Natural Wonders Inc.

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Natural Wonders Inc.

4209 Technology Drive
Fremont, California 94538
U.S.A.
(510) 252-9600
Fax: (510) 252-6795

Public Company
Founded: 1986
Employees: 2,052
Sales: $137 million
Stock Exchanges: NASDAQ
SICs: 5947 Gift, Novelty and Souvenir Shops

Natural Wonders Inc. operates a chain of mall-based specialty gift stores that sell products related to the appreciation and enjoyment of nature and science. Merchandise ranges from jewelry and wind chimes to telescopes and games, and the stores are targeted toward upper-middle income adults and children. Natural Wonders was operating 145 stores in 36 states going into 1995.

Natural Wonders was started in 1986 by two entrepreneurs and veterans of the retail apparel industry: Robert S. Rubenstein and Stephen L. Jacobs. Rubenstein had formerly cofounded Pic-A-Dilly Stores and the Athletic Shoe Factory Stores. He had also served as a principal in the Hit or Miss retail chain. Jacobs had worked with Rubenstein at Pic-A-Dilly and Hit or Miss and had helped to open 300 new stores for the apparel-retailing Fox-moor chain. By the mid-1980s, Jacobs and Rubenstein had become restless and were looking for a new challenge.

Rubenstein and Jacobs found their new challenge in the northern California city of Los Gatos, California. There, Diann Reading had formed a successful specialty nature and ocean shop called Sand and Foam. Rubenstein and Jacobs believed that the Sand and Foam concept had a lot of potential and that similar stores could be replicated across the country. All they needed was a savvy marketing plan and some financial backing. Reading agreed to team up with the two retailers in 1986 with the long-term goal of taking the Sand and Foam concept nationwide. The team started with two northern California stores. Rubenstein and Jacobs drew on their extensive retailing backgrounds to tweak the stores’ format, and they also managed to find some investors that were willing to gamble on their idea.

Among Rubenstein’s first moves was to change the name of the stores from Sand and Foam to Natural Wonders. The name change reflected the founders’ intent of capitalizing on the emerging market for nature specialty products. In fact, Ruben-stein’s plans for Natural Wonders were inspired, in part, by the burgeoning nature store chain The Nature Co. That successful shop started expanding nationwide in the mid-1980s and was enjoying big gains when Rubenstein started Natural Wonders. Its growth prompted other retailers like Rubenstein and Jacobs to consider the nature niche. “No question that the success of The Nature Co. helped sell us on the idea of Natural Wonders,” Rubenstein was quoted as saying in the November 2, 1987, Business Journal-San Jose.

The Nature Co., which was in the San Francisco Bay area, was started in 1972 by a former Peace Corps volunteer. In 1983, the enterprise was purchased by the Boston-based CML Group. The deep-pocketed CML began taking the chain nationwide during the mid-1980s with shops as far away as Massachusetts, New York, and Minnesota. By 1987 The Nature Co. was operating 21 stores and was planning to step up expansion efforts in the near future. Natural Wonders differentiated itself from The Nature Co. with its emphasis on specialty gifts, as opposed to the educational and science merchandise highlighted by The Nature Co. “Their stores are more serious, more science oriented,” Jacobs explained in the Business Journal-San Jose article. “We’re less formal and more hands-on.” Despite their differences, similarities between the two companies would eventually cause a rift that would be played out in the courts.

During 1986 and 1987, Rubenstein, Jacobs, Reading, and a small group of investors poured about $750,000 into Natural Wonders. That money was used to open two new mall stores. The shops stocked a variety of nature-related items ranging from small toys that sold for less than $1 to expensive telescopes. Natural Wonders sold a unique plastic worm that wiggled when it was placed on a table, for example, as well as a pair of expensive binoculars. Other items included gardening supplies, sea shells, rocks, and a selection of T-shirts, art, compact discs, and gifts and games for children. The stores were located in more upscale malls to complement their impulse-purchase gift orientation and to appeal to a relatively high-income crowd. Rubenstein compared his specialty retailing strategy at the time to that employed by the Sharper Image and Williams-Sonoma.

The private company did not release sales figures, but analysts estimated that Natural Wonders’ sales were approaching $30 million by decade’s end. Buoyed by the success of the first stores, Rubenstein was able to attract venture capital to fund ongoing expansion in 1988 and 1989—Jacobs left the company during that period and Rubenstein became president and chief executive. By late 1989 the company was operating a total of ten stores and had six more stores scheduled to open by the end of the year. The shops averaged 2,200 to 2,600 square feet and were typically located near clusters of stores within a mall. The successful retailing formula allowed them to garner sales-per-square-foot figures that were 40 percent to 50 percent above the average store in their respective malls.

All of the Natural Wonders outlets were in California in 1989, with five in the Bay area and the rest in southern California.

However, Rubenstein was beginning to eye the broader U.S. market. He began looking for store locations in Oregon, Washington, and Arizona, as well as in the Midwest and on the East Coast. Natural Wonders did begin expanding outside its core California market in 1990. In fact, the chain more than doubled in size during the year to 36 outlets. It became clear during 1990 that the Natural Wonders concept was working. Despite an economic recession, average annual net sales per square foot at Natural Wonders increased to a healthy $428 and the company’s revenues surged to about $30 million. Meanwhile, Rubenstein searched for new store locations with plans to intensify expansion efforts.

Rubenstein had announced in 1989 that he expected to open 100 Natural Wonders outlets by 1994. In fact, the company was able to grow at a much faster rate. By 1991 there were 61 outlets, and by 1992 the Natural Wonders chain had swelled to an impressive 88 stores. The company’s rapid growth rate was made possible, in part, by a public offering of Natural Wonders stock. The company used cash from that sale to build new stores and infrastructure. Early in 1993, for example, the company broke ground on a new national distribution center to replace the California-based distribution center. The new 323,000-square-foot facility was located in Kentucky to accommodate the chain’s eastward move across the United States.

Natural Wonders’ gains during the early 1990s were the result of its savvy marketing stratagem. By 1993 Natural Wonders’ product mix had grown to include well over 2,000 items like globes, minerals, géodes, bird feeders, ceramics, science kits, and educational toys and games. In addition to the specialty gift items, the store carried an array of educational and science products for adults and for children aged six to 12 years. Besides an appealing inventory, the store attracted buyers with well-lit, floor-to-ceiling glass storefronts, an open floor plan that invited customers in to browse, and a hands-on environment that encouraged customers to pick up and explore different products.

New Age music or environmental sounds played through the stores, and a video monitor continuously played videotapes of nature scenes from the store’s video collection. The stores kept advertising costs low by relying almost solely on their appealing environment to attract mall foot traffic. Furthermore, each store was supported by information systems located at the California headquarters. There, financial and merchandising information was gathered daily by polling sales information from each outlet’s point-of-sale terminals. The data was used to generate various sales reports, identify buying patterns, and to manage inventory. Finally, Natural Wonders prided itself on trying to staff its shops with enthusiastic, informed salespeople that were trained to demonstrate products and engage customers.

Natural Wonders tagged a record 35 new stores onto its chain in 1993, bringing the total to 123. Sales shot up from $56 million in 1991 and $88 million in 1992 to a whopping $119 million during 1993. Unfortunately, the strain of rampant growth was beginning to show on the company’s bottom line. The company had posted its first positive net income figure in 1990, and by 1992 earnings had surged to an encouraging $5.6 million. Despite sales gains in 1993, however, net income dipped to about $4.9 million. Natural Wonders’ stock price tumbled from a high of $27.50 early in 1993 to a lowly $8 by late summer. Company executives cited inventory mismanagement as the problem. They felt that the merchandise assortment had become too diverse and needed to be refocused. To that end, management initiated a new merchandising strategy in 1993 that jettisoned slow-moving, lower profit items like bird feeders, and emphasized high-margin, fast-moving ecology-oriented goods priced at $20 or less.

Another factor contributing to the company’s profit slowdown in 1993 and 1994 was increased competition. Indeed, several retailers had hopped onto the nature retailing bandwagon during the early 1990s, including larger department stores that were offering merchandise similar to that sold by Natural Wonders. Importantly, Natural Wonders was also vying with its original nemesis, The Nature Co., in some key markets. The Nature Company had expanded at a pace similar to that of Natural Wonders and had become clearly uncomfortable with its competitor’s gains. The Nature Company eventually sued Natural Wonders, claiming that Rubenstein had ripped off its retailing formula and infringed on its trademarks. Natural Wonders countersued, citing differences in its operating practices. The conflict was eventually settled out of court: All claims were dropped, and Natural Wonders agreed to pay the Nature Company a painful $1.1 million.

Natural Wonders hired a new merchandising manager late in 1993 to revamp its product mix. That manager tendered his resignation after only five months on the job, however, and the company continued to scramble to assemble a cohesive merchandising strategy. To make matters worse, the company’s new distribution center went on line early in 1994, and Natural Wonders had trouble getting the facility to operate smoothly. Most of the start-up problems were eventually corrected, but not before creating significant delays in deliveries to several stores. All the while, increasing competition seemed to be eating away at the company’s per-store margins. For example, after peaking in 1992, average per-square-foot sales at the company’s outlets dropped 12 percent to $407 by 1994. That dynamic contributed to lower profit margins. Net earnings for Natural Wonders, in fact, fell to a disappointing $1.77 million in 1994.

Although comparable store sales drooped after 1992, Natural Wonders continued to expand at a steady, though slower, clip. The company added 22 new stores to its chain in 1994. By the end of the year Natural Wonders was operating 145 outlets in 36 states. States where the greatest number of stores were located included California, Illinois, Texas, Ohio, Washington, Michigan, Florida, and New Jersey. Because of lackluster performance by individual stores, however, management decided late in 1994 not to increase the number of outlets during 1995. Indeed, the company’s 1994 annual report was refreshingly blunt about management’s shortcomings during 1993 and 1994. It cited problems stemming from failures related to merchandising and inadequate long-term strategies.

Early in 1995 Natural Wonders initiated a reorganization. It eliminated approximately 20 employees at its corporate offices and distribution center, among other changes, and developed a plan to reduce the number of items in store inventories from 2,200 to about 1,600. In addition, Rubenstein stepped aside as President and chief executive, but remained as chairman of the board. He was succeeded by Kathleen M. Chatfield. The 42-year-old Chatfield was a retail industry veteran and had been with Natural Wonders since 1987. After taking the helm, Chatfield announced her intent to cut costs, reign in expansion, and work to improve per-store profitability.