By Cecil Hoge
In 1985 I was frustrated with the state of our family business. Our two businesses, Panther Martin fishing lures and Sea Eagle inflatable boats, were both making some money. In retrospect, we were doing quite well. But that was not how I saw it. Being young and by that time, somewhat ambitious, I thought our business should be doing better, I thought the sales should be higher. But how? That was the problem.
At the time I was on my annual European trip, about halfway through, I just arrived in Paris, comfortably ensconced in the Hotel Lutetia. For those of you who do not know this hotel, it is a well-appointed 4 star hotel located on Boulevard Raspial, on the left bank of Paris. While it is not the best hotel in Paris, it definitely falls into the very nice category, being a kind of ornate arte nouveau building with tall ceilings, comfortable beds and well stocked minibars. It is also a relatively short walk to the Left Bank student section of Paris with thousands of little cafes – quaint and crowded with impoverished students, well-heeled tourists and Paris evening goers.
Since I had just gotten in from Charles DeGualle Airport and had nothing scheduled, I was simply looking to take an afternoon break and ponder my possibilities. I had just come from Milan, taking the flight over the Swiss Alps into Paris. The flight, as you may know, is not very long and the transition from Italy to France was, as usual, quick and jarring. Considering each country regards itself as the premier provider of great food and drink, it is very easy to be over-fed and over-served. In Italy, my fishing lure supplier and my inflatable boat supplier both made great efforts to give me the best meals and the best drinks of my life.
I can tell you after six or seven days of the best meals and best drinks of your life, you want to take a break. You want to take it easy, have a simple meal, have a couple of glasses of wine and then to bed. That was my plan for the remainder of my first day in Paris. I had planned on this trip to keep some time open to ponder my opportunities and my options. For this reason, I had left myself with a 4 day gap in my business meetings to hunker down and hang out in Paris.
So immediately after appropriating a Kronnenbourg from the minibar, stretching out my legs, flicking on French TV which appropriately was covering the French Open, I began to ponder – what was I going to do? Not wanting the thought to go away, I immediately replenished my beer and resumed my pondering. Hummh, it was too early to go to dinner and I did not feel like a nap. And so I did what I always do when I had some time in Europe. I finished my beer, got up, took the elevator downstairs and walked out on to the Boulevard Raspial.
Immediately, I instinctively headed toward the student section to see what was happening. It is really more an evening place, but there are still cafes with people sitting and sipping coffees, aperitifs and beers. I just kept wandering, walking aimlessly down streets I did not know. Since I had stayed at the Hotel Lutetia 3 or 4 times before and was already familiar with most of the surrounding areas it was not likely I would get lost. After about an hour and half of wandering up and down different quaint streets, I headed back to the hotel with the thought I would rest up for an hour or so and then go out for Steak Frites, some mellow red and then maybe listen to some music at a nearby cafe. That was my plan. That is almost always my plan when I hit Paris with a few hours to spare.
On the way back, only a block from my hotel, something caught my eye in a drugstore. It was a small cardboard figure pulling a strange spring device. There must have been some kind of electric motor which manipulated the strange spring device backwards and forwards, pulling it out and then letting the springs pull back. Since I could not read the French placard, which I assumed was explaining the merits of the product, I could not understand completely what I was looking at, but the moving figure held my eye. By and by, I realized that the spring device, which had a footrest, a handle and 3 springs, was some kind of exercise device. Moreover, I realized that it’s principle benefit was that it supposedly reduced the size of your waist. That was enough to sell me.
Coming at that time, when I was just off a plane, exhausted after a six days of the best meals and drinks of my life, the opportunity to reduce the size of my waist sounded like a truly excellent idea. So I dashed into the drugstore, purchased the strange spring device and was completely amazed. After I did the math (converting francs to dollars), I realized that it cost just $15. This was truly a dream come true. The opportunity to reduce the size of my stomach for just $15.
I have to say my original intent was simply to alleviate the bloated feeling I had after 6 days of glorious pasta and vino in Italy. So I took my new exercise device back to my hotel room and immediately tried it out. I must say I was impressed. It duplicated, as far as I could tell, the beneficial exercise of rowing. After about 30 minutes of working out, I began to realize that I was getting hungry. That was fine because by this time it was getting dark and it really was dinner time.
I went out again onto Boulevard Raspial, turned left and headed back up to the student section on the Left Bank. I found a little sleazy student restaurant where you could sit outside, ordered steak frites and une verre vin rouge. After about 20 trips to France, my menu French had become almost good. With a simple meal and two more verre vin rouge, I came across a genius idea. Maybe, I could sell that thing – the strange exercise device with 3 springs.
Now some people might consider even supposing such idea was premature. For one thing, I did not know who made this thing. I had no idea whether whoever made it would sell it to me. But, no matter, I was my father’s son. I had the idea and that was enough. Later that evening, when I went back to the room, I pulled out the strange device and looked at the box it came in. Here, I was frustrated because I was hoping to see the name, address and phone number of the manufacturer, but there was nothing on the box. Only inside the box did I notice some writing on a tiny piece of paper that said “made in Italy”. That really pissed me off. I had just come from Italy.
Now it happened that I was scheduled to meet with my fishing lure supplier in Denmark the next week at a fishing tackle trade show there. So I formulated a new plan – I would ask my Italian fishing lure supplier to find out who made the exercise device. And that is what I did and by and by, my Italian supplier came back with some information, Italian Style. You see it was the end of July and the sacred period of August vacation was approaching. So my supplier dutifully promised, after the sacred period of vacation passed, to get me the name of the people who made it. And that is what they did. Only they did not get me the name of the actual supplier, they got me the name of a company who they thought made it.
Now it was September of 1985 that I got this name. This was still the period of the telex – before the time of faxes, before the time of e-mails, even before the time of cell phones. Fortunately, because we had been an importer for over 20 years, we had recently installed a super high-tech clunker typing machine, aka the telex. The way this kind of machine worked is that you typed a message, kind of like a telegraph, with a keyboard instead of tapping out dots and dashes (at least, that was an advance). Usually, you would send a telex in the afternoon and the next morning, maybe, just maybe, you might find answer. This was the apogee of international communications at the time.
Sometime on an early September day, a telex rumbled in (it really clanked more than rumbled) and we got a message from our lure supplier – “we think these are the guys” – and then it listed a name and a telex number. Wanting to jump on this right away, I clanked out a return message to the new telex number – do you make that strange 3 spring device?
The next day a new telex clanked in – “No, we are not the guys, but we know who the guys are – try this telex number.”
So that is what I did – I sent a new telex to the new telex number, asking if they made the strange 3 spring exercise device and, if they did, how much it cost.
The next day a telex came back asking why do you want to buy the device? I then replied with a little more detail, saying I had no idea if I could sell it, but I wanted to run an advertisement for it and if the advertisement worked I would buy 2,000 immediately. That is, if they had 2,000.
They came back and said, Yes, we have 2,000 – the price is $2.18.
I came back – I will buy 2 – tell me where to wire transfer money, send the 2 by air and I will photograph and write an ad.
To be kind to the guys who made the product, as I was later to learn, they were very advertising and promotion savvy, so they really understood immediately what I was trying to do.
From here the story gets really complicated. They flew exercise 2 devices over. I photographed the device with somebody far more buff than me using it. I called the device “The Stomach Eliminator” and my ad copy focused on the fact that it was a portable exercise device you could use anywhere. It went on to describe the many benefits of the product – great exercise, fits in any travel bag, goes wherever you go and can be used anywhere with enough space to pull on it.
I decided to run my first ad in the East Coast edition of the Wall Street Journal. I knew this was a responsive medium because we often advertised our boats there. The deal was pretty simple. The ad cost $1700 for running one day in the East Coast Edition, our selling price per unit was $24.95 and we needed to sell at least 150 Stomach Eliminators for it to pay out. Since we had an 800# in the ad, I also knew I needed to get at least 10 orders by phone on the first day. If we got 10 or more orders the first day by phone, we could safely assume that we would do 20 times the first day’s phone orders. Then, if that happened, I would telex Italy, order the 2,000 Stomach Eliminators, wire more money to them and start scheduling ads. That was the plan.
Now, I have to say that many times we had run ads in the past and many times they had failed or broken even or just made some money. So, at that time, I was not personally familiar with a true mail order success. A truly successful mail order ad is defined by making at least $1 for each dollar spent on the ad, after all other costs – i.e. product, labor, shipping, etc. A really successful ad can make $2 or $3 for every ad dollar spent.
In our regular business, we were able to run a schedule of ads for our fishing lures and our inflatable boats because we had the base of existing businesses. So, the trick in our two traditional businesses was to keep our ad costs to a small percentage of overall sales. This was relatively easy to do, but making money right out the gate on a stand alone ad – that was relatively rare and really hard. So, while in the past, I had some close successes, none were truly stand alone self-driving mail order successes.
But the Stomach Eliminator was to be my first true mail order success and maybe my only true mail order success. The story of what happened is remarkable. The first day we got 18 phone orders. On the basis of that, I wired the money for first 2,000 Stomach Eliminators and within 3 days they sent the first 2,000 units by air. One week later we had the 2,000 Stomach Eliminators. Since this was already September of 1985, I knew I had to move fast. On the basis of my first ad, I scheduled a full run in the Wall Street Journal the very next week – at the time there were four editions – East, Midwest, Southeast, West. I also scheduled the New York Times Sunday Magazine, the New Yorker, Smithsonian, Natural History, And, in a really gutsy move, I took a 1/3 of page on the masthead of Time Magazine – that was a very visible, far forward position that usually did very well for our boats.
I must remind readers that this was a time when print media was actually read and was actually effective. By the end November, we had already grossed $50,000 in sales and were flying in 10,000 more, at a clip of 2,000 Stomach Eleminators a week. By the end of December 1985, we had done $100,000. By the end of 1986, we had done $4,200,000. At that point, we had dropped the price to 19.95 and were taking in a 40′ container a month – each container held 10,000 Stomach Eliminators. All of this gathered momentum and in 1987 we sold another $4,600,000 of the strange 3 spring exercise device. In 1988, we sold another $4,200,000. In 1989 we sold less than a hundred thousand dollars of the Stomach Eliminators and were trying to exit the business as fast as we could.
By that time we had sold 770,000 Stomach Eliminators.
You might be asking yourself, what happened? Why did we want to get out? Why did sales fall off so sharply? Well, you could say my experience was kind of like the sub-prime housing bubble. When it was going up, it seemed like it would never stop. When it began to slow down, it seemed like it was only a temporary problem. And when it collapsed there was a sudden and incomprehensible realization that it had all gone to hell. I might use a more forceful expression, but I am trying to keep my blog reasonably wholesome.
So what really happened? Well, first my print ads were doing great and we were making money hand over fist. Then we got the bright idea to make and run 2 minute TV spots. At first these did not seem profitable, but after some rewriting of the copy and then lowering the price to $19.95, the TV ads starting making money hand over fist. That meant, by the way, that we had to lower the price of The Stomach Eliminator in our print ads to $19.95. Then, a competitive product began appearing in ads and on TV. Strangely, the first result from the added competition was that our prints and our TV ads did even better.
Before recounting the collapse, I would like to mention some aspects of the success. As soon as it became clear that we had a hit ad, we began to gear up to handle the inflow of orders. There were many aspects to the new situation. First, we had to hire more people. That is something we did almost week to week. We started out as 26 people, but almost immediately we added an extra ten people to take orders on the phone, to type in orders on the new IBM 36 we had recently gotten and to pack and ship orders during the day.
In the first two and half months of the introduction of this product we sold 5,000 pieces of this new product or just over $100,000. That was pretty good when you consider only four months before I had seen the product in a drugstore around the corner from my hotel in Paris and was sipping some red wine when the brilliant idea came to me to try to sell it. But the first two months of sales were small compared to the next month of January 1986. We sold 10,000 units in that month alone. By that time, we had a new night shift in order to keep up with typing in orders and shipping orders, not to mention one very crowded office during the day to keep up with the taking of phone orders and the typing in of those orders on the new IBM 36.
About three months before selling Stomach Eliminators, we had a Data General computer that was struggling to keep up with the regular orders for lures and inflatable boats. So before my trip to Europe we decided to go for what was, at the time, a newer state of the art system. This was an IBM 36. This did prove to be a pretty stout machine once we got it working. The problem was that it took about 3 years to get it working.
When we listened to the smooth sales talk of the IBM sales rep and of the software “company”, Pat Pepplar and Associates, it sounded like we would be up and running in 30 days. On the basis of these glowing sales pitches we took the leap. By the time I got back from Europe the IBM 36 had been in place 3 months and still was doing a decent job of handling our lure and boat orders. In retrospect, it was the right thing to do, but the 3 years of agony to get the thing working seemed pretty onerous.
When we started inputting the orders Stomach Eliminators, the brand new IBM started to retrogress. I will say that it accepted orders and it spit out shipping labels like a champ. That was not the problem. It was all the other things that a computer has to do that was the problem. Keeping track of inventory, calculating currency conversion costs, foreign duties of 3 different ranges of products, calculating sales of individual ads, keeping track of inquiries, ad costs, showing profits or losses of individual ads and individual segments of our three businesses and actually adding it all up together and generating an income monthly statement. These were all additional things that the new computer system was supposed to do and, in the first six months did not.
No matter, we were selling stuff faster than I ever knew possible. It was an extraordinary experience. Each month I would schedule new print ads and make projections of expected sales and each month I was wrong, but wrong in a good way. Because each month the sales were higher than I had projected. I had, by that time, been projecting ad sales and trade sales (sales from customers who bought from us) for over 10 years and the one thing I could almost always be sure of was that my projections were wrong, but generally they were wrong in a bad way. That was because I almost always projected higher sales and they were almost always lower. It may be that I am a naturally optimistic person. That is, until I started projecting Stomach Eliminator sales. Then my projections were almost always wrong, but in good way, because the sales were almost always higher than I projected them. This was truly a first for me.
So by January 1986, we were already in the brave new world of mail order marketing, struggling with logistics of taking orders fast enough, hiring new people almost everyday. In January we had sales of $250,000 of Stomach Eliminators alone, not including fishing lure or inflatable boat sales. Since January is a slow month for both fishing lures and inflatable boats, this meant that as of January, the Stomach Eliminator had become our principle business. February and March, the same situation pertained because sales of the Stomach Eliminator were even higher. That was to continue for almost 3 years.
In March, 1986 the software company, Pat Pepplar and Associates, were still taking up space on our premises just as it becoming clear that we needed still more people and the miracle computer system was not yet up to snuff. As matter of fact, it was barely working. The crack software company kept saying it would the next Wednesday or Friday that it would be up to snuff, but while Wednesdays and Fridays came with great regularity, a fully working computer did not. I have to admit over the weeks and months that came and went, things did get better. Pretty soon it was adding up sales and spitting out results. The computer was far from telling us what it was supposed to, but it was telling us some things and what was clear was that we were selling a hell of a lot of Stomach Eliminators.
By May, I was getting ready to wind down our 8 months of selling exercise devices. Everybody we knew in the sporting goods business, and we knew a lot of people, told us exercise dropped dead in the summer. So that is what I was planning for, but by this time we had made our first TV commercial, finding a couple of models who looked fit, flying them to Lancaster PA to make the commercial at a local TV station. The first TV ads we ran did not do very well, but we kept testing, kept messing around with the copy and we lowered the price to $19.95.
And then another weird and unexpected thing started to happen. Just as the print ads started to fall off, the TV ads started to work. And when I say work, I mean really work. This was my first introduction to the intoxicating world of TV ads and I soon found out, that if they worked, they could work in an incredibly fast way. The thing about print ads that you had to schedule them one or two months ahead of time. Even newspaper ads took one or two weeks to run. But with TV spots they could run the next week. In fact, they could run the next day if the TV station had the tape to run.
The other thing about spot TV ads that I learned that all costs could be negotiated. TV stations have a problem, often TV station and TV networks had airtime when no ads were running. That meant they had open time that was bringing zero income, so if someone could give them some income for that time, any income, that was better than zero income.
I did not know any of this before I began, but we got some good advice along the way from a gentleman named Malcolm Smith. He had been first an employee of my father and then a partner of my father and over the years, after he learned the trade, he had sold hundreds of millions of dollars of records through TV ads. You could say he wrote the book on TV ads. So, with the advice of Malcolm Smith, we were able to learn a lot of the ins and outs of TV advertising and it was a whole new world for me.
At first we had just one guy, George Clay, the nephew of Malcolm Smith, buying spot TV ads. George and I wrote the first ad on the Stomach Eliminator and George scheduled the first test. As I said, originally they either broke even or lost a little money, but because we were doing so well in print advertising, we kept testing.
It turned out that the key to successful TV ads on the Stomach Eliminator was the $19.95 price with free shipping on a COD basis. That meant we got orders from TV ads for Stomach Eliminators and we sent them out COD though UPS and the UPS delivery man would collect the $19.95 before turning over the goods. While this proved incredibly successful, there were a couple of problems with the process. Often the customer refused the shipment because they did not have the money, often the customer was not at home and often the customer did not remember even ordering the product.
No matter, despite the above problem, selling Stomach Eliminators on a COD basis through TV ads was incredibly successful. That is not to say that there were no problems with this method of sales. One problem was these goods started coming back almost as soon as we started selling them on TV. We solved that problem by repacking Stomach Eliminators at night everyday they came back and that turned out to be everyday we were open. Another problem was the fact that the brand new IBM seemed to have grave difficulty figuring out what UPS owed us. It had one number, UPS had another number. That problem came back to haunt us just as the great explosion of sales was collapsing.
So in the summer of 1986, just as I was expecting to take a relaxing vacation, sales of the Stomach Eliminator began to really soar. Instead of selling 10,000 a months, we zipped up to 20,000 at month. That’s $500,000 a month of cash sales on a product that we only started selling 9 months before. Again, I was in a strange new country. I was used to projecting sales each and every month and I was used to those projections being down. Now after 9 months of being up, I was getting a whole new feeling. I was in control of my destiny. I could dial the sales I wanted. Yes, I truly felt like those bankers creating all interest mortgages – there was no need to worry about anything – I was in a position to create my own sales, write my own ticket.
Things really started getting exciting from that point. I started flying back and forth to Italy, first meeting my new supplier, then visiting regularly going over future plans for world domination. It turned out the “guys” who made the Stomach Eliminator were two old-time school buddies. One was the sales guy – his name was Massimo – the other guy was the genius inventor – his name was Allessandro. I have to admit these guys were pretty cool. They were two young guys in their thirties and they were located just outside of Milan. That was perfect for me because I had two other suppliers within 40 miles of Milan. One, my long-term fishing lure supplier, was located in downtown Milan, our other main inflatable boat supplier, was located in Varese, about 40 miles from Milan. So, whenever I came to Italy, I could visit all three suppliers and have the best meals and best drinks of my life that you can fit into 7 or 8 days.
Because Massimo and Allessandro made a whole range of exercise equipment, I set about creating a whole line of portable exercise equipment to sell in the U.S. under the name GoGym. By this time, I was convinced that I had stumbled on the fountain of youth and my new found success was only beginning. I was ready to build an empire and that is what I set about.
In retrospect, it is wise to consider the base upon which you are trying to build an empire on. Such thoughts never entered my mind. I had created sales out of nothing. It seemed self-evident to me that I would succeed in every new endeavor thereafter. That did not turn out to be the case.
What happened is that we sold an incredible amount of Stomach Eliminators and some other exercise equipment along with it. We started attending lots of trade shows. I started traveling and attending trade shows around the country and around the world every two months. Our little company of 26 people went to 110 people fairly short order. We ran day and night shifts so we could ship all of this new business out of our Long Island warehouse. Since we also had a warehouse for our boats in Milwaukee, Wisconsin, we started stocking and shipping Stomach Eliminators from there.
I hired a national sales manager, a man recently employed by the then failing Montgomery & Ward Company. His name was John Newicki and he proved very professional at his job. He managed to get us Sears and Roebuck, Montgomery Ward, KMart, Sports Authority and many other retail chains of the time as customers of the Stomach Eliminator. Soon we were doing a large trade sale business with the Stomach Eliminator in addition to our direct marketing sales.
All of this activity was nothing, if not exciting. Even my father, who had never been very impressed my selling capacities, came to me and said, “Thank you for making our little family enterprise bigger.”
My father had many such mail order successes in his time so it was not surprising to him that we were enjoying a mail order success, it was just surprising that I had not done it sooner. My father, in strange and noble gesture, had passed the ownership of the company to me and his wife in 1976. He went off to write books on Mail Order Marketing, with which he had some major success. In the meantime, he had been looking at our business wondering when it would finally get going.
Well, I finally did get it going and new things were happening everyday. To accommodate the need for more office space, we added new offices. To accommodate the need for more warehouse space, we added more space in Milwaukee.
In the summer of 1986 I was so excited by the new business we were in and in the success we were enjoying that I made the decision to go ahead with a major house renovation which was supposed to cost $45,000. To make this convenient for my family, I rented a 5 bedroom house for the summer. Like many initial quotes for rebuilding, it ended up costing a little more than I had planned for. After a year or so of the builder asking me to give him $5,000 to $10,000 a week, I had to tell him to stop. By that point, we were about $145,000 into the project and only about 2/3 thirds through. So much for house building.
I can say not all of my success was frittered away, even if it was soon to collapse. I did some things that in retrospect proved to be good for our future and future survival. I did spend more money in advertising both the lures and boats. That helped their sales. I invested in a plastic floorboard system for our inflatable boats that we still sell around the world. So not all was wasted.
So what brought it to a rattling fine conclusion? Well, a few problems began to surface. A competitor emerged who began to sell a similar exercise device. That was called The Gutbuster – not a bad name if I do say myself. They started selling on TV and print and they were even more successful, even if they copied us. We found later that according to the Federal Trade Commission, they sold over 2,000,000 units of a 1 spring copy. It was not as good as a device as ours, but it had a catchy name and it sold better.
Then another thing began to occur. We began to get some complaints of a spring breaking on one of our devices. This did not occur often. In first year or so we got less than 10 complaints of a spring breaking on one of our Stomach Eliminators. The thing was that when one of the springs did break, sometimes, just sometimes, the spring came back and hit the user in unfortunate places. Sometimes, on the arm, sometimes, in the face, sometimes in the groin area.
I had no way of knowing that would become a big problem at the beginning. It seemed like our new product either appealed to guys who liked to exercise in the nude. I never really found out why. What was clear was that some guys liked to exercise in the nude. That proved to be unwise if a spring happened to break and spring back, as springs can do sometimes. And sometimes the spring that snapped hit in an unfortunate place.
Our company’s experience with product liability had been faultless up until that point. We had sold literally millions of fishing lures and tens of thousands of inflatable boats with absolutely no insurance claims. So, it never occurred to me that this new product, which I had already been faithfully using for over a year, would have some kind of liability problem. Pretty soon we would get these stray letters from people who had a spring break and who had gotten hit in some unfortunate place. Again, these cases were really rare. In the first year and half, after selling over 250,000 units (i.e. a total of 750,000 single springs), we got maybe 15 cases of people breaking a single spring and 5 cases of people hitting themselves with a single spring.
Naturally, we spoke to our supplier. They assured us that they would eliminate any weakness in the production of springs that could occur and we kept on selling. Meanwhile we started to get letters from our insurance company saying that maybe the premiums needed to go up. And that is what they did, but just modestly in 1986. We had been paying $40,000 for product liability and it then it went up to $92,000. That sounds like a big leap, but most of it was caused by the fact that our 1985 sales of $4,600,000 went up to $10,200,000 in 1986.
You would think that with the introduction of a competitor our sales would suffer. The opposite occurred – our sales increased in total units and in velocity. In fact in the fall of 1987 we sold over 100,000 units, literally 20 times what we sold in the fall of 1986. And that was just the beginning. In the winter of 1988, we sold another 200,000 units.
By this time our TV advertising program was getting into fourth gear. We had hired 3 other full-time TV media buyers. Their job was simple. Call every logical TV network, big city station (NYC, Chicago, LA, etc.) find out what time they had available and bid on it. We’d call and ask what they had available, we would tell the networks what we were looking to pay, they would tell us what they were willing to sell at. If the price and time seemed right, we would go ahead with the buy. At this point we were spending $5,000 or $10,000 a week on TV spots and we were selling $50,000 or $100,000 a week. And that was only on TV.
At the same time, I was scheduling more and more print ads. These were just repeats of the original third page ad (we did change the price to $19.95, but basically, we ran the same copy), either running in black white or color. We ran in prestigious publications, we ran in newspapers, we ran just about anywhere we thought we would make money. If the ads made money, we bought more ads in those publications. If they did not make money, we scratched them off the buy list and moved on.
In the middle of the summer of 1987, the TV sales escalated our sales when we thought they would collapse. It was then we took the extraordinary step to rent a 747 jet to pick up Stomach Eliminators in Milan. It cost $50,000 to rent the plane for the one flight from Milan to JFK, but since we able to cram 25,000 Stomach Eliminators onto to the plane, it only cost $2. per Stomach Eliminator. This was far more than sea freight, but still livable since we found ourselves with 15,000 Stomach Eliminator orders and no stock.
All of this reached an amazing crescendo in January of 1988, when we sold 100,000 units in just that month, or $2,000,000 in 30 days. On the first working day of January, we got an amazing 15,000 orders or $300,000 of sales on that one day. By that point, we had 110 people working day and night. About 60 during the day and about 50 at night. We were opening envelopes, typing in orders, packing orders, taking back returns from COD orders, unpacking the COD orders, repacking Stomach Eliminators and often shipping all of the returns the same day.
We had appointed one recently married young lady, I would guess she was only 24 at the time, and put her in charge of handling all of the people processing orders. Her name was Lori Michel and she had started in our business packing fishing lures about six years before. You would think that packing lures was not a very good education for processing hundreds of thousands of orders for our Stomach Eliminator and managing the 70 or so people who were doing the work, but it turned out she was perfect for the job. She still works for us today running our fishing lure business.
UPS trucks, container trucks were backing up to our two shipping doors day and night. Some dropping off, others picking up. It was exciting times for us. Stuff was moving. In the meantime, we had fired the hotshot software team who had claimed 9 months previously that our new IBM would be up and running and hired as their replacement an inveterate night owl techy, Terry. She was a kind of unique in that she would show up at 10 or 11 at night and work until 10 or 11 the next morning. Terry was single and fancy free. This might of worked for her but for the fact that she was working for several clients. So her time for a free roaming love life was very limited.
Terry came and went on different days and at different hours. Sometimes, we would not see her for days. Sometimes, we would find messages that everything was fixed. Inevitably, they were not. Sometimes, she would show up just as the computer was crashing.
I will say the IBM 36 was staggering toward figuring out all things we were told it would figure out in the first 30 days. And although the $15,000 that we had paid the first “software team” had migrated into $45,000 before we terminated their services and although we were paying Terry $2,000 to $3,000 a week, the computer was actually doing some very useful things. Keeping track of ad costs, ad sales, figuring out whether they were profitable, were all things the IBM did pretty well. Calculating how much money UPS owed us in COD and calculating whether we were making money overall were things that the now old IBM 36 was still having some difficulties with.
In any case, our sales program for the Stomach Eliminator was a moving train that had left the train station. There was literally no way to stop things. In 1986, we knew were making money and when our accountants did the statement for the year, they announced we had made over one million dollars on $10,200,000 of sales. In 1987, we were able to pop that up to $10,800,000. We were making money and growing faster than I had ever imagined. However, when our accountants did the statement, they determined we had made just a little over a half a million dollars. That was disappointing considering the fact our sales actually increased, but we realized that we had acquired a lot of extra unexpected costs, so we were satisfied that it was still a good year.
As you might imagine, when a business is growing at a very rapid pace, things are changing daily. One of the things that I did as our business started to explode was to hire an internal finance controller to keep track of our businesses and tell us how things were going. His name was Steven Kevey. He was a very nice Hungarian gentleman who had worked most of his life for New York Life Insurance as their controller. It probably should be said that roller coaster world of mail order was probably never meant to be his bag.
That said, one day he came to me quite concerned with a very serious and worried look. I remember I had been talking to one of our media buyers, going over that week’s buys when I felt a tug on my suede jacket. I turned around to see Steven with a deeply troubled face. I asked him what was the matter.
“I am very worried,” he said and I could see that from his face.
“Why,” I asked.
“I am very worried,” he repeated.
“Why?” I repeated, getting into the flow of things.
“Come with me,” he said.
I followed Steven over to a cabinet which he pointed at.
I looked at it and could not see anything very wrong.
“Open it,” he said.
I opened it and could see it was full of envelopes. It didn’t really register anything to me, so asked Steven what the problem was.
I could see that and came back with the proverbial “so?”
“They are all full. All the drawers are full.”
I looked at the other drawers below and sure enough it was true. I was now beginning to understand what he was getting at because they were all letters and I noticed the letters were not opened. It did not take me too much longer to deduce that these were unopened Stomach Eliminator orders.
Anyway, I called over Lori who also looked at the draw and also said, “so?”
After only six years in our place, three of them packing lures, Lori was already old school mail order.
“How long, I asked.”
Lori eyed the three draws. You could she was computing.
“4 days,” I could see the young 24 year old was guessing as to the number orders in the 3 draws (let’s see that looks like about 5,000) and then dividing by 1200 (the number of orders we were manually processing daily at that time). Voila, 4 days.
At that moment we both turned to Steven and asked “So, what’s the problem”.”
The problem was this very nice gentleman was used to the insurance business and they never had 3 draws full of anything unfinished and this was very, very disturbing. For me, I was kind of happy. That was what we call a backlog. The only thing better than having a ton of orders is having a ton of orders to process on top of the ton of orders you were processing. That was good. Of course, it meant more overtime, some extra people. I figure the guess of 5,000 orders those 3 draws was pretty accurate, meaning there was about $100,000 of checks or credit card orders in those three draws. It was very exciting for Lori and me, but not so much for Steven.
In the end Steven’s instincts were right. It all did go hell in the next 18 months, but it did take a while to fall apart. First, we started getting more pictures of people who had hurt themselves. Then grim letters started arriving from our insurance company saying the we had to pay immediately higher premiums. Our annual premium migrated from $40,000 a year to $92,000 to $250,000. Now there were about 25 cases of people actually hitting some part of their body with a single spring that had broken. By the spring of 1988, we had already sold about 500,000 Stomach Eliminators with 1,500,000 springs.
But that was only one of several things going wrong. By this time, our competitor, The Gutbuster, had sold 1,000,000 of their devices. And those devices had real quality problems because they had only one spring and because it was not a very well made spring and they broke far more often with some pretty disastrous results. That apparently caught the attention of the U.S. Government (specifically, the Federal Trade Commission) and eventually, because we were in the same basic business, we caught the attention of the same government agency.
But that was not the end of our problems because by this time there were literally dozens of copies coming out on to the market. It seemed like every container ship coming to the U.S. had 40,000 or 50,000 spring exercise devices on it and they all were cheaper than ours.
And that was about when the whole big bubble burst because pretty soon all of these other people were cutting their prices even though they were crappier and crappier copies. So now the United States was awash with spring exercise devices, all the result of me stopping in a drugstore and having a few glasses of red wine. There must be a moral in that.
Our sales in the spring of 1988 were still great, but in the summer they started falling off fast. By that time, people were literally hawking spring exercise devices in the streets of New York for $5. So the Stomach Eliminator Christmas Party came to a roaring, screeching halt. In the meantime we had been cleverly continuing to order more Stomach Elimnators and they were still coming. By the end of 1988, we had sold over 700,000 Stomach Eliminators and all sales had stopped. Worse, we had about 78,000 Stomach Eliminators still in stock.
So here is how those five years of sales went
1985 – $4,600,000 – $100,000 of which were Stomach Eliminators
1986 – $10,200,000 – $4,200,000 of which were just Stomach Eliminators
1987 – $10,800,000 – $4,600,000 of which were Stomach Eliminators and other exercise equipment
1988 – $13,700,000 – $7,000,000 of which were Stomach Eliminators and other exercise equipment
1989 – $4,200,000 – with almost Zero Dollars for the sale of exercise equipment!
Looking at these numbers, it really takes someone with some small business expertise to understand how miraculous the ascent was and how disastrous the collapse was.
Family businesses, especially when there is more than one partner and especially if the partners own equal shares, can become nasty fast. In good times, partners tend overlook the failings of other partners. In bad times, partners become convinced that their worst fears were correct. And so it was with me and my stepmother. As mentioned earlier, in 1976 my father had divested his ownership of the company and given 50% to me and 50% to my stepmother. And by the way, just because my father off-loaded his ownership in the company did not mean he offloaded his opinions of the company.
Now all of this, both the rise and the fall, was clearly caused by me. If I had not passed that drugstore in Paris, purchased the strange exercise device and later had a few glasses of French red in a Paris bistro, none of it would have happened. Now when I first proposed to sell this weird exercise device, my stepmother’s attitude was that it probably was fated to fail, but she would sit by and let me try. When I did try and it did succeed, at first she had a lot of difficulty understanding that it indeed was a success. After getting over the initial success, she came to enjoy the ride. It was plain and simple exciting to double the business in a single year. However, when things went South, it just brought back all the original doubts about the project in the first place and me in particular.
So as the sales of Stomach Eliminators began to collapse and then halt, I became the official punching bag of both my step-mother and my father. This is not to say that the criticism was not deserved. It was. I had made my own bed and now I had to sleep in it. But who knew, starting out, how uncomfortable that might get.
I should have known something was afoot when heard Steven say one day,
“She saves the pennies, he spends the millions.” – Steven was referring to my step-mother and myself, of course.
By this time Steven also had sussed that his worries about draws full of orders and other economic confusions were well-based. The ship, if not actually sinking, had come into some heavy weather and was listing to port. By the fall of 1988 it seemed like all the containers on all the ships coming to the United States contained spring exercise devices, some of them were ours, but most of them were other people’s knock-offs. And most of the knock-offs were selling at far cheaper prices.
Despite these warning signs, we were charging ahead, full of optimism and hope for the new year. And indeed 1988 started out fantastic, We were still selling Stomach Eleminators at an incredible pace and were even selling some of the exercise equipment that I put together. In the month of January 1988, we sold $2,000,000 in Stomach Eliminators and related exercise equipment. I had high hopes for 1988 and indeed that turned out to be the peak year of sales, even if everything fell off of cliff by the end of the year.
But we did notice certain things were changing. There were more and more knock-offs on the market. Some of initial trade customers, Sears and Roebuck, Kmart went into their own knock-offs of the Stomach Eliminators that they had once purchased for us. Worse, thinking they were smarter than us, they started running copies out at $14.95 and then, in a couple of months, $9.95. Meanwhile, our 4 media buyers were charging ahead buying more and more time, thinking none of this would slow us down. At the same time, Gutbuster must turned up their team of media buyers and they too were running TV spots like crazy. In January and February our ads were still making money hand over fist, but by March ads became more borderline. We thought this was because of the season, we thought it was because of the weather, we thought it was because of economy. In short, we thought it was because of everything and anything but the fact that the giant fad was crashing.
As the year progressed, each month got worse, even if we were selling tremendous quantities. Huge quantities were being sold each week, but as the summer took hold, we suddenly realized that sales were dropping in relation to the sales the year before. By then, the unthinkable began to happen. Ads, both print and TV, started to break-even and even lose money. At first we thought this was just the summer doldrums. I was convinced that things would right themselves in fall when my divine right to sell Stomach Eliminators would be renewed and revitalized. But that did not happen.
What did happen was that all the ads stopped working. Then, other things began to go wrong with amazing rapidity. The insurance company said we now had to fork over $500,000. Soon after they said that would no longer sell us liability insurance. Now, the insurance company was not raising their rates because they had paid out huge claims. Quite the opposite, they had not paid out any substantial claims, but the number of claims had escalated rapidly and while no single claim was for a large amount, a number were going to trial and it looked to our insurance company that they might have to pay out substantial claims. In fact, they never ended up having to pay substantial claims, but neither the insurance company or ourselves knew that at the time. The one thing we knew for sure was that our insurance had become vastly more expensive in 1988.
Other problems occurred almost immediately, in spite of doing vastly more in sales, our cash flow began to disappear. Suddenly, we were paying for print ads and TV spots that no longer working. It was easy enough to stop the TV spots, but print ads took longer. Since we only knew in the late 1988 that ads were not working, we still had about $500,000 of ads breaking. That helped get rid some of the excess inventory we still had coming, but it did not prevent us from losing money on each and every sale.
When it rains, it pours, they say, and that was surely true of the year 1988. Just about everything that could go wrong, did go wrong. Murphy’s Law, I think we all know Mr. Murphy, “Whatever can go wrong, will go wrong.” That is the law in question and it proved remarkably true. Strangely, inflatable boat sales and fishing lure sales decided to take a tumble that year. We blamed it on the cold spring weather and tightening economy that year.
And then there was the little matter of our relatively new IBM36. It said UPS owed us over $1,000,000. The only problem was that UPS said they did not. They said they owed us $150,000 and that is what they paid us, $150,000. That left an additional $850,000 loss in our statement.
Meanwhile, I was living in this wonderful 5 bedroom house that we had rented for the summer until my house was supposed to be finished. Every week, without fail, the builder doing the renovation of my house, showed to ask for an extra $5,000 or $10,000. It was costing a little more than he had calculated, he said. There were some unforeseen costs he could not have known about. He just needed another $5,000 or $10,000 and it all would be finished and beautiful. The end of the summer came and our house rental was up and we had to move back into a half-finished house. It seems that builders and tradesmen sense of finishing things is different from mine.
So, amid that personal hysteria, and despite reaching the highest sales we had ever achieved, $13,700,000 in sales, I managed to lose one and half million dollars in 1988. At least that was the opinion of Coopers and Lybrand, the prestigious accounting firm that was then doing our accounting.
My father said one simple thing to me, “You have got to declare bankruptcy.”
He repeated that statement on four or five different occasions.
I can only say that I understood fully the reasons he was saying that. He could see that the successful print ads and TV spots were no longer profitable and we’re going to lose more and more money. He could see that we were rapidly running out of money and losing our ability to pay suppliers and for basic business expenses. I also saw all that, but I refused to declare bankruptcy.
I remembered when my dad declared bankruptcy in the early 1950s and I remember the shame and agony it brought him. I decided I would not subject myself to that.
So, how did I come back from the abyss? Not easily, I can tell you. 1989 was the year it all came crashing down. Stomach Eliminator sales were almost completely eliminated. By the beginning of 1989, we still had 78,000 Stomach Eliminators and almost nobody who wanted them. Even at that point, I had some hope. A big bread company came forth out of nowhere and brilliantly decided to get in on they thought was the “boom”. Late in the summer of 1988, I negotiated with them to print a Stomach Eliminator ad on their plastic bread covers. They claimed it sell 300,000 pieces or more because the ad was on 6,000,000 bread packages. Cleverly, since I already knew we were having trouble selling even 3 Stomach Eliminators, I did not go out buy another 225,000 to prepare for the promotion. That was good because the promotion ended up moving about 3,000 pieces. At that time, January of 1989, any sales were welcome, but that still left me with 75,000 Stomach Eliminators, most of which were in our Milwaukee warehouse.
How did I avoid bankruptcy? How did I get rid of the remaining 75,000 Stomach Eliminators. I avoided bankruptcy by refusing to go bankrupt. You have to declare bankruptcy to go bankrupt and I was simply unwilling to declare bankruptcy. Regarding my excess inventory problem, I am not quite sure how we finally got rid of them all, some we sold off at cost to QVCTV at cost or less, some we gave to charity, some we sold in losing ads, some we threw in the dumpster. Somehow, by the summer of 1989, we had gotten rid of all of our stock.
That was good because that was when the FTC (aka Federal Trade Commission) went after Gutbuster and ourselves. To be fair, Gutbuster had enormous problems by then. They had over 1,000 lawsuits from people who had hurt themselves. We had 62 lawsuits, some of which were legitimate, many that were phony, where no real damage had been done to anyone. No matter, the FTC not only forbid us to sell Stomach Eliminators, something we had already stopped selling, they also said we should take back and pay every single person who had ever bought one.
By this time, we were really quite close to bankruptcy, unable to pay many suppliers and reps, with far more payables than we had receivables.
I went down to Washington and met with this lady in small dark office in this gigantic, bureaucratic building that was the Federal Trade Commission offices (you literally had to walk about a half mile down dark, somber hallways to get to her small dark office). I had a simple message, “dead ducks pay no bucks.” Fortunately, I had my lawyer cousin Chris along with me, and he explained to the lady that we simply could not do what she was asking, but we would do our best to go along with anything they proposed, as long as it was financially possible. In the end, we settled on us running a few public ads saying the product had been recalled and that we would pay anyone $15 for each and every returned Stomach Eliminator. In addition, the FTC sent out their own press releases that the product had been recalled and it was picked up and reported on every major TV network of the time. That ended up costing us about $45,000 in refunds and the cost of the ads. Somehow, we managed to pay it, even though everyday someone was calling and screaming at me for money.
All of the above still does not explain how I managed to escape declaring bankruptcy and going out of business. As usual, the light at the end the tunnel came by chance. I was enjoying an outdoor barbecue at the parents of some friends when the father of one of my friends sidled up me and whispered quietly that he just sold a half-acre lot for $565,000. That caught my attention. Especially since his empty lot was two blocks from our two acre lot which also had our 10,000 square foot building on it. The fact that he had sold his lot for over a half million dollars gave me the idea that we might be able to sell our lot and our building for more.
As soon as the next week commenced, I started calling around the several local businesses that I thought might have an interest in buying our 2 acres. I called just about everybody except the person who had just bought the empty lot next to me. That’s because I thought it was just an empty lot. That mistake cost me $120,000. Anyway, while I got a lot of interest from all of the logical neighbors, no one actually wanted to spring for our property, especially for the $2,000,000 price I was graciously offering. At that point, we called the real estate broker who had originally sold us our property. He said he would look around.
To make a long story short (a little late at this point), the real estate agent located the people who just bought the empty lot next to us. They turned to be a leading local car dealer. Two guys showed up later that week and said yes, we want it. How much? $2,000,000 I said. We did not get the 2 million, but we did get $1,600,000 and the real estate agent who happened to know that the lot next to us had been sold for a lot more, got $120,000.
All things considered, it did end up happily, even if we spent that money within one week of clearing the check. Some of it went to taxes – there was $100,000 fee on any sale in New York over $1,000,000 plus a 7% sales tax. We gave $600,000 to our bank and $300,000 to our boat supplier, $200,000 to our lure supplier and it was gone, gone, gone. But we did not go bankrupt.
It took my business a full ten years to recover from the problems I created with the Stomach Eliminator. I learned some valuable lessons. Real estate that may have no value on your statement still has a real value if you can sell it. If you are a long-term business and you have had good relations with your customers, your representatives and your suppliers, that also is an asset. I found I could plead poverty to my customers (when I had problems shipping them), to my reps (when I had problems paying them), to my suppliers (when I had problems paying them) and they all would be patient and live with the problems we were having. By talking directly to each person and each company, we were able to maintain our relationships, to go on and to survive.
All of that said, it was a tremendously exciting time while the sales were soaring. I think I can honestly say that even though I made almost every mistake you can make (Mr. Murphy was in the house), I did learn from those mistakes and I did learn many important things about business.
The big question – would I do it again? Well, that depends on what “it” was.