NordicTrack

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NordicTrack

104 Peavey Road
Chaska, Minnesota
U.S.A.
(612) 368-2500
Fax: (612) 368-5590
Web site: http://www.nordictrack.com

Wholly Owned Subsidiary of CML Group, Inc.
Incorporated : 1975 as PSI NordicTrack, Inc.
Employees : 3,500
Sales : $267.74 million (1997)
SICs : 3949 Sporting & Athletic Goods, Not Elsewhere Classified

A wholly owned subsidiary of CML Group, NordicTrack is one of the world’s leading fitness equipment manufacturers. NordicTrack is best known for its cross-country ski simulator which dominated the home fitness market in the late 1980s. Since that time the company has introduced a range of new fitness related products including leg machines, treadmills, strength trainers, a rider, an abdominal exerciser, and a line of elliptical motion machines. NordicTrack ski machines garnered their first major sales boom through direct response television and magazine advertisements but since 1990 the company has sold its workout equipment through its NordicTrack Fitness at Home retail outlets, the largest fitness specialty retail chain in the United States.

Company Origins in the 1970s

NordicTrack was founded as PSI NordicTrack, Inc. in 1975 by Edward Pauls in Chaska, Minnesota. Pauls, who had studied mechanical engineering at the University of Wisconsin at Madison, was a designer of ski boots and bindings for the Minnesota based Rosemount, Inc. When that firm was sold in 1969, Pauls began to focus on his own inventions, patenting a design for “outrigger” skis for use by handicapped skiers. According to Forbes, the idea for the NordicTrack ski machine came to Pauls, an avid cross-country skier, during a particularly wet and cold training session on the streets of Chaska. Pauls reasoned that if he could invent an indoor exerciser that duplicated the motions of cross-country skiing, competitive skiers, including his daughter Terri who was a national collegiate cross-country skiing champion, could train year-round and gain a competitive edge. The key to such a device was the recreation of the unique properties of wooden ski against snow, a subtle resistance which Pauls was able to capture through the use of a patented flywheel and one-way clutch mechanism. In response to requests for the ski simulator from cross-country skiing friends, Pauls began to manufacture the machines in his garage, investing $10,000 of his own savings.

As word of mouth in the cross-country skiing community began to spread news of the indoor trainer, and orders started to pile up in the Paulses’ garage, manufacturing was moved to a small warehouse in Chaska and workers were hired to manufacture the machines and take telephone orders. Pauls’s wife, Florence, a former elementary school teacher, became the business manager of the new venture, organizing the books and the telephone sales force. The Paulses initially placed direct response ads for their machine in ski magazines but as it became apparent that the device was attractive to non-skiers looking for an excellent aerobic workout the advertising campaign was extended to such high-end general interest publications as Smithsonian and Scientific American, accompanied by the tag-line “The World’s Best Aerobic Exerciser.” With Florence Pauls overseeing telephone sales, the effectiveness of each ad was gauged and the carefully planned campaign adjusted as necessary. According to an account in Minneapolis/St. Paul CityBusiness, much of the company’s success could be attributed to Florence Pauls’s prudent management and Ed Pauls’s ability to obtain cheap manufacturing and office equipment. A longtime family friend and former co-worker, Paul Petersen, said of Pauls’s approach to problem-solving: “When I look back at working with Ed, I remember one thing: Anything he did was pig-tight, bull-strong and functionally simple.”

Acquisition by CML Group in 1986

The Paulses’ frugal management and well-executed direct response ads, combined with the fitness craze that swept across the nation in the late 1970s and early 80s, propelled the small family-run firm into a major competitor in the growing fitness equipment industry. By the mid-1980s the company’s Chaska manufacturing and sales operations were employing 200 people and annual sales had risen to about $15 million. Although the business was solidly profitable, Pauls realized that further growth would require the deep pockets of a larger corporation and when CML Group, Inc., a publicly owned company run by entrepreneur Charles M. Leighton, offered Pauls $24 million for Nordic-Track he agreed to sell. According to the deal, the Paulses would get seven million shares of CML stock plus a five-year employment contract that would allow Ed Pauls to continue as chairman of the company and Florence Pauls to assume the position of senior vice-president. In addition the Paulses were to receive large sales-contingent bonus payments which were to total more than $26 million by the time the deal expired in 1990.

When CML bought NordicTrack it was a one-product company. The company’s $600 cross-country ski machines sold well but CML was looking to grow the company through diversification and expanded distribution. CML CEO Leighton brought in James Bostic, a former auto industry executive, to head up the new subsidiary. During the late 1980s Bostic oversaw the introduction of an array of new NordicTrack products including NordicPower, a strength trainer, and the Executive Power Chair, a $1,200 black leather chair whose arms folded out to allow the busy executive to do some upper body training between meetings. These new products were designed to attract the 52 percent of Americans whom surveys by the College of Sports Medicine had identified as being “fitness aware” but who did not follow a regular exercise routine. In an interview with Advertising Age’s Monte Williams, Bostic reported that NordicTrack designers sought to create exercise machines that would fit easily into a home environment by resembling furniture, “not medieval torture instruments.”

In addition to broadening NordicTrack’s product line, Bostic expanded NordicTrack’s direct response advertising both by increasing the number of magazine ads and by adding network and cable TV spots and infomercials. “The margin is good in direct response,” Bostic told Advertising Age. “In addition, it gives us direct contact with our customers and better control and management of selling.” In spite of Bostic’s enthusiasm for the factory direct distribution which had worked so well for Nordic-Track in the past, in 1990 the new company president decided to open the first NordicTrack retail outlet in a mall outside of Washington, D.C. “Some people just need to get in there and kick the tires,” explained NordicTrack’s marketing manager, Henry Barksdale, in an article in Forbes.

Boom in the Early 1990s

CML’s investment in new advertising and product development for NordicTrack had paid off handsomely by 1991. Compound annual sales growth at the subsidiary for the five years since its acquisition in 1986 was an impressive 53 percent. Sales during the same period rose by more than 500 percent to $135 million, providing about 40 percent of CML’s sales. With a 42 percent operating margin, however, earnings on these sales accounted for a stunning 86 percent of CML’s operating income.

NordicTrack management continued to introduce new products through the early 1990s in an attempt to increase the company’s penetration into the growing home fitness market. By 1992, it was estimated that up to 55 million households were willing to spend $300 or more on in-home exercise equipment and NordicTrack sales represented only three percent of this potential market. New NordicTrack products included the NordicFlex, a muscle builder, and the Aerobic Cross Trainer, which featured a treadmill and stairclimber as well as a Nordic-Track skier and upper body exercises. While in 1992 only eight percent of NordicTrack’s sales were generated by products other than cross-country ski machines, by the following year this figure had risen to 25 percent.

As the growth in direct order sales began to taper off, NordicTrack looked to its retail outlets to provide a higher percentage of sales. By the end of 1992, the company had opened 18 “NordicTrack Fitness At Home” retail outlets through Nordic Advantage, a new retail subsidiary. Nordic Advantage also sought to capitalize on the company’s reputation among health-conscious Americans by opening two “Healthy Kitchen” retail stores that would sell small kitchen appliances, such as bread ovens and stainless steel cookware, marketed as promoting a healthy lifestyle and two “Healthy Express” health food outlets positioned as alternatives to the fast-food vendors of mall food courts. By 1994, in addition to 60 “NordicTrack Fitness at Home” outlets the company was operating 12 high-end stores called “Nordic Sport,” two family- and youth-oriented locations dubbed “Fitness for Fun,” and a larger format “Factory Direct” showroom which featured all NordicTrack lines as well as discounted equipment.

NordicTrack’s impressive performance continued into the early 90s. Sales almost doubled to $265 million in 1992 only to climb to $378 million the following year. Largely on the basis of NordicTrack’s success, CML stock became a darling of Wall Street, soaring to a high of $41 per share in June 1993 and spurring the Boston Globe to name CML “company of the year” for 1993. Even as new products and retail outlets kept sales rising, however, the costs involved in these new ventures caused operating margins to shrink alarmingly from a high of 42 percent in 1990 to only 26 percent in 1993.

Company Perspectives:

One of the world’s leading fitness equipment manufacturers and a strong advocate of healthy lifestyles through exercise, NordicTrack is committed to helping people get in shape and stay in shape. Each of the company’s high-quality aerobic and anaerobic fitness products is specifically designed for busy people to enjoy at home.

Concerns about the performance of NordicTrack began to surface in mid-1993 when management imposed a one-week layoff on all office and manufacturing employees. In a memo explaining the decision to employees, Bostic wrote: “Widespread consumer concern about our nation’s lack of leadership, the absence of any plan to build our country’s economy, as well as worry about personal financial outlooks and even job security, have kept many, many prospective fitness equipment buyers from responding to our ads and TV commercials as they normally would.” When copies of the memo circulated on Wall Street CML stock sunk to $26 a share. Although the stock rebounded on the announcement of 1994 income of $84 million on sales of $455 million for the company’s NordicTrack subsidiary, analysts remained cautious about the fitness industry in the wake of surveys that indicated an overall decline in the number of frequent fitness participants in the United States. Nordic-Track was particularly vulnerable to a downturn in the number of people actively participating in fitness activities because, unlike such products as running shoes, the company’s exercise machines did not require frequent replacement.

Collapse in the Mid-1990s

By the second half of 1995, it became clear that CML was in trouble. Throughout the early 90s, NordicTrack had been providing the bulk of CML’s sales and an even greater percentage of earnings, reaching almost 70 and 96 percent, respectively by 1994. NordicTrack’s phenomenal growth, however, could not be sustained. NordicTrack sales were up for the year overall, thanks to the opening of 26 new retail stores, but comparable store sales and sales generated through the company’s direct-response ads decreased significantly. Even more alarming was an abrupt drop in operating income which, at $46 million, had been cut almost in half from the previous year. CML stock fell 60 percent over the course of the fiscal year as management was forced to continually downgrade earnings estimates.

If 1995 was a poor year for NordicTrack, 1996 was a disaster. Riders, a combination stationary bike and upper-body exerciser, had replaced the skier as the new exercise equipment fad, and NordicTrack missed the chance to enter this market while it was at its peak. In addition, a new and expensive direct sales advertising campaign fell flat, failing to deliver during the company’s peak winter selling season. Sales for the year fell for the first time since NordicTrack’s acquisition by CML, dropping by 27 percent to only $368 million. Most of this decrease was caused by a 50 percent decline in direct response sales. The cost of ineffective advertising as well as a high fixed cost structure, meant that the company was unable to reduce operating expenses quickly in response to the drop in sales, resulting in a net loss of $73 million for the year.

CML responded to this crisis by replacing key management personnel. G. Robert (Bob) Tod, president of CML, took over management of NordicTrack on a day-to-day basis. Under his aegis the company slashed fixed costs by switching to contract manufacturing and closing several manufacturing facilities. NordicTrack also sought to replace skier sales with new products geared specifically to the aging population of baby boomers looking for low impact exercise equipment. An entirely new line of aerobic exercisers called the Ellipse, introduced in the fall of 1997, was designed specifically for this demographic group by promising to provide a stress-free total-body workout. In response to a growing trend towards exercises designed for specific muscle groups, the company also marketed a number of body-toning machines, including AbWorks for the abdomen and LegShaper Plus for the thighs and hips. NordicTrack management also looked to new distribution channels to increase market penetration by reaching an agreement with giant retailer Sears to carry NordicTrack products in 850 stores in the United States and Canada. Sears was the largest retailer of exercise equipment in the country and NordicTrack surveys had indicated that up to 80 percent of their potential market was purchasing equipment in such large retail environments.

In spite of these efforts, NordicTrack sales continued to decline through 1997, dropping to only $268 million for the fiscal year. Cost-cutting measures did little to reduce operating losses which dropped only slightly to $59 million. The NordicTrack cross-country skiers that had been responsible for building the company had lost their appeal to the fad-driven fitness market and the company had so far failed to deliver a product with a similar novelty edge. The NordicTrack Ellipse and eMotion lines of aerobic exercise machines, which came on the market in fiscal 1998, might prove to be the fitness trend of the late 90s. If so, NordicTrack, with its excellent brand identity and strong customer base, should be able to rebuild successfully.