Vermont teddy bear case study

MARKETING MANAGEMENT CASE STUDY

ALEXANDER CHERNEV

Vermont Teddy Bear Company: Calyx & Corolla

On September 2, 2003, the Vermont Teddy Bear Company announced the acquisition of Ca- lyx & Corolla, a catalog company that ships fresh flowers direct from growers to customers. Prior to the acquisition of Calyx & Corolla, the Vermont Teddy Bear Company had focused on popular gift alternatives to flowers. In addition to its core business of manufacturing and marketing high- end gift teddy bears, the Vermont Teddy Bear Company operated TastyGram, a gourmet foods catalog launched in October 2002, and PajamaGram, a gift delivery business launched in April 2002.

Floral Distribution Industry

In 2003, flower distribution in the United States was a $19 billion industry that included more than 75,000 florists. Flowers are purchased for a variety of occasions, including weddings, funer- als, birthdays, anniversaries, Valentine’s Day, and Mother’s Day. In addition to special occasions, flowers are also purchased to alleviate guilt and to decorate homes.

The demand for flowers is seasonal, with high peaks around holidays and much lower sales during the rest of the year. The perishability of flowers and the seasonality of demand make effi- cient distribution crucial for the industry. Usually, the distribution process begins with growers selling flowers to distributors. Some distributors, such as Calyx & Corolla, send the flowers di- rectly from the grower to consumers using shippers such as Federal Express. Most distributors, however, sell their flowers to wholesalers who then sell the flowers to retailers at a substantial mark-up. Given this chain of distribution, a $1 flower could reach the customer two to five days after being cut and be sold for around $5. Retailers also apply an additional delivery fee.

Calyx & Corolla

Calyx & Corolla was founded in 1988 by Ruth Owades. After graduating from Harvard Busi- ness School in 1975, Owades joined the CML Group, a direct mail retailer, as director of market-

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VERMONT TEDDY BEAR: CALYX & COROLLA KEL138

ing. Two years later, she launched Gardener’s Eden, a catalogue offering gardening accessories. In 1982, Owades sold Gardener’s Eden to Williams-Sonoma, an upscale retail chain, but re- mained to manage the Gardener’s Eden division of Williams-Sonoma for four years until she re- signed in 1987. A year later, she and Fran Wilson, a coworker from Williams-Sonoma and an- other Harvard Business School graduate, founded Calyx & Corolla. Owades became president and Wilson became vice president of operations at Calyx & Corolla.

Calyx & Corolla pioneered the concept of selling flowers through mail order catalogs. Cus- tomers browsed through beautiful, colorful catalogs they received in the mail and then called or sent a fax to the main office in San Francisco to place an order. Their request was then sent to a grower, who packed the flowers and shipped them to the recipient by FedEx. This process en- sured that customers received much fresher flowers than they would through conventional meth- ods of purchasing. The success of Calyx & Corolla depended on the three-way partnership be- tween the company, the flower growers, and FedEx. To strengthen this partnership, Owades took responsibility at the onset for maintaining relationships and resolving problems with growers and FedEx representatives.

This new form of distribution initially provided challenges not only for Calyx & Corolla, but also for its partners. Growers who were used to selling flowers in large cartons to distributors were now asked to carefully pack perfect flowers in special boxes,

and to ship them directly to the recipient. However, there were ad- vantages: Calyx & Corolla offered a new distribution opportunity for growers, which could in- crease their sales and help offset the seasonality of their business.

Calyx & Corolla executives carefully analyzed the extensive database of customers, recipients, and prospects in order to target their mailings more precisely.

Calyx & Corolla catalogs included a wide variety of fresh flowers, plants, vases, and other floral accessories. Freshness was paramount and every attempt was made to ship flowers to the customer before they reached full bloom. Prices for fresh flowers, including delivery, ranged from $44 for a hydrangea plant in a basket to $126 for a bouquet of three dozen roses. A typical offering ranged between $40 and $60, excluding shipping charges. Vases and accessories started at $20. Continuity programs were another important part of Calyx & Corolla’s marketing efforts. One of the most popular programs was “A Year of Fragrant Plants,” under which plants were shipped to the customer-designated recipient every other month for a total value of $250 per year.

Most Calyx & Corolla growers were located in California, Florida, and Hawaii, typically with sales of less than $1 million. The top 18 percent of these growers supplied nearly 80 percent of Calyx & Corolla’s flowers. Calyx & Corolla had exclusive contracts with many growers, which prohibited them from supplying any other mail order retailers.

Calyx & Corolla provided growers with shipping supplies (such as boxes, cards, labels, vases) and sent them demand forecasts. Growers, in turn, informed Calyx & Corolla of low or excess stock. This allowed Calyx & Corolla to substitute suppliers or alternate selections in case of low stocks and to use excess stocks for promotional purposes.

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KEL138 VERMONT TEDDY BEAR: CALYX & COROLLA

Calyx & Corolla flowers were distributed almost exclusively by FedEx. Over the course of several years, the initially bumpy relationship between Calyx & Corolla and FedEx matured and improved. Delivery drivers became familiar with Calyx & Corolla and handled its packages with extra care. FedEx also offered special discounted rates, which allowed Calyx & Corolla to charge its customers shipping fees of $14.95 for an average order instead of the regular rates that ex- ceeded $20. Saturday delivery was available in most locations for a $10 surcharge.

Competition

Competition in the floral industry was fragmented. Retail florists constituted the oldest and one of the most popular ways of distributing flowers. Customers could stop by and see the flow- ers they were buying, or they could ask for the flowers to be delivered locally, usually for an ad- ditional cost. Retail florists prepared custom bouquets and usually provided flower arrangement services for special events. Some florists delivered on Sundays and holidays in addition to regular business days and Saturdays.

Founded in 1910, FTD was the largest floral company in the world. FTD connected approxi- mately twenty thousand North American retail florists and supported an international floral deliv- ery network of fifty thousand affiliated FTD florists in 154 countries. Originally called Florists’ Telegraph Delivery, FTD was the world’s first flowers-by-wire service. Fifty-five years later, FTD expanded to include international transactions. The company was renamed Florists Trans- world Delivery to reflect its growing worldwide presence. In 1914, FTD adopted the classic fig- ure of Mercury as its official logo.

FTD could deliver products to nearly 100 percent of the U.S. population. FTD received or- ders from customers through a toll-free number (1-800-SEND-FTD) or online (FTD.com) and transferred them to the florist nearest to the recipient. The final price included a service charge of $9.99. FTD spent nearly half of the revenue it received from its handling fee on advertising. This advertising appeared primarily on television and in print and focused on holiday-specific promo- tions. FTD also provided all of its member stores with a catalog for customer reference. However, because orders were transferred to different florists depending on the recipient’s location, there was no guarantee that the flowers would be delivered exactly as they appeared in the catalog or that they would be the freshest flowers in stock. Approximately 10 percent of all floral sales were made through FTD.

Another large flower distributor in the United States was 1-800-FLOWERS. CEO Jim McCann opened his first retail store in 1976 and successfully built his own chain of fourteen flower shops in the New York metropolitan area. In 1986, he acquired the 1-800-FLOWERS tele- phone number and continued to grow his business under the 1-800-FLOWERS name. The com- pany advertised extensively through television, print, and billboards. Orders could be placed by phone or online and were then transferred to the closest florist. The company’s hybrid fulfillment system included its BloomNet network of approximately fifteen hundred florists around the coun- try (including approximately thirty-five company-owned stores and eighty-five franchised stores), as well as its own distribution and warehouse facilities. Customers were charged a $9.99 service fee, which was added to the price of the flowers.

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VERMONT TEDDY BEAR: CALYX & COROLLA KEL138

Supermarkets offered flowers at prices substantially lower than those of other floral distribu- tors. While they offered lower prices than florists, supermarkets did not offer the same level of quality. Su- permarket employees did not usually handle and package flowers effectively and aesthetically. In addition, flowers in supermarkets were not always kept at an optimum temperature, which af- fected their freshness.

Calyx & Corolla’s Strategy

Six months after Calyx & Corolla’s acquisition, Irene Steiner, vice president of marketing for Vermont Teddy Bear Company, was discontented with its financial performance. Calyx & Co- rolla’s gross margins had decreased to 50 percent, compared with 60 percent in 1999. The reve- nues of Calyx & Corolla came primarily from the fifteen million catalogs it mailed every year. Two million were mailed to prior customers (one catalog every month), one million were sent to flower recipients (one catalog every other month), and the rest of the catalogs were sent to rented mailing list names, selected because they had demographics similar to Calyx & Corolla’s current customers. The yields varied depending on the recipient group: customer mailings yielded 4.5 percent, while recipient and rented mailing lists yielded 1 percent. Calyx & Corolla’s marketing expenses, which included $0.48 for production and mailing of each catalog and $0.06 per name for mailing list rental, were rather low by industry standards. Online sales, although growing, represented a relatively small part of Calyx and Corolla’s total revenues.

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KEL138 VERMONT TEDDY BEAR: CALYX & COROLLA

Exhibit 1: Calyx & Corolla’s Promise

Calyx & Corolla: The World’s Most Beautiful Blooms

Our story begins in flower fields around the world.

The most luxurious roses come from Colombia, while the hardiest orchids hail from Thailand. To bring you truly exquisite blooms, we have partnerships with growers around the world. The day you place your order, we’ll send it straight to the source.

Extraordinary blooms deserve special attention.

Each rose is set on an ice gel pillow and thirsty cymbidiums get individual water vials. Every bouquet is carefully packaged, wrapped in tissue, and set in our sig- nature gift box As soon as packaged, we air-ship them direct from the grower via FedEx.

You’ll see the difference freshness makes.

Since our blooms don’t lose their glory in a truck or cooler, they last 5 to 10 days longer than most. And because our growers span the globe, we can offer summer- bright Gerbera daisies in December and spring-fresh freesia in August.

Send a glorious bouquet.

We guarantee your flowers will arrive fresh and perfect on the date you specify. There’s simply no easier or more reliable way to send the very best flowers the world has to offer!

From bud to bloom

Our flowers are shipped to you while they're still in bud; this ensures that your flowers will last as long as possible. Within a few days, the petals will begin to open and fresh blossoms will emerge. The flowers exhibit a great deal of vitality, just as they would if they were growing in the garden. After a few more days have passed, your blossoms will be a full bouquet that will last for quite some time.

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VERMONT TEDDY BEAR: CALYX & COROLLA KEL138

Exhibit 2: Calyx & Corolla Catalog Information

DUPLICATE AND UNWANTED CATALOGS Please help us reduce waste by sending us the labels from duplicate catalogs and circling the correct ad- dress. To cancel future issues, please send us your mailing label. Mail to: Calyx & Corolla Mail Fulfillment Services P.O. Box 965, Shelburne, VT 05482

Our mailing list will be updated within three months.

OUR 100% SATISFACTION GUARANTEE

FLOWER CARE Over the years, we've discovered that although all flowers need water, some need a little more attention. Some flowers will arrive in bud and open over time. Some will arrive just a bit thirsty, and will need to re- hydrate for a few hours. We enclose a complete care guide with each of your gifts.

CUSTOMER CARE Call 1-800-877-0998 (Our hours are M-F 7am-10:30pm EST; Sat./Sun. 9am- 4pm EST))

We are happy to accommodate changes to your order whenever possible; however, once an order is en route, we are unable to change the order or stop the delivery.

GIFT CERTIFICATES Call 1-800-800-7788 The gift of choice is often appreciated more than any other. Gift certificates are available in any amount greater than $25 and will be sent in a handsome presen- tation package. (Please specify dollar amount).

For each address, please add $14.95 Year of…” gifts add $6.95 for each shipment *During high volume periods, minimal transportation surcharges may apply.

Our bouquets are delivered in a protective box. For added protection during shipment, some bouquets and vases will arrive in separate boxes.

We are happy to take orders for future delivery dates. For special events, we recommend having products de- livered prior to the exact date in order for it to rehy- drate, buds to open, etc. We will deliver on the exact date you choose, whenever possible. (Sorry, we cannot deliver on Sundays or to a P.O. Box.)

Our delivery charges include shipping and handling via FedEx within the United States. Charges are billed when you place your order. Call by 3 PM EST week- days for next-day delivery. If payment is sent in the form of a check, please allow an additional ten (10) business days to process your order.

*SUPER RUSH SERVICE & SATURDAY DELIVERY: Some orders may require an additional $10 super rush charge for an extra fast, next-day delivery. Additionally there is a $10 charge added for Saturday delivery. Prior- ity Delivery (before noon) is available for an additional charge to most addresses. Please call for this service. © 2004 Calyx and Corolla

SHIPPING AND HANDLING

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