ADVO, INC. - Company Profile, Information, Business Description, History, Background Information on ADVO, INC.

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History of ADVO, INC.

Advo is America's largest direct mail marketer, dispatching 18 billion pieces of advertising to American homes every year. With an address list comprising virtually every household in the United States, the company can deliver materials to every possible consumer or to a more selective subset.

Advo was founded in 1929 by Paul Siegel, who offered a private service delivering printed advertising fliers by hand for retail stores in the Hartford, Connecticut area. The privately owned company limited its activities to this modest field until 1946, when Advo switched from hand delivery to delivery by mail. The company sent out materials for Hartford's insurance companies, and also dispatched individual pieces of advertising for retail stores to selected households, a practice known as "solo mail."

By the mid-1970s Advo had changed hands twice since 1969 and had expanded the scope of its operations beyond the Northeast, opening additional plants in Atlanta and Miami. The company's annual sales had reached $7 million, on which it was losing $1 million a year. In 1976, the company's latest set of owners, a group of companies headed by the Travelers Insurance Company, sold the company to two partners, Jack A. Valentine and Robert Stucki, a Minneapolis real estate developer. Although Stucki acted simply as an investor, Valentine's professional background was in the direct mail business, and he set out to revamp Advo's operations.

Valentine's first move was to expand Advo's base of operations from just three areas to over six, opening facilities in Chicago, Dallas, and selected locations on the West Coast. In this way, Advo hoped to reap higher profits through higher volume on its fixed expenses. Within a year, however, the company had run out of money, and its precarious financial situation made borrowing from a bank impossible. To raise funds, Valentine sold one-third of the company to the Allstate Insurance Venture Capital Group, a subsidiary of Sears, Roebuck & Company.

Advo had a new lease on life, but it was shortly to face an even greater peril, when the United States Postal Service raised its third class bulk mailing rate, dramatically increasing Advo's costs. With postage exceeding $50 for 1,000 pieces of mail, mailers could no longer afford to deliver an individual advertisement to a household for less money than a newspaper charged to fold the advertisement into its publication and deliver it along with the paper. The effect on Advo's business was "catastrophic," Valentine later told Advertising Age. "Our volume fell right off the table, and the newspapers owned virtually 100 percent of the market. The only mail we were left with was in small-town, rural America, where there was no alternative."

Convinced that "solo mail ... was dead," as Valentine further recounted, Advo began to experiment with various forms of joint mailings. The company tried a "shopper" packet, and failed. Next it offered something called the "Value Parade," with four pages of ads wrapped around retail fliers. This, too, failed. Then it set up a co-op program, in which two merchants committed to advertising together on the same day in the same market, but store owners chafed under the lack of flexibility, and this, too, failed.

Finally, Advo was contacted by the owner of a small Los Angeles direct mail firm who was trying to sell his company, called Marriage Mailers. The company was losing money on its Shared Mail operations, in which advertisers were guaranteed a certain rate to place materials in the company's package, regardless of the number of advertisers joining any given effort. Since the company covered only one market, it frequently found that it had too few customers signed up for a mailing, which nevertheless went out, with the company taking a loss. "It gave the company a flat rate to deal with, and they could then make commitments," Valentine explained to Advertising Age. "In effect, what he was doing was creating a publication without a cover." The idea later began to work because it allowed direct mailers to exploit a change in the bulk-mailing regulations, which had gone into effect in 1979. The new rules stipulated that mail would be priced by weight, rather than by the number of pieces it contained. In this way, a company could put together a package of fliers for different merchants that would cost only 7.4 cents to mail, as long as it weighed less than 3.9 ounces.

Advo purchased Marriage Mailers and combined its guaranteed rate pricing plan with the company's existing practice of wrapped packaging. The company signed on several large stores in Los Angeles and within 18 months began to expand to other markets, competing with newspaper delivery systems by offering more complete coverage in a given area. Although newspapers got advertising only to homes that subscribed to the paper, Advo's mailing lists, compiled with the assistance of postal service route carriers, covered every address in a zone. With this new program, Advo first turned a profit in 1980, when the company was given a large boost by the United States Census Bureau, which purchased its near-inclusive list of American households. This success launched Advo on a rapid expansion, and the company doubled its sales every year for the next several years. In 1981, the company launched Advo Publications, Inc., a company operating independently of the direct mail operations, whose purpose was to create a national chain of free newspapers that would carry advertising. In addition, the company endeavored to build a nationwide network of printing businesses. The company bought the Western Offset Publishing in San Diego, and also purchased two presses to be installed in a facility in Columbia, Maryland, near Washington, D.C. Advo also took over Grit, a weekly newspaper designed to get advertisements into rural areas that had long been unprofitable.

This expansion was not without its costs, however. In addition to the start-up expenses of the company's new ventures, maintaining Advo's essential database of addresses siphoned off capital, as did the ever-present search for new clients, who, once found, proved slow to sign on. By the end of 1982, Valentine had grown weary of the constant fund-raising necessary to keep Advo afloat. "The more we borrowed, the more we needed," he told Advertising Age. In that year, outsiders estimated that Advo lost $5 million, despite its growing sales.

By early 1983, Advo's efforts had earned it 12,500 retail clients, including Sears, Roebuck & Company, Kmart, and the Kroger's grocery store chain. The company's mailing list, arranged in "carrier-route" sequence for easy delivery by the post office, contained 83 million residences, making up 97 percent of the households in America. Advo operated 14 distribution centers, sending out shared mail packages to 60 different markets. Through its aggressive spending, Advo had expanded to become the country's largest commercial bulk mail distributor.

In June 1983, Advo put these resources to use in a partnership with John Blair Marketing, a division of the New York-based John Blair & Company, a marketing firm that was the country's largest distributor of national brand coupons. The joint venture, in which Blair provided a four-to-eight-page spread of coupons to wrap around Advo's promotional circulars, was called "Network Mail." The program was designed to reach 40 million customers and draw them into stores with its combination of coupons and promotions.

Despite its gains in revenue, which doubled again in 1983, Advo had trouble becoming profitable. The company's attempt to start up several free-circulation newspapers had failed, and it also lost money on Grit. Armed with the Blair partnership, as well as regional contracts to deliver advertising circulars throughout several states, Advo went head-to-head with the newspaper industry in an effort to gain a third of the $2.5 billion a year business of distributing promotional materials. The company won a decisive battle in this war in September 1983, when it announced that it had won a contract with the Kmart Corporation, a major user of newspaper distribution facilities, to deliver 10 million promotional fliers each week in a four-state area of the Midwest. The retailer cited Advo's more complete coverage of the area involved in explaining its switch to direct mail.

At this time Valentine and his two co-owners announced that they had decided to sell Advo to their Network Mail partners, John Blair & Company, for $40 million, and the sale was finalized in March 1984. Valentine stayed on as the company's president and also became Blair's senior vice president in charge of marketing services and coupon operations.

With the resources of the Blair operation, Advo continued its rapid expansion, installing its fourth major new computer system in three years, at a cost of $16 million, adding six new handling and distribution centers, and augmenting its sales force by 350 people and more than 12 new offices. At the end of 1984 Blair posted a decline in earnings, reflecting the high costs of its Advo acquisition and expansion. Advo itself posted losses of $20 million at the end of the year.

In February 1985 as Blair continued to pour money into Advo, Valentine resigned. By the end of that year Blair had sunk $150 million into its subsidiary, expanding its reach into 238 different markets. Despite this growth, however, Advo continued to have problems. Confused by the similarity of Blair's free-standing inserts of coupons in newspapers and its coupon wrappers for Advo's Network Mail, clients for both services withered away. In an effort to woo them back, Advo introduced Coupon Feature Plus, designed to combine direct mailing with trade advertising. Beset by poor management and little control over spending, the company racked up another $30 million in losses. "Under Blair, the company grew out of control," one analyst told New England Business magazine. "They tried to grow too fast and bled Blair to death."

Weakened by its experiment with Advo, Blair became the object of a hostile takeover by McFadden Publishing in 1985. McFadden proposed to justify its investment by disposing of Advo at a fire-sale price: $100,000. Rather than effectively close the company down, Blair sold Advo to a group of investors led by the investment house Warburg, Pincus & Company, which purchased 28 percent of the company for $11 million, and sold the rest of its stock to Blair shareholders.

In its new incarnation, the company was run by former Blair executive Hugh R. Beath, who became Advo's chief executive officer. Under its new management, Advo was reorganized. The company abandoned its quest for growth, withdrawing from markets in which it failed to make money, and focused instead on profitability. In addition, the company took steps to cut its costs, thereby stabilizing its bottom line.

Advo aggressively sought new clients, inaugurating marketing efforts designed to attract national advertisers and ad agencies. The company built on its strengths of market saturation and selectivity to offer joint national and local campaigns to potential clients such as McDonald's and General Electric, with national rebates or coupons linked to customized promotions for local franchises or dealers. With its zip code indexes, Advo was able to key its mailings to the areas surrounding local businesses.

In its continuing battle with the newspaper industry, Advo filed an anti-trust suit against the New York Times, charging that the company used economic leverage to infringe on Advo's attempts to do business. In addition, the company charged that the American Newspaper Publishers Association had used undue influence in arranging for anti-junk mail editorials to be run when deliberations over third class mail rates, which had a major impact on the viability of Advo's operations, were taking place within the Postal Service. Despite all its efforts at change, Advo continued to lose money in 1986, posting losses of $47.8 million. By 1987, however, its first full year as a publicly held company, Advo's sales of $520.5 million allowed it to move into the black, notching profits of $9.6 million.

In the following year, Advo suffered the implementation of higher third class mailing rates, which upped the company's postage costs by 26 percent. In addition, the company received a second blow when Kmart announced that it would stop sending advertising circulars through Advo's distribution channels, concentrating on television advertising instead. With the loss of this large account, Advo racked up about $600 million in sales, but its earnings suffered. By 1989, however, Advo had regained its profitable status, and the company posted earnings of $5.3 million.

In the early 1990s Advo continued to increase its net income, despite a general recession in the American economy and an associated cutback by most advertisers. The company's earning power was curtailed again in 1991, however, when a 40 percent hike in third class postage rates took effect in February. To lessen the impact of this, the company developed a "drop-ship" system, using more than 700 rented trucks to deliver its mailings to the appropriate United States Post Office mail facilities. This practice allowed Advo to qualify for discounted mailings.

In addition to its shared mailings of promotional fliers, Advo also introduced several more elaborate direct mail initiatives, in an effort to retain its market share. The company began producing Savers, a magazine-like publication of advertisements. Savers had an artistic cover and a calendar of upcoming local events, designed to make consumers keep it around the house for handy reference. In addition, Advo launched Celebrando, a publication geared to the Hispanic population, and International Style Report, a fashion magazine and catalogue.

Advo also developed a strategic plan to broaden its activities, moving into the developing field of micromarketing, which identified discrete parts of the market and then targeted them for specialized, and presumably more effective, advertising efforts. Convinced that micromarketing represented the wave of the future in the advertising field, Advo hoped to reposition itself as a growth company that dominated this special niche of the advertising market. The company foresaw a movement from saturation marketing, in which it blanketed every household in the country with a given mailing, to segmented marketing, in which only certain neighborhoods, selected by zip code, received a certain advertisement, and to even more highly targeted efforts, in which specific households were chosen to receive a mailing.

To achieve this goal, Advo formed a number of alliances with other firms in its field. In late 1990 the company bought the majority of RM Marketing, a Los Angeles-based marketing concern that created customized publications to carry the advertising of supermarkets and other retailers.

In addition, Advo moved to tap the potential of one of its greatest assets, its mailing list of virtually every household in the United States. The company formed Decision Base Resources, a joint venture with worldwide advertising giant Young & Rubicam to sell marketing databases. Advo also entered into an agreement with a company called Acxiom to form Infobase Services. The goal of this joint venture was to develop name-specific lists, with data on behavioral characteristics, lifestyle, and the demographic nature of a large segment of the population. This represented a significant augmentation of Advo's name-blind address files.

In the same vein, Advo formed a strategic alliance with VNU/Claritas, a marketing research company that had developed a series of demographic, psychographic, and product-oriented profiles of the American populace arranged around zip codes. Claritas classified areas into 40 different consumer "clusters," giving them names such as "Blue Blood Estates," "God's Country," and "Pools & Patios." With this information, designed to tell advertisers which products residents might want to buy, marketers could attempt to target their appeals to the most receptive audience.

Along with these futuristic advances, Advo reverted to its earliest incarnation when it formed Door-to-Door, a hand-delivery service that operated in three small Michigan cities. The company was a joint venture with Alternate Postal Delivery, which Advo undertook as an experiment, to explore possible alternatives to delivery by the United States Postal Service should third class mail become prohibitively expensive. In this way, the company also hoped to mollify investors who felt that Advo's future prosperity was a hostage to postal rates, a factor largely beyond the company's control. In April 1991 Advo moved in on its newspaper competitors when it bought the Chicago Sun-Times Distribution Systems.

Firmly committed to a future in micromarketing, Advo appears to have put its past financial swings behind it. If the company continues to innovate as a direct marketer, Advo appears well suited to prosper in the coming years.

Additional Details

Further Reference

Radolf, Andrew, "Direct Mail Firm Seeks Marriage to Newspapers," Editor & Publisher, August 14, 1982.Jervey, Gay, "Blair, Advo to Debut 'Network Mail' Plan," Advertising Age, May 16, 1983.Jones, Alex S., "Competition in Ad Circulars," New York Times, November 24, 1983.Gloede, William, "Blair Now Shares Success of Advo," Advertising Age, August 9, 1984.Edwards, Paul L., "Blair Ducks FSI Confusion," Advertising Age, April 7, 1986.Welles, Chris, "What's Free, Full of Ads, and Read All Over," Business Week, November 2, 1987.McGurrin, Lisa, "A Nemesis to Newspapers, Advo Pulls in First Rate Revenues via Third-Class Mail," New England Business, May 2, 1988.

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