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Inventions `R' Us

Profile of a start-up retail shop's attempt to create a market for overlooked new products.
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With little money, no retail experience, and one store in a mall in Irving, Tex., Zane Causey and Bob Clark are trying everything they can think of to create a market for overlooked new products

It's the inventor's catch-22: you can't get it to market unless it's proven, but you can't prove it until it gets to market. And Zane Causey, a former preacher and frustrated inventor, knew it well.

Two years ago Causey had developed a new product: the Lawn-sak, a disposable bag for lawn mowers. The steam engine it wasn't, but it was a practical product nevertheless. "Nobody would even talk to me," he recalls. He tried distributing the Lawn-sak himself and even ran ads on late-night TV. But Causey found his product, unproven and unpromoted, shut out. Alas, he was not alone. He knew there were thousands like him, lone inventors with one or two products, desperately looking for an entré into the market.

If the sad tales of fellow inventors weren't proof enough, Causey had only to read the U.S. Patent and Trademark Office reports to know he had a market. More than 200,000 patents had been awarded to independent inventors in this country since 1975. Surely, there were 10,000 to 20,000 products among all those patents. Even if only 10% were marketable, that left at least a thousand products. And those were just the patented ones; there was no telling how many others he might find.

Like any good inventor, Causey began tinkering. First, he started a marketing firm, Ideas Plus, to promote inventors' products. "But we were turning down eight new products a month because we didn't have a way to move them," he says. That's when Causey, a barrel-chested man with thick black hair, got an even better idea: what if someone started a chain of stores to showcase inventors' handiwork, thus opening channels for the flood of new products currently closed out of the marketplace? It would be an incubator for never-before-seen inventions, a launching pad for promising products. With the right location and an ever-changing line of practical, low-priced items, Causey's shop was bound to attract buyers, both retail and wholesale, he thought. All he needed was the money to start it.

Causey had no real capital of his own, but Robert Clark did. The two had met through the church to which Clark belonged. Clark, a lean, bespectacled man, had made his money in insurance as a "storm trooper," or independent claims agent, chasing disasters around the country. After three decades of fires, hurricanes, and earthquakes, he wanted less calamity and more equity in his work.

He joined forces with Causey, and they began shopping for a location -- preferably a mall site for the traffic and visibility it offered. "We wanted to give inventors a broad range of customers," Causey explains. They soon found a vacancy in the north corner of a half-mile-long mall in Irving, Tex. There, a clothing store next door to Everything's a Dollar and across from Frederick's of Hollywood had gone belly-up. With a recession stalking, Causey and Clark had a crack at a temporary lease for a rock-bottom rent. Midway between Dallas and Fort Worth, and minutes from the airport, the Irving Mall -- even the slow end of it -- would draw the right mix of shoppers, they hoped. They sealed their partnership with an Orange Julius.

On a Saturday afternoon last September, Causey and Clark threw open the doors to the New Product Showcase (NPS), "a world of new ideas" right there in the Irving Mall. This, their flagship store, looked every bit the inventor's experiment, with its mix-and-match fixtures, homemade displays, and worn carpet. Just 20 products, spread thin, graced the shelves. And announcing the grand opening was a plain brown sign with a typo. "A deal," Clark explains.

* * *

Six months later, one wet morning in March, the back room at the New Product Showcase is strewed with new ideas and old buckets. The roof is leaking again. A chain-smoking Clark is packing up a water-balloon catapult for shipment to a lawyer in Los Angeles. Everyone else is too busy working the phones to notice as another piece of the ceiling falls. Meanwhile, Causey has an eager inventor on the line.

"Here's the hook," he tells him. "You pay us $350, bring in your product, and in 15 minutes it's in the accounting system and on the shelves for 90 days."

To bootstrapping inventors, it sounds like the answer to a prayer. They could forget the empty promises of fly-by-night inventor outfits and crooked patent lawyers, as well as the thousands of dollars in up-front fees those agents often demand. Causey and Clark would give inventors what they really wanted: a shelf to call their own for 90 days.

But retail is an unforgiving business. Depending on the type of store, initial inventory requirements can eat up as much as 70% of the start-up capital. And a retailer turning over less than 50% of inventory should start planning a going-out-of-business sale. If the New Product Showcase planned to gamble on untested products, many with packaging from hell and price points from Pluto, Causey realized he and Clark would never survive without limiting their risk. "We had to get the inventors to pay."

He found that for a $350 slotting fee, inventors were willing to participate, and the store's operating expenses were covered. If the founders pulled in the 28 new products a month they planned, they'd count nearly $10,000 in revenues before ringing up a sale.

And as the founders had only $30,000 in capital, two retail salespeople on the payroll, and more than a few long-shot products, they figured, Why tie up money in inventory? They persuaded inventors to consign small quantities of a product -- already produced and packaged -- for the 90-day trial. And they persuaded them to provide that initial inventory, anywhere from 12 to 70 units, at manufacturing cost. Every first order would sell at a whopping 80% gross profit. If the item moved, it would be reordered at wholesale price, for the normal retail markup. "We'd actually pay only for the proven sellers," Causey figured. "And that would be 30 days later."

With no up-front costs for inventory, healthy gross margins on sales, and limited expenses, the founders thought, the cash would flow freely. They'd have to pay a low base rent and 15% of sales exceeding a $6,666 threshold each month. No sweat.

* * *

Clark and Causey knew they had to market their idea to inventors first. After all, they needed something to sell. Advertising in inventors' magazines and working through associations and state offices helped. In six months they increased their line to 175 products.

But Causey and Clark had only the dimmest vision of who their retail customer might be. As it turns out, NPS tends to attract an older customer, mostly a low-to middle-income home owner browsing for gadgets. Consumer advertising -- often budgeted at up to 10% of revenues in retail operations -- has been unnecessary. Coverage in both local and national media has kept traffic brisk. Still, Causey and Clark see more curiosity seekers than serious buyers. And the fact that NPS's products are so new, even foreign, to customers means that more staff and service are needed on the sales floor.

Of course, many products will probably never sell. Take the Texas-shaped spice racks, stacked ceiling-high in the back room. Or the Dine-therm, a 10-pound plate-warmer, which has sat stone-cold on the shelves since it arrived. "I don't think it's ever going to take off," Clark says. But who's worrying? With no cash outlay, the two could afford to turn over as little as 32% of their inventory. "It's impossible to lose money on a product," says national account executive Dan Jennings. "If we don't sell the thing, we still haven't lost."

* * *

Is this attitude cavalier or just plain crazy? Perhaps neither, when you consider NPS's chameleon-like approach to the market. Causey and Clark hope to generate revenues on a number of fronts:

* Retailing. This is simply their first plan of attack. "We want to get the products out there in bigger channels," Causey says. "We don't intend to keep them in the store. This is just a proving ground. If a product turns out to be a keeper, then we'll use its success in this store to push it into other stores."

* Wholesaling. Getting products into larger venues has so far meant making cold calls on reps and distributors. It's true that wholesaling to a rep or distributor cuts NPS's margins. "But it's the only way we can get into the chains," Causey says. Under those deals, they settle for 5% to 10%, but volume more than compensates. Out of several hundred new products a year, the founders expect to sell 3% to 5% through Walmart or K mart stores. So far Causey has persuaded four smaller distributors to take on products, one of them his Lawn-sak. Although he imagines at some point distributing some products himself, it's easier on cash flow to rep the products and let others distribute them. "We can let someone else worry about warehousing, selling, and shipping the stuff."

On the international front, where the partners expect to sell $131,000 this year, a Japanese distributor is expected to take on four products, and Causey is talking to a company in Taiwan about manufacturing products to market there.

* Brokering. Manufacturing remains the rub for several of Causey and Clark's inventors, many of whom crank out products from their garages. So Causey finds himself the middleman. "Inventors show up looking to put products into production," he says. "Manufacturers come to us because they know we deal with inventors and we've got products." But occasionally, manufacturers come peddling products of their own.

Take Solera Inc., for one. The Taiwan-based development and manufacturing company wanted to break into marketing in the United States with a line of solar-powered consumer electronic products. "We had been turned down by many retailers and established reps," says company vice-president Michael Hsi. "It was very frustrating." The company slotted four products with NPS to test the retail waters and prove their market. Solera plans to introduce future products the same way.

* Test marketing. Determining pricing, packaging, and markets can be uncertain tasks even for large companies, but they're downright guesswork for many inventors. That's why Clark and Causey decided to offer a $1,200 test-marketing service to eliminate some of the mystery. "By test marketing we find out if a product can sell retail, how many will sell, and whether the product belongs on the shelves at all," Causey says. He realizes that one sampling from one site may not amount to full-blown market research, but contends it will at least determine whether an item is priced and positioned right. As the company grows by adding other locations, its test marketing should become more competitive.

* Direct sales. Clark and Causey are hoping for a joint venture to publish an inventors' magalog as early as this year. But first, they have capital and supply shortages to overcome. They'll begin mail-order sales with a few products that can be produced quickly and in quantity, Causey says. Then they'll gradually expand their catalog line. Finally, for a base price of $2,500 plus 5% of sales, they will produce and place direct-response video ads for local television markets.

On the drawing board, at least, it all adds up to first-year revenues of $937,113. Clark and Causey's suppliers will pay them slotting and test-marketing fees. The partners will open two new stores and see revenues from retail, wholesale, catalog, and video-ad sales. "We hope to do business with everybody," Causey says.

* * *

The founders' ambitious growth strategy is plotted on the map that hangs behind Causey's desk: 20 stores in 20 cities in three years. They expect to have the first 2 open in Boston and Atlanta by summer, if joint ventures go through as planned. Chicago, Orlando, Hartford, New York City, Phoenix, Los Angeles, Miami, and Washington, D.C., will follow.

Clark and Causey claim it will take as little as $600,000 to $2 million in equity investment to do that. If Causey can raise the money through venture capitalists, he will move the Irving store to a better site in the same mall and undertake a $150,000 store design and build-out. He'll hire two experienced marketing pros to address "weaknesses we know we have." And he'll begin the expansion mapped out above his desk. That's Plan A.

Plan B seems more likely. It involves launching a series of joint ventures with operating partners in each of the cities targeted. The two are negotiating with at least a half dozen potential partners who would each invest $50,000 to $100,000 to own and operate expansion stores. Causey originally envisioned a web of subsidiary corporations, operated by partners who would put in the same amount for a 50% stake. But no investors would assume the costs of an expensive build-out and a pricey lease for only half the net profit of a store. "If they were going to put that much money in, they wanted to own the store," Causey discovered. "Maybe it's all happening too fast. I would have liked to wait three years. We'd have a track record based on good, solid experience. We could look at franchising then."

So what's the rush? "There are some hungry malls out there," says Dan Jennings. Expansion hinges as much on finding cheap leases as it does on raising the capital. Now is the time to negotiate advantageous leases with mall operators such as Melvin Simon & Associates Inc., owner of the Irving Mall and more than 70 others in 39 states.

Competition also is driving the decision to expand quickly. In this business, the cost of entry is so low that almost anyone could knock off the idea. And competition is already hot on the trail. The New Product Store, a similar venture founded in the summer of 1989 in Toronto, Canada, plans to expand into the United States this year. And the potential partners who have paraded into the Irving store might just as easily end up being competitors. "Some come in for one reason," Causey says. "To get an idea and run with it."

Although the start-up cost of a slickly designed store -- such as the one Causey plans to build once he has the capital in hand -- might deter some copycats, Causey realizes there's no time to lose.

* * *

By the end of that day in March, rain has nearly filled the tubs in Clark and Causey's back room. Hunks of ceiling lie in wet heaps on the floor. But for the moment, the two partners are more concerned with propping up their enterprise. Managing a runaway, scattershot idea is their biggest challenge. Can they keep up with it? There are so many channels, so many products, so little time. The market is big and their shop is small.

If their idea does take off, will competition be far behind? They may have the first-mover's advantage, at least in the United States, but they also have no cash. The Irving store's revenues aren't likely to finance the growth they imagine. And if luck deals them a truly hot product, a bona fide hit, will their inventor-suppliers be equipped to deliver? "We'll have to manage the supply problems by not promoting products that inventors can't produce," Causey contends.

Yet finding the right products is the more immediate problem. Too many products like the Texas-shaped spice rack could sink them, even if their costs are covered. And though NPS carries insurance, one untested, unsafe product could spark a liability suit they might never survive.

If Clark and Causey hire the merchandising talent they lack, if they get a slicker look and better locations for their stores, they stand a chance of retailing in volume. If they don't, their other channels -- wholesale and direct -- might keep them afloat. But in the interim, they risk tying themselves to expensive leases for retail space that will produce precious little revenue. The odds are poor they'll win prime space at the same basement price they pay for their temporary site in Irving. And mall space on the East Coast or in California could cost them close to 10 times as much as they are paying now.

Right now, there's no money for any of that. There is simply the idea -- a big idea with problems to match, and perhaps a life of its own. So why worry that the roof is caving in? Despite his troubles, Zane Causey says he has good reason to be optimistic. What is it? "The next phone call."

* * *

EXECUTIVE SUMMARY

THE COMPANY

New Product Showcase, Irving, Tex.

Concept: A chain of stores that gives independent inventors access to markets by selling new products through retail, wholesale, and direct channels

Projections: Revenues of $937,113 the first year, reaching $9.3 million in the third. Operating profits will climb from $422,437 to $5.6 million in year three

Hurdles: Finding marketable inventions and reliable suppliers. Raising the capital to expand. Juggling a variety of marketing concepts including retailing, wholesaling, brokering, and selling through a catalog. Staying ahead of competitors sure to take advantage of low barriers to entry

THE FOUNDERS

Zane Causey

Age: 53

Family: Single, one child

Personal funds invested: $0

Equity held: 51%

Salary: $0

Other companies started: Metroplex Carpets, Fort Worth; Singles Adventure, Hurst, Tex.

Last job held: President, Ideas Plus, Dallas, Tex.

Robert Clark

Age: 59

Family: Married, four children

Personal funds invested: $30,000

Equity held: 49%

Salary: $0

Other companies started: Clark Claims Service, Arlington, Tex.

Last job held: Owner of an independent insurance-claims agency


FINANCIALS

New Product Showcase Projected Operating Statement

($ in thousands) Year 1 Year 2 Year 3

NUMBER OF STORES 3 6 20

REVENUES

New-store receipts $70 $150 $700

Shelf fees 90 180 600

Domestic retail sales 294 706 2,802

Domestic wholesale sales 117 234 780

International sales 131 338 1,125

Video production 120 720 2,400

Video sales 90 216 720

Catalog sales 25 50 167

GROSS REVENUES 937 2,594 9,294

($ in thousands) Year 1 Year 2 Year 3

COST OF SALES 205 468 1,536

OPERATING EXPENSES

Lease 24 35 75

Salaries 120 320 550

Office 58 69 120

Advertising 60 175 525

Store opening 48 48 432

Store training 0 75 125

Regional office 0 0 325

TOTAL EXPENSES 310 722 2,152

OPERATING PROFIT 422 1,404 5,606

(continued)


WHAT THE EXPERTS SAY

COMPETITOR
BRIAN GRAY

General manager of The New Product Store, retail/wholesale marketer of new products in Toronto, Canada, which is expanding to the United States this year

Retailing products that have limited market potential does not make any sense. We know -- we tried it and got out of it. Ninety percent of new products fail, and Causey and Clark won't escape that. With their current product mix and retail look, it's just not going to fly. Gadgets are not going to sustain a retail store. And if a product doesn't sell retail, it's not going to sell catalog, it's not going to sell direct to buyers, it's not going to sell. Period.

Causey and Clark are also going to have problems with overpricing. With limited production runs and low volume sales, pricing can be outrageous. That will work against successful distribution deals, because you need a certain amount of margin for the distributor to sell it. As for selling to mass-market chains, that's a pipe dream.

Another fact is that inventors don't have to pay for shelf space. They can get it free from owners of independent stores just by offering a consignment deal. Causey and Clark's 90-day deal is too short for nonseasonal hard goods, anyway. What if a customer comes back four months later, looking for a product that's gone?

OBSERVER

ALAN A. TRATNER

President of the Inventors Workshop International, a nonprofit inventors' association in Camarillo, Calif.

Causey and Clark have a terrific idea. But forgetting for a moment their ambitious plans to expand nationally, the problem with their single store is that it isn't mainstream enough and can't move enough product to really serve an inventor. What inventors need is access to either mass markets through a large chain or very targeted markets through specialized merchandisers. Right now the New Product Showcase is neither.

As an inventor and a marketer, you would be idiotic if you used this as your sole source for rolling out a product. You have to entertain other introductory venues. And other retailers and wholesalers might frown on a separate arrangement with this showcase. It could create trade-offs that inventors are unwilling to make.

I think they should really concentrate on their catalog. We tried a catalog and a trade center as a nonprofit operation, but we failed miserably because we didn't have the money to do it right. Still, it was a great concept and attracted a lot of international attention. If they can establish themselves as a premiere conduit -- by the image they portray, the ads they run, how they recruit inventors -- it will ultimately help them in the retail market.

POTENTIAL CUSTOMER

STANLEY MASON

President of Simco Inc., a product-development company in Weston, Conn. Mason is a professional inventor who has created more than 100 products that have been brought to market

It doesn't sound as if Causey and Clark are really experienced. But that doesn't mean they won't make it. They have a very interesting concept, but I see several weaknesses in their plan. Sure, there are lots of people out there inventing and looking for a way to market. But how many of those products are really marketable?

There's only one kind of inventor that this store will cater to. It won't be a high-tech team of Ph.D.'s who will turn to the New Product Showcase. It may not be inventors like me, who try to invent so that a product has an easy entry into the market. This store seems to position itself for inventors who make something, then wonder what to do with it.

Is it worth the manufacturing investment just to put something on a shelf in one retail store? That's a costly way to find out if it can sell. And who knows if what sells in Texas will sell in California? They'll have to advertise or take other steps to get a better selection and avoid putting everything they have on the shelves.

And if a product is a success, Causey and Clark want a long-term piece of it. That might keep a major buyer from working with the inventor. Buyers don't like encumbrances.

FINANCIER

DON PHILLIPS

General partner at Phillips-Smith Specialty Retail Group, a Dallas, Tex., venture capital firm with $70 million under management exclusively in retail ventures

This is not a financeable deal -- at all. These guys have an interesting concept, but they don't have any retail experience. And the profit margins they're expecting -- well, retail stores just don't do those numbers.

If there is a business here, it's on the mom-and-pop level. It isn't viable as a national chain, but as a group of independent stores supplied by local inventors, selling to local buyers. If something is really selling well in one store, they might decide to try it out nationally. Then, if something is selling like gangbusters in 20 different stores, that's when they should go to K mart or Walmart or whomever.

Their strategy seems very unfocused. What they should do is spend a year just working their one store and see if they can really get it going. They will probably learn a lot. Then, with some good financial advice, they might have something they could franchise. But a franchise deal that gives them 50% of revenues is unrealistic. I think they'd be lucky if they could get 3% of revenues in exchange for their concept. They don't have much that someone else couldn't do or get on their own.




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