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Takeover helps company meet its 'Target'

From Tuesday's Globe and Mail

Mel Mogil

Mel Mogil was one elusive contract away from being the undisputable market leader in soft-sided coolers. The Toronto entrepreneur just needed Target Corp. as a customer.

With a reputation for selling stylish but inexpensive products and almost 1,700 stores across the United States, Target was a coveted account. Mr. Mogil's company, California Innovations, had being trying to get its coolers and lunch bags onto Target's shelves, but Chicago-based competitor Arctic Zone had a tight grip on that space.

From its head office in a Toronto industrial park, California Innovations' employees design soft-sided coolers, freezer bags, diaper bags and lunch bags for sale in more than 25 countries. But as Mr. Mogil, the company's co-founder and president, notes: “It's very difficult to say you are the market leader without that [Target] account.”

So when rival Arctic Zone went up for sale in 2004, Mr. Mogil saw opportunity, having admired his competitor for years. When he went to trade shows, he worked a 10-by-10-foot booth, he recalls, while “Arctic Zone had a building.” Most important to him was his belief that the two companies shared a dedication to innovation, rather than an appetite for churning out knock-offs.

At that point, California Innovations had a strong business in soft-sided coolers (the kind that can collapse and fit in a car trunk, some with wheels and an extendible handle for picnics) and counted big-box retailers such as Costco and Price Club among its biggest customers. Fifteen-year-old Arctic Zone, meanwhile, had a tight grip on the lunch bag market, with an innovative plastic insert that kept soft foods from being crushed.

But Mr. Mogil and his co-founders, Ron Amber and brother Lorne Mogil, weren't looking for an acquisition for California Innovations, and had never done one. So Mr. Mogil was planning to simply take a look when he got on a plane to Phoenix to meet the venture capitalists who had bought Arctic Zone from its founder several years earlier. Once an industry Goliath, Arctic Zone had been on a decline since that sale (“the thrill was gone” for its employees, Mr. Mogil says). If he waited for it to go bankrupt, he might be able to buy its assets more cheaply.

As he and his team got deeper into Arctic Zone's books, Mr. Mogil realized that despite its weakening position, he couldn't risk waiting for a better deal later. Not only did Arctic Zone have Target as a retailer, it also had a stronger business relationship with Wal-Mart Stores Inc., a valuable brand name, and a top-notch team of designers in Chicago.

And in the wings was another rival making it clear that if California Innovations didn't buy Arctic Zone, it would. “I don't know how true that was, but it was a motivating factor,” Mr. Mogil says.

But he wondered how his team could make an acquisition work: He would have two brands that had previously been competing for the same business. And to top it off, he would have to figure out what to do with all the inventory that came as part of the purchase. “If we'd had our druthers, we wouldn't have bought any of it.”

That said, he saw economies of scale in selling another product line using the company's existing infrastructure, less reliance on big-box stores as customers, and a way to expand without moving into an unknown business.

Despite their inexperience, Mr. Mogil's team completed the multimillion-dollar acquisition in 2004 with few problems. California Innovations already had a strong team of advisers in place, he says, so there was no scramble to find people at the last minute. And because the company was in a strong position itself, financing the deal wasn't a problem.

The payoff was immediate, Mr. Mogil says. Sales increased by 22 per cent in the first year, thanks to the Arctic Zone product line. Profit rose 50 per cent, including organic growth. California Innovations became lead vendor at Wal-Mart, and finally got onto Target shelves with the Arctic Zone products.

Equally important for him was the effect the acquisition had on his employees, both old and new. It created a “buzz” in the company, he says; employees pushed themselves and set higher standards for themselves.

But integrating the two companies was challenging. With a combined staff of about 100 post-acquisition, Mr. Mogil and his partners were faced with defining clear identities for the two brand names, and then getting both brands onto store shelves.

He had expected that existing California Innovations customers would readily embrace a second brand name from one supplier. “The theory was that it would be one-stop shopping – with one supplier you would have all this diversity,” he says. And while that was true for some customers, others took more persuading. Even California Innovations' sales staff had to adjust to selling what they were conditioned to think of as the competition.

Today, Arctic Zone products make up about 37 per cent of California Innovations' sales, up from the 22-per-cent level of 2005. Mr. Mogil attributes the increase to his team's work at coming up with more compelling designs for items such as lunch bags.

Becoming a market leader has paid off, Mr. Mogil says, rhyming off the benefits. Talented design and sales staff want to work for him. When retailers want to reduce the number of brands they carry, California Innovations is at less risk because it provides the two largest brands. And the company has more leverage with manufacturers in China because they want the stability of working with the market leader, allowing the firm to maximize margins.

Better margins and higher volumes means that the company can spend more time on market research, which in turn pays off with better products and higher sales.

The value of being top dog in the market was illustrated recently, Mr. Mogil says, when he was approached by a celebrity chef looking to create an endorsed product line. That connection came about when one of the celebrity's employees saw California Innovations products in a store, identified the company as the market leader and then called his office. They plan to roll out that line in the coming months.

Special to The Globe and Mail

On the Record

On Friday, Mel Mogil joined us to talk about his company's breakthrough. Click here to read the full discussion.

Expert Insight

“I would suggest that any target that you are thinking of acquiring needs to be very strategic to your core business. Stick to your knitting,” says Dean Mullett, a partner in the corporate finance practice of PricewaterhouseCoopers LLP. On Wednesday, Mr. Mullett will talk about how companies can avoid some common pitfalls when making acquisitions. Click here on Wednesday to read the full interview.

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Know a business that has experienced a big breakthrough? We want to hear about it. Email: nhulsman@globeandmail.com.

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