High Noon in Aisle Five
No harm in asking. That thought had Richard Rebh sitting at a round table in the corner of a Chinese restaurant in Manhattan on an afternoon in July of 1999. On the other side of the table was Paul Carlucci. Both Rebh and Carlucci are CEOs, but the parallel pretty much stops there. Carlucci is a corporate chieftain who runs a division of News Corp., Rupert Murdoch's global media empire. Rebh heads Floorgraphics, an advertising company based in Princeton, N.J., that specializes in placing colorful poster-size ads on grocery-store floors.
In mid-1999 Floorgraphics was three years old. Its revenue would hit $25 million that year, an impressive number but, of course, scarcely a blip next to that of News Corp. (whose sales for 2003 totaled about $17 billion).
The meeting at the Dish of Salt restaurant was at Floorgraphics' request, but it was Carlucci who ordered a platter of hors d'oeuvres and presided. Accompanying Carlucci was Dominick Porco, then his second-in-command at News America Marketing. News America is best known for its SmartSource discount coupon booklets (called freestanding inserts or FSI), which hundreds of newspapers distribute every Sunday. In 1997, the News Corp. division began offering in-store promotions, notably dispensing discount coupons from little red boxes on shelves in thousands of grocery stores.
Stunned by what they perceived as a bald threat coming from one of the world's most powerful companies, Floorgraphics executives quickly left the restaurant.
By mid-1999, News Corp. was reportedly eyeing Floorgraphics' burgeoning floor-ad business, a niche Floorgraphics had created and considered its own. Rebh's goal in seeking an audience was to strike a deal that would allow the two companies to cooperate in the in-store marketing business--to "live in this space together and not conflict with each other" is how he puts it. Along with Rebh were two other Floorgraphics executives: his brother George and Gary Henderson, a sales executive.
A waiter arrived with the hors d'oeuvres platter, and the five men exchanged pleasantries. Then Carlucci turned to Rebh: "What's on your mind?"
Rebh pointed out that his company's expertise was in advertising and graphic arts, and suggested that what Floorgraphics was doing with in-store advertising was quite different from what News Corp. was doing with in-store promotions. Then Rebh got to the point: "Maybe we could work out a business arrangement where we would give you equity in our company so that you would have an in-store advertising play." In return for News Corp.'s leaving in-store advertising to Floorgraphics, Rebh proposed, his company would stay out of in-store promotions.
As Richard and George Rebh recall four years later, the exchange then turned ugly. Carlucci declines a request for an interview, according to a News Corp. spokesman, who says the company has no comment. But the Rebhs say the conversation went something like this:
"So you're not here to sell your business?" Carlucci asked.
"No," Rebh replied.
"Congratulations, guys, on what you developed," Rebh recalls Carlucci saying, "but I have one problem: I work for a guy who has to have it all. And I kind of like floor advertising. So eat up, boys." Then came the kicker. "Carlucci said, 'I want to tell you one more thing. If you ever go into my business, I will destroy you."
Rebh's brother leaned over the table. As Rebh tells it, "George asked, 'Paul, let me see if I've got this right? It's okay for you to come into our business. That's fine. But if we ever go into your business, you're going to destroy us.' And Paul said, 'That's right."
Stunned by what they perceived as a bald threat coming from one of the world's most powerful companies, Rebh and the two other Floorgraphics executives quickly left the restaurant. They had a sinking feeling that they had just blown their best chance to avert Murdoch's juggernaut.
The meeting in Manhattan would presage fierce competition between Floorgraphics and News Corp. The way the showdown has played out does not fit any of the narrative conventions that customarily describe what happens when vastly asymmetrical forces meet. It is not a David-and-Goliath story (ingenuity triumphing over raw power) or one like the tale of Icarus, who flew too close to the sun, causing the wax on his wings to melt and bringing him crashing to earth (arrogance of a lesser power causing it to overreach).
Instead, the Floorgraphics-News Corp. rivalry has a story outline very much its own. That the outcome is still in doubt is a testament to the Rebhs' true grit, but no less to their stubbornness. "Ninety-nine percent of people would say, 'Let's get out while the getting is good,' but we said that we were two guys who would never do that," George Rebh says, recalling the brothers' vow to tough it out against News Corp.
People say that Richard and George Rebh look like brothers, yet no one would mistake one for the other. Richard, who is 49, is of medium height and rail thin, his angular features softened by a ginger beard flecked with gray. George, who is two and a half years older, has brown hair and is taller and broader than his brother. Richard is a vegetarian, George is not. "George's genius is how he deals with people," says Fred Potok, who launched Floorgraphics in 1996. "Richard's genius is business."
Potok says he came up with the idea for floor ads while running his industrial graphics company in Montclair, N.J., that used to install laminated logos on the sides of trucks. To sell the concept of floor space as an altogether new ad medium in retail stores, Potok recruited George Rebh, who had strong credentials as both a salesman and a freelance artist, as a partner. The plan posed a daunting challenge. It meant overcoming retailers' gut resistance to ceding control of their floors. "You want to put what on my floors for advertisers?" George remembers grocers asking. It also meant persuading manufacturers such as Procter & Gamble and Campbell Soup ("You're suggesting that people walk on my name?" was their initial response) that two- by three-foot vinyl floor ads were an inexpensive way to boost sales.
But floor ads did catch on with packaged-goods manufacturers, in part because of favorable test results, says Joseph Martino, a vice president of Roper ASW Inc., a market research company based in New York City, who has studied in-store marketing for 23 years. "Now," he says, "floor advertising has become an important part of the mix of the whole scheme of in-store marketing" that can jack up a product's sales by as much as 25%.
By the summer of 1997, George and Potok believed they had proven the viability of floor advertising as a business concept. To develop Floorgraphics to its full potential, they concluded, they would have to build a business on a national scale. Neither was taking any salary, and the $200,000 in seed money that they had scraped together from family and friends was long gone. The next step, they decided, was recruiting a seasoned start-up executive, someone who would have credibility with professional investors.
They needed, in other words, someone like George's brother Richard. He has a stellar resumé, including an undergraduate degree from Princeton, law and business degrees from Stanford, and a three-year stint as a management consultant at Bain & Co. No place had seen a greater burst of high-tech entrepreneurship during the 1980s and 1990s than Silicon Valley, and Richard had been in the thick of it. For 15 years he had worked for high-tech companies there as a start-up strategist and marketing executive.
George asked his brother to join him at Floorgraphics, first as the company's emissary to financial backers and later as its CEO. It took Richard half a year to round up $5 million in private equity capital (he raised a like amount a year later, in 1999). One investor was Atlas Holdings, a holding company based in Greenwich, Conn. Atlas's managing partner, Andrew M. Bursky, says he admired not only the Rebhs' "intellectual firepower" but also found that they were "extremely competent with the execution of their business plan. They sweat the details."
Floorgraphics' strategy was to garner the rights to the floor-ad "real estate" of many of the nation's top grocery chains. If the company could do that, Rebh believed, it would attract no end to advertisers who would pay for its "billboards on the floor," as the company's slogan has it.
But the billboard division of the 3M Co., the Minnesota-based giant that Potok had approached as a partner in the venture in 1995, had entered the business on its own. There was no patent to bar 3M from taking this step. (Potok maintains that 3M acted on his idea. "They like to deny it, but that's what happened," he says. A 3M spokesman says the company has no comment.) Potok had not applied for a patent, relying on a lawyer's advice that the floor-ad concept was ineligible for one.
So Floorgraphics had to butt heads against 3M, which guaranteed large floor-ad payments to the chains. "They outbid us every time," Potok says. By and by, 3M's network of retailers would encompass A&P, American Stores, Winn-Dixie, and several Kroger divisions, while Floorgraphics had to scramble for lesser retail partners. Some automotive stores were willing to sign on, and George cobbled them into a mini-network. And he was able to assemble regional blocs of small grocery chains--the Price Chopper stores in the Albany-Schenectady market of upper New York State, for example.
Stymied by 3M from a quick ramp-up, Floorgraphics looked for a retail partner that could provide national reach. The answer was a mass merchandiser, Kmart, which then had 2,150 stores nationwide. Under a two-year contract signed in 1998, Floorgraphics secured the floor-ad franchise for all Kmart stores.
Rebh cut the Kmart deal on the strength of optimistic predictions from manufacturers' agents, who indicated that they would buy at least eight to 10 floor ads for each Kmart store. The stakes were high. Unless Floorgraphics could sell a certain number of ads, its investors had the right to seize control of the company. But when Floorgraphics' representatives called on the agents for floor ads, the results were disastrous. "They produced zero," Rebh recalls.
Rebh asked his five employees at the time to hustle ad sales, with his brother swooping in to close the deal. "Within 30 days we had 25 ads on the floor at the Kmart stores," Rebh recounts.
Then there came a stroke of good luck: 3M sold its billboard division, making its floor-ad business an unwanted orphan within the company. Floorgraphics jumped, buying 3M's operation for just under $2 million and achieving an instant network of 3,800 top grocery stores as venues.
Floorgraphics now had the floor-ad niche to itself, a niche that was living up to the Rebhs' greatest expectations. Its sales grew 3,410% between 1997 and 2001, to $59 million.
Seeing Floorgraphics survive--indeed, prosper--while a company the size of 3M dropped out of the competition had immensely buoyed the Rebhs' confidence. "We had succeeded in an environment where a corporation with deep pockets had been able to outspend us at every turn," George Rebh says.
Some retailers saw News Corp.'s message as an ultimatum: If you want to keep your in-store promotions contracts, stop dealing with Floorgraphics.
Although 3M's musclebound presence in the floor-ad market had hindered Floorgraphics, it also apparently had deterred others from entering it. Even so, 3M's departure would tempt other companies to compete, Richard Rebh reasoned, and he cast a particularly wary eye toward News Corp. "We thought that they were a potential threat just because of their resources and because, if you're already contracting with retailers and you have people servicing the stores, it's a natural add-on," he says.
The circumstances surrounding News Corp.'s aggressive expansion into in-store marketing were all the more disquieting. Since 1996, News Corp. and ActMedia, a division of Heritage Media, had been dueling rivals in the instant-coupon-machine business. The competition escalated into a price war that had caused a sharp drop in Heritage's stock value.
In 1997, Heritage Media called it quits, agreeing to a merger with News Corp. Murdoch paid $1.35 billion for Heritage, which owned TV and radio stations in addition to the ActMedia collection of in-store promotions programs, embracing the coupon machines and shopping-cart ads. Salomon Brothers termed $1.35 billion "a very reasonable price" in an analyst's report.
The swallowing of ActMedia enabled News Corp. to virtually corner the coupon-machine market, which gave it the leverage to pressure retailers into accepting lower fees. "They began going to retailers to renegotiate their contracts," Rebh says.
When Rebh looked into Murdoch's background, he was not reassured. One article, published by Fortune in 1998, was headlined ominously, "The Rules According to Rupert." It reviewed the media baron's relentless rise from a modest start--at age 22 he inherited a provincial Australian newspaper from his father--to the pinnacle of an international business with TV, newspaper, book publishing, and magazine properties on five continents.
Murdoch was, the article continued, a high-stakes gambler in his many ventures who was known for "breaking the rules, defying convention, waging war by any means necessary--and usually coming out on top."
Any company that stood in the way, Rebh came to believe, ran the risk of having to joust in court against a deep-pocketed giant. He was aware of what happened when Sullivan Communications Inc., based in New York City, had taken on News America in the freestanding insert market. In 1993, Sullivan sued News America in U.S. District Court, charging it with, among other things, predatory pricing. A year later, Sullivan quit the FSI business, selling out to News America reportedly for $15 million. (At least three other companies in the FSI or in-store marketing business--Theme Co-op Promotions, Menasha Corp., and Insignia Systems Inc.--would become embroiled in lawsuits in which they accused News America of anticompetitive conduct. The Theme Co-op case is pending, a judge's ruling dismissing Menasha's suit is on appeal, one involving Insignia is pending, and a second one was settled in 2002 under terms that were not disclosed.)
In spite of that reputation--or because of it--Rebh sought the meeting with Paul Carlucci in 1999. When Carlucci rebuffed the overture, saying the only kind of cooperation he could imagine was the sale of Floorgraphics to News Corp., Rebh braced for the worst.
He didn't have long to wait.
News Corp. not only entered the floor-ad business but also was soon portraying itself as the single-source provider of in-store advertising and promotion. As some retailers interpreted the message, it amounted to an ultimatum: If you want to keep your in-store promotions contracts with News Corp., stop dealing with Floorgraphics. That constituted an "unreasonable demand for exclusivity," wrote Dennis Hopkins, an executive with Giant Food Stores, in a November 9, 1999, letter to News Corp.
News Corp.'s negotiators wooed retailers by offering higher, guaranteed fees, according to industry sources. Floorgraphics had been paying its retailers 25% of the gross floor-ad receipts attributable to each one of them. That worked out to a 50-50 split of the profits, according to Rebh, which he considered a "principled" policy because it disclosed each partner's share of the benefits and denoted an equal partnership. Floorgraphics' rate schedule soon went by the boards.
In talks with retailers, News Corp.'s negotiator Jeffrey Jensen pushed for an all-or-nothing deal, according to Hopkins. Jensen "was aggressive. [He] was forceful. It was, like, 'Here's the money, you either want the money or you don't want the money, take it or leave it, I really don't care," testified Hopkins, who represented Giant and four other major U.S. grocery chains owned by international food provider Ahold, in a lawsuit unrelated to the negotiations.
The tough talk backfired in some cases--notably, in News Corp.'s dealings with A&P. According to Floorgraphics, the people at A&P said they didn't like how they were being treated. "They [A&P] were not happy with anyone dictating terms to them as to how they would run their business," says Mike Devlin, a Floorgraphics senior vice president. (A&P declined to comment for this article.) As a result, A&P asked Floorgraphics to be its one-stop in-store marketing partner and sign a contract covering floor ads and all other in-store marketing at the 700-plus stores it then had nationwide. Despite Carlucci's warning that Floorgraphics would enter News Corp.'s business at its peril, Rebh accepted A&P's offer.
Floorgraphics had to invest $5 million to develop its own instant coupon machines, shopping-cart ad program, and other in-store marketing media, among other costs. Meanwhile, word was filtering back to Floorgraphics' employees from News Corp. counterparts that News Corp. had authorized a $50 million "war chest" to put Floorgraphics out of business, according to court papers that would eventually be filed by Floorgraphics.
Richard and George Rebh girded for a long struggle against News Corp. They attribute their resolve to the influence of their father, a West Point grad and Rhodes scholar who compiled an exemplary military record as the commander of a tactical deception unit during World War II. He closed out his career as a major general in the U.S. Army Corps of Engineers.
Having a father like theirs, George says, instilled a credo: "You don't cower from a fight. If someone is going to bring a fight to you, you don't turn and run. That is in the military DNA."
Given that Richard Rebh has come to speak scathingly of News Corp. as the Evil Empire, it's noteworthy that Floorgraphics struck the first direct blow in the two companies' rivalry.
With the help of a headhunter, in March 2000 Floorgraphics hired Steven Marquis, who had been a News America vice president in charge of $45 million worth of contracts with retailers. As a Floorgraphics vice president, Marquis was to oversee contract negotiations with retailers and create in-store marketing programs that matched News America's.
From News America Marquis brought not only his network of contacts but also a box full of store lists and other materials copied from the company's records. Alleging the unlawful "use and disclosure" of confidential business information, News America sued Marquis and Floorgraphics in a Connecticut state court. But in response to a warning from News Corp., Floorgraphics inserted a clause in Marquis's employment contract saying that he was not to pass along any such information to his new employer. And when Marquis heard that News Corp. might sue, he disposed of the copied materials without showing them to Floorgraphics, a judge found. The judge decided the case in favor of Floorgraphics and Marquis, saying that News Corp. had not proved that it had suffered any damage.
There was soon another round of employees jumping ship, but in the opposite direction. In July 2000, Gary Henderson, a Floorgraphics senior vice president in charge of sales to advertisers, defected to News Corp. as a consultant. Then Rebh sued Henderson, claiming he was making "unlawful financial demands" on Floorgraphics and threatening to divulge its confidential information.
For his part, Henderson accused Floorgraphics of not granting him stock options that he said were promised to him. The case settled out of court, says Rebh, with Henderson returning a Floorgraphics employee directory to the company and each side paying the other $1. (Henderson, too, declined to comment.)
Henderson's defection would have had less of an impact if the five sales representatives whom he supervised at Floorgraphics had not followed suit. "Henderson orchestrated a conference call among employees, where he told them that he and News Corp. were going to destroy [Floorgraphics] and they had only one option to preserve their financial well-being, which was to leave [Floorgraphics] and start working for News Corp.," Rebh wrote in the Floorgraphics court filing.
On October 19, 2000, came what one Floorgraphics executive calls the "Thursday massacre." Within 73 minutes that morning, four of the company's leading salespeople sent e-mails tendering their resignations. A fifth sales representative departed for News Corp. a few weeks later. The five employees together accounted for more than half of Floorgraphics' sales.
News Corp. offered four of the five employees jobs paying from $250,000 to $275,000 a year and guaranteed for one year--roughly double what others in comparable positions at News Corp. were earning, according to one of News America's former senior sales executives. The five defectors, along with Henderson, would eventually constitute News Corp.'s entire floor-ad sales staff.
Henderson pursued at least five additional Floorgraphics employees, recruiting them to work at News Corp., according to the court papers. Mike Devlin, a Floorgraphics senior vice president, recalls a voicemail message from Henderson saying, "We've got some great opportunities over here. You're well thought of. You can make a lot of money."
A series of press releases touting News Corp.'s achievements soon began to arrive by mail at Floorgraphics employees' home addresses. One press release, dispatched in July 2001, announced a further blow: Kmart had jumped ship to sign an exclusive floor-ad contract with News Corp.
To head off further defections, the Rebhs and Potok talked individually with each of the company's then 55 employees and demanded their loyalty. "They really wanted to understand where my head was at," recalls Bob Kamen of his post-massacre meeting with the Rebhs. Kamen says that he reassured the brothers that he had a high regard for both of them and the company and was devoted to his job. "It was emotional," he adds. "I said, 'I'm here for the long run. If this business closes, I'm gone. If the business is here for 10 years, I'm there with you."
Rebh took one further precaution. He required that all his employees sign noncompete agreements. Since that time, no one has broken ranks and joined News Corp.
As the competition between News Corp. and Floorgraphics has heated up, Rebh's files documenting News Corp.'s aggressive business practices have grown. For example, there is a letter sent to retailers early last year by Dominick Porco, who was then News America's president. The letter charges that Floorgraphics had complied with its promises to advertisers "below 50%" of the time. The claim, Rebh insists, is dead wrong (he cites an independent audit that put the company's average compliance rate between 91% and 94%) and is "clearly defamatory," although Floorgraphics has not filed suit. "We don't like to sue News Corp.," he says. "They've got a lot more money to put in a lawsuit than we do."
On October 19 came the "Thursday massacre." Within 73 minutes that morning, four of Floorgraphics' leading salespeople defected to News Corp.
The Floorgraphics headquarters is on the second floor of a small office building with large windows and blond oak paneling. The office is a short walk to the Princeton Junction commuter rail station, from which it's only a one-hour train ride to New York City, where Rebh's sales reps call on ad agencies.
In the teeth of News Corp.'s challenge, revenue growth has slowed. Still, it has continued rising at a remarkable clip. From 1999 to 2002 company revenue rose 280%, to $61.7 million. Sales for last year were projected to reach $75 million.
To outflank News Corp. in appealing to advertisers, Floorgraphics has devised an array of sophisticated new floor ads. An electronic version talks and flashes (a diaper ad emits a baby's giggle, for example) when a shopper steps on a button. There's also a 3-D model. Determined to become a smarter competitor, Floorgraphics has applied for patents covering those new technologies.
And the company has been extending its reach beyond the U.S, with a subsidiary in Spain and licensees in Europe and Latin America. All told, it has a tentacle of one kind or another in 18 countries. "In-store marketing is an American innovation that we believe will spread around the world like blue jeans and rock 'n' roll," Rebh says. "I don't think News Corp. is going to challenge us internationally because they're focused on the U.S. marketplace."
In the U.S., the rivalry with News Corp. has been at its most intense in the jockeying over the in-store marketing contracts of the nation's biggest retailers. The results are mixed. Floorgraphics retains A&P and Safeway in its camp, while News Corp. has gained Kroger, Albertsons, and--a big loss, symbolically--Kmart. (In September 2001, in the midst of haggling about its contract with Floorgraphics, Kmart sued, alleging that the company purported it had a "lifetime contract" with Kmart and that it was interfering with and intimidating potential advertisers. Floorgraphics countersued for damages, claiming breach of contract. The claims, which were stalled during Kmart's bankruptcy proceedings, are still pending.)
By Rebh's reckoning, Floorgraphics and News Corp. have achieved rough parity in their attempts to invade each other's turf: News Corp. has floor-ad contracts in about 5,500 grocery stores (versus Floorgraphics' 10,000), while Floorgraphics has instant coupon machines and other in-store promotion programs at 4,500 locations (versus News Corp.'s 11,500), he says. (According to News Corp.'s website, its floor ads are in 7,500 drug, grocery, and mass merchandise stores, and it has a marketing presence in 30,000 stores.)
News Corp. has been gaining share in its freestanding insert business, which Rebh attributes to its ability to leverage its in-store marketing. Rebh says it works like this: If advertisers will agree to make News Corp. their exclusive FSI dealer, they can have discount rates for their in-store ads and promotions.
The effect has been to depress the rates that Floorgraphics charges, cutting into its profitability. Rebh's response has been to reduce expenses at Floorgraphics. It has 80 employees, down five from two years ago, and the company operates on a tight budget; staffers fly on discount airlines and bed down in places like Motel 6 or Holiday Inn. Rebh also implores retailers to think far ahead. "Remember how they acted when they were in control," Rebh tells retailers, referring to News Corp.'s pressure to accept lower fees in the wake of the ActMedia merger. "They want the money. They're not about paying you a fair rate."
To keep his company as competitive as possible, Rebh works extraordinary hours. Many nights he sleeps on a pullout bed in his Floorgraphics office. His only companion is Nicky, a short-haired calico cat. He logs 80 hours a week in the office, he says, not counting sleep time.
"That's the only way we can survive," he says in a somber tone.
Joseph Rosenbloom (JoeRBloom@aol.com) is a contributing editor at Inc.