Deal Mechanic: Profits in sight

In June, New York-based Fenway Partners sold 1-800 CONTACTS to publicly-listed healthcare company WellPoint. Financial terms were not disclosed, but a source familiar with the situation said the exit generated a 4x return multiple for Fenway. Fenway had bought the (then NASDAQlisted) contact lens company for $340 million back in 2007. Started by chief executive officer Jonathan Coon out of his Brigham Young University dorm room in 1994, 1-800 CONTACTS had increased revenues from $500,000 in 1995 to $249 million in 2006.

Happily, Fenway was able to keep the business on a growth trajectory: during its time under private equity ownership, top line revenue at 1-800 CONTACTS grew by double digits every year, while EBITDA more than doubled. However, achieving this was no mean feat – because when Fenway bought the business, it had some major problems… 


1. Simplifying the business model

Perhaps the most serious of these issues was that the company did not have enough agreements in place with contact lens manufacturers to ensure a constant supply of product. As a result, it had even invested in manufacturing facilities in both Singapore and the UK, in case supply ever ran short.

“We were purchasing from suppliers at the same time that we were making contact lenses ourselves,” says Tim Mayhew, managing director at Fenway. And the business was much better at selling lenses than making them, he admits.

Indeed, owning and operating two manufacturing facilities was proving to be a significant drain on the company’s financial and human resources, according to Brian Bethers, president of 1-800 CONTACTS. “That was a challenging investment for us,” he says. “We weren’t manufacturers.”

Resolving this supply issue meant simplifying the business model. And why not – this was, after all, a company that had been founded on simplicity (just hearing the name meant knowing how to order its product). So one of Fenway’s first acts was to sell off the company’s manufacturing divisions, and help to execute supply agreements with every contact lens supplier. 


2. Focusing on service

Exiting the manufacturing side of the business allowed Fenway to focus on 1-800 CONTACTS’ core competency (and, arguably, its principal asset): customer service.

“1-800 succeeds because it provides fantastic customer service at a really good price,” says Mayhew. “It just so happens that it’s selling contact lenses.”

One of the reasons for 1-800 CONTACTS’ previous success was that the customer experience was fast, easy and efficient. Customers could order lenses over the phone or online and receive them the very next day. And because all of 1-800 CONTACTS’ business came through the phone or the website, excellent customer service was critical to the company’s success.

“Fenway understood that our business model is structured around taking care of customers,” says Bethers. “Sometimes you can get really mired down in a focus on trying to save money, without really focusing on trying to take care of customers and grow the top line.”

But Fenway wasn’t just interested in taking better care of existing customers. It would also need to attract new ones in order to continue 1-800 CONTACTS’ upward trajectory. So after simplifying the company’s supply model, the firm concentrated on finding new ways for customers to buy the product. 

“Our view was: let’s reinforce our strength by being able to sell to [customers] in places that we weren’t able to at the time that we bought the business,” Mayhew says. 

3. Entering Wal-Mart

In 2008, Fenway helped negotiate a marketing agreement that allowed 1-800 CONTACTS customers to place orders in Wal-Mart stores. “The premise of the alliance was to make the customer experience completely seamless,” Mayhew says. “A person can walk into a Wal-Mart vision center or they can call our number or they can go online, and their customer information is equally well known.”

Since establishing the agreement, 1-800 CONTACTS’ market share has increased from 7 percent to 10 percent, according to Bethers.

“We were always phone and web, but it gave us experience operating with a store-based channel,” he says. “I’ve done a lot of agreements in my professional career [and] that’s probably the best single agreement that I’ve seen negotiated, in terms of trying to address the complexity of the situation and come up with something that would be mutually advantageous for both 1-800 and Wal-Mart.”

As well as establishing the agreement, Fenway helped 1-800 CONTACTS participate in a number of co-branded marketing initiatives with Wal-Mart to increase awareness. 

The firm also brought in a number of marketing executives to drive additional growth, including John Graham, former director of marketing at Mrs. Fields Famous Brands, who joined in January 2009 as senior vice president of business development, and Joan Blackwood, former chief marketing officer for employment website Monster.com. “Joan has helped us evolve in terms ofthe look and feel of the advertisements,” Mayhew says. “We’re very proud of some of the ads that she’s created.”

While ramping up advertising reduces the profit 1-800 CONTACTS earns on first time customers, the company’s level of customer retention has made its advertising effort a sound investment.

“When we acquire a customer, the first transaction that we make we barely break even, because of the customer acquisition costs of our television [advertising],” Bethers says. “Where we make money is through repeat purchasers.”

Today, these repeat customers account for roughly 80 percent of 1-800 CONTACTS orders. 


4. Going mobile

In 2009, Fenway began investing in an important new ordering platform: mobile devices.

“The first great awakening was this move to mobile, and that meant not just taking your desktop website and sticking it on a mobile device but actually taking this notion of  customer service and improving upon the experience, optimised for the mobile device,” says Mayhew. “Really great websites have stumbled and missed the move to mobile.”

By staying focused on that notion of a quick and easy customer experience, Fenway helped ensure that 1-800 CONTACTS’ mobile platform was simple and efficient. The firm invested in technology enabling customers to purchase contact lenses in as little as two clicks, chat with live call center operatives and reorder by taking a picture of prescription barcodes and uploading them.

Because roughly 15 percent of contact lens customers are under the age of 18, Fenway’s mobile platform upgrade also focused on the trend among young people of texting. “You’ve got to move where the customer is, and that customer actually wants to text,” Mayhew says. “All these things make for faster service.”

Ordering via text message was introduced in 2010, and to make the process of reordering even easier, the company purchased the SMS rights for “refill”.

Developing the mobile platform also led Fenway to reassess its main website and add new email capabilities. “You can [now] email the company and get a live response generally within 10 minutes, if not less, from one of our customer service representatives,” Mayhew says.

In 2011, Fenway also helped launch the 1-800 CONTACTS iPhone app, which lets customers manage their entire family’s contact lens needs.

The investment in mobile has clearly paid off. Today, close to 20 percent of 1-800 CONTACTS’ revenue is through a mobile device, up from zero in 2009. 

5. Moving into glasses

Earlier this year, Fenway and 1-800 CONTACTS launched eyeglass website Glasses.com. “Who better to start to explore the notion of buying glasses online or over the phone than the person who is supplying you your contact lenses?” says Mayhew.  The website allows customers to order up to five pairs of glasses at a time for in-home trial – and send back the ones they don’t want.

Moving into glasses has given 1-800 CONTACTS another opportunity for substantial growth. While the contact lens market is estimated at between $3.6 billion and $3.8 billion, the eyeglass space is roughly a $25 billion market.

The decision to expand into glasses also represents a change in the way 1-800 CONTACTS thinks about the mission of its business.

“How do you help [consumers] manage their entire optical needs – [that’s] what was really in the back of our head,” Mayhew says. “I feel very comfortable that 1-800 will continue to expand and become as significant a participant in the eyeglass market as it is in the contact lens business. And it will do that because of its emphasis on customer service.”

==

Today, 1-800 CONTACTS is the world’s largest contact lens store, with an inventory of almost 10 million contacts. In a single day, it sells as many contact lenses as 2,500 retail optical shops combined.

Still, according to Mayhew, the most important statistic and greatest indicator of success is the company’s customer satisfaction scores. In 2012, Internet Retailer magazine ranked 1-800 CONTACTS seventh in customer satisfaction, between L.L. Bean and Barnes & Noble.

While 1-800 CONTACTS rose to prominence well before being acquired by Fenway, much of its growth in the past five years is clearly attributable to the strategic initiatives instituted by the firm. And there was certainly no asset-stripping involved: in fact, during Fenway’s involvement with the company, headcount rose more than 10 percent. Definitely a deal that merits a closer look…