Be nimble, be quick

Be nimble, be quick

Brad and Ryan Kugler took over the family

entertainment products liquidation business and boosted its growth through tough deals and flexible response to the market. Now they are seeking an acquisition.

STRATEGY

by Dave Szymanski | Tampa Bay Editor

When shoppers visit Kmart, Target or Dollar General and see the $3.99 CDs or DVDs in a bin, the products may have gone through a Palm Harbor company called Distribution Video & Audio Inc.

Distribution Video is a family business, started in a garage, bought by Ben Kugler and now run by his sons, Brad, 41, the chief executive officer, and Ryan, 34, the president.

They run a distribution center and headquarters in Palm Harbor with a marketing and sales office in Los Angeles, blocks from the movie studios.

The company strategy is simple: Buy a bunch of slow-selling entertainment products, such as music CDs, from companies that want to get rid of them quickly. Make a cash offer. Buy at a low price. Sell them at a higher price to a retailer, large or small, or to a museum or Web site.

It's mainly, but not exclusively, a volume business that has been working, with a few glitches, for more than 20 years.

"Our biggest challenge is finding the right liquidation at the right price," says Brad Kugler. "Sometimes the best deal is the deal you don't do."

It does a couple dozen deals a week. Turning quick is important because the company has relatively limited capital and works on credit lines. It turns about 80% to 90% of its inventory monthly.

Its margins vary depending on its three lines of business.

The retail margins are huge, and can reach 400%. Those happen in stores, on its Web site and through eBay and Amazon.com. Retail brings in about 10% of revenues.

Its special markets business targets niche-place products, such as a set of DVDs on model trains. Distribution Video sells them to libraries, museums and companies that sell online. The margins are 10% to 20%. This brings in about 30% of revenues.

Its wholesale business reaps 10% to 20% margins. It represents about 60% of revenues.

Sought out

The owners of the products sometimes find Distribution Video. Sometimes DVA finds them.

The customers include movie studios, retailers, distributors, other wholesalers, manufacturers and private investors. One customer was CBS, which wanted someone to sell all of its "Survivor" TV series merchandise.

That's why DVA's 10-year-old Los Angeles office is important, so Distribution Video can have access to the movie- and television-making industries and those who do business with them. Ryan Kugler is based there.

"It's important for him to be where the schmooze is happening," Brad Kugler says. "We source a lot of product from studios and Hollywood-connected people."

Sometimes those connections come from lawyers, sometimes manufacturers.

One differentiator for Distribution Video is its diverse customer base. Unlike its competitors, DVA's largest customer, Trans World Entertainment, owner of the f.y.e. (for your entertainment) national entertainment stores chain, makes up maybe 5% of its business.

Overall, entertainment liquidation is a fractured industry. There are about a handful of companies that do exactly what DVA does. Among them, it is the biggest player.

But there are four other liquidators, who handle a bigger variety of products, who are much larger. Those include Gordon Brothers and Genco, which liquidates couches, carpets and food.

Then there are dozens of small businesses that work out of houses. These brokers do one deal a month for about $10,000. "We will always have those guys," Kugler says.

DVA isn't worried about them. It has two offices, two warehouses. It has money it can wire today. It can wire $1 million tomorrow. "Right now, when cash is king, that's important," he says.

Another thing that's important is reputation.

The importance of ethics

For some cash-hungry companies in the entertainment liquidation business, ethics and professionalism are not as important as they are at Distribution Video.

"In this business, some people run for the hills, grab all that they can," Kugler says.

Some customers ask for conditions when they sell to Distribution Video. They may not want the product sold to certain retailers. Or they only want the product sold outside the United States. DVA honors those. Some of its competitors do not.

That's why Distribution Video gets repeat business. Even with smaller movie studios, stories about honored or broken sales contracts get around.

"It's used car mentality with some liquidators," Kugler says. "We stay away from it. We make a deal. This is what I feel has set us apart. We honor what we say. People come back to us."

But that does not stop sellers from making strange demands to Distribution Video, even if DVA won't agree to them.

It is not a daily occurrence, but sometimes some sellers have asked Distribution Video or other buyers to buy them cars in exchange for getting a big, $1 million liquidation deal.

Some have asked for a suitcase of cash. Some asked to have money wired to a number of different places. "A lot of times, companies are distressed, or they are playing balance sheet games," Kugler says.

While it is selective on the buying side, Distribution Video is rigid on the selling end. Once it sells product, the buyer is responsible for it.

"We mark it down and it is their problem," Kugler says.

It may come back, but only if Distribution Video chooses to buy it back.

Because its business is national, DVA leases space in other warehouses in other cities at times. It has used such fulfillment houses in Chicago, Texas and Los Angeles.

Why does it keep its main warehouse in Palm Harbor, and not in less expensive areas such as Indiana or Arkansas? "Because I don't want to live in those places," Kugler says.

Costly detours

Similar to the lifecycle of other companies, Distribution Video has made some costly errors.

In 2000, it took venture capital money and tried become an Internet-only sales company. While sales doubled every month, expenses tripled. It needed equipment, software and training to run a global Internet operation, like Amazon.com. It abandoned the idea after 18 months and took a loss that year.

It tried to expand by owning the license to product titles, such as Felix the Cat, Teddy Ruxpin and some French cartoons in 2006. It was a new process for Distribution Video. Stores ended up shipping unsold product back. It ended that operation and absorbed the cost.

"We lost our shorts," Kugler says. "We dumped those two strategies. We stuck to our core."

That strategy is buying distressed products and reselling them. Distribution Video buys from many sources, including Amazon. It also bought some product in China. A couple of times, movie producers called after a movie flopped financially and they were stuck with a pallet of unsold DVDs.

During those times, Kugler's learned his most valuable CEO lesson: Patience. He has learned more patience with sales decisions, employees and buying.

"When I was younger, it was more shotgun, more off the hip," he says. "Now, you take a step back, do a count and make the decision."

Many of those decisions have led to profits and steady revenue growth. But the revenue growth has slowed and that has Distribution Video talking to companies about an acquisition to kick-start faster sales growth next year.

In business since 1988, this year's revenues should come in around $21 million. Last year they were around $20 million and they were about $19 million in 2006.

"I feel like we've hit a ceiling with sales growth," Kugler says.

Looking ahead

The future for Distribution Video may change in various ways, including the possibility of an acquisition and because of technology.

DVA is looking for a company it can acquire next year to complement its business and stoke its slowing growth. Those would include a similar liquidator overseas, or a company that deals in different products, such as electronics, Kugler says.

But in true Distribution Video fashion, it is not going to pay retail price for a company.

"I'm not going to pay top dollar," Kugler says.

The other change-agent in the future will be technology. This is an industry that has seen many entertainment formats come and go, including vinyl records, eight-track and cassette tapes, laser discs, VHS and red-laser DVDs, which recently lost out to the Blu-ray format.

Next on the horizon? CDs, a possible victim of the downloading music phenomenon? Kugler is not worried.

"I will just liquidate DVDs or Blu-ray," he says.

When the Sony-licensed Blu-ray won the DVD format battle against Phillips-Toshiba's red-laser format, there were still several million red-laser players out there.

"It was sort of a win-win for us," Kugler says.

The CEO does not think formats will last indefinitely. But he does always see business opportunities when they change.

"When they do, I'll be there," he says.

The warehouse sale

It happens for only one weekend, but after attendance doubled this year, Distribution Video & Audio is thinking that it may be on to something.

"It has made us think that maybe we should look into a store," says Brad Kugler, chief executive of Distribution Video in Palm Harbor.

The event was the company's fourth annual SOS (Shop our Shelves) warehouse sale, which it held earlier this month at its distribution center in Palm Harbor.

For 363 days a year, it is a wholesale distributor from one company to another. But for two days, the 32-person staff changes hats, turning their desktop computers into cash registers, becoming floor sales people and welcoming more than 2,000 people into their normally pallet-filled warehouse starting at 5 a.m.

Distribution Video literally makes its entire warehouse available with more than 2 million DVDs, CDs, books, toys, movie posters and other entertainment related knick knacks. Some movie DVDs are priced at $1 to $3. The boxes may be broken, but the discs are intact.

"This moves things we have no wholesale outlet for," Kugler says. "It's five of this. Three of that. It's great. It converts things to cash."

DVA is going to end its fiscal year as one of a shrinking number of businesses that will post larger revenues and profits in 2008 over 2007.

It has already set the date for next year's sale: Dec. 5 and 6.

REVIEW SUMMARY

Business: Distribution Video & Audio Inc.

Industry: Entertainment products

Key: Getting non-moving entertainment products at a low price and selling them as quickly as possible at a higher price.