Looking for customers? Why not grab them inside someone else's store?

We're going to get philosophical for a minute, so please bear with us. We'll need that patience, because we want to talk about shopping malls. (We promise we won't take long.)

You can think of a shopping mall as acres and acres of enclosed space, filled with spooning teenagers who hover outside individual shops. Or you can think of it as one giant department store, with the separate retailers making up sections of the largest Macy's, Burdines, or Dillards you've ever seen. (In any event, the teenagers remain.)

We like the mall-as-department-store image best, because it seems to describe what's actually going on. People who go to the mall -- even if they have a particular purchase in mind -- usually duck their heads into a few other stores "as long as we're here." That's no different than the person who goes to Sears for a new socket wrench and then meanders over to look at dishwashers or bikes.

Retailers -- both at Sears and the mall -- know this. Indeed, they count on it. They figure people attracted to one kind of merchandise will like similar items. That's why you have malls filled with pricey shops (The Galleria, in Fort Lauderdale, Fla.; Plaza Frontenac, in St. Louis), middle-class malls (ones built by Rouse Co.), and malls composed of factory outlets (like the ones in Pigeon Forge, Tenn., and Tukwila, Wash.)

Today, though, some people are taking this a step further. They're opening their stores not next to a retail store that offers related merchandise, but within it.

Larry Margolis offers car phones from inside automobile dealerships and at car washes.

Marie Mahan is selling cookies in Arby's restaurants, hotel lobbies, and a hospital.

And Robert R. Johnson ships packages nationwide out of other people's retail stores.

In every instance, overhead is virtually nonexistent. There are no stores to lease, no utilities to pay, no fixed operating costs to be met whether there are any sales or not. Usually, a store-within-a-store pays a percentage of revenues to its host in exchange for taking up what is most often less than 100 square feet of space. And to hear the piggybackers tell it, it's the only way to sell.

"The piggyback idea works," says Larry Margolis, 21, who started the Parsippany, N.J.-based Car Phone Connection Inc. two years ago. "Our start-up costs are nothing, and anywhere there is a good stream of traffic we could open a store.'

But the biggest advantage from Margolis's point of view is that his stores, by definition, are instantly profitable.

"If a store sells four or five phones a week [at an average price of $1,200 each], it is doing OK," says Margolis, who has sold 33 Car Phone Connection franchises so far. "We don't have a huge overhead nut to meet. On average we pay the host, such as the automobile dealer, $75 to $100 per unit. So if we don't sell a lot of phones, there's not a lot of rent.'

But the host is more than a benevolent landlord. While all the piggyback operations advertise, it is the host -- at least at first -- who attracts the walk-in traffic and takes most of the risks that come with opening new stores. And according to Marie Mahan, that's perfect.

Mahan, 45, had 7 Flour Pot cookie stores of her own in Iowa and had franchised 20 more when she hooked up with Arby's. "They were looking for a way to sell a distinctive dessert item, and I was looking for a way to increase our sales," says Mahan, who makes her own dough as well as selling the cookies. Under the joint venture, tiny Flour Pot cookie stands are being set up in Arby's restaurants, with Arby's paying the $12,000 or so in construction costs.

"It would take me years and years to gain the experience in franchising that Arby's already has," says Mahan.

Robert R. Johnson has found a ready-made market for the 200 United Package Mailing Service centers he has set up, many in drugstores and hardware stores, throughout Virginia. The centers accept packages and route them through United Parcel Service and Federal Express.

Johnson, 42, an 11-year veteran of UPS, provides his hosts with a scale, forms, and training in handling packages. He charges about a 15% to 20% premium over what the shippers would bill if the hosts were to deal with them directly. His host stores, whose employees process the orders, receive about 60¢ for each package they handle.

"We started out by having a storefront, but the one person who would run a store can now supervise 80 accounts a week," says Johnson. "It's a wonderful arrangement for us.'

The host retailers like it as well. They say the store-within-a-store attracts new customers, serves as a way to differentiate themselves from the competition, and provides additional revenues at very little cost. Often, they say, the space they lease to piggybackers wasn't being used, and they are more than happy about turning dead space into cash.

"It's just been a real good deal all around," says Ronald G. Davis, who owns Tuckahoe Cardinal Drug, in Richmond, Va., and was one of Johnson's first hosts. "You can do this yourself, but if you do, you've got to take the time to learn the business, and you're liable if anything goes wrong. This is risk free and guarantees a profit." Even better, says Davis, is the increased traffic from having the United Package outlet in his store. He handles between 40 and 50 packages daily -- and as many as 200 a day in the weeks before Christmas -- ``and it is almost impossible to come in here to mail a package and walk out without buying something.'

What Davis is saying is that the piggyback store adds value to his operation. His drugstore is better with the United Package store than without it. And as long as that remains true, it's a good deal for everyone. But if a customer has a problem with the piggyback store, he is likely to blame the host as well, no matter how often Davis tries to point out that they are separate operations.

There are other problems, too. First, the entrepreneur is beholden to the host. The host decides where the piggyback store is going to go and what hours it can do business -- hosts, as a rule, allow the piggyback store to be open only when they are. In some cases, hosts supply the employees, who the public will assume are working for the entrepreneur.

So we're talking a serious loss of control here, in exchange for low rent. And even that advantage may be fleeting. If sales are good, the fixed percentage you pay in lieu of rent can end up being thousands of dollars per square foot.

"But that," says Larry Margolis of Car Phone Connection, "would be a very nice problem. If I'm paying all that rent, it means my sales are wonderful.

"From my point of view," he adds, "this is the perfect relationship.'

Now as we said at the outset, this idea is not exactly new. The fancy term for it is cross-selling, and it's been done for years. Mail-order companies traditionally rent mailing lists from retailers and from magazines to try to find customers receptive to their pitches. Smart companies do this internally, knowing it is easier to sell to an existing customer than it is to find a new one. American Express, for example, has formalized this idea. Its One Enterprise program, in which the company might try to get one of its cardholders to buy traveler's checks or open a Shearson brokerage account, provided more than 10% of the company's $16.1 billion in revenues last year. And, of course, there are the examples of a bank setting up branch offices within a department store, or the department store itself contracting with someone to run its computer or jewelry departments.

But the piggyback approach is far less subtle. You're not trying to attract similar customers who might be walking by, as you would in a mall. You're not even trying to tap your existing customers' loyalty with a new product, as American Express does. Here, you are coming very close to creating a joint venture with someone in a related -- but not identical -- line of work.

Given the success of Margolis, Mahan, and Johnson, that sounds like an idea whose time has come.


If the idea of riding piggyback appeals to you, here's how to go about it

There is a lot to be said for setting up within someone else's shop. You don't have to build store traffic; it already exists. Rents are low -- at least at first -- and you don't waste time identifying prospects. Your host has already done it for you.

If all this sounds appealing, there are a few things to keep in mind:

Go where the people are. This entire marketing strategy hinges on locating in high-traffic areas. If you aren't making a lot of money on each sale, then you need a lot of volume. That is why United Package Mailing Service, which operates strictly as a middleman that doesn't mark up much, sets up in drugstores and hardware stores.

Be compatible with your host. Remember, you are trying to get your host's customers to be your customers, so there should be some kind of common ground -- no matter how tenuous. Larry Margolis says car washes have proven to be good locations for his car-phone franchisees because "you have people who, by coming to the car wash, show they have little time and that their car is important to them.'

Bring something to the party. Just as you are counting on your host's customers coming to you, your host is counting on you to increase traffic. People who come into Arby's for Marie Mahan's cookies may order a cup of coffee as well.

Remember, you are beholden. Your host is going to set the times he or she -- and therefore you -- are open. If you are counting on huge weekend sales, and the host is only open during the week, you'll be in trouble.

Published on: Aug 1, 1988
The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.