Most businesses coming out of one of their worst quarters ever would be moving cautiously, tightening their operations, considering cutbacks.
Not Best Products.
The Richmond catalogue showroom chain reported a $3.2 million first-quarter loss last Thursday, but barely 24 hours later announced the biggest takeover in the catalogue business ever, a plan to acquire Modern Merchandising Inc. of Hopkins, Minn., for $111 million.
If the deal succeeds--and there's no reason to believe it won't--Best Products could nearly double in size by next year, vaulting into the big leagues of U.S. retailing with annual sales of close to $2 billion.
The decision to merge with Modern is the latest evidence of a change in strategy at Best, already the biggest company in its field. Best became a $1 billion business by developing an extraordinarily successful concept for merchandising and operating a catalogue showroom, then building more and more showrooms on the same model.
But after 25 years of expanding its basic business, Best is branching out in four new directions:
* Data Base, a subsidiary that sells small computers for home and business use, opened its first store in Richmond in March.
* Ashby's, a string of eight women's clothing stores based in Richmond, was acquired the same month.
* Basco, a money losing chain of catalogue stores with $130 million in sales last year, signed a preliminary merger agreement in January and will be taken over by Best this summer.
* Modern Merchandising is the latest acquisition, with annual sales of $715 million in the last year.
The new computer stores and the women's clothing chain are the sort of small-scale diversifications that offer the potential for long-range growth with little risk to the parent company. If either bombs, Best can write them off with relatively minor losses, but one or the other could become a big hit.
Basco and Modern are more closely related to the business Best knows best, but they pose different problems. Basco is for sale because the 19 stores lost $3.6 million last year.
Modern Merchandising got into trouble in 1980, when earnings fell to $1.3 million--a paltry 0.2 percent profit margin--but profits bounced back to $5.4 million in 1981.
That's still only 0.75 percent of sales, far short of the 2.5 percent after-tax profit earned by Best in the last couple of years.
Turning Basco around and moving Modern Merchandising up to reasonable profit levels will be a new challenge for Best's management. It's one thing to build a profitable, smooth-running $1 billion business and quite another to revive a struggling company.
But the upside potential of the Basco and Modern acquisitions makes clear why Best Chairman Sydney Lewis and his son, the president, Andrew Lewis, are willing to take the risk:
First is the sheer size of the company that will result from the acquisition. Only a few days ago, Andrew Lewis told an interviewer, "I think that the next $1 billion in sales will come harder than the first $1 billion."
It doesn't look that way now. It took Sydney a quarter century to get the first billion, but the second billion in sales is just around the corner.
Best's volume is running 13 percent ahead of last year, a pace that would mean $1.13 billion in sales if it holds up. Modern's 71 stores did $715 million last year, Basco another $130 million. Even if Basco and Modern don't grow at all, that's $1.975 billion for the year.
Best didn't make the Fortune magazine list of the top 50 retailers in the United States last year, but would rank in something like 30th place after the two acquisitions.
Because of the way catalogue showroom chains operate, Best ought to be able to manage that much new business successfully and at the same time cut the overhead of the expanded operation.
Showroom chains are highly centralized, tightly controlled companies. Most decisions are made at headquarters. Once a product goes into the catalogue, it stays there, all year long, in all the stores. Expanding from 100 showrooms to 200 adds little to the merchandising and management cost.
Best also ought to be able to cut its costs by taking direct control of production of its catalogue, a job now handled by Modern Merchandising through its Creative Catalog subsidiary.
As a catalogue coordinator, Creative not only prints the books used by many other showroom operators, it also picks some of the items included in the book.
By acquiring Creative, Best should also acquire new expertise in catalogue publishing and at the same time get its books cheaper by holding on to the publishing profit now earned by Creative.
Further efficiencies could result from putting the Best name on all the stores now run by Basco and Modern, which operates under half a dozen diffent logos.
The quickest way to turn Basco around will be to convert the 19 stores to Best units. Best has a better name with consumers than Basco and many of the Basco stores are in or near markets in which Best already operates.
Likewise, converting Modern's Jafco, Great Western, LaBelle's, Miller's and Dolgin's showrooms into Best units could give them an instant shot in the arm, a new identity.
With twice as many stores carrying the Best name and its geographic market expanded from 11 states to 27, Best Products would be on its way to becoming the first nationwide catalogue showroom chain. The potential is unquestionably enticing to Best executives, but any double-your-money bet is risky and this is no exception.