I've learned that the most effective strategies foster the discipline of innovation everywhere -- including every component of a healthy brand: positioning, product, pricing, marketing mix, sales channel strategy, supply chain, finance and management processes.
My stint as CEO of Celestial Seasonings taught me the importance of ubiquitous innovation. In 1997, Celestial Seasonings was stalled. Our revenue, profits and market capitalization had been flat since 1993. We were a small, publicly held company, with a $70 million market capitalization. Faced with a lack of momentum, the board of directors pursued selling the company but received tepid interest.
Much of the company's malaise had to do with a growing aversion to change. Celestial Seasonings was founded and fueled by innovation. Yet by 1997, our recent offerings had become increasingly esoteric, with limited appeal.
Appointed CEO in June 1997, I realized that any honeymoon would be brief. The board asked me to come up with a strategy to jump-start revenue and profit growth in 120 days. I sought new ideas and practices in every corner of the company.
To revitalize growth, we had to conceive new products and fund these without taking an earnings hit. We would have to be as innovative in our funding -- for example, self-funding new-product launch expenses -- as we would be in the products themselves. This called for significant consumer insights that would increase the chance of success with new launches.
My first action was a comprehensive review of all dimensions of the business with an eye to what was essential to current business, what could be changed to increase profitability to fund innovation, and where could we innovate to drive profitable revenue. We recognized the following opportunities:
Generate a better return from existing products. We found that a few simple changes to our current products could boost profitability significantly. For example, we were overfilling our tea bags by up to 30%. Adjusting the label weight, and switching to boxes with a 20 count, had an enormous payoff. The new count immediately improved our gross margins and accelerated unit sales, as consumers needed to restock their inventory more frequently.
Roll out new products beyond our core offering. When I came on board, Celestial Seasoning was an herbal tea brand, with 70% of this segment; we captured a mere 30% of the broader specialty tea market. But from our consumer insights, we learned that our core users also drank green, medicinal and black tea. Most important, these consumers would prefer to buy these varieties from Celestial, if only we offered them. So we quickly developed a new-product blueprint focused on filling these product-line gaps.
Spend our marketing dollars smarter. In 1997, Celestial was spending $6 million annually in TV advertising. After careful scrutiny, we concluded that it just wasn't working. Eliminating our TV spending would suddenly make $6 million available for other marketing tactics -- as long as we knew they would be more effective.
We made a bold decision to shift our spending entirely. What we found was that by investing the same marketing amount in a fundamentally different set of marketing tactics, we could increase our base volume. Revenue that had been flat for three years with $6 million in advertising spending started to grow at first 10% and ultimately 25%, all with the same $6 million marketing budget.
Shaking up our channel mix. In 1997, Wal-Mart was an emerging reality. But most companies, particularly those offering premium brands, were uncertain as how to approach what most people perceived as a lower-end discount operator. In 1997, Celestial was selling less than $100,000 annually to Wal-Mart through specialty product distributors. As a result, retail out-of-stocks were high, and item selection was limited to two or three items. In 1998, we persuaded Wal-Mart to order directly from us and to broaden the range of our items to eight. In two years, revenue from this one account exceeded $10 million annually. The combined impact of this multidimensional strategy was immediate. Within 32 months, revenue climbed to $125 million, and earnings to $25 million.
Our resilience came down to one simple reason: the power of a comprehensive strategy. Seeking innovation across the board did more than spark our top-line growth. It served as a catalyst to generate growth in many other critical areas, including finance, strategy and distribution. Our comprehensive approach reduced risk to an acceptable level while providing the investment funds to support an aggressive overall business strategy.
We built on this lead by introducing at least one new innovation in our products every six months. Sticking to our philosophy of innovating across the board, these rollouts involved everything from pricing to packaging. Our goal was to keep our consumers continually engaged with the brand, and also to keep our competition at bay. In fact, our relentless push to keep innovating, building on fresh insight from consumers, created chaos for our competitors. At a time when we were rolling out new products, they were scrambling to simply understand what was happening in the marketplace. They got caught in a game of playing catch-up to our products -- which led to matching offers 12 to 18 months late, by which time we had already shifted the terms of the game. In essence, they were innovating nowhere at all -- a result of our innovating everywhere.