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CUC: Building an Advantage

NEW YORK -- In 1973, Walter Forbes had an idea for an electronic shopping service. It took the rest of the world nearly 20 years to catch up with him.<BR><BR>Forbes is chairman and chief executive of CUC International, a company that offers low tech...

NEW YORK — In 1973, Walter Forbes had an idea for an electronic shopping service. It took the rest of the world nearly 20 years to catch up with him.

Forbes is chairman and chief executive of CUC International, a company that offers low tech interactive shopping through membership, but is on the verge of a high tech interactive TV shopping breakthrough.

Customers pay a membership fee to use CUC’s Shopper’s Advantage system, either by calling over the telephone or accessing it through an on-line computer service like Prodigy. Membership puts a data base of over 250,000 brand-name products, discounted 10 to 50 percent, at a customer’s fingertips. The leverage of 31 million members allows the company to negotiate sharp prices, Forbes said.

CUC charges from $13 to $49 annually to use its services, which range from shopping and travel to dining. The Shopper’s Advantage membership fee also includes a two-year guarantee for every purchase.

Most of CUC’s revenues come from the membership fees. Forbes said the company keeps a very small percentage of product sales — about 5 percent — with the bulk of the sale going directly to the manufacturer.

Last year, Stamford, Conn.-based CUC had revenues of $879 million. Next year, analysts predict the company’s revenues will top $1 billion.

But Forbes admits his journey to the interactive superhighway was not always smooth. Several times, he watched losses pile up and investors vanish.

Tenacious though he was, however, Forbes was no fool. He had the good sense to adapt his electronic shopping model to the available technology — the telephone. Customers called a CUC representative to get product information and prices, then placed an order.

The company has been revamping its on-line computer service to include pictures and is planning to put its shopping offerings on CD-ROM.

The company’s fortunes changed in 1983, when Walter Loeb, president of a retail consulting firm that bears his name, enlisted Morgan Stanley to take the company public after hearing Forbes speak to a group of European businessmen. It then had $4 million in sales.

Wall Street analysts now believe CUC is poised to dominate interactive home shopping.

“They’re in the position to be the leader of interactive TV shopping and interactive computer shopping,” said Steve Kernkraut, a managing director of Bear Stearns.

“They’re doing a lot of things that are unique,” said Annie Erner, an analyst at UBS Securities. “They built up a superb data base and have one of the best renewal rates in the industry.”

CUC has a presence in the U.K., Holland, France and the Scandinavian countries, but as of now, just with direct mail. The cost of starting the European businesses has been relatively small, since CUC begins by aligning itself with a major bank and selling products to the bank’s customers through billing inserts. Ultimately, CUC expects to expand this to interactive home shopping.

With the Shopper’s Advantage service in the U.S., there are three ways to shop: Using “quick select,” a customer asks for a specific item; with “feature shop,” products are located by their specific features, such as a 26-square-inch color TV with built in VCR, and there is also “browsing.”

CUC cuts a wide swathe through Middle America, which is where it wants to stay. Forbes said the attempts of new home shopping channels to court upscale customers will prove to be misguided.

“People haven’t figured out how important price will be in this new world,” Forbes said. “When you click your thumb to go from store to store, price is going to matter.

“We’re going to be low price, high value and high information. We’ll grab a high share of the market. We have no bricks, mortar or people. Even Barry and Gerry’s stores can’t beat us,” Forbes said, referring to Barry Diller, QVC’s chairman, and Gerald Hogan, president and ceo of HSN.

Forbes also noted that at CUC, the customer initiates the purchase, whereas at the shopping networks, on which the hosts hawk the products, returns can be upwards of 40 percent.

“People that get sold have buyer’s remorse,” he said. “When you buy from us, you make the decision. Our returns are less than 1 percent. It’s due to the fact that people get a lot of information and we’re selling brand names.”

While CUC has focused on hard goods, it will begin offering apparel in Time Warner’s Interactive Full Service Network test in Orlando, Fla., and Viacom/AT&T’s competing trial in Castro Valley, Calif.

Tweeds, Jos. A. Banks Clothiers, Simply Tops, International Male, Discount Shoe Warehouse and Undergear have committed to join CUC in the tests.

“CUC is certainly going to be adding apparel partners,” said Kernkraut. “When full interactivity occurs, a lot of apparel manufacturers will sign up with CUC. The one thing that apparel manufacturers will have to be willing to do is offer their merchandise at less than full retail price. That could create problems for some upscale manufacturers.”

Because CUC saw interactive shopping coming, the company is prepared. It has been shooting the video content for both the Time Warner and Viacom interactive tests in its studio. The basic format shows a product in the inset of the TV screen, surrounded by icons that viewers click to see the product’s features or to get prices.

Keith Arnold, manager of CompuServe’s electronic mall group, said, “They offer great prices coupled with a warranty program. People know there’s value to the membership.”

Even when competing on-line shopping services arrive, Arnold said CUC will still have a advantage.

“The depth and breadth of products they sell will still give them an edge,” he said.

After 20 years, Forbes is anxious for interactive shopping to finally get off the ground.

“We believe our member purchases will go up dramatically as we add pictures,” he said. “But our customers are not going to want to be sold on a glitzy basis. They want the facts.”