créatives” Defines Future Growth

In 1996 two events occurred that had an impact on Gaiam at a crucial period of its growth. The first event was a chance meeting between Rysavy and Lynn Powers on an airplane. A common interest in the convergence of business and alternative lifestyles led to a meeting of the minds between Rysavy and Powers, who became CEO and president of Gaiam in 1996. Powers had served as senior vice-president of strategic planning, marketing, and merchandising at Miller Outpost, transforming that company from a 24-store company to a 335-unit chain with $575 million in annual revenues.

Also in 1996, the sociologist Paul Ray published his groundbreaking research in which he identified a new American demographic called the “Cultural Créatives.” Cultural Créatives matched the profile of Gaiam’s customers, educated consumers who based their purchasing decisions on certain values, either concern for the environment, holistic health and well being, a personal philosophy, or a mix of the three. Ray estimated the growing market at 44 million people and more than $200 billion annual revenues in 1996.

This market was also known as the Lifestyles of Health and Sustainability (LOHAS). The LOHAS market consisted of five segments of interest: (1)Sustainable Economy, (2)Healthy Living, (3)Alternative Health, (4)Personal Development, and

(5)Ecological Living. Rysavy determined to focus Gaiam’s growth on this market by consolidating various segments of the LOHAS market to create a unified, identifiable brand, trusted by the customer for the credibility of its information and the quality of its products and services. Gaiam identified its customer base as 80 percent female, 20 percent male, with a median age of 42, earning a median annual income of $52,000, with more than one-third earning more than $75,000 per year.

In pursuing the goal of serving all facets of the LOHAS market, Gaiam acquired two catalog companies in early 1998 that complemented or overlapped with existing businesses. For $25 million in cash, Gaiam acquired a 67 percent interest in Healing Arts Publishing, LLC, doing business as Living Arts. Based in California since 1987, Living Arts produced and distributed yoga and meditation videos, which it sold through 15,000 retail outlets, including Target, Borders, and Musicland. Living Arts published a catalog through which the company sold its videos, and related products, as well as ecologically sound products. An existing order fulfillment service agreement with InnerBalance Health, based in Colorado, evolved into Gaiam ownership of that company. InnerBalance sold vitamins, herbal supplements, and fitness equipment by direct mail. Gaiam also renamed the Seventh Generation catalog, selling environmental products under the catalog brand Harmony.

As Gaiam grew, its place on the Inc. list rose to 11th in 1997 with $19.7 million in sales and to 10th in 1998 with $30 million in sales. The customer base grew from 300,000 in 1996 to 685,000 in 1998. The company operated at a loss in 1996 and 1997, but marketable securities contributed by Rysavy and sold by Gaiam countered losses. The company also supported growth with private placements of stock and subordinated debentures. Moe Siegel, founder of Celestial Seasonings, and Michael Gilliland, founder of Wild Oats Markets, known leaders in LOHAS markets, became investors during this time. In 1998 a private placement of stock and debentures raised $2.65 million for operating capital and acquisitions.

By the fall of 1998, Rysavy decided to resign his position as CEO at Corporate Express to dedicate himself to Gaiam’s future, specifically an initial public offering of stock. Rysavy’s resignation became official in February 1999, when he took the position of CEO; Powers became COO and retained the position of president. Gaiam went public in October. The company first offered stock to its 800,000 customers at $4.50 per share for up to 200 shares, a 10 percent discount off the public price of $5.00 per share. On the public offering Gaiam net $6.1 million on 1.7 million shares sold at $5.00. Rysavy retained a 77 percent ownership in the company.

Funds from the public offering provided capital for further expansion. The company relocated its fulfillment center in Cincinnati to a larger, 208,000-square-foot space only two miles from the original site. In July the company acquired complete ownership of Living Arts as well as a 50 percent stake in a company that supplied environmental products to Living Arts.

Company Perspectives:

Gaiam was created as a multichannel lifestyle company to provide choices that allow people to live a more natural and healthy life with respect for the environment. Our vision was inspired by the growing number of people who make purchasing decisions based on personal values. We believe that it is through the simple choices we make every day that we can transform the world in which we live.

Much of the Gaiam’s growth in 1999 stemmed from acquisitions. In 1999 Gaiam ranked fourth on Inc.’s list of the fastest growing private companies, with $45.7 million in revenue, while net income nearly doubled to $1.8 million. Increased profit margin to 60.2 percent in 1999, largely due to an increase in proprietary products, such as, mind-body-spirit videos that garnered a 70 percent gross profit margin, selling for $10.00 to $14.00 each. Gaiam’s web site, launched in late 1998, contributed to the company’s success with a 50 percent gross profit margin and an average order of $100, more than double industry averages at 17 percent to 20 percent and $40, respectively. Gaiam attributed the high average order to the high annual income of its customers.

Business-to-business revenues grew by 49.4 percent in 1999 to $11.2 million, accounting for 24 percent of revenues, compared to 13 percent in 1998. Businesses that used Gaiam products included spas and resorts and health care providers, while wholesale business included lifestyle stores, bookstores, sporting goods stores, and national and regional mass merchandisers. Gaiam planned to expand its consulting business, providing other businesses with a “green audit,” a sort of environmental impact statement, advising companies on how to improve resource usage. Services included the design and installation of renewable energy systems. Gaiam initiated an Internet site specifically for access by its business customers.

Multichannel Growth at Turn of the 21st Century

In September 2000 Gaiam launched an upgraded Internet site at www.gaiam.com, expanding the line of products for sale at the site and powering the site with a stronger engine. One of a few profitable e-commerce sites, Gaiam’s success stemmed from low advertising overhead, avoiding online advertising and expensive advertising campaigns. Instead, Gaiam promoted its web site on yoga videos and DVDs and in its catalogs, resulting in a $20 per customer advertising expense. As the site developed, Gaiam attained gross profit margin of 55 percent and an average of $106 per order, higher than the company’s cataog order average of $90.

Gaiam and Whole Foods Market merged web sites in June 2000. By merging with WholePeople.com, Gaiam eliminated a competitor and gained exposure to customers of Whole Foods Market. Since WholePeople.com suffered losses of over $5 million, the partnership benefitted Whole Foods with a financial cushion and shared data on a common customer base. Gaiam owned 50.1 percent, of the venture, Gaiam.com, Inc., while Whole Foods’ vitamin subsidiary, Amiron, maintained a 49.9 percent stake. Wholepeople.com deactivated its web site and entered a direct link to gaiam.com in its place. Gaiam then upgraded the web site with a stronger engine and a new look. The site offered more than 10,000 stock keeping units, including over 2,000 proprietary products.

The media became an important new avenue of growth for Gaiam as Living Arts began to produce yoga and health programs for cable television. The company provided 13 programs for broadcast on the Discovery Health Channel in the fall of 2000. International distribution involved productions for networks in Italy, Germany, Brazil, Canada, and Australia. Living Arts produced 16 new video/DVD titles, including the popular Pilòtes and Yoga Conditioning for Weight Loss, the latter selling 250,000 copies. A series of massage videos included Accupressure Massage, Reflexology, and Couples Massage. With On Command, which provides in-room entertainment to hotels, Gaiam arranged for two Yoga for Beginners shows to be available to travelers at more than 500,000 hotel rooms. Participating chains included the Hyatt, Four Seasons, Marriott, Radisson, and Inter-Continental. Living Arts gained exposure on mainstream television as well, including yoga instructor Rodney Yee’s guest appearance on The Oprah Winfrey Show in April 2001. Gaiam also introduced the Gaiam Lifestyle magazine/catalog, featuring articles and information on personal well being and ecological sustainaibility.

The company expanded its reach into retail stores, providing products to retailers that few competitors could duplicate. New retail customers included Store of Knowledge, Discovery Channel stores, and regional Canadian retailers. Gaiam experimented with the store-within-a-store concept in 2000, developing Gaiam Natural Living Centers in such national chains as Borders Books, Whole Foods Markets, Gaylans (sporting goods), Dick’s Sporting Goods, Target, and Ulta (skin care products). The company planned to expand product lines offered within these branded retail boutiques and to expand the number of stores involved in the program. Toward that end, Gaiam introduced a line of organic cotton clothing and bedding, using the brand name Gaiam Organix. Gaiam signed an agreement to obtain exclusive rights to North American distribution of organic cotton products from the leading producer in Europe.

Gaiam’s business consulting continued to be a focus of growth in 2000. Gaiam began consultation with Hilton Hotels on providing hypoallergenic products for the chain’s specialty rooms as well as for Hilton’s “stress-less” rooms. Gaiam assisted in the energy and ecological efficiency of several large corporations, such as Disney, Sony, and AT&T, and several government agencies, including the White House, NASA, the Department of Defense, and the Department of Energy.

Key Dates:

1995:: The company ’s growth phase begins with the acquisition of the catalog business Seventh Generation, Inc.
1996:: Paul Ray identifies the $200 billion Cultural Créatives market.
1998:: The company acquires Healing Arts Publishing and InnerBalance Health.
1999:: The company is ranked fourth on Inc. magazine’s list of Fastest Growing Private Companies, the fourth consecutive year that it is listed.
2000:: The firm forms Gaiam Organix division for organic cotton clothing and linens.
2001:: The merger with Real Goods Trading Corporation is completed.

Sales for 2000 reached $60.6 million, a 33 percent increase over 1999, while net income increased to $2.65 million, nearly double profits of the previous year. Gaiam attributed the increase on an internal growth rate on proprietary products of 37 percent. Business-to-business revenues increased 50.3 percent to $16.8 million in 2000. gaiam.com continued to be profitable.

The next step on Gaiam path of growth and industry consolidation involved a merger with Real Goods Trading Company. In business since 1978, Real Goods complimented Gaiam’s existing products with renewable energy products, such as solar panels and energy efficient lighting, and books and information on ecologically sustainable living. Through its two catalog businesses, Real Goods and Jade Mountain, and corresponding web sites, as well as five retail centers in Hopland, Berkeley, Los Gatos, Santa Rosa, and West Los Angeles, California, Real Goods offered a variety of environmentally positive products. These included clothing from hemp and organic cotton, gardening tools, recycled glass products, and other household items, as well as information on alternative home building and materials, such as straw bale houses. The Solar Living Center, a 12-acre demonstration facility at the Hopland, California, store provided consulting on renewable energy for commercial applications, a program compatible with Gaiam’s green audit.

In January 2001 Gaiam and Real Goods completed the merger through a stock swap valued at $8.7 million. Real Goods shareholders received one share of Gaiam for ten shares of Real Goods stock. All accounting responsibilities were consolidated at Gaiam’s offices in Colorado, while graphics merged with Gaiam in Santa Monica, California/Real Goods, and Gaiam also merged order processing and distribution centers in Cincinnati, implementing a new supply-chain management information system. Real Goods added approximately $19 million in annual revenues as well as thousands of customers to Gaiam.