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STRATEGY

A Bigger Wheel

Chris Zane's bike shop was healthy and profitable. To grow it, though, he would have to act like a CEO.
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Growth Strategies

In Branford, Conn., Chris Zane is something of a minor celebrity among the elementary-school set. "Hey, that's Chris Zane!" gushes a 10-year-old boy who spots him one day. "Man, he is so lucky!"

And so it would appear. Zane owns the biggest bicycle shop in the area, he drives a Porsche Boxster on the weekends, and he's even shared the stage with Apollo 13 astronaut Jim Lovell. When Zane overhears the kid's comment, he smiles -- but it also rankles him. Lucky? Sure, there's an element of good fortune to his success. Not everyone, for instance, has parents who are willing to help their 16-year-old acquire the assets of a failing bike shop and then help him run it until he graduates from high school. (See " Leader of the Pack," February 1996.) But Zane, now 35, knows that no one builds a business on happy coincidence.

What luck boils down to, more often than not, is the ability to choose the right open door and walk through it, sweaty palms and all. That's difficult enough for fledgling CEOs of start-up companies, but it's even tougher for owners of established businesses who have something to lose -- and who can become so preoccupied with what's working right now, or what's not working, that they can't imagine a different future. The desire to stay with the game plan is understandable: you can become scattershot if you embrace every growth scheme that comes your way. Entrepreneurial hyperactivity can mortally overtax your resources and capabilities and jeopardize the very core of your company. Little wonder then that so many CEOs stick to their proverbial knitting, often settling for growth strategies that are linear and limiting. For Zane's Cycles, such an approach might have meant opening new retail locations or expanding the product line -- options that Chris Zane considered and rejected.

Instead, he found himself responding to a market opportunity that most bicycle dealers would have dismissed out of hand, deeming it too far removed from their core business and too risky. But the fiercely competitive, iconoclastic Zane recognized a door ajar when he saw one. What he didn't know at the time was how a move into a new market, premiums, would ultimately force him to rethink not only his own strengths and weaknesses as a company builder but also how his business was structured and what it was that Zane's Cycles was really selling in the first place. In other words, it would force him to think and act like a CEO, rather than merely like the owner of a cycle shop.

Doubling his company's revenues would be just a lucky side effect.

Recognizing opportunity
Zane came upon the door in question without warning.

Eight years ago, a marketing manager at Chesebrough-Ponds, a consumer-products company, asked Zane if he'd be interested in selling Trek mountain bikes to the company as part of an incentive program for salespeople. Zane says, "I saw the opportunity in that business, but I didn't know how to position myself to do a good job in it." Bicycle dealers generally stay away from the premiums market -- also called "special markets" -- because their suppliers, by and large, won't allow their products to be shipped directly to the consumer unassembled. It's up to the dealer to assemble and repackage the bicycles for shipment. Trek also has strict rules that prevent dealers from selling bicycles directly to consumers by means of mail order, a practice that could jeopardize dealers in other markets. It seemed at first blush as though the premiums business would be more trouble than it was worth. It would not have been surprising had Zane politely declined Chesebrough's offer.

But Zane went ahead and called John Burke, then Trek's vice-president of sales and now the company's president. Burke gave him the go-ahead but added a stern warning: if Trek bicycles ended up in other geographic regions poorly assembled, so that local dealers were compelled to fix products they hadn't sold, that would be the end of Zane's foray into special markets. Also, Burke said, Zane would need to ship every bicycle directly to the end user rather than bulk-ship to a single corporate address; that way Trek could be sure its bicycles were going to individuals and not being diverted to retailers for resale. For Zane, there were potential inventory problems. He would need to buy and store enough bicycles to accommodate Chesebrough's incentive program without knowing how many salespeople would actually reach their goals and earn bicycles. "They gave me a purchase order for up to 125 bicycles," says Zane -- a lot of bikes for a store used to stocking only 450 bikes. "If they couldn't use all of them, I'd be stuck with the inventory and have to unload it in the store."

Nonetheless, Zane believed that the probability of success with the premiums program outweighed the risks. The Chesebrough program would require him to make very few capital expenditures. He already had enough manpower in his three-person shop to handle the orders, and he was confident that the customer-service culture he had worked so hard to build would serve him well in the new market. He had made a name for himself in the industry by offering his customers lifetime free service, guaranteed lowest pricing, and a host of other perks. "I thought that if I went in with a service attitude and did my fulfillment better than anyone else, then it would be a success," says Zane. The Chesebrough deal would be his beta test.

He hired his older brother, Ken, and gave him free rein to set up the premiums fulfillment system. "But remember," he cautioned him, "the product we deliver has to be perfect." Chris sent all premiums recipients a questionnaire asking for their inseam measurement, their height, and their style of riding, because "you can't send one size bike to everyone." When the bikes from Trek reached Zane's Cycles, they were assembled, checked for factory defects, test-ridden, then partially disassembled for shipping. Zane included with the bikes a detailed instruction sheet that guided the customer through a minimal amount of assembly (putting on the handlebars, seat, pedals, and front wheel), a special wrench for tightening pedals, and a toll-free number through which recipients could reach a mechanic who would help them with any difficulties. "Our first time out of the gate, we got 15 to 20 calls on an order of 125 bikes," says Zane. "We didn't have one dissatisfied recipient, and Chesebrough-Ponds hit 184% of its initial sales goal."

Chris Zane had always joked with his Trek representative Craig Seeger that life was much easier for manufacturers than for dealers. Manufacturers, he groused, might sell 100 bicycles to a single customer, whereas dealers were obliged to create 100 different relationships to sell just as many products. "If I could just find a way to sell 100 bicycles to one customer," he'd mused. Now he had.

Weighing options
Although the Chesebrough-Ponds deal had fallen into his lap, Zane didn't delude himself into thinking that the premiums business would be a snap. In fact, he refused to actively market himself to other companies until he'd done his homework on the industry. "I spent the next three years going to trade shows, talking to people in the industry, figuring out how the business worked, and thinking about what my point of difference would be," he recalls. From 1993 to 1996 he prowled the Premiums/Incentives Show in New York City, and he dragged a Trek representative to the Motivations Show in Chicago, so that he "could show him this was a viable opportunity." At the time, four other bicycle companies were in the premiums market, but Zane noted that they were requiring recipients to do the kind of complicated reassembly that "it takes me two years to teach my mechanics to do properly." Zane fancied himself an expert on customer relationships and knew intuitively that the premiums business was not just about handing out free merchandise. "When a recipient receives a gas grill on a Friday afternoon, say, and has to spend seven hours on Saturday assembling it, he's not going to like the company that gave it to him," he surmises. Zane's job, were he to enter the market, would be to help companies build and maintain good relationships with employees by giving them merchandise that would make them feel good, not irritated.


Preoccupied with what's working -- or what's not -- many CEOs see only linear paths to growth.


As he was exploring the premiums market, Zane also weighed other opportunities for making his company "larger, stronger, and faster." In 1997 his store posted a respectable $1.6 million in revenues on sales of 3,400 bikes and was solidly profitable. But Zane yearned for new challenges. He considered adding a line of exercise equipment, opening a cellular-phone retail outlet, and expanding his retail operation into other areas. He had, in fact, opened up a second store in 1986, only to lose his $100,000 investment in a mere 10 weeks. Granted, he was older, wiser, and more established now, but he still wasn't sure the numbers for opening additional stores were in his favor. "The best tip I got was from a friend in the Washington, D.C., area who owned a chain of bike shops," says Zane. "His revenues were probably $20 million, but in the end his take-home pay wasn't much more than mine, and he had a lot more headaches."

And so Zane continued on as a minor player in the premiums market. Trek passed on leads to him, and he accepted orders from corporations when they called, but he didn't aggressively pursue the business. He also learned, sometimes painfully, that the market could be far less predictable than he had expected. In 1996, for instance, General Mills contracted with Zane to ship bicycles to grocery stores that ordered a certain amount of cereal. The idea was for the stores to give the bicycles away in sweepstakes contests intended for customers. But a grocery chain in Ohio had something else in mind. It ordered enough cereal to earn 28 bicycles, then diverted them to another division of its company, an odd-lot retailer, where they were sold for $79 apiece. "Trek went crazy," recalls Zane. "They asked me what the hell was going on -- how could this store be selling a $260 bike for $79? It really screwed up the value of the product, and I had local dealers calling me." Zane managed to assuage the dealers and Trek, but he was forced to acknowledge that there were certain elements of the market that he just couldn't control.

He learned a similar lesson when he signed a deal with Tropicana, six months later. The company's "Juicy Rewards" program offered New York City-area consumers merchandise in exchange for the UPC codes, or bar codes, on orange-juice containers. Tropicana anticipated needing only 200 or so bicycles for the 18-month program, since 1,000 codes were required to earn a bike. But the company vastly underestimated New Yorkers' lust for free merchandise. Legions of sanitation workers in the five boroughs and at the city's two major airports armed themselves with box cutters and began hacking away at empty Tropicana containers, collecting enough UPC codes to claim one or more bicycles. Restaurant and bar owners who bought the juice in large quantities also cashed in. "We had one guy receive 14 bicycles from us," recalls Zane. "He was a New York City garbageman." Zane was shipping between 20 and 100 bicycles a week, and Tropicana "got their budget blown out of the water," he recalls. By the end of the program, more than 2,000 bicycles had been shipped -- a number that might have terrified him at the outset but that turned out to be manageable after all. After that experience it was clear that Zane could remain in the market as a sometime incentives player without straining his company or taking huge financial risks.

He still didn't know whether he "wanted to make the financial commitment to enter this market in a big way," he recalls. And then he met with George Kling.

Moving to the next level
Kling was a local consultant whose stock-in-trade was introducing companies into the premiums and incentives markets; Zane had first met him in 1992 at a trade show. Back then Kling was offering, for $500, a daylong primer on the industry, which Zane opted not to sign up for. "I didn't understand the value of what he could give me," says Zane. "I didn't want to spend the money."

But by 1998, Zane had begun to wonder if there was more to the business than he was seeing, so he called Kling, who also lived in Branford. "It was the best $500 I've ever spent," says Zane. "I thought I understood the business, but I really had no clue." Kling laid out all the ways in which the same product could be brought to market -- through promotional agencies, advertising companies, incentives catalogs, supermarket syndicators, and premiums representatives. "When he came to me, he was convinced there was a pot of gold somewhere, but he just didn't know how to get to it," recalls Kling, whose clients have included AT&T, Crabtree & Evelyn, Gillette, and Izod Lacoste. "I tell many more companies to stay out of this business than I encourage to go into it," he adds, "but when I saw what Chris had to offer, I felt he could be successful." When Kling told him just how big the pot of gold was, it didn't take long for Zane to do the math. Premiums and incentives were a $23-billion market, while retail bicycles weighed in at just $2.5 billion.

But if the meeting with Kling whetted Zane's appetite, it also provoked intense anxiety. It became painfully obvious to Zane that although the new market offered tremendous potential for growth, it also required money, patience, and professional guidance. Accustomed to running his business on his own, Zane was a pathological micromanager, and he didn't relish giving up control. "I hemmed and hawed," he recalls. "George wanted a $60,000 retainer to advise me, I was going to have to increase my facility, and we were looking at a long gestation period -- maybe six months until we got an order." Zane's wife, Kathleen, reminded him that he had lost much more than $60,000 when the business was far smaller and less profitable, and she encouraged him to take the risk. "So I rolled the dice," says Zane. "And it was a lucky roll."

Within five weeks of hiring Kling, Zane had 16 premiums representatives nationwide. Reps are usually loath to take on new clients for fear that a new company's less-than-perfect service will damage their reputations. But Kling's word was as good as gold in the industry. "For what we paid him in fees, we jumped five years in the business," says Zane. "Without him, we probably wouldn't have survived."

With a marketing machine in motion, Zane needed to make significant changes at the shop itself. "We made a real commitment to the business model," says Ken Zane. "We had to find a new facility, hire and train help, and develop the operating and control systems needed to deliver products." Less than a mile from the shop, Chris Zane found an 18,000-square-foot warehouse and charged his brother with transforming it into an assembly and distribution center. "The thing that's different about the premiums market is that it's systems driven," notes Chris. "In a retail environment, your people do whatever it takes to make a sale, and there's a lot of creativity involved. You aren't focused on process. In the corporate market, you just have to get the job done." Ken, who had spent his share of time assembling bicycles, taught his system to eight new employees, cross-trained them, and set up an assembly line in which three employees built, quality checked, and then disassembled every product.


"For years I had my hands in every aspect of the business," says Chris Zane. "I'm a better manager now."


As his company grew more complex, it became clear to Chris that he could no longer afford to micromanage -- a trait of his that, in fact, his staff viewed as increasingly irritating. His brother notes that "as the organization grew there was more on Chris's plate, and things would occasionally slip through the cracks." Chris agrees, acknowledging that he sometimes let orders for parts sit on his desk for days. Tom Girard, who has been with Zane for eight years, says that "for quite some time, he had his fingers in the pie too much. Once in a while, he'd come out and throw a wrench in the gears for no reason, just because he had to get his hands in it. Then we'd have to fix the bike all over again." Girard, now the company's retail manager, says that Zane is now forced to concentrate on marketing, leaving Girard alone to do what he does best -- manage the store and the employees. "For 16 years I had my hands in every single aspect of the business," says Zane. "But I'm a better manager now. I have to let the system be handled by my staff so that I can stay focused on opportunities that come up."

The changes have also made Zane more focused on cash flow. Although he's paying Trek more than he ever has -- for an increasing number of bicycles -- he's also found a way to make that work to his advantage. He always pays his bills early and consistently captures discounts for doing so. "I make my salary on the discounts we get from paying our vendors early," he says. Even if he needs to draw on his line of credit, he typically makes more from paying early than he pays out in interest. "I've always tried to pay cost-effectively," he says. "But now it's an important part of our business."

Staking a claim
Two years after entering the premiums market, Zane now has 24 reps nationwide and has leveraged his long-term relationship with Trek to become its exclusive distributor in special markets. Zane projects that sales, which reached $2.2 million in 1998, will increase to $5 million by the end of this year, with premiums sales accounting for two-thirds of revenues and an even greater percentage of profits. He has 20 full-time employees in the fulfillment warehouse now, bringing his total staff to 40, and has even hired a director of special markets, Heather Boardman. And he is coping with more stress and uncertainty than he ever could have imagined back when he took that first incentive job from Chesebrough-Ponds. "I've got a full head of gray hair," says the 35-year-old.

Zane's emphasis on service and speed is what allows him to differentiate himself in the marketplace, but it also puts a huge burden on Zane's Cycles. While many companies that sell their products as premiums take six to eight weeks to deliver, Zane's promises fulfillment in two weeks. That means it needs to have inventory ready to go. "Tomorrow, I could get an order for 5,000 bikes or no order," Zane says. "But I still need to build 100 bikes a day to keep my staff busy and happy. No matter what, the machine is in motion, and there's no way to stop it. I have to make sure we sell the stuff. We need to stay limber, and that's trying." The fast delivery and meticulous assembly-and-shipping process make special markets an expensive proposition for Zane; he spent $200,000 setting up the system. But his methods, he thinks, also help insulate him from competition. "You'd have to make a huge capital investment to be competitive with us," he says.

Corporate customers have asked him if he'd consider working with other products, such as inline skates, but he's flatly refused. He's learned a little something about picking and choosing among opportunities. "You put them in a box, and you send them out," he says about the skates. "Where's the service point of difference? I wouldn't have the assurance of knowing I'm bringing something of value to the table." So he's passed on that one.

It hasn't escaped his notice that he could also sell bike accessories, such as helmets and pumps, to premiums recipients by mail order, thus capturing potentially loyal customers outside his New Haven County market. But he's rejected that opportunity as well. "I don't want to take business away from other bike shops outside my market," he says. "And I don't want to take Trek sales away from other dealers." Indeed, while Zane gleefully boasts of putting other Trek dealers in his own market out of business, he'd be in trouble with Trek if he threatened established dealers further afield.

And so he finds himself evaluating opportunities using an increasingly complex set of considerations. In the meantime, Zane's increased involvement in the premiums market has elevated him to the higher playing field he has always envisioned being on. It has turned Zane's Cycles into a company that befits its owner. As a 16-year-old kid who thought it would be cool to own a bike shop, Zane was never really in danger of having his company outgrow him. But once in his thirties, Zane could have outgrown the bike shop. As things have turned out, he now spends less time in the shop and a great deal of time and money visiting corporations and traveling with his reps. And when he is in his shop, he thrives on "the hot and cold of corporate sales," negotiating deals that may or may not come to pass, committing to long-term programs without knowing what products he'll have to sell, and shooting from the hip. And he has every intention of transforming his shop into a $12-million company. All he needs now is a little luck.

Donna Fenn is a contributing editor at Inc.


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