For more than two years, direct marketing stock pickers have trumpeted the advantages of buying shares in business-to-business companies rather than stock in consumer DMers. An analysis of the price performance of B-to-B DM issues over the last two years indicates that the cognoscenti were correct-though on a more limited basis than many market watchers may realize.
For the 12 months ended April 30, 1998, the average stock price of the 32 publicly traded business-to-business direct marketing companies increased 62.9%. Over that period, consumer direct marketing stocks recorded average price gains of 45.5%.
The Standard & Poor’s 500 increased by about 36% during those 12 months. (Gruppo, Levey & Capell Inc. has added PC Connection to the B-to-B catalog segment of its GLC Portfolio, bringing the total count to 25 catalog and seven marketing companies.)
The recent performance among B-to-B marketers has enabled the segment to approach the results turned in by consumer direct marketers over the last two years. From May 1, 1996 to April 30, 1998, the stock prices of B-to-B direct marketers increased at a compound annual rate of 32.7%. Business-to-business companies’ two-year performance led the consumer sector, which over the same period saw stock prices rise at a compound annual rate of 15.8%. These results surpassed the 30.4% average annual return of the S&P 500 during the same time frame.
(The two-year return reflects the performance of only 28 business-to-business companies and 37 consumer companies; four B-to-B companies and 15 consumer direct marketers in the GLC Portfolio have been trading for less than two years.)
But the one- and two-year market returns of the GLC Portfolio’s B-to-B segment masks widely divergent results in the catalog and marketing sectors. Catalog marketers have experienced generally weak results the last two years. On the one hand, stock prices in the sector have increased at a compound annual rate of only 4.3% for the two years ended April 30, including a 35.4% hike for the most recent year. On the other, business-to-business marketers using a multichannel strategy recorded a 94.4% compound annual price increase for the 24-month period, including a 161.4% gain for the most recent 12 months.
The marketing sector’s gains, moreover, were concentrated in a handful of computer-related stocks. Since it came perilously close to running out of cash three years ago, Dell Computer Corp. has incinerated the market, including a whopping 1,308% price gain for the two years ended April 30.
The computer hardware assembler and marketer has successfully employed a marketing strategy that integrates direct mail, telemarketing, space advertising, the Internet, online services and a sales representative network to maximize customer contact and loyalty. The other three market leaders-American Power Conversion Corp., Gateway 2000 Inc. and Insight Enterprises Inc.-have developed and executed a marketing strategy similar to Dell’s, with comparable financial results.
It’s interesting to note that if Dell is factored out of the one- and two-year averages for stock performance, the B-to-B segment’s results fall significantly-to 43.3% for the last 12 months and to a 14.2% compound annual rate for the last two years.
The contrasting fortunes of business-to-business catalog and marketing companies points to two business tactics that catalog companies should consider to improve results. For one, catalogers may need to develop stronger brand identity for their catalogs and products; most of them have little or no private- label product, and thus they compete on price for the most part. Price competition and discounting generally lead to brand erosion and product commoditization. This, in turn, conditions the shopper to look for the best deal without regard to the source.
Development of a proprietary line of products could enable many of the catalogers to increase margins and brand loyalty. Second, B-to-B catalogers should examine whether they need to develop a multichannel marketing strategy or to expand the one they already have in place.
The successful implementation of this strategy by many B-to-B marketing companies could serve as a lesson and a primer for those considering multichannel marketing. In fact, of late the best performing B-to-B catalogs have been Black Box Corp., Henry Schein Inc., JLK Direct Distribution and MSC Industrial Direct.
Industrial firms have expanded beyond catalogs and into some combination of telemarketing, field sales and online selling to increase customer contact and build brand awareness and loyalty.
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