Full-Bloom Ahead

It’s been a long time coming for Jim McCann, a social worker-turned entrepreneur who opened a single flower shop in New York 30 years ago, built a small chain, then in the ‘80s pioneered a toll-free brand in 1-800-Flowers that evolved in the mid-‘90s into one of the first online retailers.

Chairman and CEO McCann, always the executive who seems to enjoy his work, a trait reflected by the relaxed smile that exudes from advertising billboards and TV commercials, has built what is now known as 1-800-Flowers.com Inc. in an innovative yet carefully orchestrated manner that is just now bringing the company into full bloom on the web.

A turning point

This year, in fact, could mark a turning point in the company’s growth and profitability, as McCann juggles pressures to manage a multi-pronged transition from telephone to e-commerce sales, from flowers to a broader and more profitable range of products, and, perhaps most crucial, from annual growth based on heavy marketing and acquisition to less costly organic growth.

McCann, based in a new Long Island headquarters in Carle Place, N.Y., appears as positive in his outlook as ever. “Business is way more exciting now,” he says, recalling the thrills of starting his first shop and launching national toll-free telephone sales. “All the things we dreamed of doing in the telephone world are so much more possible now in the world of e-commerce. It’s just a challenge of where to put your resources.”

So far, McCann has shown a strong knack for directing long-term growth, analysts say. After building a 14-store chain over his first decade in the business, he acquired the rights to 1-800-Flowers as both his main customer telephone line and brand in 1986, becoming one of the first toll-free telephone branded merchants. He then became an early entrant into e-commerce, launching 1-800-Flowers.com in 1995 as one of the first transactional e-commerce sites. Along the way, he has made strategic acquisitions and brand extensions, while avoiding excessive debt. His company now does over $400 million a year in sales and is one of the 35 largest online retailers, according to the Internet Retailer Top 500 Guide to Retail Web Sites.

“McCann has handled things very astutely so far,” says Ulysses Yannas, stock analyst with Buckman, Buckman and Reid in New York. “Other companies get in trouble worrying about how well they perform quarter to quarter, but I like the way he’s invested for the long term.” 1-800-Flowers’ transition from phone to web retailer will play heavily into the company’s long-term success, Yannas says.

Growing the flower shop network

Despite the overall positive outlook projected by the affable yet savvy McCann, everything isn’t rosy at 1-800-Flowers, where the transition away from telephone sales has been costly, Yannas says. Telephone sales, which sparked the company’s growth into a major retailer in the mid-‘80s, have dwindled in recent years, taking their first year-over-year drop in fiscal year 2004, declining 3%, followed by a 1.2% drop last year.

Overall net sales increases, meanwhile, have slowed in recent years while marketing and sales expenses have grown at a faster rate. Now that the company is primed with its expanded product line to boost its e-commerce growth rate, it should reel in its marketing and sales expenses to focus on profits, Yannas says. “They’re happy to migrate to higher-margin online sales and products, but they’re selling costs have been going up,” Yannas says.

Based in a country where consumers do not buy flowers outside of special occasions—unlike in parts of Europe, where flowers are more everyday items—McCann has put his company on a dual track of expanding its product line beyond flowers into complementary, higher-margin gift products like candy, gifts and wine, while pushing a faster transition from telephone to e-commerce.

“We’re increasing our market dominance in the floral category, focusing on being the largest and fastest in the market, and establishing more retail brands for our customers, with more products and services,” McCann says. In addition, 1-800-Flowers is expanding its BloomNet network of about 6,000 flower shops, including 16 company-owned shops and 95 franchises, to also include b2b sales with corporate customers.

Food and gifts

Much of the company’s efforts and capital in the past couple of years have gone into acquiring food and gift retailers and boosting their web presence, including bakery retailer Cheryl & Co., wine distributor The Winetasting Network and Wind & Weather, a retailer of products ranging from weather instruments to garden ornaments. 1-800-Flowers.com expects to generate about $100 million this year from its non-floral products.

“We want to universally apply what consumers expect a florist to carry, with chocolate being the No. 1 thing,” McCann says.

Not only does that give consumers and corporate customers more reason to shop and come back, but it adds a significant boost to profit margins, Yannas says. “Floral has a gross margin of about 35-36%, but the non-floral areas have a gross margin of well over 45%,” he says.

That’s why 1-800-Flowers recently paid $85 million in cash to acquire Chicago-based Fannie May Confections Brands Inc., even though it already had an ongoing deal with Godiva Chocolatier Inc. to sell its premium line of candies. “We needed a popularly priced range of chocolates, so we bought Fannie May,” McCann says.

The acquisition includes 52 Fannie May retail stores in the Chicago area and a 200,000-square-foot candy manufacturing facility in North Canton, Ohio. Fannie May Confections, which also includes the chocolate brands Harry London and Fanny Farmer as well as Fannie May—each with its own retail e-commerce site—is expected to do about $75 million in sales this year.

Economies of scale

Although all the brands McCann has acquired in recent years have their own e-commerce sites, most also bring the opportunity to significantly increase the online portion of their sales by leveraging the e-commerce expertise and infrastructure of 1-800-Flowers, McCann says. “Our job is to ‘webify’ them,” enabling them to reach a broader customer base at lower costs, he says.

Cheryl & Co., for example, fit nicely into its new parent company’s formula when it was acquired in May 2005 because it had developed a strong brand and reputation for quality baked goods that can be used to complement floral products—and had plenty of room to grow, especially online, McCann says. “They had been growing nicely, but not fast,” he says. “But after leveraging our web marketing, our IT infrastructure and our customer base, they went from 1% of their sales online to more than one third in the first year.”

Cheryl & Co.’s web site, Cherylandco.com, now runs off of 1-800-Flowers.com’s server farm and will receive more site bells and whistles this year, McCann says. To maintain their brand identities, the parent company continues to operate separate sites as the main selling channel for its acquired brands, incorporating selections of their products into 1-800-Flowers.com.

1-800-Flowers.com already has most of the infrastructure it needs to absorb its acquisitions, and will have to make only modest additional investments in technology, Yannas says. “It will have to make some further investment, but the investment isn’t big related to the sales and gross margins it’s gaining,” he adds.

Creating organic growth

Still, the time is nearing when McCann will need to settle down and concentrate on organic growth while stemming the kind of annual increases he has been pushing in marketing and sales expenses, Yannas says. The company has impressed analysts with its ability to avoid taking on long-term debt—its under $5 million due in long-term debt payments over the next five years is “small change,” Yannas says—but its cash hoard has dwindled after recent acquisitions to about $18 million from a recent high of about $65 million. “So I think they’ll consolidate what they have and start to build up margins,” he says.

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By the end of the company’s 2006 fiscal fourth quarter at the end of this month, 1-800-Flowers should show signs that its marketing and sales expenses are beginning to grow at a lower rate than its rate of sales growth, Yannas says.

“1-800-Flowers.com has been sacrificing near-term profits to expand its base of sales—and McCann has accomplished that,” Yannas says. “But he’s been playing that game long enough so that now he can concentrate on building his gross margins. And they will go up, judging by the way he’s worked things so far.” l

paul@verticalwebmedia.com

1-800-Flowers’ growth chart

1976: Jim McCann opens a single florist shop in New York City, building it into a 14-shop chain over the next decade.

1986: McCann acquires the rights to the telephone number 1-800-Flowers, launching a national brand.

1992: 1-800-Flowers starts taking online orders through CompuServe.

1994: 1-800-Flowers becomes the first online merchant to sell over AOL, remaining as AOL’s exclusive floral merchant into 2006.

1995: McCann launches 1-800-Flowers.com as one of the first transactional e-commerce retail sites.

1998: Acquires household goods cataloger Plow & Hearth, part of a string of non-floral acquisitions.

1999: Company sells shares to the public.

2001: Acquires The Children’s Group, which sells under the HearthSong and Magic Cabin Dolls brands.

2002: Acquires The Popcorn Factory.

2004: Acquires the Winetasting Network.

2005: Acquires baked goods seller Cheryl & Co. and Wind & Weather.

2006: Acquires Fannie May Confections Brands Inc. for $85 million in cash.

The more things change ...

Three decades ago, Jim McCann left his job as a social worker to open a flower shop in New York, where he delighted in talking with customers and getting ideas from them on how to improve his business. It was an intimacy largely lost after his business moved mostly to telephone sales in the mid-‘80s as 1-800-Flowers. But now he has recaptured that interaction and uses it extensively on the web through 1-800-Flowers.com. “We’re now able to do what we could do in our floral shop 30 years ago,” he says.

Although growing his company has involved several acquisitions, expanding staff and moving to new facilities, he spends a lot of time working directly with customers through informal dialogues as well as through a more formal and elaborate system of exchanging ideas. “What I’m mostly focused on personally is keeping and deepening relationships with customers,” he says. “I used to talk with customers in my shop in New York, now I may talk with a customer from Kansas.”

Just recently, he received an e-mail from a good customer with a great idea about meeting customers’ needs. “She didn’t realize we already have a team working on the same product line, so I asked her if she wanted to be part of the team,” McCann says.

Although that product plan was too knew to reveal publicly, McCann says 1-800-Flowers.com has incorporated numerous ideas generated with the help of customers and retail partners—enough to have formed more than three dozen online panels of contributors who work on marketing ideas as well as product lines in Expressions Exchange online discussion forums, where participants comment on posted ideas or contribute new ones. Participants can earn points in the company’s Fresh Rewards loyalty program for making purchases from 1-800-Flowers.com.

One of McCann’s favorite things generated by the panels is the “At a loss for words?” shopping-help feature, which was conceived as a way to give men ideas on how to express themselves on cards sent with flowers and other gifts. The feature, which appears with drop-down menus of suggested sayings in checkout, offers expressions for men as well as women and helps to increase the number of shoppers who complete checkout.

McCann admits he’s taking a risk in developing the consulting panels. “We’re making a big bet because they take lots of technology and lots of bandwidth,” he says, adding that he’s made mistakes before, such as when he developed a hard-to-sell line of silk robes embroidered with images of roses.

But he realizes that he needs to stay in tune with customer ideas and needs. “It’s like the good old days of running a single store, when I could pass a good idea from one customer to others,” he says. “Now online I can get the best ideas of all customers.”

paul@verticalwebmedia.com