American Greetings (NASDAQ: AM), is a leading retailer in the social expression products industry. Since its founding, American Greetings has grown to become the largest publicly owned social expression producer. The company designs, manufactures, and sells its own products. Products include greeting cards, gift wrap, stationary, electronic greetings, giftware, and other party goods.
Saperstein Greetings was founded in 1906 by Jacob Saperstein. In 1940, the company was renamed American Greetings Publishers and is now the world's largest publicly owned creator, manufacturer, and distributor of social expression products. Headquarters are located in Cleveland, Ohio and there are approximately 18,000 employees globally. American Greetings recently acquired two wholesale greeting card businesses: Recycled Paper Goods on February 24, 2009 and Papyrus on April 17, 2009. The corporation now consists of 7 domestic greeting card brands, 6 internet brands, and 3 brands comprising the final segment.
Domestic Greeting Card Brands
Other Product Brands
(*)Carlton Cards has been recently sold as a part of the retail operations divestiture
The North American segment includes the United States, Canada, and Mexico. In the third quarter, American Greetings moved to a third party distribution business in Mexico and the reduction in revenues has been reflected. The majority of the increase in revenue, from 2009 to 2010, can be attributed to the acquisitions of Papyrus and Recycled Paper Goods. The two acquisitions added approximately $129 million.
Internationally, American Greetings operates primarily in the United Kingdom, Australia, and New Zealand. The increase in sales from 2009 to 2010 can be attributed to increased sales of non-card products and new product introductions. On March 4, 2011, the company acquired Watermark Publishing, which is located in the U.K. Watermark Publishing is a leading innovator of greeting cards in the U.K. and since 1990 has seen sales grow to $40 million annually.
AG Interactive encompasses the company's digital operations. Lower advertising and digital photography revenue led to a decrease in revenue of $21.6 million from 2009 to 2010.
American Greetings sold its retail stores to Schurman in April 2009. The decision was made to improve operating income and the retail operations had continually generated an operating loss. The sale led to the decrease of $158.3 million in revenue from 2009 to 2010. The $11.7 million recorded for 2010 reflects the period that the company was still operating the stores. Schurman continues to operate these acquired stores, still using the American Greetings trademark, under a conditional lease agreement. If Schurman is unable to adequately run these retail outlets, there could be a material adverse effect on American Greetings. To offset this risk, American Greetings has acquired an equity share in Schurman.
Social Expression Products
Revenue Contribution By Product Category
American Greetings offers a full social expression product line, with a greater focus on greeting cards. Nearly 50% of total revenues come from greeting cards, further proving the focus on this category. The company offers many different types of greeting cards for every occasion. There are cards that have lights, make sounds, and even move. A number of higher priced cards allow you to prerecord an actual message, while others are capable of playing music when the card is opened.
American Greetings places a lot of importance on its designing process and has produced some innovative types of products. One such innovation is the first-ever digital slideshow card, allowing individuals to upload images of their choosing. Another such innovation is the "Surprise Inside" line of cards, which are meant for children and contain a toy inside. The company also offers an interactive birthday card that lights up and plays a song when you blow on the candles.
In 2010, American Greetings reached an agreement with 5-time Grammy award winner Taylor Swift to be the designer of a new card collection. The company offers other card collections including Jim Birkman and Mom's Connection. The Taylor Swift and Jim Birkman collections contain both musical and standard greetings cards. The musical cards each play a song from the respective artist.
The internet is proving to be a very revolutionary tool for all types of businesses, even the greeting card industry, and has led to the creation of e-Cards. e-Cards are electronic cards that can be sent online in a digital format, instead of physically having to be mailed. Through the AG Interactive segment, American Greetings offers a wide variety of e-Cards that can be sent to a computer or mobile phone. The company has recently created an iPhone application that allows an iPhone user to create and send personalized cards right from their mobile phone.
American Greetings offers various digital services on its website. The website gives an individual the ability to send out invitations online (eVites), create their own printable cards, download wallpapers and a birthday reminder for your desktop.
American Greetings is part of the social expression industry. The industry is extremely competitive, however, the industry is very concentrated and there aren't many large competitors that offer a full line of products. Some of the deciding competitive factors in this industry are: Brand recognition, breadth of innovative products and services, ease of use, and price.
Seasonality plays a large part in industry, with holidays and birthdays occurring at different points in the year, causing sales to fluctuate from quarter to quarter. Card sales are split 50/50 between seasonal and everyday cards, with Christmas cards accounting for 60% of the seasonal card sales. Sales are generally higher during the second half of the year, due to the number of holidays during that period. To prepare for the holiday seasons, large amounts of inventory are produced ahead of time to satisfy the expected demand. There is a possibility that too much inventory will be carried and sales will be less than expected. This will prompt the company to sell off their inventory at discounted prices, in hopes to reduce the lost revenue.
There are an estimated 3,000 greeting card publishers in the United States, making this industry highly competitive. When a market is saturated, competition reaches a high and potential profit margins fall to a low. Increased competition forces a business to constantly innovate and adjust to consumer preferences, so that they can capture an adequate percentage of the profit pool. Not all 3,000 companies offer a full line of products, leaving American Greetings to believe they are one of only two (Hallmark) that do so.
There currently is a growing initiative to "Go Green" and be more environmentally responsible. Going Green involves using less limited resources, switching to a more renewable source, and not using substances that are harmful to the global environment. There are going to be some consumers who will only buy a product that is supporting this initiative, so this gives businesses an opportunity to grab market share while becoming more economical. Going Green can also save a company money by making their production processes more efficient and affordable by using recycled materials and printing in volume.
Greeting cards have come a long way since their creation, and now can do all sorts of things. As technology rapidly develops, consumers require newer product innovations to win them over. Cards now light-up, have digital slideshows, and can even play music. With the help of the internet, cards have even become digital in the form of e-cards. To stay ahead of the competition, companies need to remain creative and continually develop new types of cards.
*Numbers Represent 2010 fiscal year
Compared to Shutterfly and CSS Industries, American Greetings is doing very well for itself. Both gross and operating margins are the highest of the three, Return On Invested Capital (ROIC) is more than double the closest competitor, and revenues greatly outpace that of the competition.
The Cash Conversion Cycle (CCC) is determined by Days Sales of Inventory (DSI), Days Sales Outstanding (DSO), and Days Payable Outstanding (DPO). The CCC measures how long it takes a company to convert its resources into cash through sales to customers. This measure is particularly important for retailers because it allows them to determine how effective their respective business models are in generating revenue. The lower the CCC the better it is for a firm's bottom line because it shows that capital is tied up in the business process for a shorter period of time. A negative CCC can be achieved by having a higher DPO, which determines how long a company takes to pay back its bills. A high DPO allows for a company to hold onto its cash for longer and use it for other activities, such as investing, before paying its suppliers. With that said, Shutterfly has the best CCC at a -45.2 days, followed by American Greetings and CSS Industries at 72.4 and 101.1 days respectively.
The drop of $96.9 million in costs of sales from 2009 to 2010, can be attributed to in an increase in operation efficiency, including tightened control costs, reductions in supply chain, scrap, and distribution costs due to an improved balance of card unit shipments with card unit net sales, a favorable change in the product mix, and a favorable foreign currency translation impact. The favorable product mix was a result of switching from non-card products to lower cost card products. Decrease in revenue was primarily from the divestiture of American Greetings's retail operations, but was mostly offset by the acquisition Papyrus and Recycled Paper Goods.
CSS Industries, Inc. was founded in 1923 and now has three primary operating affiliates: Berwick Offray LLC, Cleo Inc., and the Paper Magic Group. Like American Greetings, CSS Industries designs, manufactures, and sells a full line of seasonal and everyday occasion products. The company's primary focus is on its seasonal products, living up to its motto "Earning the Right to Own the Seasons." Seasonal products offered include Christmas wrapping paper and gift boxes, Valentine cards for classroom exchange, Dudley's Easter egg dye, and Halloween costumes. Focusing primarily on these products, as well as offering consistent customer service, CSS Industries is able to compete with companies like American Greetings and Hallmark.
Shutterfly Inc. was incorporated in 1999 and completed its IPO in September 2006. The company is the leader in internet-based social expression and personal-publishing service. Through these online services, the consumer is able to personalize their products and services. Personalized products include: Photo book products, stationery, greeting cards, and calendars. Shutterfly also offers Share Sites, which allow users to easily create custom, personalized, private web sites for sharing with others. The company recently partnered with American Youth Soccer Organization to create over 50,000 Share Sites for soccer teams in the U.S.
Hallmark (privately-held company)
Hallmark was founded by Joyce Clyde hall on January 10, 1910 and is still privately owned. It is also now the largest greetings card company and is currently headquartered in Kansas City, Missouri. The company's products can be found in 30 different languages and 100 countries. As a result of being privately owned, public financial data for the company is very limited. The company, however, has reported a revenue increase of 3 % in 2010, bringing their total revenue to $4.1 billion.
Hallmark boasts a full social expression product line, just like American Greetings, and offers a number of innovative products. One such product is the recordable storybook. In addition to its line of products, the Hallmark brand itself gives the company a competitive advantage. Brand recognition for Hallmark is very high, and is generally associated with quality and value.
Bargaining Power of Consumers
Bargaining power of consumers is high. There are over 3,000 greeting card publishers in the U.S. alone, giving consumers a number of options to choose from. Switching costs are non-existent, which doesn't give the consumer an incentive to stay with one particular brand over another.
Bargaining Power of Suppliers
The bargaining power of suppliers is low. Again, there are over 3,000 greeting card publishers, making competition intense. Big companies, such as American Greetings, rely heavily on just a handful of retailers to buy their products. With their being so many options for retailers to choose from; the quality, price, and compensation become increasingly more important.
Threat of New Entrants
The threat of new entrants is high. Anyone can make cards from their house or online, and sell them to other consumers. Whether it be an aspiring poet, an illustrator, or even kids selling hand-made cards for charity.
Threat of Substitutes
The threat of substitutes is low. American Greetings offers a a full portfolio of social expression products, which makes finding an alternative to greeting cards near impossible.
Rivalry Amongst Competitors
Rivalry amongst competitors is extremely high. There are thousands of card publishers and independent competitors around the world, offering all sorts of social expression products. Increased competition is good for consumers because it drives the price down, as well as, increases pressure for companies to produce newer products.
American Greetings's strengths lie in its product line and its design team's ability to create quality products. By offering such an extensive line of products, the company is able to cater to every occasion, while keeping its products affordable. In the current economy, it is important that consumers are receiving quality products that they perceive as valuable and worth the money. Consumers buy cards based on the illustrations and words inside. The writers and illustrators have to remain creative, and continually think of new ideas that haven't been done before and are still enticing.
A weakness for American Greetings is its retail operations. The retail operations was not profitable for the company and have now been sold to Schurman.
There are two main opportunities, that American Greetings can taken better advantage of, the internet and globalization. The internet has become an amazing tool for all kinds of businesses, and the greeting card industry isn't any different. The internet has brought about the possibility of sending electronic cards (eCards) to anyone in the world in a matter of seconds. With the start of AG Interactive, American Greetings has taken large step towards securing a part of the digital market share. The other opportunity, globalization, offers a large profit potential. Currently American Greetings is mostly in North America, Canada, Mexico, New Zealand, Australia, and the United Kingdom. By expanding to other growing and established countries, American Greetings has the potential to further increase both economies of scale and revenues.
One of the biggest threats that American Greetings faces, is copyright infringement. The legal team is responsible for making sure that another business does not infringe upon American Greetings's copyrights, and use them as their own. However, it is difficult to police the entire globe, and as a result, some other companies can get away with stealing from American Greetings. Another threat would be the loss of market share to other competitors. There are over 3,000 other companies in the same line of work as American Greetings, and all have the opportunity to innovate and grow.
American Greetings has really tried to challenge the market leader (Hallmark) by offering a full line of innovative social expression products. As stated before, these products include musical cards, interactive cards, regular cards, gift wrap, recordable cards, etc. This extensive product line has allowed American Greetings to become the second largest company in the market, in terms of both market share and revenues.
The company's products have a wide range of prices, making it affordable for every consumer. Regular American Greetings cards range anywhere from $0.99 - $6.99, with the average price ranging from $2.79 - $3.99. The Tender Thoughts and Today and Always lines of cards, are the company's value brands, and are priced at $0.50 and $1 respectively. Music cards range anywhere from $4.99 - $12 a piece. Higher end cards, such as the digital slideshow card, can cost as much as $23 per card.
The unit volume of everyday and seasonal cards has increased 7.2% and 6.7% over 2009 numbers. The selling price for everyday and seasonal cards has increased (decreased) by 1.4% and (1.6%) respectively. Drop in the selling price of seasonal cards can be attributed to the company creating a value line of seasonal cards.
The company looks to offer the cheapest products by cutting costs in certain areas. One such area, is advertising. American Greetings hasn't got rid of advertising all-together, but instead uses a few cheap channels (in most cases they are free). These channels include: store circulars, Facebook, Twitter, and word of mouth.
American Greetings products can be found in many locations. The company distributes its products primarily through mass retail channels, as well as, card and gift retail stores, department stores, military post exchanges, variety stores, and combo stores. Mass retail includes mass merchandisers, discount retailers, chain drug stores, and supermarkets.
The company relies heavily on its top 5 customers for revenue. Collectively, they accounted for 39%, 36%, and 37% of total revenue in 2010, 2009, and 2008 respectively. Of these 5, the two largest are Target and Wal-Mart. Target accounted for approximately 13% of revenue in 2010, while Wal-Mart accounted for 14% of revenue in 2010.
Revenue collections are based on a scan-based trading business (SBT) model. Based off the SBT model, American Greetings owns its product until the retailer sells it to the ultimate customer, and then the sale is recorded. Once recorded, the retailers then pays American Greetings for the product, with collection generally taking 10 - 15 days.
Stephen J. Smith