Need new batteries for your laptop? Don't know what kind or where to get them? Catalog retailer Power Express thinks it can become a big business by putting you and the right manufacturer together -- electronically
Ken Hawk had more than just a diploma when he graduated from Stanford Business School, in 1993. He had a fledgling company -- complete with an A+ business plan, two backers, and a part-time employee. Now in its third year, Power Express, Hawk's company, sells specialty batteries by mail order and over the Internet to users of laptop computers, camcorders, cellular phones, personal digital assistants, and other expensive electronic gadgets.
Selling batteries wasn't an idea Hawk would have had on his own. In the fall of 1992, the then-29-year-old M.B.A. student received a letter from a Stanford alum "looking for someone at the business school to take an idea and develop it into a company." John Mackall, a lawyer in Santa Barbara, Calif., briefly laid out the battery scheme, suggesting that replacement batteries for the millions of electronic devices in use were no one's principal business. The idea had come to Mackall when he couldn't find a replacement battery for an AST laptop at the very store that had sold him the machine just two weeks earlier. "The salespeople were focused on computers, not spare parts," he recalls. Hawk immediately grasped Mackall's logic. Before entering business school he, too, had conducted frustrating battery searches as a portable-gadget-wielding sales rep.
As copresident of the Stanford Entrepreneurs Club, Hawk shared Mackall's letter with his fellow members, but he was secretly pleased that no one else showed interest. He also shared the idea with two classmates. The three of them were looking for a business-plan topic to fulfill a course assignment. In describing the idea, however, Hawk did not mention Mackall -- for good reason.
An electrical engineer by training, Hawk approaches projects methodically, with scientific rigor and analytical dispassion. He went to business school expressly to acquire the additional tools he'd need to launch his own company, and he ticks them off: "I already had sales and engineering, but needed to learn finance, operations, how to lead people and build a good team -- plus have time to think about it all." In their search for a business-plan topic, he and his teammates had devised a grid they could use to score various ideas, based on suggested businesses' ability to meet the trio's preselected criteria. In not mentioning Mackall, Hawk wasn't claiming the idea as his own. He feared that an idea that came with a willing investor attached "would bias the criteria," he says.
Of the 16 businesses the team considered and scored, the battery idea emerged on top. It met the most criteria, including "non-location-specific" (since the three had uncertain futures at the time), "high tech" (the course was called Entrepreneurship and High Technology), "low start-up capital" (for obvious reasons), "takes advantage of a trend" (trends are a lot easier to ride with than against), and "ability to build up barriers to entry" (an idea taken from Harvard Business School professor Michael Porter's theories on competitive advantage). Only then did Hawk tell his teammates about Mackall.
Since batteries aren't sexy, Hawk proposed an idea to keep his classmates interested: "Let's get the investor to pay us to write the business plan." Even a small sum, he reasoned, would "hook the investor into being very committed and into giving good feedback." Hawk wrote to Mackall that he and his associates would need 10 weeks to develop the plan, that they would provide him with weekly status reports, and that when the plan was done they would like his decision about investing as well as permission to find other investors if he opted out. And they would like $1,000 to cover their costs. Mackall agreed.
By surveying other students, the team confirmed their hunch that owners of laptops tended to own additional portable electronic devices, such as cellular phones and camcorders. "The weak link, and only consumable part in these products," the three wrote in their business plan, "is the rechargeable battery." What's more, they added, "there are over 1,000 different portable batteries," which, according to their research, "never last long enough between charges, wear out too soon, cost too much, and are difficult to purchase."
Finally, they checked their plan against Porter's theory, outlined in Competitive Strategy: Techniques for Analyzing Industries and Competitors (The Free Press, 1980), which held that five forces drive competition in any industry.
They decided that force one, the bargaining power of suppliers, wouldn't be a problem, since, as Hawk figured, "no single battery manufacturer or assembler makes every single battery in the world, and none of them has a total lock on distribution." Plus, the suppliers were selling to large, established networks of dealers and distributors, not to the end users Hawk and company were targeting.
The bargaining power of buyers, Porter's second force, didn't seem to pose a threat, either. Market research confirmed Hawk's own experience that for traveling businesspeople, the battery-draining devices they used were not luxury items but vital tools. When those people need batteries, they need them now, and "their time is worth a lot more than the cost of the battery," he says.
Analyzing the threat of new entrants, Porter's force three, was trickier. Rechargeable batteries account for about $1 billion of the $5-billion to $6-billion U.S. retail battery market. But the $1 billion is split among many disparate players -- battery manufacturers, portable-device manufacturers, computer-equipment distributors, discount superstores, specialty retailers, and direct marketers. The share held by any one group of sellers is hard to figure. Says Joe Carcone, vice-president of Sanyo, the leading manufacturer of rechargeable batteries, "I sell to 70% to 80% of the market, but the other 30% is so proliferated, I don't even try to address it." Hawk reasoned that the combination of a free catalog, an 800 number, and Internet access would be sufficiently novel to raise a new seller -- that is, Power Express -- above the industry's noise level.
Besides, each of the existing sales channels had shortcomings. Call a computer manufacturer's customer-service line and you're likely to sit on hold or be routed through a frustrating network of voice-mail menu choices. Laptop superstores might carry a particular battery, but you won't find it unless you know its original part number as well as the model number of your PC. "Old products are totally orphaned," Hawk says.
The threat of substitute products or services, Porter's fourth force, appeared small for the foreseeable future. The three M.B.A. students decided that portable electronic devices' power needs were unlikely to fall to the point that users could substitute throwaway (for example, C or AA) batteries. They spotted no looming technological breakthrough that would grant indefinite life to rechargeables. And battery makers told them that their own attempts to standardize products wouldn't pay off for several years at least.
Porter's fifth force, the industry's rivalry, Hawk characterizes as "pretty gentlemanly." Established industry players seem to welcome the new retailing concept. "It makes sense," says Sanyo's Carcone. "No single store has the ability to serve all customers." Supplier Pat Hoscoe of House of Batteries, in Huntington Beach, Calif., is happy to work with newcomers: "The way I see it, these smaller distributors are almost like a subdistributor for me. If I can't get the business directly, I can get it indirectly."
The business plan that Hawk's team wrote and submitted earned an A+ from the B-school professor who had assigned it. But an A+ business plan does not ensure a smooth start-up -- even when it attracts two angels. (Mackall and another investor put up $125,000 for a 23% stake in Power Express.) Power Express had to climb the same learning curve as any new mail-order company, but Power Express's had an extra wrinkle -- a critical one. Unlike customers of, say, J. Crew or Gardeners Eden, who know what they want when they call, the people who phone Power Express usually don't. Discovering what kind of battery powers their Zenith Mastersport ZWL-360-06 or Magnavox V08116BK01 is more daunting for most people than choosing among T-shirts or plant pots. It's a job best left to battery experts. The trouble is, would-be battery experts need to acquire their expertise somewhere.
In the beginning Power Express consisted of Hawk and a Stanford undergrad, Brian Villanueva, squeezed into Hawk's bedroom. Hawk's business-plan partners had conveniently exited the scene as their own career plans jelled. They sold Hawk their rights to the plan for a token $10. Hawk spent $4,500 on ads that were to appear in the June 1993 issue of three airline magazines, and with two suppliers lined up and 300 batteries in his database, he thought he was ready to go. Not so.
The phone started to ring on May 28 (more than three weeks before Hawk's graduation), and as Villanueva recalls, "calls were coming through for products we didn't have." Their hit rate -- the batteries they could supply versus those they couldn't -- was an abysmal one in 10. It didn't take genius to see that Power Express needed greater product variety. Then one of Hawk's suppliers was acquired and abruptly stopped filling orders. Hawk's next employee, hired to design the company's first catalog, suffered an eye injury and couldn't look at a computer screen for longer than an hour at at time. A dejected founder suggested to Mackall that perhaps the business wouldn't fly, but the lawyer saw a bigger picture than the freshly minted M.B.A. did. "He was discouraged because sales were going nowhere. He'd just graduated and thought he could build something big instantaneously," Mackall recalls. He gave Hawk a critical piece of advice: "Instead of looking at revenues, try to define success in another way."
Specifically, Mackall advised Hawk to concentrate on building his database of battery models. The suggestion was right on track. Today the company's silver bullet is a cross-referenced database of detailed specs, part numbers, descriptions, and digitized photos of more than 4,800 battery models. Power Express obtains that information from its nationwide network of suppliers, which includes the top 30 battery-pack makers and the occasional device maker or distributor.
Hawk has begged, borrowed, and bought the information that fills the database. He spent months negotiating contracts that gave him access to 1,500 battery models in the databases of two suppliers. Other entries have come from combing through the resource materials published by manufacturers. Sometimes he's asked customers to measure their batteries and read him the part numbers over the phone.
Once Hawk had the database and supplier network under control, he had to create and distribute a catalog -- inexpensively. He bartered with a Berkeley, Calif., design firm, trading some of Mackall's frequent-flier miles and a couple of cellular phones for a catalog design template on a disk. Helen Park, Power Express's first full-time employee, got the first catalog into the hands of the Comdex computer trade show's attendees in November 1993, even though the company had no booth (a booth was too expensive) and couldn't pass catalogs out curbside (that was against Comdex rules). She put the catalogs in cabs and promised the drivers that a mystery rider would reward random cabbies with $50 for distributing them to passengers. The distribution cost: $400 -- "cheaper than postage," boasts Hawk. And the 3% response rate (that is, catalog recipients who subsequently placed an order) was "pretty good," he adds, "considering a typical catalog response rate is in the 1%-to-2% range."
"I love reviewing that little sheet. You can see the dream on its way to becoming a reality," said John Mackall, reacting to the sales figures Hawk had sent him in February 1995. The chart graphed quarterly sales for 1993 and 1994 and sales estimates for 1995, and all the bars consistently rose. Sales, $60,000 in 1993, increased more than 10-fold, to $676,000, in 1994. Hawk foresees them hitting $2.1 million this year and doubling again in 1996.
The company, with nine employees, has graduated to new but still basic digs: 2,000-square-foot headquarters in Portola Valley. The new location generated enough foot traffic to justify opening a small retail area, which helps cover the company's $4,000 monthly rent. Most customers, however, contact Power Express through its 800 number, advertised in computer magazines. Their names are added to the company's mailing list, to which Power Express sends free quarterly catalogs. The company also collects mailing-list names at trade shows and by trading lists with vendors who target portable-device users -- magazine publisher Ziff-Davis, for example. To date, the customer database contains 45,000 names, with associated information, such as Jamal Jabar, Gabon, IBM ThinkPad; Frank Duzenski, Greenwich, Conn., Toshiba T1000SE. An increasing number of people learn about Power Express through its home page on the Internet's World Wide Web or through its postings on America Online and CompuServe. Currently, 30% of Power Express's orders are generated electronically, and Hawk predicts that on-line sales will spurt when payment over the Internet becomes more secure.
While 65% of revenues come from the sale of laptop and notebook batteries, customers also buy batteries for other portable devices. The sale of add-on products such as adapters, power boosters, and car-lighter-socket converters for on-the-road recharging has raised Power Express's average order from $117 with its first catalog to $162 today. Power Express's revenues are divided evenly between corporate and individual buyers.
The comprehensive product database now lets Power Express fill 9 out of 10 battery orders without additional research. As for the remaining one in 10, Power Express tries to track down the battery for each one. If it can't, it has suppliers that will reverse-engineer and custom-build a replacement battery.
Hawk says his low overhead and lean operation enable Power Express to offer prices that average 30% less than those of its competitors (and it will match any price). The company turned a profit in the summer of 1994, a year after start-up. Its pretax margin, 2.7% that year, could more than triple, to 9.1%, by 1996 -- placing Power Express in rare company among catalogers, whose sales, says catalog consultant Bill Dean, typically must hit $5 million before a venture breaks even. "Profitability within a year was an important benchmark to me," says Hawk. So were response rates exceeding the industry average -- 3% from the first two catalogs and 4.6% from the third.
The founder expects to pay down Power Express's $75,000 debt by the end of the year. Another near-term goal: to move beyond battery retailing to offer comprehensive battery services. The company's new director of business development is designing a package for corporate customers that will offer companies free analyses of their sales forces' mobile-power needs as well as seminars on battery care. Hawk is talking to the top 10 notebook manufacturers about his providing product-registration service if they'll put Power Express's 800-number stickers on their original equipment batteries.
He'll have achieved all his goals, says Hawk, when Power Express becomes the undisputed "number one rechargeable-battery supplier in the world." But is his business model sustainable? The company currently relies on its suppliers to drop-ship most orders after it faxes them a Power Express purchase order and packing slip. While that arrangement reduces Power Express's overhead by eliminating inventory-carrying costs, it puts Hawk at the mercy of his suppliers. What would happen if they found a way to sell directly to his customers? "It's something we're working on," one of them confides. Power Express also relies on its suppliers to pick up the tab on one of the perks it offers customers -- free recycling of spent batteries -- as most of them have paid the fees to belong to the industry's nonprofit recycling association. "We'll join if we have to," Hawk says.
Power Express has carved out a niche in today's rechargeable-battery market. Is it a business for the long term or just a novel distribution channel that others will replicate? Hawk hints that he might settle for building Power Express into an attractive candidate for acquisition by a specialty-parts distributor or a large catalog company by 1997. As certain as he was that the Power Express idea met all the challenges implied by Porter's five forces, he thinks there's no point to pushing that certainty too far into the future. What would happen, for instance, if battery makers pursued standardization to the point that rechargeables became a commodity? "You can't become so enamored with any idea that you hold it forever," Hawk says.
Power Express Forecast
Number of Catalogs Mailed 400,000 1,600,000
Gross Sales $2,100,000 $7,500,000
Cost of Goods Sold $1,386,000 $4,800,000
Payroll $264,000 $867,000
Printing & Mailing Catalogs $176,000 $704,000
Advertising & Marketing $60,000 $240,000
Rent $21,850 $87,400
Other Overhead $50,000 $200,000
Total Expenses $1,957,850 $6,898,400
Pretax Profit $142,150 $601,600
Pretax Margin 6.8% 8.0%
Company: Power Express, in Portola Valley, Calif., founded by recently minted Stanford M.B.A. Ken Hawk
Concept: Be the top source of replacement rechargeable batteries for users of notebook computers, cellular phones, and camcorders. Make it easy to shop for the batteries through a mail-order catalog, on-line services, the Internet, and a 24-hour service hot line
Projections: Current-year revenues of $2.1 million; $7.5 million by 1997
Competitive Advantage: First, a database that will let Power Express quickly locate the hard-to-find batteries most replacement-battery shoppers need; and second, lower costs through elimination of warehousing and inventory expenses
Hurdles: Finding customers who will call its 800 line, and recruiting good telephone-sales reps. "Unlike taking orders for a sweater, color pink, size large," says Hawk, "helping callers figure out which battery out of thousands they need is a tough job."
Ken Hawk, age 32
Family: Single; one dog, Beaux
Personal funds invested: 0
Equity held: 77%
Entrepreneurial roots: Son of a divorced single mother with two sons who made a name for herself in Detroit real estate by buying, renovating, and then selling houses. "We moved probably nine times when I was growing up," says Hawk. His maternal grandfather, a tinkerer, invented the auto seat belt and the vending machine. "He was a terrible businessman and never made a dime."
First business: At age 10, founded neighborhood skateboard distributorship; earned $900 toward a Hazeltine 1410 computer with a dumb terminal and 150-baud modem
Last job before business school: Windows product manager, multimedia group at Microsoft
On entrepreneurship: "Anybody who's thinking of starting a business should have selection criteria up front, because it's easy to fall in love with an idea that's appealing but just won't work."
WHAT THE EXPERTS SAY
Venture capitalist with Sierra Ventures, in Menlo Park, Calif.
Hawk and his company have been resourceful in accomplishing quite a bit in a short time with modest initial capital. It's particularly impressive that they have become profitable so quickly and at such a modest scale of operation. Hawk should be congratulated for being disciplined in thinking through what sort of company he wanted to start. Many would-be entrepreneurs fail to make even the crudest systematic examination of an opportunity before committing substantial time and money to it. The company's pricing strategy should be reviewed. Its we'll-meet-any-price strategy makes no sense in light of the unique service the company offers. There is no reason not to look continually for new ways to improve profitability. Particularly with the retail purchaser who calls once a year for some odd type of battery, Power Express deserves premium pricing for the service it provides. Hawk should also think more broadly about his long-term liquidity strategy. If his only option is to sell out to another company, he may not get the best result unless he can find at least two potential buyers (or one very dumb one) and get a bidding race going. If Hawk's company continues to grow at its current rate, it may be a candidate for a public offering. If the company does build the potential for going public, that can increase the price a corporate buyer would pay, because the buyer would know that Hawk has other options.
Director of marketing at Sharper Image, in San Francisco, and former president of Northern California Catalog Club
Hawk's business is a perfect example of what mail order does best -- going after a niche market. But he can do much more to grow that market. His database of 45,000 current portable-device users is a valuable asset he should exploit more than he has. For instance, if the average battery lasts a year, and Hawk knows when people bought their batteries, he should be mailing them reminders when the battery is about to run out. Going back to his customer database in a big way will generate big revenues for him in the years to come.
Major-account manager for Kronos Inc., a $93-million manufacturer of hardware and software for collecting and using employee time-card data, who spends up to two hours a day in his Rosemont, Ill., office when he's in town but who is usually on the road, "living with my laptop, cellular phone, and camcorder"
Salespeople are focused on computers, not spare parts. A while back I quit using an old laptop because it became difficult to get a reliable battery for it. Once a store starts carrying a newer-model computer, it's not long before you can't get replacement parts for the old one. It would be nice to have a source that would probably have the battery I need or could help me track it down. If Power Express can make it easier for me to find the battery I need and at the same time save me money, I'm definitely interested.
Founder of Lens Express, in Deerfield Beach, Fla., a mail-order seller of contact lenses
I would encourage Hawk never to ignore the basics. His highest costs are going to be for advertising, inventory, and people. To help keep them under control, I'd suggest that he use independent contractors for things like marketing, art, and computer programming until it's cheaper to hire full-time employees in those areas. He could eliminate much of the cost of telemarketing sales reps and still boost his capacity by using interactive voice response to handle inbound calls from existing customers who want only to duplicate their last order. Batteries, just like contact lenses, are a volume (low-margin) business that requires a high volume of leads to grow. Lead sources need to be targeted or, if they're not, very cheap. Has he considered inserts in cellular-phone bills? Has he considered encouraging loyalty with a membership program, in which he could offer additional savings, specials, and premiums?
Founder of computer reseller Inacom Corp., with executive offices in Troy, Mich.
Hawk has found a rich and promising opportunity. It's got low-tech complexity, but it's riding a high-tech growth wave. And it's still small enough to stay off the traditional computer channels' radar screen. Oh, how I wish I'd thought of this one. Hawk is a good example of a "new economy" entrepreneur: he's building core value on a foundation of creative information technology (his battery database and virtual-warehouse relationships) instead of bricks and mortar. He's using creativity, not mass, to exploit opportunity. To protect its future, I suggest Power Express get a substantial dose of second-round venture capital to build from its "first to market" foundation to a "top of mind" preemptive position. Power Express is not the next Apple Computer, but I bet Hawk's kids won't have to find jobs.