ShopNBC Reprograms Its Shopping Channel Model
When the closing bell rang on the last day of trading in 2008, the coming year didn’t augur well for ValueVision Media, Inc.
Trading at 33 cents a share, the stock price of the 18-year-old Eden Prairie company (Nasdaq: VVTV), which owns and operates home-shopping cable channel ShopNBC—the company also prefers to be referred to as ShopNBC—was off more than 99 percent from its historical peak. Revenue in fiscal 2008 (the company’s fiscal year ended on January 31, 2009) had declined 27 percent year-over-year to $567.5 million, with a net loss of $97.8 million.
ShopNBC’s management team couldn’t even look forward to ringing in the New Year with family and friends. The executives had just a matter of hours to renegotiate a major satellite distribution contract. If not, at midnight, ShopNBC’s satellite feed to millions of potential households across the U.S. would go dark. Just as retailers ply their wares through stores, ShopNBC, which operates the ShopNBC channel, makes its money selling goods over the airwaves. No distribution meant no sales. The satellite provider had the power to make life difficult.
Negotiations had progressed normally until a few days before zero hour, when the satellite provider seemed to go silent. “That’s where it got a little bit unnerving,” recalls Keith Stewart, ShopNBC’s CEO since January. He understood the rules of the game, however: “You really just need to stand up and take it right to the end to get the best possible deal you can.”
Plus, there was no other option.
ShopNBC was staring down the barrel of a possible bankruptcy. “There was just a wholesale disenchantment from the shareholders, and you might say some distrust,” Stewart acknowledges.
This year, Stewart and ShopNBC have bought some time. Its stock price has recovered a bit, climbing slowly but steadily since February; it was at $3.37 as of October 29. The company is still not running a profit, but it is getting some traction thanks to improving its operations and broadening its marketing efforts. So is ShopNBC in a turnaround?
Staying on the Air
Formerly at Pennsylvania-headquartered QVC, a $7.3 billion company and ShopNBC’s largest competitor, Stewart had worked his way up through the ranks over 15 years to become a vice president of merchandising. He’d opted for an early retirement in 2007, planning to spend time with his family, run a fishing equipment business he’d acquired, and maybe become a professional on the Pro Bass Tour.
John Buck, ShopNBC’s chairman, contacted Stewart with a top-job offer early in 2008. At first Stewart demurred. “John, to his credit, is very persistent,” Stewart notes. He soon changed his mind. One problem: He couldn’t start until August due to a noncompete agreement he signed when he left QVC.
In the meantime, ShopNBC hired in March 2008 a new CEO, Rene Aiu, who remained with the company only a matter of months. Buck took over as interim CEO in August 2008. Shortly afterwards, Stewart joined as president and chief operating office.
“I had done an awful lot of research on ShopNBC,” Stewart says. On the bright side, he saw opportunities to cut costs without “taking too much out of the business.” Chief among those opportunities was renegotiating its satellite and cable contracts. On the other hand, Stewart realized there were big problems, notably inefficient operations and an out-of-date merchandising strategy. “Quite candidly, I saw a business model . . . that could not sustain itself, and immediate action was necessary.”
Stewart began to develop an aggressive turnaround strategy that he sought to execute during his first 100 days at the company. However, the strategic picture changed completely within weeks of Stewart’s hiring when investors called for the sale of the company. In response, ShopNBC hired Minneapolis-headquartered Piper Jaffray as a financial advisor to a special committee of independent directors assigned to review strategic alternatives and solicit potential buyers.
Tackling the cable and satellite distribution would be a major undertaking as well, since almost two-thirds of the company’s agreements were set to expire. Referring to those negotiations during an investor conference call, John Buck would later say: “Sometimes you are strongest when you are weakest.”
If ShopNBC was at its weakest New Year’s Eve in 2008, the company was arguably at its peak exactly nine years earlier when its stock closed at $57.31, near its all-time high, on New Year’s Eve 1999. Everything seemed to be going the company’s way. Founded in 1990 and made a public company a year later, ValueVision began as a home-shopping network; in 1996, it expanded to include a direct-mail catalog business that it started with now-defunct department store chain Montgomery Ward. Three years later, ValueVision shed the catalog business, which was losing millions, to focus on home shopping.
More importantly, the company had a new strategic partnership with the National Broadcasting Company (NBC) and GE Capital Equity Investments. According to SEC filings, the new partners poured cash into ValueVision, first through $44.2 million in preferred shares and then through $178.3 million in common stock. In November 2000, ValueVision also obtained the rights to use NBC’s brand. ValueVision became known as ShopNBC the following January. (The company also has a fulfillment center in Kentucky and a television station in Boston, which it acquired in 2003 to replace an NBC cable station that became part of the the Spanish- language Telemundo network. This kept a channel open for ShopNBC in the Boston market.)
From the standpoint of revenue growth, the strategic alliance was a success. ShopNBC nearly tripled in size between 2000 and 2008, when it generated $781.5 million in sales.
As part of its strategic relationship, ShopNBC named NBC as its agent for negotiating cable affiliate relationships. NBC managed all of Shop-NBC’s long-term satellite contracts with DirectTV and Dish Network, as well as cable distribution contracts. Locking in a long-term contract can be a savvy move, since it removes cost variability. What happened instead is that ShopNBC locked in rates in a market where prices were declining—and storm clouds, notably declining sales, were starting to roll in.
Through its over-the-air distribution, ShopNBC reached 72 million households with its programming. QVC and Florida-headquartered Home Shopping Network, a $2.8 billion competitor that’s number two behind QVC in the home-shopping category (ShopNBC is number three), reached slightly more homes—about 90 million. Yet on a relative basis, ShopNBC was spending two to three times what those companies were paying. It was a key reason why ShopNBC had not turned a profit since the fourth quarter of its 2006 fiscal year.
Stewart knew ShopNBC had to wring major price concessions from its distributors because its annual tab was $124 million. Thus, New Year’s Eve 2008 was a failure-is-not-an-option moment.
With less than an hour left in the year, the satellite distributor came back with an offer ShopNBC could, literally, live with. At 11:59 p.m., the final agreement was signed and faxed back. By March, ShopNBC had renegotiated practically all of its expiring carriage contracts, and by October had completed its negotiations, cutting distribution costs by $24 million in its fiscal 2009.
Meanwhile, the process to sell ShopNBC continued. There were good indications that a transaction might get done. Thirteen buyers expressed interest. The board reviewed the bids and pared down the list of candidates to four to begin serious discussions.
But “at the end of the day,” Stewart says, “there was not a company with a final binding bid.” Why didn’t a sale happen? “There was a lot of risk and uncertainty the company faced back then,” General Counsel Nathan Fagre explains. “That’s why there was not an interest to buy it.” A press release announcing the failure of the sale went out in January 2009 along with the annual results.
There was still more to come.
“We had a looming debt that was coming upon us,” Stewart recalls. General Electric planned to redeem the $44.2 million in preferred shares it had purchased 10 years earlier. ShopNBC had a cash balance of just $56 million. “To the extent that we paid down that preferred, we would have been insolvent as a company,” Stewart notes.
It was at this time that Buck stepped down and Stewart was made CEO. “The shareholders, larger institutionals as well as the private retail sector, had very low confidence in our ability to renegotiate that with General Electric and survive,” Stewart says. The stock plummeted, hitting a low of 18 cents in late February.
Here a miracle occurred. Or something like one. That same month, ShopNBC restructured the deal with GE. General Electric was paid $3 million and issued a new series of preferred stock due in 2013 and 2014. Stewart won’t discuss the details of the negotiations between GE and ShopNBC. But it seems reasonable to speculate that giving ShopNBC a chance to make money was worth more than pulling the plug and perhaps getting little in return.
In any case, another crisis had been averted. But ShopNBC still had to prove that it could survive.
Getting on More Channels
Who shops on TV? The primary demographic for home-shopping networks is women in their 50s. The competitive differences between networks are largely based in programming and the merchandising mix. Gift items not found in stores and celebrity-driven clothing lines are two major sources of merchandise. ShopNBC itself has focused heavily on jewelry.
This business model had worked during more flush times. But last year, U.S. sales in the home-shopping industry fell 6 percent to $7.4 billion, according to New York–based investment firm Gabelli and Company. Meanwhile, ShopNBC’s reliance on jewelry was causing pain: Its 2008 sales of jewelry decreased 32.3 percent compared with fiscal 2007, to $196.2 million. Overall sales decreased 27.4 percent in fiscal 2008, falling from $781.6 million to $567.5 million.
To get his company back on track after the multiple distractions of the distribution deal, the GE negotiations, and the aborted company sale, “We had to reorganize the company completely,” Stewart says. ShopNBC cut more than 10 percent of the work force—about 60 jobs. All told, it had reduced its salaried work force by 27 percent since 2007. But the company knew that trimming staff wasn’t nearly enough to keep it afloat.
Take, for instance, ShopNBC merchandising mix. “One cannot live by jewelry alone,” Stewart says, acknowledging that his company had grown too concentrated on that particular category. Not only does jewelry fare poorly in bad economic times, it had narrowed ShopNBC’s customer base to low-volume buyers.
Stewart notes that when he started, ShopNBC’s average price point was $250—six times higher than the competition’s. “We’ve been working very hard to reduce that average selling price so we can broaden the customer base,” Stewart says.
A key is increasing the proportion of lower-cost items—lower-cost relative to jewelry—such as apparel and accessories, beauty products, consumer electronics, and household goods. So far, things are moving in the right direction: ShopNBC’s average price point is now down to $140; Stewart would eventually like to reach $85 by next year. The theory is that, at that level, ShopNBC could maintain its premium brand status with its core audience while still increasing its volume.
ShopNBC also has been seeking to better leverage its existing partnership with NBC. As part of the shopping network’s new “ShopNBC Anywhere” initiative, customers are able to shop across cable, satellite, mobile, and live streaming. Exploring TV commerce opportunities with NBC is another dimension to this approach. It would mean more sales channels available through different NBC properties, like Bravo and Oxygen, as well as local affiliates.
In September, ShopNBC launched a pilot effort in the Twin Cities with affiliate KARE-11. The company airs a five-minute segment every morning on the station’s Showcase Minnesota program called “Our Top Value,” which pitches a ShopNBC-featured product. If successful, ShopNBC hopes to expand the “Top Value” concept to NBC stations in other cities.
In addition to partnerships, ShopNBC’s online business will play a major part in its new strategy. Television is a single-item experience, whereas online shoppers tend to browse multiple categories. According to ShopNBC, multi-channel shoppers spend four times the amount a single-channel shopper does. Internet sales currently account for one-third of revenue; ShopNBC wants to see that percentage rise to about 50 percent by 2014.
In April, ShopNBC officially launched ShopNBC Anywhere through mobile-commerce apps on the iPhone and iPod Touch. The company enables shoppers to stay up to date on new offers through Twitter, Facebook, and the ShopNBC YouTube channel.
“We’re in front of enough people,” says Randy Ronning, ShopNBC’s chair since June. “We have to convert them into purchasers.” A former chief merchandising officer of QVC, Ronning’s expertise is in online retail. After leading department store J. C. Penney’s Web business to $1 billion, he accomplished a similar feat at QVC. ShopNBC has also hired Carol Steinberg, formerly of QVC and, more recently, of Pennsylvania-based wedding retailer David’s Bridal, to lead e-commerce efforts.
“I think we’ve got some real low-hanging fruit in the fact that we haven’t always managed the online business as efficiently and cost effectively,” Ronning says. For instance, ShopNBC has been paying for search engine placement to drive traffic to the site, which Ronning says generates volume but not necessarily profit. ShopNBC now is spending its time and resources on improving search on its own site so visitors can more quickly find what they’re looking for.
In July, actress-turned-fitness-guru Suzanne Somers moved from HSN, where she’d been a regular presenter for several years, to ShopNBC along with her fashion, food, and personal care product lines. Like ShopNBC’s improving stock price, Somers’ move may reflect a comeback for the company.
Recent numbers are ambiguous but promising. In August, ShopNBC reported second-quarter revenues $119 million, down from $142 million the previous second quarter—a decline the company attributed largely on its shift to lower-priced wares. On the other hand, operating expenses were down, and operating loss declined from $16 million to $10 million. Gross margins increased from 32 percent to 35 percent.
“Eating My Own Cooking”
Stewart has said that ShopNBC would focus on refining its U.S. strategy over the next three to five years, and then might consider expanding internationally. This would leverage Stewart’s previous experience as general manager of QVC’s German business unit.
Between March and August, Stewart began buying large blocks of common stock on the open market with more than $1 million of his own money. When queried about it during an investor conference call, Stewart responded by saying, “I cannot speak for others, but I can speak for myself that I would eat my own cooking.” As of late October, Stewart’s investment had returned more than 250 percent.
Stewart reached his first anniversary with ShopNBC in August. He describes his first year as “the most difficult . . . of my life both personally and professionally. It really took an awful lot of personal and professional investment not just from myself but all the hard-working employees at ShopNBC.”
“We are now in the early innings of a whole new ball game at Shop-NBC,” Stewart told investors during the company’s second-quarter conference call in August. Although ShopNBC is still losing money, Stewart asserted, “Our turnaround is very much in hand.” The coming months should reveal what’s in store.