Jim McCann knows about the power of technology—and about popcorn, chocolates, and all the other things that can be packed into a flower delivery. The former social worker bought a single Manhattan florist shop in 1976 and turned it into a national brand by hitching his star, in succession, to toll-free telephone calls, cable television, AOL, and the Internet.
For Mr. McCann’s 1-800-Flowers.com and its rivals FTD, Teleflora, and ProFlowers, sentiment will carry you only so far. Carnations and roses may charm spouses, mothers, and lovers, but the battle for the estimated $1-billion annual direct retail florist market (just 5 to 7 percent of the overall retail florist industry) is being waged with servers and software.
And nobody’s wasting time smelling the posies. Ninety-six-year-old FTD, the leader in providing high-margin subscription services via its Mercury Network to 20,000 North American member florists, is expanding its online consumer business; Teleflora acquired several smaller business-to-business florist networks to take on FTD—and 1-800-Flowers has been busy adding florists to its Bloomnet network launched in January 2005 to challenge both. ProFlowers’ parent, Provide Commerce, was acquired by Liberty Media, parent of QVC shopping channel, in February for $477 million in cash. Meanwhile, they’re all elbowing each other for the best position on the search engines.
The florist business has been a dizzying ride for Mr. McCann, whose 55 percent stake was valued recently at well over $200 million. It was two decades ago when he decided he was ready to leave social work and focus exclusively on his florist business. He acquired the 1-800-Flowers name by buying a nearly bankrupt Dallas florist for $2.5 million in 1986 and unwittingly (through a process he calls “due negligence”) taking on $7 million in debt.
In January 1991, 1-800-Flowers got a call from cable pioneer Ted Turner’s office. Antsy advertisers were threatening to pull their commercials from CNN on the eve of the first Gulf War. If they had holes in their commercial schedule, Turner executives wanted to know, could they run 1-800-Flowers spots? Mr. McCann agreed, war broke out, CNN’s ratings soared, and 1-800-Flowers’ message was drilled again and again into the public consciousness. “It’s the war brought to you by 1-800-Flowers,” Mr. McCann says of the “branding event.”
By 1992, the company was online with pioneer Internet pioneer CompuServe. Two years later the company was considering a switch to two rival entrants. “Prodigy was the star of the day, backed by Sears and IBM,” Mr. McCann remembers. “How could it not be a home run?” He recalls Prodigy’s impressive headquarters in Westchester County, New York, and executives in “beautiful suits.” Then he and brother Chris, president of 1-800-Flowers, went to meet AOL chief Steve Case in a diner outside Washington. “We didn’t know anything about the space,” Jim McCann recalls, but they decided to go with AOL.
As AOL’s first online merchant partner, 1-800-Flowers became its exclusive fresh flower provider. “AOL took over our lives,” Mr. McCann says. For a time, life in AOL’s “walled garden” was good, indeed. But as AOL’s power waned, the walls started closing in. “We did a wonderful $15-million deal a few years ago with AOL, which for six months was wonderful,” Mr. McCann says. “For the other three and a half years it was painful because the world changed and we were locked into this contract.”
Like AOL, 1-800-Flowers rode the dot-com roller coaster. Indeed, during the heady Internet days, 1-800-Flowers was not shy about hitching a ride with blue-chip venture capitalists like Benchmark Capital, Softbank, and JP Morgan Capital. All eventually sold out of the stock after the bubble burst except JP Morgan, which retains a stake.
Venture capitalist Charles Lax recalls Softbank’s 1999 pre-IPO investment in 1-800-Flowers was a “natural extension” to its mezzanine portfolio that included E*Trade and E-Loan. Not only was the family florist business the world’s first online e-commerce play, says Mr. Lax, who had a seat on the board, but it had multiple distribution channels via retail stores and telephone and had begun to diversify into non-floral gifts.
Venture capitalist Charles Lax recalls Softbank’s 1999 pre-IPO investment in 1-800-Flowers was a “natural extension” to its mezzanine portfolio that included E*Trade and E-Loan. Not only was the family florist business the world’s first online e-commerce play, says Mr. Lax, who had a seat on the board, but it had multiple distribution channels via retail stores and telephone and had begun to diversify into non-floral gifts.
Mr. Lax, now managing general partner at Softbank spin-off GrandBanks Capital, says the fund made an undisclosed profit from 1-800-Flowers, but acknowledges that it wasn’t the windfall realized from early-stage investments in companies like Yahoo. After the IPO, Softbank cashed out, Mr. Lax says, and though he calls the McCanns “phenomenal operators,” his focus on the online florist business dimmed.
Competition for Clicks1-800-Flowers remains an AOL partner, but nowadays, 1-800-Flowers.com also runs a 24/7 “trading desk” with a dozen staffers testing search engines and bidding on search terms for the company’s growing menu of gift items. It’s a heated pay-per-click competition where companies bid to come first, second, third—you get the idea—in the sponsored links section when someone searches for “flowers” or “roses” on Google. The same is true of “daisies,” “chocolates,” or almost anything else a florist might sell. Advertising links are listed in sequence of bidding, which can change constantly.
1-800-Flowers remains an AOL partner, but nowadays, 1-800-Flowers.com also runs a 24/7 “trading desk” with a dozen staffers testing search engines and bidding on search terms for the company’s growing menu of gift items. It’s a heated pay-per-click competition where companies bid to come first, second, third—you get the idea—in the sponsored links section when someone searches for “flowers” or “roses” on Google. The same is true of “daisies,” “chocolates,” or almost anything else a florist might sell. Advertising links are listed in sequence of bidding, which can change constantly.
“It’s frenetic—it burns people out,” Mr. McCann says, especially as traders are confronted by newer and newer automated web crawlers, or bots, seeking the best price—or challenged by what Mr. McCann calls other shopping modalities. “It’s changing every day. I go to all these technology conferences and I come out of there trembling.”
Details of online florists’ search engine strategies are about as easy to come by as evidence of WMDs. 1-800-Flowers, whose chief executive is known as a spirited raconteur and author of
Stop and Sell the Roses, clams up when it comes to spilling the beans on the company’s trading operation. Comments on search strategy from FTD CEO Michael Soenen in a recent conference call are like reading tea leaves: FTD has been “generating some really great yields” in search, he says, and has “found better ways to hedge our exposure to the volatility in the online market space.” Rather than stretch what it will pay for a search term, Mr. Soenen adds, the company avoids trying to “chase a number” and tends to “take what we can get profitably.”
You can understand their reticence. “The companies monitor each others’ search efforts pretty well,” says Mark Sottosanti, senior vice president and general manager of ProFlowers. “The bids are changing every couple of minutes.”
One inescapable trend, however: The cost per keyword and cost per click have been soaring. A survey by online advertiser DoubleClick based on a pool of paid search campaigns found the average cost per keyword rose from $25.50 in September 2005 to $54.62 in December. Though that moderated to about $30 in the first quarter of 2006, 1-800-Flowers and others have been looking at offline advertising to drive online traffic. Notably, 1-800-Flowers contracted with CBS unit CBS Outdoor, to promote its new Happy Hour bouquets, a bouquet of flowers in a margarita glass. The ads were tested in bus shelters, phone kiosks, and billboards in New York City, Los Angeles, Atlanta, Miami, Denver, and Washington, D.C., and became what Mr. McCann terms “the most successful new product launch for us.”
At the same time, the company has been broadening its product line by acquiring gift companies to cross-sell offers to floral buyers. On May 1, the company completed its $85-million acquisition of chocolatier Fannie May Confections. Earlier acquisitions included Plow & Hearth, a maker of home and garden merchandise, Cheryl & Co., a maker of baked goods, and The Popcorn Factory.
Still, when it comes to selling cookies or roses, the name of the game is technology. Mr. McCann cites a book by former Intel chief Andy Grove, Only the Paranoid Survive, as an inspiration for keeping ahead of the curve. About once a month, Mr. McCann gathers about 10 Generation Y-ers at a Long Island restaurant and picks their brains for the Next Big Thing. He calls the events “What Have You Learned Lately?” sessions.
“The challenge,” he deadpans, “is to continue to attract young, talented people who understand this crap.”
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New Flower Arrangement?
Which company is set to bloom? The evidence is mixed among the publicly traded online florists. For the third quarter ended March 31, FTD Group (which went public in February 2005, two years after it was acquired by Los Angeles-based private equity firm Leonard Green & Partners for $420 million) posted a 3 percent increase in revenue to $128.6 million.
FTD’s consumer business had revenue of $75.7 million, while the florist segment posted revenue of $54.3 million. Looking at pre-tax operating income, however, the florist business contributed $17.3 million, more than five times the $2.9 million of the consumer business. Net income for the third quarter of fiscal year 2006 was $7.4 million, or $0.26 per diluted share. Standard & Poor’s gave FTD stock a five-star rating recently based on growth in consumer-side revenue and improved margins from its florist network.
In its third quarter ended April 2, 1-800-Flowers posted revenue of $180 million, but a GAAP net loss of $1.5 million, or $0.02 per share. The company did not break out its Bloomnet business, but Joseph Pititto, vice president of investor relations, said those numbers will be coming in July. Despite FTD’s bottom-line gains and 1-800-Flowers’ GAAP net loss, some on Wall Street see an upset in the making.
Eric Beder, an analyst with Brean, Murray, Carret & Co., says FTD’s fortunes are flagging. “We believe the market is going against them and 1-800-Flowers is taking market share,” he says. Mr. Beder contends that 1-800-Flowers will be able to undercut FTD’s services to florists by 20 to 40 percent and still improve its relatively slim margins. “If they get 20 percent operating margins on business-to-business, that helps them.”
That wholesale side includes hundreds of floral arrangements, plants, and gift basket designs offered by FTD and 1-800-Flowers. (FTD also offers point of sale software systems to florists. Systems may include electronic mapping and routing, an integrated ledger, and wireless delivery confirmation.)
In their latest quarters, 1-800-Flowers had a 39 percent gross margin, up from 37.6 percent in the year-earlier period, versus FTD’s gross margin of 42.5 percent, up from the prior year’s 42.2 percent. Financials for privately held Teleflora and ProFlowers, now a small chunk of Liberty Media, were not available.
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