THE FUTURE OF HOME SHOPPING? HOW CUC'S VISION WON IT A SPOT IN TIME WARNER, VIACOM TEST BEDS

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For Walter Forbes, chairman-ceo of direct marketing company CUC In ternational, 1993 will always be known as the year of the power lunch.

A parade of executives from GTE, Time Warner, Viacom, Eon, BellSouth and U S West came courting, and now CUC is poised to offer home shopping services in major interactive TV test beds from Flor- ida to California.

CUC operates Shoppers Advantage, a shopping service with a database of more than 250,000 brand-name products; Travelers Advantage, a computer online travel agency with 700 consultants offering lowest-price guarantees; Autovantage, a nationwide discount car dealer network; and Premier Dining, a discount dining program.

Shoppers Advantage members call a toll-free number to purchase products such as camcorders, stereos or TVs. Telephone operators search a database full of offerings from competing manufacturers to find a product with the desired features and price. Members can also order by catalog or through an array of online services including America Online, CompuServe, Prodigy, Genie and the ImagiNation Network.

Membership has grown 25% per year for the past three years, reaching 29.6 million last year.

Now, sitting in Mr. Forbes' suburban Stamford, Conn., office, watching the tall patrician with the X-ray eyes shuttle between the phone and the sofa, it's easy to identify the man with his art collection. Arrayed around the room are a variety of life-size cottonwood sculptures in primary colors, depicting an eagle with a fish in its claws, an owl with a mouse clasped firmly in its grip and a psychedelic Santa Fe-style leopard.

Like these predators, Mr. Forbes has a smile with fangs.

"[I'd like to say] thanks to Barry Diller, who put a lot of attention on home shopping, and did a great service to us by putting attention on it," says Mr. Forbes, 51. "Most of the major companies that have come through here ... suddenly realize that video-on-demand-that's the winner, that's the killer strategy. Everything else is interim technology."

In the Viacom-AT&T test bed in Castro Valley, Calif., and in the Time Warner test in Orlando, CUC will offer a selection of products from its vast database. CUC expects eventually to offer travel and dining services as well.

What CUC's service will look like on interactive TV isn't set yet. But some concepts are clear.

"There are three ways to shop," Mr. Forbes explained. "Quick Locate, which means you know the model and the brand-just put it in and you're there-boom. Feature Shop, which means you can take the time to design the product you want by feature-whether it's a trip or a car or a TV. And the third option is Browse, where you go into a category like `Just show me them all.' I think the emphasis will be on Feature Shop and Quick Locate."

The interactive travel service offers more than a list of hotels and prices, Mr. Forbes said.

"You don't just see the hotel, you can actually look at the rooms, bring up the rooms next door, look at both rooms, look at both pools, hear about the kids' features, look at the golf course, check the menus-seamlessly, video on demand-and then get our travel price," he said.

All this presents a huge threat to retailers, Mr. Forbes said.

"If these new interactive [shopping] systems just take away 5% or 10% of sales, it takes away the margin of profit from most retailers," he said. "In a full-wired world with 85 million households totally interactive 20 years from now-an educated population-when you come home and say, as if you were on the Enterprise, `Computer, did I get my shirts?' the retail environment is severely impacted."

The key to CUC's success on interactive TV will be combining the company's strengths with a user-friendly interface, said Vincent Grosso, interactive TV project director for AT&T.

"CUC represents what we thought was a real advantage for electronic multimedia," Mr. Grosso said. "They had groups of products where you can rapidly get to know the attributes of the product and also the lowest price ... They have a superior back-end business. Their ability to fulfill a factory order, to know current models and styles and their relationships with vendors and manufacturers-all those things are very, very good."

Specifically what items will be available in Castro Valley and Or lando hasn't been determined yet.

"We expect to be able to ... offer a range of products from the CUC product categories," a Time Warner Cable spokesman said. "And offer them in full-motion video, and begin to understand how customers like to purchase items like that."

CUC's shopping service, Spiegel's Catalog 1 channel and a version of a Warner Bros. Studio Store will be part of Time Warner's Interactive Shopping Mall in Orlando.

"CUC buys in very large quantities direct from the manufacturer, which allows them to offer their products at the lowest possible price in a market area," the Time Warner spokesman said. "Because their present business is one that sells directly into the home, they are very expert at understanding what kind of offers are successful in the home shopping environment. They have databases of customers and databases tracking consumer preferences. They bring a lot to the table." CUC believes it's poised to win the war with retailers, and with other home shopping competitors.

"We are truly a virtual company in that while we offer many products on TV, we have no inventory," Mr. Forbes argued. "Our store is made up of computers, databases and telecommunications, all of whose costs are going down. All the competitors' bricks, mortar, costs of people, healthcare, are going up. We have 30 million members, and that's volume. We're doing it already. We're already online all over the country, so we're experienced."

Mr. Forbes first fell in love with the notion of electronic shopping nearly 20 years ago, when he and other venture capitalists created Comp-U-Card International to market products and services to PC owners at home. This visionary idea for a virtual shopping mall was doomed to founder in a pre-Powerbook world, however, and Mr. Forbes quickly re-engineered the company as a discount direct marketing and catalog-based shopping club with a unique corporate strategy.

CUC offers wholesale memberships to banks and other issuers of credit cards, whose members get discount products, checking account enhancements and even insurance products. Non-affiliated members pay $40 to 50 per year to join.

CUC carries no inventory and needs only $26 million in fixed assets-mainly a telephone and computer room operation-to do business. CUC's low operating costs allow the merchandiser to sell products for 6% to 8% over wholesale prices, compared with a 11% to 15% markup at typical discount wholesalers.

The result has been skyrocketing growth. Between 1989 and 1993, CUC generated 7.6 million members, sending out an avalanche of direct mail that grew from 118 million pieces in 1989 to 206 million in 1993, while expanding its marketing databases exponentially.

CUC is the most likely big winner among shopping services entering the new digital marketplace, said Steven Kernkraut, managing director of Bear, Stearns & Co.

"CUC is a marketing machine," Mr. Kernkraut said. "The keys are: A. They offer value to the consumer. B. They provide an enticing source of revenue to a credit card list-holder, whether or not it is a Penney's, a Sears or a Citibank ... And lastly, they know how to turn a customer on to get them to open the envelope and accept the offer."

"They're really an affinity marketing company," explained Rita Spitz, partner and securities analyst at William Blair & Co., who shops through CUC. "And to do it at their scale is very unique. There are a lot of mom-and-pops that do it on a single-product basis."

The visionary Mr. Forbes is as gloomy about the future of traditional advertising as he is about 21st century shopping malls.

"I think the rise in the growth of general advertising is over forever," Mr. Forbes predicts. "Media and contact with consumers have become so fragmented that you're going to have to switch to direct marketing techniques."

His advice?

"If I were [an ad agency] I would be out there trying to figure out how to become king of this new hill," he said. "Interactive, electronic direct marketing. I'm sure some agencies could bring a whole new and very valuable perspective to it. I just don't know of anyone who's come by to talk to us. I mean, why wouldn't you? Every major manufacturer, telephone, cable, software, computer company has come by to see us. Why haven't any of the agencies come by?"

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