Private equity firm Apollo Global Management will take Rackspace private in the all-cash deal.
Its name used to say it all: 1-800-Flowers sold flowers by telephone. But its name is a misnomer these days.
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.