How To Screw Up a Good Company

So many ways to kill a business.

by Mike Hartnett (May 19, 2008)

The previous issue of CLN included an article, “10 Reasons Why Industry Businesses Fail,” and I promised I’d address the issue with examples from the years I’ve spent reporting on the industry.

Many businesses die because of reasons beyond management’s control. But many other successful companies – retailers, vendors, and others – fail because of critical, strategic mistakes. In some cases, people were just plain stupid. Or arrogant..

1.  Not listening. Some new execs from other industries ignore employees who know that our industry is different in certain critical ways.

Shortly before a trade show, the sales manager for a very successful company called and asked, “Would you pleasehave dinner with us at the show?”

We were friends and had often eaten together, so I said yes, but what was the big deal?

“We have a new president who’s from the appliance industry. He thinks he can sell craft products like washers and dryers, and he won’t listen to us. At dinner I want you to sit next to him. Maybe he’ll listen to you.”

We followed my friend’s secret seating plan during the dinner and the president and I talked about the industry. But by the time the salad was served, however, I knew it was a hopeless case. The president was gone within a year, but the damage was done. He left behind a mere shell of what the company once was.

Another example: Craft World was once the largest, most successful distributor in the industry. The founder, Bud Rothschild, eventually sold the company to an investment firm and retired. The new owner hired as president, a fellow from the high-end department store industry, who never could get beyond the fact that craft stores were not like Nordstrom.

2. Beancounters. They make short-term decisions, often to satisfy investors, with long-term negative consequences.

When Crafts magazine, once the largest craft consumer magazine, was owned by Primedia (supported by the private equity firm, KKR), the owners forced an unrealistically high budget on the staff, and insisted the magazine meet it each quarter. (Why was the budget unrealistic? Because Primedia paid too much money forCrafts‘ parent company, and the gurus at Primedia, rather than admit their mistake, tried to force it.)

Because subscribers get bored, die, or whatever, magazines traditionally rent mailing lists and send out “junk mail” encouraging consumers to subscribe. The problem is, the cost of the mailing (printing and postage) occurs up-front, in this quarter, while the subscription revenue comes in the next quarter.

More than once the staff had to cancel a mailing to meet the current quarter’s budgetary bottom line. Then cancel it again the following quarter. Eventually of course, the circulation began to slip. There may have been other causes for the decline, but cancelling mailings virtually guaranteed the circulation would drop.

End result: the circulation dropped so much that finally management had to change the magazine to Paper Crafts.Primedia later sold the magazine and others and is out of the magazine business.

3. Absentee owners. A salesman on the road or a designer may be able to work effectively away from the home office, but not the boss.

A successful company was sold and the new owner put his son in charge. The son didn’t want to move the 175 miles to be near the company’s facilities, so he tried to run the business from home. The company died.

4. Watching costs. Many companies over the years have thrown elaborate parties for the industry. None of them are still in business.

One wholesaler sponsored a big open house for its retail customers. Most wholesalers did that, but this one kept the champagne flowing while a string quartet played. The wholesaler is no longer in business.

Before Tulip was sold by the owner, Dave Lester, to Bain Capital, I could always call him if I had a question about an article for Craftrends, and I would receive a call back the same day. After Dave sold the company, all questions were directed to an expensive pubic relations firm. The firm never got back to me by my deadline, and though Tulip’s pr costs went from nothing to god-knows-what, Tulip received far less editorial coverage.

5. The grass is greener. Expanding into other industries can be a valid strategy as long as you don’t abandon your base.

See #9.

6. Changing times. How many specialty shops refused to widen their inventory, then had nothing to offer consumers when interest in the specialty cooled?

At an International Needlework Retailers Guild (the organization for cross stitch specialty shops) show, I was on a panel begging the retailers to expand their inventory beyond cross stitch – plastic canvas, framing, needlepoint, yarn, whatever. The audience of about 150 retailers scoffed at the idea. Judging from their reaction, you’d think we were suggesting they sell pornography or toxic waste. Today virtually all of them are gone.

7. Forgetting the newcomer. Some retailers and vendors concentrate on providing new products and challenges to the hard-core enthusiast; eventually the category evolves into something that seems to be complicated, difficult, time-consuming, and expensive. That scares away novices.

If I ran a scrapbook store, I would hide Creating Keepsakes‘ Hall of Fame issue from novices and save it for my hard-core enthusiasts. I don’t want the newbies to conclude they need a degree in graphic art to try scrapbooking. (Instead I’d show them other magazines and books.)

8. Nepotism. Sometimes the kids don’t measure up when placed in an important position.

See #3.

When the Nordstrom-type fellow left Craft World, the owner of the investment company put his sister in charge. Bye-bye Craft World.

9. Betraying your loyal customers. Giving a volume discount is one thing. Agreeing to a discount so large that it puts your base customers at a serious price disadvantage often backfires in the long run.

Independent retailers kept the original Tulip alive, barely, until consumers discovered fabric painting. The founder, David Lester, eventually sold Tulip to Bain Capital (yes, the Bain that’s now half owner of Michaels, although the people who were there then are probably no longer there now.)

Bain spent a fortune on a new product line and a Tulip salesperson eagerly presented it at a Sierra Pacific Crafts meeting. First question from the retailers: “Are the chains carrying it?” The salesman finally admitted the line was going into Wal-Mart, a month before it would be shipped to anyone else.

The independents refused to carry the line. Eventually the line’s sales didn’t meet Wal-Mart expectations and was dropped. Duncan later bought the Tulip line and has since brought it back to prominence.

Most vendors built their business thanks to support by independent retailers who carried the products and taught the classes. The quickest way to lose that support is when the independent can buy the product for less at a chain store than from a distributor.

Meanwhile the chain store is ruled by numbers. If interest in the vendor’s product wanes (or isn’t strong enough), the chain will drop it, and the vendor will have an impossible time trying to earn back the trust of the independents.

10. Dazzled by big sales. A small manufacturer called to say goodbye because he was going out of business. He said, “It’s my own fault. I said yes to Wal-Mart once too often. I moved a lot of product, but I never made any money.”

A relatively small vendor had an opportunity to sell to Ames, a Wal-Mart-type chain in the Northeast, but Ames insisted he keep a half-million pieces in inventory so he could quickly fill and ship reorders. The vendor borrowed money to expand his warehouse and made the deal with Ames. Six months later Ames dropped him because a competitor underbid him by a nickel.

The vendor is gone now, and so is Ames.

A Final Thought.

So often in this industry, an entrepreneur builds and grows a fine little company. It is his top, virtually his only, priority. He eventually sells it because of age, burn-out, health, or whatever. But the new owner has other divisions in his company, and now his new acquisition is not his first and only priority.

One of the most successful trade magazines in industry history was Sew Business, which thrived when it was the owner’s only magazine. Eventually he retired and sold it to a publisher with numerous magazines.

After the sale, a vendor told me he was visited by a bright, new Sew Business ad salesman. He liked the young man so they continued talking after the sales pitch. But at one point the salesman said, in effect, “If I do a good job here, they’ll promote me to a bigger magazine.”

I hope the kid did get promoted, because Sew Businessisn’t around any more.

Some businesses need to be the owner’s major concern, and they languish if they aren’t.

(Note: To read previous Business-Wise entries, click on the titles in the right-hand column. To comment, email your thoughts to CLN to mike@clnonline.com.)