Lillian Vernon, Sharper Image Crash. Why?

Two entrepreneurs who started off on the wrong foot

February 2008 By Denny Hatch

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In the News

Two Gift Retailers File for Bankruptcy
NEW YORK - A weak holiday season and a struggling economy led retailers Sharper Image Corp. and Lillian Vernon Corp. to file for bankruptcy this week, and analysts predict others could soon follow them as consumer spending worsens. “You’ll see a record number of bankruptcies over the next 50, 100, and 1,000 days,” said Burt P. Flickinger III, managing director of the New York-based retail consulting firm Strategic Resource Group. “Consumers are cash and credit constrained. They’re out of purchasing power.” Both Sharper Image, known for its high-tech novelty gadgets, and Lillian Vernon, which sells low-cost gifts and gadgets through its catalog and Web site, have long been plagued with falling sales. But retailers across the sector have been laying off staff and closing stores as consumers cut back on discretionary spending.
—Mae Anderson, The Associated Press, February 20, 2008

The king of high-end tchotchkes (Richard Thalheimer, former CEO and chairman of The Sharper Image) and queen of low-end tchotchkes (Lillian Vernon) have been dethroned.

Lillian Vernon and Sharper Image—two iconic catalogs—were known to have been struggling in recent years.

Their bankruptcies were expected.

That they were announced on the same day is astonishing.

How could this happen?

Both Vernon and Thalheimer launched businesses without paying their dues.

Ultimately, neither of them knew what the hell they were doing.

Lillian Vernon’s Story
In 1933, Lillian Katz’s family fled the Nazis. They left Leipzig, Germany, for Amsterdam, and four years later were lucky enough to catch a ship to the United States.

Fast forward to 1951. Living in a small apartment and using her kitchen table as her desk, Katz took $2,000 of wedding gift money and placed a small ad in Seventeen magazine selling a purse and belt with free monogramming. Her $495 investment in ad space generated 6,450 orders and $32,000 in sales.

(The $495 ad that launched Lillian Vernon is illustrated below. Alas, I could not find the ad that launched The Sharper Image.)

From the first thrill of seeing stacks of envelopes containing cash money through the next half century, Lillian Vernon was passionate about her business, growing it into a behemoth.

Her corporate and personal moniker, Lillian Vernon, was a combination of her first name and the last name of her hometown, Mount Vernon. Over more than 50 years, 5-foot-1-inch dynamo Lillian Katz Vernon built a mail-order powerhouse, moving from space ads to catalogs that averaged 96 pages and 700 items. Retail and outlet stores followed, and in 2001, her Web site was launched. She was able to get inside the heads of her customers—think like they thought, feel what they felt—and offer merchandise that they bought and bought and bought.

The Harvard Business School Web site includes Lillian M. Vernon (Katz) in its list of 20th Century Great American Business Leaders along with Warren Buffett, George Eastman, Marshall Field, Henry Ford, Howard Hughes and Henry R. Luce.

From 2001 to 2003 the company struggled, losing more and more money.

Since neither of her sons wanted to take over the $250 million-a-year business, in July 2003—at age 76—Lillian Vernon sold the company to a private equity firm. The sale price: $60.8 million. The new owner immediately ordered a new business plan that would ratchet up the corporate gifts division, and hired a consultant to oversee this new operation. They could not make it work.

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Takeaway Points to Consider:

* “As direct marketers, we’re not here primarily to make a sale; we’re here to get a customer. Sales are important, of course. (Where would marketers be without them?) But the name of the game is repeat sales rather than one-shots. And to have that, you need a customer.”
—Joan Throckmorton

* People buy for three reasons and three reasons only: (1) Price, (2) Service, (3) Exclusivity.

* Always have a USP (Unique Selling Proposition) and never lose sight of it.

* Create dependency.

* If you sell DVD players, offer the greatest selection of DVDs ever assembled—or cut a joint venture deal with Blockbuster or Netflix—so that you receive continuing income from that initial sale.

* “One book is an item. Two is a line.”
—Richard Schuster, founder of Simon & Schuster, publisher

* When an entrepreneur creates a business and runs it for 30 of 50 years with no logical succession in place, you are looking at a temporary winner and an ultimate loser—who most likely has an ego problem.

* Bill Gates has Steve Ballmer. Who did Richard Thalheimer and Lillian Vernon have? Nobody. Who do you have?

Companies Mentioned:

Best Buy	Carol Wright Gifts	Consumer Reports
Crutchfield	Hammacher Schlemmer	Improvements
Netflix	People Magazine	Radio Shack
Target	The New York Times	The Sharper Image
Wal-Mart	Walter Drake

COMMENTS

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Most Recent Comments:

Barry Dennis - Posted on March 22, 2008
Denny,
As you know, my mail order company was the largest independent consumer electronics cataloger in the seventies and early eighties(Stereo Discounters electronic World) I bought Circuit City's mail list when they discontinued Dixie Hi Fi -our major competitor- to embark on their "category killer" concept (like Best Buy).
I always admired Dick Thalheimer, although I thought his ego was way too big, and I admired Lilian Vernon for different reasons - she knew what she was doing. I agree that both lost their way as companies, and perhaps as individuals. In Vernon's case no successors who cared _ no "romance" in the company to brag about.
I though Thalheimer's mistake was in going retail, and still do. Some people think bigger is better, and only an idiot would think that he could personally design enough new products to sustain a retail store operation. Oreck may be headed in the dame direction, but Dyson seems to know better, at least so far.
Your comment about the need for the USP to always be "top of the mind" was telling, particularly since even in today's thoroughly knowledgeable marketplace, the branding process seems to be elusive for many.
The temptation to become Rome is just too great, I guess.
Let's raise and few bucks and show them how it's done.

Joe Chapuis - Posted on February 27, 2008
Hi Denny -

Great article, as usual. But I think you're overlooking something important here:

"People buy for three reasons and three reasons only: (1) Price, (2) Service, (3) Exclusivity."

We buy what we buy because we want to change the way we FEEL - and we want to feel good. We buy based on a perception of value, and the anticipated [good] feelings that will be derived from buying and using the product.

For example - I'm considering buying a new MacBook Pro laptop from Apple, which:

1. Is somewhat over-priced, at least compared to other models (e.g., the Dell Inspiron 1720);

2. Has a history for being a bit troublesome, especially right after new features have been added; and,

3. Is hugely popular, and a big reason behind Apple's recent record-breaking quarter.

But in the end, I'm not buying it because of price, service or exclusivity. After a little in-depth self-analysis, I realize that if I do go ahead and switch from PC to a Mac after 15 years, it's because I'm tired of Microsoft and Windows.

I'm ready for a change, and I'm overly optimistic that switching to a Mac will make me feel better than I would have had I not made the purchase, or had I purchased yet another PC.

While exclusivity plays a role here, it's secondary, and is not the main reason. The primary reason for purchasing is the anticipation of feeling good about buying, owning and using a Mac.

Although most people don't know this - and those who do usually aren't willing to admit it - in the end, we buy what we *want* (not necessarily what we "need"). And what we all really want is to simply feel good...

My best,
-joe chapuis
http://w

Richard Palarea - Posted on February 27, 2008
Wonderful expose on what went wrong.

I read one account that, in the case of Vernon, printing and shipping costs were out of control. Crazy...when you consider they are a catalog fulfillment company (printing and shipping). Two core expenses that are fairly easy to manage in today's economy.

I posted a lightweight article regarding this at Eric Joiner's Freight Dawg Logistics Blawg http://www.freightdawg.com/2008/02/two-distributio.html on 2/26/08.

Lawrence Hansen - Posted on February 27, 2008
Reminds me of the United Audio/Tweeter Group story. Back in the late-80s, I'd been working for a few years and had a little discretionary to start upgrading my stereo system. In the market for a cassette deck (remember those?), I landed in a store called "United Audio," family owned, with several branch stores around the Chicago area. The salesman spent more time than was absolutely necessary to set me up with his least expensive Yamaha tape deck (I still use it, by the way). He could have hustled me through so he could concentrate on a big-ticket sale. Because I was treated so well--and got a good, fair price for the item--I came back, and based on my recommendation, my brother did as well. Later, we both had the experience of selecting a piece of gear, only to find it was out of stock. Rather than make us wait, the salesman was empowered to give us the next higher-grade model FOR THE SAME PRICE, instantly guaranteeing more repeat business from us.

A trip to United was fun. I knew I'd get a quality product suited to my needs at a price almost as good as at an impersonal big box or dept. store. But then the owners sold out to Tweeter Group; service went down, know-nothing kids replaced the knowledgeable salesmen, the place became too much like Best Buy and Curcuit City and lost its cache. I took my custom to another audio shop with United-like service. Now, the Tweeter chain has filed for bankruptcy and closed half its stores. I'm not surprised.

Slightly higher cost coupled with first-rate service becomes insignificant when amortized over many years; the sting of a bad buying experience doesn't dull with time.

Robert Doscher - Posted on February 27, 2008
Denny:

The objective of most private equity firms is to grow the business through acquisitions and synergies. There were not and are not a lot of synergies available to either of these companies. Neither could be considered a strong platform company to use as the base. The goal, in lieu of add-on acquisitions should have been the development of new product lines and new marketing channels. Seldom does cutting staff and mailings work. Both companies had a chence to survive by creating new, exclusive product areas that appealed to a broader market.

Having a solid, workable vision and financial resources that won't bail at the first hiccup are two important ingredients for success.

Wouldn't you have loved to see the most recent business
plan.

Bob Doscher

Joi - Posted on February 26, 2008
Hi Denny,
I love reading your articles!!
Thanks for including the original Lillian Vernon ad. It was fun seeing an order form with only 2 lines for contact information. Those must have been the days. Now we have order forms that take days to fill-out online and hard copy.
As a female marketing person she still is an inspiration to have built such a large company from such a simple ad.
Joi Jones is The Joiful Assistant
www.thejoiful.com

Drayton Bird - Posted on February 26, 2008
On the money as usual, Denny.
David Ogilvy always said to his office managers: your first job is to find a successor.

I have been saying for some years that there is one question in EVERY customer's mind which most marketers fail to consider.

It is: Why should I choose you? With two subsidiaries: 1. What can you do for me that nobody else can; or, failing that, what can you do better than anyone else?

The correct answers to these questions lie at the heart of any business.

I might add that I have been saying for years that nothing fails like success - and these two collapses epitomise this.
Successful people start toi think they are geniuses, when often they are just lucky. lose concentration and forget what made them succeed.

Aunt Joy - Posted on February 26, 2008
Denny, I am in my 14th year as an internet mail order business. I am very small. I plan to stay very small. I started Aunt Joy's Personalized Christmas Stockings with $100 of Christmas fabric and I started reading every book I could find on mail order and people who built their business into a successful enterprise. I read Lillian Vernon's book and was inspired by many things she said... until I got to the almost end of the book, where she admitted that her father's advertising department wrote and designed the ad for her. It was disappointing to learn she had NOT started on her own. But I did learn alot from her book, and perhaps the CEO's that ran the company into the ground never bothered to place an order and learn what it is like to be the customer. Small cottage businesses that survive, like Aunt Joy's, have lots of competition, but I offer A UNIQUE PRODUCT that you cannot buy at Walmart, Lillian Vernon or crate & barrel. I sell products MADE IN AMERICA'S HEARTLAND, and every customer is my new BEST FRIEND. I strive to give STELLAR CUSTOMER SERVICE, the kind of service I want when I shop. I answer my own phone, take most orders, or pass the phone to my workshop elf after a nice chat with the customer, but most of all, I HAVE A PASSION ABOUT MY PRODUCT AND MY CUSTOMER. And that passion is communicated to the customer and reflected in the product. The Big Boys of Mail Order always lose sight of the customer... how many of the Big Boy CEOs have actually shopped at their own company... probably NONE.... so they just did not GET IT. It was Lillian Vernon's passion that kept the customers coming back, and the bean counters just cannot capture that passion. I expect to be around for a long time. My customers are counting on me to be here when they have another baby and need another Aunt Joy's Personalized Christmas Stocking for their holiday celebrations. Success to many of us is not measured by the MILLIONS in sales, but by the CUSTOMERS WE KEEP!

Anthony Green - Posted on February 26, 2008
Denny, thank you for bringing this to my attention and for your, as usual, intuitive thoughts.

This is truly is a sad day for mail order. Sadder than we realise. Two of the greatest symbols of the Great American Dream have spectacularly imploded into their respective warehouses full of unsold Chinese merchandise. It?s sadder than we think because these businesses, until recently, were not faceless corporations. They were started by people like you and me who dreamed of making a fortune and actually went out and did it. They were living proof that anybody, virtually broke, with a great idea and tons of energy can become spectacularly rich running space ads. I know because I?ve done it myself! And these two icons were the very people who inspired me to do it. It?s sadder than we think also because who is left in the industry to look up to now for such inspiration? They both perfectly symbolized the opportunity, the romance and the excitement of this business.

One of the immutable laws of mail order is that when a business gets sold it always goes bust, often in less than a couple of years. Without the founder it?s a dead duck. It?s the nature of the business. The founder knows in his bones when the end is nigh. That?s the only reason they sell up. There is nothing more depressing than running a mail order business which you know is inexorably on the way out. It?s like having cancer. You know it?s incurable and after trying every quack consultant you go for a sale, preferably to someone new to the business. I know because I?ve done it myself!

Many years ago I went to see Lillian Vernon. A most pleasant woman with whom I got on with very well because we both spoke the same language, ie, we both ran catalogues. We got on so well that she decided to feature the product I had shown her on the flap of the reply envelope bound into the centre fold of her catalogue. Wow! Did she shif

Connie - Posted on February 26, 2008
I used to work for a 'reprographics' company that was started by an un-named curly red headed guy (his nickname became the company name) and it was one of the coolest places to work, and we were very, very successful. Once he wanted to retire, and he sold to the Bean Counters - the whole culture changed. It was no longer 'about the customer' and I watched as the USP of phenomenal service and 'being everywhere' fell prey the profit-centric investment company, and it was never the same again. Still in existence, and still basically a good company to frequent, it has been taken under the wing of an even bigger company, and it will be interesting to see if it flourishes. I hope it does - one man's dream becomes another man's mistake if he loses sight of the original mission.

Donna - Posted on February 26, 2008
WOW! I am not surprised with the outcome - or even the names. The jolt came from what I already know - but flew to the back of my mind 'cause I am busy, busy, busy and stressed, stressed, stressed. Thanks for the reminder - succession planning. Even in the non-profit world there is competition - agencies vying for the same philanthropic dollar just to survive. What do they have to offer - agencies duplicating services because they can tug at heartstrings rather than sticking to their mission? How do they market themselves? How do they reinvent themselves? All those are top of mind - but - succession planning is forgotten in the day to day struggle to simply exist. If it is not about me - if it is truly to help - if it is really to live the mission - then succession planning should be first on my mind - the legacy to the community.

Those two words are on my wall. Since I plan on retiring in the next three years, I need to hire that "heir apparent" now!

Thanks for the powerful reminder.

Morgan Cloward - Posted on February 26, 2008
How unfortunate for Thalheimer. He went from Target Marketing's 2003 Direct Marketer of the Year to CEO of a bankrupt company in a blink of an eye.

Sarah Shaw - Posted on February 26, 2008
I had missed hearing about the Lillian Vernon bankruptcy. Yesterday I went to their website to order a gift for a soon to be three year old that I had noticed they carried a few year's ago. It seems like everything was on sale and much less than I expected. What really surprised me however was at checkout I learned that they may take up to two weeks from the date of your order to ship your items. They were not talking about personalized items either. Years ago everyone allowed 6-8 weeks for delivery but that is not the world we live in anymore, especially for items ordered through the web. I chose to pay more for expediited shipping just to make sure I had the gift in time for the party. In our fast paced, instant gratification world that turn around time doesn't cut it. I'm sure this contributed to their demise as well.

Gary Bronga - Posted on February 26, 2008
Catalog Buyers are in a very powerful position yet most are unreachable. They can do a great deal of harm to a company. Usually by the time the affects of a defective Merchandising dept is revealed it is too late.

We tried to get Lillian Vernon Catalog to include our new unique products in one of their catalogs without success. It is so much easier to rip off products from a competitor that to find truly unique products. Lillian Vernon used to travel the word in search of new and exciting things to bring her customers.

Once, I had the honor to take with Lillian Vernon. I asked her for advise for growing a business like mine based on a single product into a huge catalog like she did??.Her answer was not what I wanted to hear. She told me that she thought it was not possible today to do what she had done. That today the business environment, taxes, adversting, marketing had all changes so much that she truly believed that it could not be done?.It was very discouraging for me.

Adam Moskow - Posted on February 26, 2008
good thought-provoking piece Denny!

But, I don't know... to me it sounds more like you're "angry" at them more so than blaming them. Other than founding and running successful companies for generations...what did they do wrong - especially after either selling out and being ousted??
A 56-year run for a company (Lilian Vernon) ain't bad - especially when most of the years were profitable. Plus she did cash out - maybe that was "HER" succession plan afterall. $60MM not too bad. In fact, she's smarter than the bankers and holding companies who bought the company.
And Richard Thalheimer and Sharper Image was more than a "flash in the pan" business? Come on, 30 years of catalogs, sales, growth and retail? All from a wristwatch offer? I respect that. The fact that their bankrupt now (after he was ousted??) who knows. Great companies sometimes do have to hit bottom before they go back up and reinvent or "go back to the well" for their reincarnation and updated USP .. in a new way. Not too many companies can claim to stay on top and be #1 forever. (Well, maybe Coke and McConalds) Look at Apple, Chrysler and many other companies that reinvent and evolve. (sure, many more crash and burn but there are no guarantees)
I think it's more a sign of us "dmers" being scared that some legendary DM companies are failing more rapidly when direct marketers should be thriving more than ever considering the growth of interactivity and ability to connect with prospects and customers. And gaining "respect" as a legitimate and necessary marketing function NOT bottom line afterthought as direct marketing was for mainstream companies and marketers. And now accountability is the buzzword, although too many image advertisers (and their agencies) are still caught up in trying to impress themselves and win awards instead of sending an exciting, honest communication to prosp

Leon Stern - Posted on February 26, 2008
Hard to believe that anyone knowledgeable about mail order would fail to recognize that the true reason for the fall of these 2 mid-size companies is the same reason the entire industry is suffering from.
Print & postage have risen to a point where the acquisition costs for new customers is not affordable.
Those companies that used space to add new customers were hit by increases in advertising costs and drops in readership.
This double whammy is the real reason for the fall of these 2 companies and the contraction of the entire industry.
The sad part is there is no solution to the problem.

Bob Ray - Posted on February 26, 2008
The Sharper Image and Lillian Vernon BK's came as a shock to the general public as perception masked reality: their size and presence suggested success.

In the coming months, there will be more big names whose foundation has crumbled behind-the-scenes and leads to their humbling tumble down in the public eye.

It this new world of technological marketing, many of those in charge of a company's marketing have precious little grasp on what marketing is; the basic rules that haven't changed.

Eliminating the signature of Lillian Vernon - free personalization - is a perfect example. Throwing the company's identity out the window to generate revenue from what was previously free for decades is - succinctly - simply idiotic.

Sharper Image, in its desperation to meet growing competition, lost their identity of being unique by selling the same items as their competition ...and at higher prices. That reality was not lost on those - like myself - longtime single-item shoppers at Sharper Image who moved elsewhere in recent years.

The lessons to be learned here are clear.

The mistakes made here will be repeated again. And again. And again.

As long as we have people in charge of marketing companies whose presence should be restricted to the other side of the cash register, those once tall will fall ...and will wonder why.

Part of the history these marketing wonders should know [but don't] is: Those who don't know history are bound to repeat it.

David P Himes - Posted on February 26, 2008
An interesting sidebar to this story is the instruction of venture capital and investment bankers into the Direct Marketing industry.

In general terms, few VCs and IBs have figured out how to make such investments.

Lillian Vernon is a prime example of a failed investment strategy.

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Morgan Cloward - Posted on February 26, 2008
How unfortunate for Thalheimer. He went from Target Marketing's 2003 Direct Marketer of the Year to CEO of a bankrupt company in a blink of an eye.

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Lillian Vernon, Sharper Image Crash. Why?

Two entrepreneurs who started off on the wrong foot

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Lillian Vernon, Sharper Image Crash. Why?

Two entrepreneurs who started off on the wrong foot

In the News

Takeaway Points to Consider:

Web Sites Related to Today's Edition:

Companies Mentioned:

COMMENTS

Free White Papers & Research

RECENT ACTIVITY:

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