Summer 2011
Specialty Retail Retrospective: Early Retailers

As specialty retail celebrates its 30th anniversary, Specialty Retail Report takes a look at early entrepreneurs who took a chance on the burgeoning retail segment and made it their own.

Specialty retailers have evolved over centuries from peddlers and traders to today’s niche entrepreneurs. Over the past 30 years, several retail masterminds have achieved phenomenal success in specialty retail demonstrating that the American dream is still alive and well. Here are a few of their success stories.

Warm and cozy feeling

The Christmas of 1980 was particularly merry for Barry Silverman. It was during that year’s eight-week Christmas sales period that the specialty retailer tested a sheepskin product called Warm Snuggies on a pushcart at Highland Mall in Austin, TX.

The success of the slippers birthed a business called Big Horn Sheepskin that eventually became the first franchised temporary tenant in the United States. Silverman is particularly grateful to The Rouse Company, who he says, “had a real vision of organized retailing in the common areas of their properties.” During the second year of expansion, Silverman decided to change his business focus completely and do seasonal retailing exclusively. Bighorn Sheepskin became the first franchise in the United States to be offered for an eight-week period.

Once Bighorn Sheepskin centralized its national leasing and organized temporary staffing, the company worked to improve systems processes. Managers became financially responsible for inventory including shrinkage. Eventually Bighorn Sheepskin evolved again and created “dealerships” whereby a mall location or a city was offered to a dealer as a territory. This meant the retailer could sell sheepskin products exclusively in that territory. At the conclusion of the season, the company would buy back any unsold inventory.

Silverman recalls that the company’s runaway success prompted Entrepreneur Magazine to name Bighorn Sheepskin as one of its top franchises for five consecutive years.

Slippers to calendars

Silverman says he and his partner, Eddie Brasch, happened upon their next business interest independent of one another. While traveling the country during the holiday season visiting Big Horn Sheepskin franchises, they each saw the success of calendar kiosks and determined they could do it better.

They hired Marc Winkleman as a consultant because of his knowledge in book selling and calendars. In 1993, Winkleman became a partner in Big Horn Sheepskin and a new concept called Calendar Club. Winkleman, who was in charge of all the buying says: “I think people loved the images on calendars in homes and offices. It was a great price point for a gift and something that people would value for the whole year whether it was fly fishing, dogs or World War II images.”

A year later, the partners sold half the interest of Calendar Club to Barnes and Noble; this move gave them financial and marketing muscle. Despite the closing of the Barnes and Noble brand mall stores, called B Dalton, Calendar Club thrived until 1995, when Waldenbooks jumped into the calendar business with custom kiosks and temporary stores.

Three years later, Silverman sold his share of the business to Winkleman and has since retired to Big Sky, Montana where he teaches skiing in the winter and fly-fishes in the summertime. “Success of Big Horn and Calendar Club allowed me to retire in 1998 at 51 years old. I have been living the dream ever since,” Silverman says.

A friendly competition between Calendar Club and Waldenbooks “Day By Day Calendars” ensued as Waldenbooks used its permanent mall store locations as influence over calendar kiosk locations and renewals. Developers referred to these years as “The Calendar Wars.” Bill Anderson, former Director of Real Estate at Waldenbooks, says: “No one could compete with [Waldenbooks] because we were a large corporate entity and were able to use our infrastructure to run the business.”

“It was very frustrating,” Winkleman recalls. However things looked up again in 2002-2003, when partner Barnes and Noble began opening stores in regional malls and the pendulum swung again.

Kiosk designs have evolved over many years and Calendar Club has developed a “Super Calendar Store” which includes gifts, games and toys, in addition to calendars. Winkleman says calendar sales are not what they used to be because PDAs and cellphones have taken their place. Today online sales comprise 
20 percent of Calendar Club’s revenues.

Winkleman continues to grow the business through smart acquisitions and has expanded to Canada, Ireland, Australia and New Zealand. In an ironic twist, Borders, Waldenbooks’ parent company, recently declared bankruptcy, and Winkleman recently purchased 
Day-By-Day Calendars from Waldenbooks. He plans to operate between 1,700-1,800 locations around the world selling calendars, games and toy concepts.

Calendar Club’s retail brands now include Calendar Club, Go! Games, and Go! Toys. The company still uses operators who are invested in a location. “For people willing to give it their all, they can earn a good income by being in business with us,” Winkleman says.

Christmas cheer

In 1980, Todd Swiler was regional vice president for Flower City, when he and his partner, Al Schneider, considered opening Christmas-themed stores in malls in Minnesota. The birth of Christmas On The Mall was an exciting concept for developers who had both vacant inline space and interest in filling a niche in the shopping center.

“We imported all of our own product. We had the ability to develop proprietary product; and we understood the big sales were driven by artificial trees, wreaths and garlands and most of our competition stayed away from these categories,” Swiler says.

Originally, there was little competition for Christmas stores and products until most department stores joined the fray and seized the opportunity to lease space. This competition drove rents up and Christmas On The Mall couldn’t compete because of the costs of goods, shipping and travel costs. As a national player, the retail margins were gone.

Asked what it is like when a retailer has to change directions, Swiler says, “Personally, it is very hard, but every retailer thinks they have magic in a bottle. When you start to see that magic is everywhere, it is time for the retailer to reinvent [himself] to be successful.”

Swiler believes all products have a five-year life cycle and a time comes when you have to make significant changes. He points to the cellphone accessories industry as an example. “They can’t stand still—they are always looking to price differently or bring in new products—the consumer has to see new. You cannot stick your head in the sand or you will get run over by a train.” Swiler is now in the furniture business. He works in the senior management team with Ekornes, a Norwegian company that designs and manufactures “stressless furniture.”

Glowing hot sales

During the late 1980s another popular product made headway in the specialty leasing business when Natan Hatzvi, an electrical engineer, discovered a wax candle-making process and brought it from Israel to San Diego. It was there that he met real estate entrepreneur, Ross Provenzano. Together they formed The Glowing Candle Factory in 1989.

Every candle was different and looked like a stained glass window when lit. “Carts were the foundation of our business,” says Provenzano, “and Natan was one of the first Israelis in specialty retail.” Ross and his partner initially owned and operated 12 carts themselves. Their first year-round cart was in Horton Plaza in San Diego. Ross ran the operations side of the business and Hatzvi, the manufacturing.

“When we realized we could make a year’s salary in two months we knew we had a hit,” Provenzano says. As the concept gained popularity, the duo hired owner-operators and supplied candles to over 300 locations. Eventually the company sold products to Wicks ‘N Sticks, BJ’s Warehouse and as gift-with-purchase promotions. As with most products, the candles too ran their course and after eight years, the concept had been reproduced in China less expensively. When Hatzvi was killed in a freak accident at their manufacturing plant, Provenzano sold the factory to a supplier from Israel and he took a year off. “Natan’s death was a sad ending to a good story,” Provenzano says.

Today, Ross Provenzano is a principal in Provenzano Resources, Inc., a specialty retail leasing consulting firm. He formed it in 1996 and teamed up with Deborah Kravitz who had managed national leasing for Glowing Candles.

The early years of specialty leasing included many great concepts including Metabolife, Nature’s Jewelry, Swiss Colony and Hickory Farms. All were spearheaded by motivated entrepreneurs. Barry Silverman puts it this way: “Specialty retailing provided a laboratory in which we could experiment.” The many individual successes and the phenomenal growth of specialty retail is a testament to this business idea.

Selling Self Esteem

Another specialty retailer of note was Max James, CEO of American Kiosk Management, who brought products like Metabolife and Proactiv into the specialty retail arena.

Metabolife was a dietary supplement product that exploded onto the specialty retail scene in 1997. Independent distributors, through a distribution system referred to as network marketing, originally marketed Metabolife directly to consumers. Network marketing, also known as direct selling, referral selling, pyramid selling or multi-level selling is when a company employs a marketing strategy in which the sales force is paid not only for the sales they personally generate, but also for the sales of other people they enroll to sell the same product or service. This creates a line of distributors with multiple levels of compensation. Several network marketing retailers including Avon and Tupperware use carts and kiosks to sell their products.

After a successful start for Metabolife, the decision was made to allow individual distributors to sell the products on carts. The sales from Metabolife’s carts were astronomical—bringing in an excess of $75,000 in monthly sales at some locations. Customers seeking quick weight loss bought the product and every developer with a Metabolife cart or kiosk loved the stellar performing specialty retail product.

Max James, who was Metabolife’s pitchman, brought another hit product on to the scene in 2002. Guthy-Renker, a direct response marketing company allowed American Kiosk Management to beta-test Proactiv, a line of skin care products. James grew the concept from one location to 40, and was then invited by Guthy-Renker to form a partnership. Here’s an interview with Max James about the venture into specialty retail:

How did you get your start?

I had been involved in a couple of nutritional supplement companies that used the network marketing form of distribution. My attorney called to tell me that there was a new company in that venue (nutritional supplements and network marketing) in San Diego that was looking for a CEO to take it from the then current level to about $40 million forward. I had no experience running a network marketing company, and did not really want to move in that direction, but I went to meet the three owners anyway. It was obvious to me that it was not the job for me and I told them that I had no interest in the position. They suggested that I might want to look at a new methodology that they had just begun, allowing their independent distributors to sell the product at retail. In the network marketing industry that was considered a cardinal sin, e.g., allowing a retail establishment to compete with the distributors. When I expressed that concern, they suggested that I take a look at the few locations that they had authorized.

I asked them how much it would cost to set up such an operation. They told me about $5,000. That did not seem a large enough investment to yield very much of a return. But I asked them what the $5,000 bought. They responded that about $1,500 for one month’s rent, $2,000 for product and the rest for a month’s employee pay. And that if it didn’t work, they would take the remaining product back.

The next question was how much their beta test locations were earning. They told me that all 15 or 20 locations were [making profits of] $10,000. I’m afraid I chuckled and asked them if they expected me to believe that I could invest $5,000 and earn $10,000 annually. The answer was “No, that amount per month!” I decided to check out several of their cart locations, and was blown away when I discovered that every one of the carts were making closer to $20,000 per month.

I ended up with 84 locations, a few with individual partners. And the profits were enormous. One example I remember is a location in Nashville that sold over $150,000 of product in one month.

What was the idea that fueled this niche?

First, weight management products have a huge potential market size. Second, the real success was product branding in each regional market. The company would run heavy radio advertising in a regional area, with a disc jockey first trying the product, losing a few pounds, and then taking live testimonials on the air (and some recorded testimonials). When the direct response sales reached the point where they were covering the costs of the radio time and the disc jockey talent fees, then distributors were allowed to open retail locations in that radio market area. So the typical first question at the carts was, “Is the same product that I heard advertised on the radio?” Some of us became a bit too aggressive and opened in shopping malls where the regional advertising had not begun. It didn’t work.

Where do you stand now? Where are you headed?

The recession of the past few years hit consumer disposable spending very hard, and had a negative impact on our sales. We replaced many of our “manned carts” with automated retail equipment (robotic kiosks). These machines allowed us to continue to profit in these locations, even with considerably lower sales. We will continue to open new locations with these automated retail units.

The second cause of the reduction in manned carts was the ever-increasing rents charged by the shopping malls. This fixed base plus percentage of sales rent rate cut the profits substantially, often resulting in significant losses. (Editor’s Note: Rents can differ for manned verses unmanned carts mostly because the sales production can be less when a product or service is not demonstrated. Often robotic kiosks are located in bump-backs rather than in main thoroughfares where rental rates are less.)

We will continue expanding manned carts into recovering malls as the recession wanes and consumers have more disposable income.

What were you motivations for getting into the specialty leasing business?

The most obvious reason is the opportunity to build a sustainable business model that would produce significant profits. The old saying, “If you can bake a dozen cookies, you can bake a dozen cookies”, meant that the model was [reproducible]. Many [malls] were large enough to support the foot traffic which we needed, to be successful. That gave us scalability.

The first product line had a universal appeal—weight management. The most successful product line offered the customers respite from what often is a debilitating condition, acne. Our theme was not to sell products, but to offer self esteem to our customers.

We experimented with seasonal products, e.g., Christmas seasonal products. We found that this was not our niche, though we had a few successful beta tests. Hiring employees for a few short weeks, managing unsold products, and terminating all the employees was not a business model that we chose to pursue.

What other types of products are you testing?

We continue to look at many products, including weight management product lines. We have beta tested them at a small number of locations. We have looked at everything from a high-tech unique musical instrument to cosmetics to physical fitness programs and even laser hair removal. Only one, Sheer Cover, has proven to have sustainability in our distribution venue. Sheer Cover is 100% pure mineral makeup owned by Guthy- Renker.

Are you sticking to the “self esteem mission” of your company?

We are hopeful that we will find another product line that allows us to do so. Certainly weight management would fall into that category.

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