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The Sharper Image Corporation is a specialty retailer, selling apparel and gift items through 74 stores and a catalog that is issued monthly. Offering a line of unique and often expensive products, the company grew rapidly in the 1980s, bolstered by a booming demand for luxury goods that appealed to a generation of affluent young consumers that came to be known as young urban professionals or yuppies. By 1990, however, the company's popularity and profitability dropped dramatically, prompting The Sharper Image to widen the scope of its retail operations to include less expensive merchandise that would appeal to a new, broader customer base.
The Sharper Image was founded in 1977 by Richard Thalheimer. Thalheimer put himself through law school in San Francisco by selling office supplies, and three years after his graduation, he hit upon a potentially profitable marketing idea that led to a full-time career in retailing. An avid runner, Thalheimer speculated that high-tech stopwatches might prove popular among others who enjoyed the sport. After lining up a supplier, he invested $1,000 in a magazine ad offering digital wristwatches with a stopwatch mechanism for sale by mail. Thalheimer's venture coincided with the onset of a national jogging craze; he was able to sell out his entire stock of watches.
Realizing that a large American market existed for high-priced gadgetry, primarily among the country's growing yuppie community, of which he was a member, Thalheimer used his profits from the watch venture to run similar ads for telephones, miniature calculators, and other devices. In 1978, he incorporated his mail order business, calling it The Sharper Image, and the following year, he compiled his product line in a lavish, glossy mail order catalog.
Profits from The Sharper Image's mail order operations rose steadily throughout the early 1980s. Eschewing market research, Thalheimer based his product line on his own instincts about what people like himself might buy, and the company's catalogs featured pictures of Thalheimer using the items offered for sale. Product lines were expanded to include a wide variety of unique, often peculiar, items, including a $250 imitation Uzi submachine gun.
As a mail order operation, The Sharper Image was able to keep its overhead low. By purchasing its inventory on delayed credit and paying suppliers after collecting from customers, the company could maintain limited inventory and operate with relatively little ready cash. In 1981, the company reported revenues of $28 million and profits of $1.4 million. In 1982, revenues reached the $51 million mark, and three years later, The Sharper Image was issuing 42 million catalogs annually and reporting sales of $69 million. Commenting on the increasingly whimsical and nonutilitarian merchandise offered in the company's catalogs, for a 1986 article in Forbes, Thalheimer recalled: "I think I got a little fixated on toys."
In the mid-1980s, orders from The Sharper Image catalogs began to decline slightly, and the company explored new marketing techniques. When The Sharper Image advertisements on cable television proved unsuccessful, the company focused on appealing to customers who preferred not to purchase items through mail order, opening The Sharper Image retail stores around the country. In 1985, 12 stores were introduced in such urban centers as New York, St. Louis, and Honolulu. Twenty more stores were opened the following year, primarily in affluent areas, including Beverly Hills and Stamford, Connecticut. The addition of in-store retailing involved a significant transformation of the company's business practices as well as increased costs for maintaining inventory and leasing store space. Nevertheless, the new The Sharper Image stores contributed strong sales to the company's overall performance, and by the end of 1985, revenues from all operations had risen to $87 million.
However, financial growth over the next two years stagnated. As new The Sharper Image retail outlets emerged, the costs they incurred, as well as markedly slower sales, contributed to a first quarter loss of $72,000 in 1987. To offset its lackluster performance, the company went public in April 1987, selling shares over the counter on the New York Stock Exchange. The Sharper Image raised $12 million by selling 1.4 million shares of stock. Thalheimer retained a 72 percent interest in the company, which immediately became worth millions. During this time, Thalheimer reduced his involvement in the company, gradually allowing management to oversee daily operations and make merchandising decisions.
With its infusion of capital, The Sharper Image forged ahead with plans for rapid expansion. The number of retail outlets was increased to 42 in 1987, and the company reported gains in the second and third quarters of the year. Moreover, after an extremely successful holiday season, the company finished 1987 with profits of $5.6 million on overall revenues of $161 million. Despite this strong finish to the year, The Sharper Image experienced losses again in 1988. While first quarter losses totaled $1.2 million, and were expected to continue for the next three months, the company continued its rapid expansion into conventional retailing, opening several more stores that year.
Increased competition from department and electronics stores, as well as an unfavorable currency exchange rate, which led to low profit margins on goods manufactured in Asia, contributed to the company's mounting losses, which were reported at $2 million in September 1988. Some analysts pointed out that any growth reported on the part of The Sharper Image merely reflected the company's aggressive expansion policy and not higher sales at existing outlets. Sales at previously opened stores, in fact, dropped seven percent between 1986 and 1987.
As a result, The Sharper Image set out to modify its product offerings. During this time, the company was known for its pricey gimmicks and gadgets, including a suit of armor that sold for $3,800, collector's sport cars selling for $80,000, a $7,700 old-fashioned Coca-Cola vending machine, and a $649 toy model of a Ferrari. While such novelties drew people into The Sharper Image stores, the company began to rely on more practical, moderately priced products, such as briefcases and cordless telephones, for the bulk of its sales. Among its more popular items, for example, was a non-fogging shaving mirror for use in the shower, which retailed for $39; the company sold more than 70,000 of these mirrors.
In addition, the company focused on controlling costs and improving management relations, which reportedly suffered due to that fact many employees and executives found Thalheimer a difficult and demanding boss. In fact, The Sharper Image experienced a high degree of employee turnover and had gone nine months in 1988 without a chief financial officer, due to disputes within the company. By providing a more cohesive managerial team, the company hoped to better control the costs incurred by its previously "loose" organization.
By the end of 1989, the company's earnings had fallen to $4.7 million, despite sales of $209 million that represented a ten percent increase over the previous year. Having become closely associated with the yuppie generation, the company saw its profits decline as the yuppie ethic of consumerism declined in popularity. In an effort to bring new customers into its stores, The Sharper Image increased its catalog mailings to 39 million in 1989, incurring a cost of $25 million, or $6 million more than it had spent on promotional mailings the year before. With fewer people in the market for luxury gadgets, however, even this big push failed to significantly increase the company's sales, 80 percent of which now took place in retail stores.
The Sharper Image introduced catalogs aimed at several new types of customers in 1990. Sharper Image Kids featured video games and other toys for children. Catalogs designed specifically for customers over the age of 50 were introduced as were home furnishings catalogs, prompted by a perceived trend among Americans of spending more time in the home. In a joint promotional venture, The Sharper Image began to feature celebrities on the cover of its catalogs, in exchange for advertising tied in with movie ads.
The company also planned to market more functional products, such as devices for measuring cholesterol levels in food. "We want to move away from the disposable glitz of the 80s," Thalheimer told Business Week in 1990.
During this time, the company sought to reduce its spending on catalog operations, reducing its yearly mailings to 32 million and trimming its mailing list by dropping customers who had not recently made purchases. Cheaper catalogs, with fewer pages, were produced, and a practice of distributing a condensed version of the catalog through Sunday newspapers was established. Other cutbacks at The Sharper Image included a two-year freeze on salary increases, initiated in May 1990, and a lay off of 110 employees in September of that year.
Like most retailers, The Sharper Image suffered a heavy blow at the end of 1990, when holiday sales declined precipitously. The Sharper Image reported losses of $3.6 million, as sales dropped 13 percent to $181 million. In the spring of 1991, the company's merchandise buyer was let go, and Thalheimer returned to a more active role in the business. To cut costs, Thalheimer directed the renegotiation of some store leases during a time in which the real estate market was depressed. He also renewed the company's commitment to providing less expensive products, particularly those that could be sold for less than $50. Cutting down on the number of low-margin electronic products offered, he began exploring a new area of high margin goods: men's clothing. Since surveys indicated that 65 percent of the company's customers were men, and Thalheimer believed that most men preferred not to shop in department stores, The Sharper Image began to offer designer ties, silk shirts, leather jackets, and comfortable walking shoes for men. This simple selection of stylish goods soon accounted for more than ten percent of Sharper Image sales. By the end of 1991, The Sharper Image was still struggling. Several banks refused to increase the company's credit lines, as sales fell to $142 million and losses reached $5.2 million during its second year of poor performance.
After this low point, the fortunes of The Sharper Image began to rebound slowly in 1992. The company began to a run full-page promotional ads in local newspapers, and ads run in two test cities--Kansas City, Missouri, and Buffalo, New York&mdash′ompted an 80 percent increase in foot traffic in The Sharper Image stores in one week. The company hoped that the ads, which were relatively inexpensive to run in major metropolitan areas, would familiarize more customers with its stores' new low-priced product offerings.
In April 1992, The Sharper Image began to market its products through mall carts, inexpensive, freestanding units, which required only one employee. Mall carts, offering a small selection of reasonably priced items, were installed in 17 locations. "It's an easy way to expand the business without opening new stores," Thalheimer noted later that year in Forbes. Moreover, in August 1993, the company announced that it had finalized marketing deals with several department stores, including, most notably, Bloomingdales, to sell its products at boutiques in their stores.
Later that year, The Sharper Image saw its stock price surge, when it announced that it would market its wares through a cable television home shopping channel. During two hour-long promotions on the QVC network, the company sold as much merchandise as a small The Sharper Image store typically sold in six months. Earnings from this endeavor were particularly high since most of the products marketed were manufactured by The Sharper Image, and those goods carried a 75 percent profit margin. In December 1993, The Sharper Image announced a second major department store deal, as it sealed an agreement with Dillard's, a department store chain with 200 outlets in the Midwest and Southwest, to sell The Sharper Image merchandise.
As a result of such innovative marketing strategies, The Sharper Image reported profits during 1992 and 1993. In January 1994, the company joined with five other retailers and media giant Time Warner Inc. to launch a new 24-hour cable shopping channel. With more functional and affordable merchandise, The Sharper Image had made strong strides in its effort to refashion itself for the 1990s. Future success depended on its ability to adapt to changes in the marketplace through creative and aggressive marketing.
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