How Martha Stewart Financed Her Global Empire - Research Paper Example

Martha Stewart: Financing an empire before and after a scandal “I’ve always considered myself the ideal customer, the perfect example of the curious homemaker who needs help” Martha Stewart (Price, 2007, p. 55). Introduction Martha Stewart is an American homemaking guru who took her skills in both business and within the home to create a do-it-yourself craze that swept through the United States, providing her with the opportunity to develop a business that has become an empire. It can be said that Stewart started her empire in 1977 when she incorporated her catering business into Martha Stewart, Inc. In the 1980’s, her catering business was servicing the elite such as Paul Newman and Joanne Woodward, as well as elite business such as Tiffany’s and Sotheby’s. It was during the 1980’s that her book publishing career began as well (Price, 2007, p. 54). Her books were filled with wonderful recipes and tips on home entertaining. While Stewart had the public image as a guru for the last word on defining good home entertaining, her business experience as a former stockbroker and wise associations with other women who were good and creative in their business positions was going to help her to find a powerful position within the business world. After a start with Time Warner Publishing in which she was the brand behind a magazine and a television show, she bought her company from the publishing giant and catapulted her brand into a wide net of products that increased her financial presence within the business world. Martha Stewart Living Omnivision, Inc. becomes a global entity with a solid corporate structure of management. Time Warner Publishing In 1990 Martha Stewart signed a deal with Time Warner Publishing in order to develop her skills in creating innovative entertaining information into a magazine. Stewart was given the position of editor in chief. By 1993 she was the host of a half hour program dedicated to expanding the information that was available in her magazine (Price, 2007, p. 55). Stewart was seen as a “lifestyle entrepreneur”, a person who goes into business for a lifestyle rather than for the purposes of making money. Her endeavors were seen as very successful, but driven from a place of the desire to increase the knowledge of the American homemaker, her concepts and attitude infiltrating, and often intimidating, the average wife as she tried to keep up with all the dried herbs in the kitchen and the handmade note cards for the sake of polite interaction with others. This, however, was a mistake on the part of the business world in thinking that Stewart was nothing more than a creative spirit. Meanwhile, the dot.com boom was shaping the financial world with any media that was associated with the internet creating a great deal of profit. Stewart had developed a relationship with Sharon Patrick, a strategic consultant, who helped her to formulate a plan (Panache Prive, 2010). Stewart’s plan was to buyout her magazine and exit from Time Warner. According to Fabrickant (1996), in an article written in 1996 just before Stewart split from the company who had facilitated her rise to stardom through the magazine deal and the television program, Time Warner was not interested in expanding her business in the many directions that she was interested in exploring. They were concerned that a business that focused on a single person was too much of a risk. Stewart, on the other hand, wanted to expand into the dot.com world, taking her ideas and influence into more than just the two avenues of interest, publishing and broadcasting. One of the financial problems that Stewart faced in trying to convince Time Warner to invest deeper into her enterprise and to let her company expand under their umbrella was that while Martha Stewart Enterprises was bringing in over 100 million dollars each year, it only had a cash flow of around 3 million dollars (Fabrickant, 1996). The net worth of Martha Stewart Enterprises was roughly 85 million dollars and despite claims of only having 3 million dollars in cash flow, the company was bringing in a total of around 50 million dollars per year for Time Warner. Stewart and Patrick reportedly went to ten banks, all of whom either denied her or wanted a significant amount of equity from the company, which would put her roughly back into the same position she was in with Time Warner (Prud‘homme, 2004, p. 148). Stewart had a relatively small contract with K-Mart which paid her 200,000 dollars per year to act as a spokesperson for the company. This arrangement, which had lasted for ten years, was up for renewal and in this Stewart and Patrick saw an opportunity. Meanwhile, according to Prud’homme (2004), Stewart began a campaign designed to make parting with her a desirable plan for Time Warner. She began to make increasing demands for perks in regard to her position, including benefits such as a chauffeur and a very large clothing allowance. In addition, she demanded that she be entitled to 40% of the equity in Martha Stewart Enterprises (p. 149). Stewart had been sorely underestimated for her ambitions and her desires to expand. Through negative relationship negotiation with the intent of making her an undesirable partner with Time Warner, she set the stage for the buyout that she intended. Meanwhile, the internet boom was reaching unimaginable heights in its success and Stewart was prepared to launch her enterprises into the virtual world. Stewart negotiated a deal with K-Mart to fund her buy out, along with private funds of her own and that Patrick would contribute to fund the buy out. The deal that Patrick helped to negotiate with K-Mart allowed for funding of her buy out from Time Warner and to increase her control over the quality of the merchandise that the chain store sold that had her name attached (Pasternak, 2010, p. 193). While the K-Mart deal helped to fund her buy out, the total buy out deal was impressively manipulated by Stewart. The K-Mart deal provided her with a 16 million dollar down payment with an additional 2 million dollars of her own money towards the buyout. The deal would require her to borrow an additional 30 million dollars in order to close, but that was nowhere near the 85 million dollars that was reported as the cost of the business. The deal included retention of 6.3% of the holdings for Time Warner in order to support the remaining costs and in exchange they would facilitate the distribution of the magazine and process the online orders. In a very short time, Stewart bought back those shares from her IPO, leaving Time Warner without interests in her company (Prud’homme, 2004, p. 150). Martha Stewart Living Omnivision, Inc. The Martha Stewart Everyday Collection at K-Mart In February of 1997, Martha Stewart Living Omnivision, Inc. was realized with four divisions within the corporation. The company was divided into publishing and online, television, merchandizing, and corporate, which would provide for the running of the magazine Martha Stewart Living, publishing of books, and stretching the influence of the company into a series of products to expand within the market. Martha Stewart took the head of the company as the chairman and CEO, her position to also include defining of the vision, being the embodiment of the brand, and running the company, while Sharon Patrick was hired as president of the company, creating the structure and strategy for the company (Prud’homme, 2004, p. 149). In 1999, Martha Stewart Living Omnivision, Inc. filed documents with the Securitas and Exchange Commission with the intent of taking 100 million dollars in stock public. Since its inception, the company had in its second year doubled its earnings to 23 million dollars with further evidence of the potential success of the company shown in the 1 billion dollars in sales through K-Mart (United Press International, 1999). On October 19, 1999, using her undeniable style, she enhanced the power of her brand with the brokers who would be trading her stock by bringing 3000 brioche and croissants along with freshly squeezed orange juice to the traders on the floor of the New York Stock Exchange. Stewart went up to the balcony, handing out hats and standing in front of a MSO (Martha Stewart Living Omnivision, Inc) banner, rang the bell opening the trading day. She had even designed her own stock certificates (Prud’homme, 2004, p. 173). The success of the first day was astounding. At the beginning of the day, the shares were set to trade for $18 per share. Martha owned 70.4 % of the shares and 96% of the voting power and stood to make 614.7 million dollars. However, the fervor and admiration of Stewart reached such a height that the shares began trading on that morning at $37.25 and by the end of the day Martha Stewart had a personal worth of 1.27 billion dollars (Prud‘homme, 2004, p. 174). By 2002, MSO was a public company listed on the New York Stock exchange with 286 million dollars in yearly revenue, 585 employees, an annual compound sales revenue growth rate of 29%, with a strong brand and a strong lead in the industry (Hendricks, 2002, p. 6). The success of MSO would continue. Two years later, after the dot.com crash, the terrorist attacks on the World Trade Center, a recession, and troubles with K-Mart in the lines it carried under the Martha Stewart label, her stock was still trading at its approximate original offering price (Townley, 2003, p. 21). Her approach to her product, presenting the softer side of life and how best to live it, was supported by hard line business decisions that represented large ambitions and distinctively meticulous expectations. In looking at MSO in relationship to Porter’s Five Forces, rivalry, threat of substitutes, buyer power, supplier power, and barriers/threat to entry, an understanding of the industry and the companies success within it can be established. The first force, rivalry is very simply defined through understanding the power of Martha Stewart’s branding. The company is dependent upon the public’s appreciation for what she has to offer and what she stands for in creating the perception of her aesthetics. Of the four main ways in which competition can be challenged, changing prices, differentiating products, creative distribution, and exploiting relationships with suppliers, MSO was primarily supported by its differentiation from its competitors (QuickMBA 2010). Martha Stewart had risen well above her competitors, responsible for inspiration on a fanatically level to the millions of viewers and readers who believed in her ability to improve their home life through attending to the making of their home. While there were others who rose to the challenge, no one rivaled the belief that was attached to her skills, taste, and style. Threat of substitutes, the second force, was negated by the power of her brand and the need for association with her name by consumers. The power of the buyer, in regard to Porter’s Five Forces and in regard to MSO was grounded in the admiration for Stewart that was held, in combination with a trust that was built between the consumer and Stewart. Stewart represented the best in class and taste, but she associated with a chain like K-Mart, promising that her products would have a low price, but not be of low quality. The relationship that was built between the consumer and his or her perception of Stewart was that whatever she recommended would meet her standard, which was always going to be above that of the consumer. Supplier power was also in favor of Stewart because no matter what her actual supplier situation had become, she was not only selling a product, but she was selling an ideal. She could shift that ideal to suit what she had to offer to her public, thus also somewhat negating the impact. In order to fully appreciate the power that her branding held, one can examine the mistake that K-Mart made in handling her products. According to Turner (2003), “K-Mart had a compelling brand in Martha Stewart Everyday Collection, an asset which, if deployed and supported correctly, could have positioned K-Mart to be the destination for home goods”(p. 213). Instead, despite the success of the brand name within their store, they failed to utilize her name in order to reposition themselves as the home goods destination. Target and Kohls, however, have managed to fill that position with much lesser names at their disposal. In examining both the success that Stewart had with K-Mart, compared to the failure that K-Mart had in utilizing that success, the power of her name is made clear. It was the barrier to entry that she held within her grasp that crumbled, letting a plethora of other home-making guru’s through after her demise that brought down the power of her company. Before she was indicted for criminal trading practices, eventually sentenced for five months of incarceration for misleading federal investigators and obstructing an investigation with the insider trading charges dropped, no other person could brand themselves to the level she had managed to rise. Stewart herself was a barrier to those who would compete with her. Others rose in popularity, but none reached the level that she had achieved, but the problem with the primary source of her success was that it rested within the public’s perception of Stewart. Branding and Strategy The best asset of MSO was Martha Stewart, her image an almost fictionalized character from which the company created a desired lifestyle that women across the world, now that she was a powerful presence on the internet, wanted to emulate. The problem with the singular focus was if that image became tarnished, the company could suffer from a full collapse. As well, the question of what would happen when Stewart wished to withdraw, or suffered from an illness, or even died, all were issues that could cause tremendous difficulties for the corporation. This possibility was answered in a much worse fashion, at least for the corporation, when her integrity was brought into question through a claim of insider trading. Stewart was accused of using information that was illegal in order to trade some of her stock portfolio. On December 27, when the stock she held in ImClone lowered below $60 per share, her stock was sold by Peter Bacanovic according to an agreement they claimed to have made (Prud‘home, 2004, p. 257). The investment that Stewart had in ImClone equaled about 240,000 dollars, a small amount of money relative to the rest of her portfolio, but the stock price had fallen during the previous week by approximately $20 per share and in selling when she did, she saved a loss of 45,000 dollars (Brickley, Smith, and Zimmerman, 2007, p. 225). There was, however, an insinuation and an eventual actual accusation that Stewart had been tipped off to an impending problem in the company that would further drop the price of the stock. This was used as a way to indict and eventually convict of her of crimes related to the sale. While there is debate on the legitimacy of the accusation and as to whether or not she was targeted for reasons outside of any actual crime, the tarnish on her name was a difficult stain from which to rebound. She withdrew from public scrutiny before the trial, her business suffering a third quarter drop of 42% as the tabloids created mocked up pictures of her behind bars and with handcuffs around her wrists. She didn’t appear on talk shows during that time, trying to calm the public arousal over her legal problems, but her image was taking very difficult hits and since her business was built upon the image of the almost fictionalized Martha Stewart, the real life problems she was suffering did not support the home grown, herbs drying in the basement, and handmade note cards to friends and family image that they had created around her. Public backlash was somewhat terrifying. While the problems at Enron and Worldcom had impacted outside of their sphere and created a great deal of suffering from their manipulation of stock, the crimes that Stewart had been accused of had not had a significant overall impact on the market. However, because it is easier to hate a person than a corporation, Stewart’s name became the symbol for corporate greed and wickedness because it is easier to hate a person than a business entity (Passikoff, 2006, p. 195). (Passikoff, 2006, p. 194) Where some celebrities and famous people might have hidden from the event, Stewart used her five months in jail to the best advantage she could create. She came out of jail and immediately began speaking about her experience, suggesting that it had created a change within her life. During the time of the accusation, the trial, and then her incarceration, the company was not profitable for 16 months (Passikof, 2006, p. 197). The future of the company was in question, but Stewart took to the talk shows discussing her adventure and creating sympathy for those she was in prison with, thus creating associated sympathy for herself. The sympathy, of course, was then rounded out by her creation of something that could be valuable to the average home maker, connecting her to her original audience. Recuperation Her new image now includes the strong, corporate powerhouse, although a fallen hero of the corporate world. According to Coultan (2007), “her key market is suburban stay-at-home middle-aged women, whom she seems to understand intuitively”. Producer Mark Burnett helped her to create a new program, post her incarceration, that continued to create the same aesthetics for which she was known. A long time relationship with Donald Trump ended up allowing her an opportunity to run a show similar to his own The Apprentice, although that show was a terrible failure. In the wake of the newly attached corporate image that was applied to her home making skills, it had been hoped the image could be revived through a combination of the strong corporate woman and the creative homemaker. It didn’t work. Stewart’s empire includes Martha Stewart homes in which you can apply Martha Stewart paint to the walls, and fill it with Martha Stewart décor and bedding. Her empire was built upon her style, upon the belief that what she had to say had such value to the public that they would work to emulate her tastes - and it happened. After her incarceration, part of the civil action precluded her from being the director of a public business (Coulton, 2007). However, even with another at the helm, the business reflects her aesthetics and her belief in perfection. Stewart has made a deal with Macy’s, up scaling her product line into a department store with her paint products going to Sherwin Williams as opposed to being carried in K-Mart. She launched a line of craft products that were described as the most significant deal since her deal with K-Mart (Coulton 2007). Her empire has endured, even as her image and branded fictionalized character has taken a beating. Rachel Ray on her Daytime Television Program (Google images) There have definitely been setbacks to the corporation. Rachel Ray has emerged, a young flawed woman who relates to the audience in contrast to the way that Stewart always was held above them. Stewart’s magazine once held the number 27 rank of American magazines, but a drop in circulation has landed the magazine at 35. This is also due, however, to the great number of DIY magazines that have entered the competition for readership, mostly inspired by the great success of Martha Stewart Living. While some see her as having been a cold hearted corporate head, others believe that her incarceration was a shame and that she “took one for the team” as an example for the American government towards others (Passikof, 2006, p. 199). With her polite, warm, country living personal somewhat revealed for the business woman, she has published a book on business and endeavored to incorporate her business persona into her public persona in a way that explains her impeccable perfectionist attitude as complimentary to her impeccable taste. The road has been hard and she has climbed back from potential ruin to sit comfortably somewhere in the middle, not quite the only guru in town, but still viable and powerful enough to still be a part of a global industry. References Bollinger, L., & O'Neill, C. (2008). Women in media careers: Success despite the odds. Lanham: University Press of America. Brickley, J. A., Smith, C. W., & Zimmerman, J. L. (2007). Managerial economics and organizational architecture. Boston, Mass. [u.a.: McGraw-Hill Education. Coultan, Mark. 17 July 2007. Can’t keep a good thing down. Executive Style. 3 January 2010. Fabrickant, Geraldine. 10 April 1996. Martha Stewart is said to seek a break with Time Warner. The New York Times. 31 December 2010. Henricks, M. (2002). Not just a living: The complete guide to creating a business that gives you a life. Cambridge, MA: Perseus Book. Panache Prive. (2010). Sharon Patrick. Panache Prive. 30 December 2010 Passikoff, R. (2006). Predicting market success: New ways to measure customer loyalty and engage customers with your brand. Hoboken, N.J: John Wiley & Sons. Pasternak, M. (2010). The best of friends: Martha and me. New York: HarperCollins. Price, J. F. (2007). Martha Stewart: A biography. Greenwood biographies. Westport, Conn: Greenwood Press. Prud'homme, A. (2004). The cell game: Sam Waksal's fast money and false promises--and the fate of ImClone's cancer drug. 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