Martha's world

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On a sunny autumn day just before the Oct. 19 anniversary of her company's initial public offering, Martha's world turns in its usual way.

Donna Karan and Barbra Streisand bunk at her Maine house. Outside the TV studios of her Westport, Conn., production complex are a baby; some guinea pigs; a South American rodent known as an agouti; a gray African parrot and a brilliantly multicolored macaw; tarantulas; scorpions; and a caged bat alternately baring fearsome yellow teeth, emitting screeches and licking its privates.

Martha's already filmed her show's first visit from "Antiques Roadshow" star twins Leigh and Leslie Keno. There's a reporter who wants to interview her and a photographer who wants to shoot her. There are plans to make for her upcoming pearl-diving jaunt in Japan. And there's a Manhattan restaurant -- Gramercy Tavern -- that, astonishingly, won't bend to her requests for a last-minute dinner reservation to celebrate an award won by her son-in-law.

Unsurprisingly, things run late, so perhaps it's understandable if Ms. Stewart starts to fray.

`SEE THIS KNIFE?'

While reading a radio spot in one of her TV studios (there's just no time to hustle her down the hallways to the radio area) Ms. Stewart, surrounded by shrunken heads carved from apples, becomes increasingly frustrated by the script. Addressing the cameras, she asks, "See this knife?"

A thwack follows, and the production room's TV screen shows an impressive-looking kitchen knife standing erect, its tip partially buried in a wooden cutting board. (At which point, since gentle requests to remind Ms. Stewart of a reporter's presence backstage went unheeded, her body mike is switched off.)

No one said being a brand is easy.

Despite meteoric growth and a formidable financial track record, Martha Stewart Omnimedia remains a company that rests in large part -- perhaps too large a part -- on its namesake's shoulders. As the company nears the end of its biggest year so far, its expansion continues with Martha-branded Everyday Kitchen housewares line hitting Kmart's shelves, and a dubbed version of her TV show that just debuted in Japan.

Among the challenges as company growth-meisters turn on the turbo jets is the tricky one of making its name signify more of a brand -- and less of a face -- to consumers.

The question of what's Martha Stewart Omnimedia without the 59-year-old Ms. Stewart is frequently asked of both Ms. Stewart and other company executives. To break away from Ms. Stewart's image, they say, they'll focus more on in-house experts -- such as gardening guru Margaret Roach and Senior VP-Cooking and Entertainment Susan Spungen. And the company is currently at work on two new shows, one on "home cooks" and one on pets -- that either won't feature Ms. Stewart or will feature her in what Ms. Stewart describes as a "reduced presence."

An analyst who follows the company isn't terribly concerned on this point. "Over time, if they manage effectively, they will create an organization based more on her philosophies and taste levels," said Jeff Klinefelter, a retail analyst with US Bancorp Piper Jaffray.

Karl Choi, a VP-analyst for Merrill Lynch & Co. is more cautious in his view of Ms. Stewart's role. "She does generate a lot of press for the company, both positive and negative," he noted, although he remains enthusiastic about the company's future.

`ENTERTAINING'

In the beginning, there was a catering business ("a physically exhausting job," recalled Ms. Stewart). Then a book: "Entertaining" came out in 1982 from Clarkson Potter. Four more followed that decade, but soon Ms. Stewart hit a roadblock.

"I'd given my publishers a list of what I called `beautiful how-to books,' " recollected Ms. Stewart. "They said they weren't interested. I said, `Well, if they won't be interested, how can I do all these things?' "

The answer was Martha Stewart Living, the magazine launched under Time Inc.'s aegis in late 1990 which became one of the decade's biggest publishing success stories.

"What hit me," said S. Christopher Meigher III, the former president of Time Inc. and current chairman of Quest Media, "was she had created -- even in her dummy prototype -- a magazine much more like a book. It was great service without being overwhelming."

The title has since spun off numerous special issues. Two of the more successful ones: the quarterly Martha Stewart Weddings and, earlier this year, Martha Stewart Baby, which will also go quarterly next year. "There probably will be a rollout from there," she said.

"Martha was convincing in two ways," Mr. Meigher said. "She really did know how to gild the pine cones. And everywhere we tested her, she was truly an expert who could do this one on her own if she had to. That's what you want in an entrepreneur."

Convincing, too, was consumer response. According to Mr. Meigher, newsstand sell-through -- the percentage of magazines delivered to newsstands that are sold -- was more than 70%, impressive even in a time when average sell-through was substantially higher than the average 40% levels of today.

TV followed in '93. Kmart Corp. followed in '97. Web commerce began in '98. Last year Martha Stewart Omnimedia took in $28.8 million in earnings before taxes, interest, depreciation and amortization on revenue of $232.3 million. This year, Wall Street consensus puts revenue at around $281 million, and earnings before taxes, interest, depreciation and amortization at $66.1 million; the 2000 numbers don't include corporate expenses. Publishing profit margins, Merrill Lynch's Mr. Choi said, will be an almost-unheard of 36% for 2000 before corporate expenses are subtracted.

DOUBLE-DIGIT GAINS

Through September, according to Publishers Information Bureau figures, ad pages at the flagship title were up 22.4% to 1,194.45 -- substantially outpacing the industry gains posted in this torrid economy. (PIB does not report on Weddings ad pages.) Since PIB began measuring its ad pages in 1992, Martha Stewart Living has consistently posted double-digit ad page gains. The flagship title recently announced it would raise its rate base, the guaranteed circulation to advertisers, from 2.1 million to 2.15 million, up 2.4%.

Ms. Stewart shrugs off questions about just when she knew how far everything could go. "It's not a premonition thing, it's totally evolutionary," she said. "One day you're one thing, the next you're something else."

Her successes have hardly gone unnoticed, and today observers can spot competitive magazines that evidence Ms. Stewart's influence. It's doubtful, though, that any dismiss them with as much verve as she does.

B. Smith, the African-American home and lifestyle guru with a TV show on the food network and B. Smith Style being tested by American Express Publishing Corp.? "A copier. Not an original. I look at it and say, `Why?' " The first issues of Time Inc.'s Real Simple? "I thought it was a disaster. A real stupid move. Write that down." To which a blanching Sharon Patrick, Martha Stewart Omnimedia's president-chief operating officer, hastily added, "and erase it."

A HUB-AND-SPOKES MODEL

Martha Stewart Omnimedia's model is a hub-and-spokes strategy that places the brand at the center of its universe and radiates its sensibility throughout what the company identifies as its core content areas -- cooking, crafts, home, weddings, gardening, holidays, keeping -- as in housekeeping -- and baby. The company promotes each area as being extendable across all media, as well as into e- and bricks-and-mortar commerce.

"TV doesn't have the idea of cooking, the magazines don't have the idea," Ms. Patrick said, explaining how category-blurring avoids turf battles. "There's only one idea -- the Martha idea."

On the commerce end, Martha Stewart Omnimedia is the textbook example of the mass-class model that transcends standard socioeconomic boundaries to excite the hell out of retailers and analysts. There's the mass-market Everyday line -- 4,000 items and counting -- available at Kmart (and, shortly, through its online arm, bluelight.com) and high-end goods available through the Martha by Mail catalog and on marthastewart.com.

Analysts love the business model Martha Stewart Omnimedia negotiated with Kmart, which is far from a typical suppler-retailer relationship. "They are given a licensing fee from Kmart to design and then monitor" the items' production, said Mr. Klinefelter. But since the retailer produces the goods, Martha Stewart Omnimedia "holds no inventory. There's no mark-down risk. . . . Their revenue stream [from Kmart] right now is essentially 99% gross profit."

OMNIMEDIA

Ms. Patrick claims credit for envisioning the "omnimedia" approach (Ms. Stewart has bristled at assumptions Ms. Patrick supplies the business smarts), which she said she dreamed up in her days at management consultant McKinsey & Co. "This was not embraced at the time as possible," she said. "Martha was the only person I met who was game for trying."

Ms. Patrick also managed the delicate negotiations that extricated Ms. Stewart from her Time Inc. deal in 1997. It was a marriage of media giants that was ultimately incompatible, recalled one executive who witnessed it firsthand. "Her advice and demands were not exceptional for a creative talent," said the former Time Inc.-er. "But perhaps it was a little unusual in the halls of the Time/Life building."

Though the Martha Stewart Omnimedia model allows for endless cross-promotion, the company has shown a knack for doing so beyond its boundaries as well. The debut issue of Martha Stewart Baby earlier this year leveraged a single-sponsorship deal with babyGap into window displays and in-store events promoting the launch.

"Martha Stewart, overall, is great for us," said Laurie McCartney, founder-CEO of eStyle, an online style site that sponsored the second issue of Martha Stewart Baby. "It's a perfect demographic [fit] for who we're targeting," by which Ms. McCartney means an affluent, college-educated female audience ages 25 to 45.

Long-term, Martha Stewart Omnimedia will look more "omni" and less "media." Last year, 76% of Martha Stewart Omnimedia's revenue came from magazines and TV, with the balance from Internet commerce and merchandising. Over the next three to five years, said Chief Financial Officer Helen Murphy, the company will move to a 60/40 split between media and merchandising/commerce.

DOUBLE '99 REVENUE BY END OF 2003

By the end of 2003, Mr. Klinefelter projected Martha Stewart Omnimedia to more than double 1999 revenue to bring the company more than $500 million.

"This will be one of the most important companies for the homemaker ever," declared Ms. Stewart. And revenue? "Oh," she said, "way more than $500 million."

Yet the market hasn't yet significantly rewarded Martha Stewart Omnimedia's plans. At press time the stock traded in the low 20s, far off its 52-week high of 47.5, and significantly down from a late-summer rally that brought it up into the mid-30s. Since its high-profile IPO, it has underperformed Dow Jones' and Standard & Poor's 500 indices.

"There was a lot of hype surrounding the IPO," Mr. Choi said. More recently, it's definitely slowed down." He attributed the stock's recent performance to market concerns over magazines' ad trends. But the recent dip in the company's stock is much more severe than its peer group's average. Oddly, the stock dropped slightly following its most recent Everyday line expansion announcement.

Analysts covering the stock point out that it has a small float -- Ms. Stewart herself owns 71% of the stock -- and is thus unusually subject to market gyrations.

Mr. Klinefelter said that the stock is being penalized for its magazine presence as well as concerns over consumer spending, which are hammering it on the commerce side.

It will take ambitious plans to grow as quickly as the company expects to, but Martha Stewart Omnimedia has never lacked for ambitious plans. Next year will come another massive launch of Kmart housewares -- this one in the area of "keeping" -- meaning about another 700 Everyday items will be available through Kmart. The gardening line will be expanded there as well, said Ms. Patrick.

`MARTHA STEWART HOLIDAYS'

Martha Stewart Omnimedia produced a Clotheskeeping special issue in fall '98, but the subject didn't keep well enough to become a whole other magazine. But Ms. Stewart remained optimistic some kind of "keeping" magazine still might. Meanwhile, Ms. Stewart said, next year will bring two new themed special magazine issues on new subjects. Earlier this fall, the company rolled out another -- 675,000 copies of a Halloween-theme Martha Stewart Holidays hit newsstands, with around 350,000 more sent to select subscribers.

"However broad you or I may think her business opportunities are," said Bob Miller, whose time running Time Inc. ventures overlapped with Ms. Stewart's tenure there, "I can assure you Martha is multiple steps ahead of anyone."

Martha Stewart Omnimedia has done so while retaining remarkable control over its products, right down to designing seed packages in-house. Up to now, all Everyday ads have been handled in-house with consultants -- including the current one, in which Ms. Stewart throws a dinner party at her home, using her Everyday line exclusively. That will change, as Martha Stewart Omnimedia will collaborate with TBWA/Chiat/Day, New York -- recently awarded the Kmart account -- to tie Everyday advertising to Kmart ad strategy.

While the creation of products sans Martha is essential to the company's future, not everyone believes they will be as successful as the ones created around Ms. Stewart.

"Their strength is their weakness," said Reed Phillips, managing director for media investment banker DeSilva & Phillips. The identification with Martha "is so strong it will be very difficult to develop any brands other than Martha."

The grooming of the company's non-Martha talent for their close-ups may succeed in changing the face of Martha Stewart Omnimedia -- though only to a point. "I still like to have my fingers in the pie," Ms. Stewart said.

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