The tagline for U.S. construction toy maker K’NEX is “Building Worlds Kids Love.” Today, the multinational toy seller, which was founded in 1992, estimates that 90 percent of its interaction with consumers is digital, and K’NEX generates about 30 percent of its revenue online. By 2020, K’NEX expects those online sales to top 50 percent.
It wasn’t always this way, a decade ago K’NEX sold the vast majority of its inventory through the traditional retail store channel, including department and children’s toy stores. The push to embrace e-commerce was driven by current K’NEX president and CEO Michael Araten, who joined K’NEX in December of 2005. By 2006 he decided the company was going to do what few toy companies dared do at that time: embrace Amazon as a primary sales channel and prepare to become an e-commerce company.
Since then, Araten has focused on e-commerce, social media and digital marketing, as well as building its own drop-ship capacity, capable of fulfilling 20,000 orders in 24 hours.
The shift to online paid off. In this conversation with Araten, we discuss the move the company made to online in 2005, why other retailers and toy companies didn’t follow suit at the time and the challenges associated with transforming a business, as well as the future of retail.
DevOps.com: K’NEX’s move to embrace online sales in 2006 struck me as a fascinating transformation, and one just ahead of its time. I think a lot of organizations now face a similar situation, but perhaps even more critical because they may have put off the decision to focus on digital.
To get started, maybe we could talk a little bit about K’NEX journey, and then how you think it applies to companies today.
Araten: K’NEX is celebrating its 25th anniversary this year, and we’ve seen the retail landscape change dramatically from ’92 to the present. I joined the company in 2005, and in 2006 started to make the strategic decision to approach Amazon. At that time Amazon was a large retailer, but nowhere near the size they are today. For our industry—for the toy industry—that was a pretty unique thing to do. I did it because I realized that we were a middle-market-sized company. But we were up against some of the largest toy companies in the world. Therefore, if we’re fighting for brick and mortar shelf space we’re going to have limited success. They can outspend us, and they’ve large teams of people to go and hold on and fight for that shelf space.
But in online, shelf space is unlimited. In addition, this part is unique to products that show well visually, and our products are so visual—online you can really show off the size, scope, scale, movement and all the things you can do with K’NEX that you can’t do on a store shelf. This is true, with rare exceptions.
Sometimes you have displays in store, but they’re very challenging to get.
It became clear to me: If we’re going to win, we’re going to win online. So, let’s become experts online. And we believed, even in 2006, that Amazon had become a much larger part of the way people shopped. Amazon made it easy then, and it’s only gotten easier now. Look at Alexa and the rest of it.
We started there. We were very early on. At that time, many toy companies refused to even meet with Amazon if you can believe it.
DevOps.com: Why do you think that was? Why did they want very little to do with online?
Araten: Many of the companies refused to meet with Amazon. They didn’t want to have anything online. Their basic position was, “We’re going to always sell 95 percent of the stuff in brick and mortar. That’s the deal.”
We started developing an expertise in e-commerce, not only what I call the front end—the marketing, product showcasing, social media—but also the back end. For instance, we invested in drop-ship capability in our headquarters outside of Philadelphia in Hatfield, Pennsylvania, so we could also fulfill orders for our other retailers.
Amazon continues to take most of the items into their warehouse because they really are fanatical about controlling all parts of the consumer experience, so we’re only shipping overflow orders for them. But this drop-shipping capability provided us an opportunity to showcase a larger amount of our product line on places like walmart.com, target.com, toysrus.com, Kohls and other places. Drop-shipping enabled us to expand our product portfolio showcase online.
Obviously, those sales grow more and more every year, and obviously now everyone is talking about multichannel and omnichannel, and pretty much everybody’s doing something with Amazon and other e-commerce players today. This is a trend not only in the U.S., but it exists in various stages around the world. The UK is not far behind where the U.S. is in terms of online toy industry purchases. China is the fastest growing market for toys in the world.
When we look at all those trends, we see that today at least a third of toys are purchased online. Pretty much 90 percent of the research starts online before the purchase is made. We estimate, based on those trends, 50 percent of all toy sales will happen online by 2020, and a majority of all toy sales later. Where it settles exactly is a little bit up in the air, depending on whether or not the retailers, which they’re scrambling now to do, give people a reason to come into the store.
It looks in retrospect like we made a really good decision, at the time it was a little bit of a risky decision.
DevOps.com: That’s fascinating. One of the questions that occurred to me while you were explaining the story is what gave you the confidence that you were right in 2005 that the big shift to online was coming?
Araten: My gut was—and I’m not every consumer, I get that—but my gut was whatever is easier to do, people will do. In 2006, it was already pretty easy to shop online. I think people’s most valuable asset—and people don’t always say it this way, but I think instinctively they know it is their time.
I believed then that this was saving people time, and on top of that it’s also in large measure saving them money. Most of the time the prices on Amazon are the same or lower than what you get everywhere else. That’s not always true, and certainly that may not always be true, but people are willing to pay for convenience when it isn’t.
That’s great perspective. Were you brought in for this transformation at 2005? Or was that coincidental?
Araten: In a way, yes, but until recently we were a family business. My father-in-law invented K’NEX. My personal background is that I’m a lawyer, and I was in private practice, and I was also in house at Toll Brothers, the public home builder, for about a decade as their chief litigation counsel. But in the mid-2000s my father-in-law was in his mid-60s, and was thinking about selling the business, so we talked about whether or not it made sense for it to stay in the family, and I decided to come in and really think about how we would make the business relevant for this century.
Part of that was e-commerce, part of that was what licenses made sense. We actually did our Sesame Street licensing deal shortly after I joined as well. How to expand to broader audiences and how to grow internationally. That was the three-pronged approach we took. E-commerce is filtering through all of that, because we also thought e-commerce would be an easier way to grow internationally, because you don’t need to have as much infrastructure. If you think about it, and you cover this all the time so you know this, technology allows much smaller companies to compete with much larger companies because they’re leveraging the platforms that they don’t have to build.
DevOps.com: Was there internal pressure that you had to overcome to drive this vision forward?
Araten: A little bit. But look, the nice part of having the three initials after the name that say C.E.O. mean people can give their opinions, but you get to make the call. Yes, we had some healthy debate about what going online meant, and we weren’t ignoring brick and mortars. I still sell to Walmart and Target. It was really about where do we want to invest in the future. If I’m wrong, we’re still in those retailers, and if they get it together and people decide, “This is something that I want to do some of the time or a small percentage of the time,” then it’s easier to pivot back. We grew up knowing how to serve brick and mortars. It wasn’t that we had to dial anything back, it was really just adding the investment in this so we could serve this new channel in a way that was meaningful.
Did you get pushback from retailers in selling direct online?
Araten: A little bit, but again it was interesting. It’s hard to see now, but it actually crept up on people. Even for a long time, probably only in the last two years, when Walmart finally bought Jet they realized, “We’ve really got to be in this game.” I think for years they figured it was going to be a very small percentage of people. I know this from meeting with them, “People gotta buy groceries every week. They’re gonna be in our stores every week. They’re not going to come here to buy groceries and not buy the other stuff they need, so we’re good.” That’s the same attitude that Target had, and the same attitude that many retailers had. They were really reliant on the food thing driving traffic.
I think there’s a certain validity to that, which is why I think it may never get to 100 percent online. I think that’s why Bezos, who’s the biggest example of that, bought Whole Foods. I think he sees that. That may be the last frontier that’s really hard for e-commerce to do. I think as a result of that, until that gets really figured out.
Today consumers, broadly speaking, are willing to buy a lot online, but not food so much.
But I’m not sure that’s true of my own children. As the technology gets better, and VR (virtual reality) and AR (augmented reality) get better, and you can visually shop, and get the fresh stuff, and have it the next day or later that day, I think even that may change. I think a decade from now we may say, “Here’s the new billionaire who figured out food.” But for now, I think food saves brick-and-mortar retail.
DevOps.com: What would you advise folks that are just starting to go through this transformation now?
Araten: I’d start with a couple of filters. The first filter is, and I hope most CEOs are doing this, is understanding who’s your consumer, how many audiences you have, and what’s important to them. You’ve got to start with that. Part of that is developing buyer personas. I think that’s the only way to really succeed online, is to have buyer personas so you understand who’s shopping where, what platforms they’re on, etc. You’ve got to do some research up front about your own consumers. Once you do that, then that will inform what platforms make the most sense for you.
I would also say the second thing is, and we did this accidentally because of the way Amazon looked at the time, is experiment. When we started with Amazon, they were relatively smaller, it wasn’t a big-dollar investment or risk because they weren’t as big and we weren’t as big. I would say start with some experiments. Pick a couple of products, put them on the marketplace on Amazon, put them on eBay, put them on walmart.com, and see what happens.
The third thing I would say, and I tell this to everybody, is if you’re going to sell online you have to have a plan to have reviews. Because no review is worse than a bad review. The reviews drive purchase, and if you don’t have reviews people rarely buy it. People are afraid to be the first person to buy something. They think there’s something wrong if there’s not a review there. It’s weird, because if you go into a store you don’t have that reaction, if you see something you like in a store, you buy it. You don’t ask the guy next to you down in the next shopping cart, “Hey is this any good?”
DevOps.com: That’s right. But then again you grow to trust certain brands. Like you know X brand of jeans fit you a certain way, and you know if you order 32/32s it’s going to fit.
Araten: Exactly right. It’s a fascinating time for retail, and what I’m starting to think about is what’s next. Because if you look at the history of retail, with almost uncannily they’ve shifted the way retail looks almost every 20 years. From the general store back in the 1800s to department stores, to super stores like Walmart, then to Amazon. But Amazon’s now 20 years old, and the interesting question is, does Amazon make it beyond 20 years or does it have to morph into something else, and what does that something else look like? We watch for that every day. It is hard to imagine while we’re in the middle of it what replaces e-commerce. I’ve seen glimpses of it maybe in China with social selling, and using social platforms to encourage people to do more than just reviews but literally engage in conversations with each other around shopping online. Maybe that’s what it morphs into, maybe it’s a blend of Amazon and Facebook kind of a selling retail experience, but I don’t know. It’s interesting that Amazon is 20, and usually the face of retail changes every 20 years.
DevOps.com: Was technology a challenge, or was that the least of the challenges for you?
Araten: It’s interesting, and it was the least of the challenges. I think one of the things I mentioned before is how smaller companies and midsize companies can compete with much larger companies. One way is that the ERP system we use, we probably couldn’t have afforded in the ’90s. But it is very affordable now. Email marketing, very affordable. Getting real-time data, very affordable. Hosting stuff in the cloud, very affordable.
Really the reality about our business is that we’re putting on a show every day. The show is for kids and parents and teachers and grandparents, who are engaged when they’re gift-giving or when they’re rewarding somebody for doing well in school. Or, we’re engaged with them when they want to be creative. Those are important moments of people’s lives. If our product quality is really high, which is what we obviously strive for, then we give them good experiences. Then it’s just communicating those experiences to them in a meaningful way. That to me is the challenge, because there’s so many places people could be. There’s so many screens they could be looking at. There’s so many places people get their information. It’s diving through the data to understand where they are. When you’re trying to communicate with them you’re doing that in the way that is not interruptive, and they’ll actually see and pay attention. That to me, the marketing challenge, is actually the biggest challenge.
DevOps.com: A lot of companies that need to transform themselves today aren’t in the same boat that K’NEX was, where it was the CEO who had the vision necessary to drive the transformation. Sometimes it’s executives, a few layers down, trying to drive change. What would you advise those folks who are trying to get the board and the CEO into investing in transformation? Because it seems to scare a lot of companies, and they shy away from it.
Araten: It does. My advice to them is you’re always persuading. Whether you’re the CEO, underneath the CEO, or trying to go to the board. You always have an audience that you’ve got to persuade. I think that you just build your case. Maybe because I’m a lawyer, I think of it this way. Build your case. Get the data that supports it. Show what the logic is behind what you’re doing, and demonstrate that to the people. I think there’s a ton of data around—it’s not hard now to find data. All you have to do is look at any retailer conference call or read their transcript and say, “We’re struggling to grow 2 percent in the stores, but we’re growing 12 percent, 15 percent, 18 percent online.”
Now the evidence is there, so it should be a pretty easy case to make. I think people get scared of, “Am I going to go into a black hole of technology,” and all of that, but I think if you can get the business case understood, which that part is fairly easy, you’ve got to make that case. If you have passion behind the case, show it. I think some of what happens is that people make the case, but they don’t seem that into it. I think the energy has to be part of the case that you’re making. I know I respond more to the passion behind the facts.
The other thing that I’ll say, I learned from marketing over the years is that it’s usually more than one conversation. What I have found is that often people are trying to convince me or I’m trying to convince others. If it’s a customer, like I’m trying to pitch something to Walmart or Amazon or whomever, and the first time they’re a little lukewarm, or they may say no at first. If you talk to your marketing teams they’ll tell you this, on average you need 11 quality contacts before somebody makes a decision.
So go in not expecting that it’s going to be one conversation and the executive is going go, “Yep, let’s go do it!” It’s probably going to be, “Here’s a bunch of questions, go back and find this, what about that,” all these things. Just assume it’s going to be five or 10 conversations before you get to the conclusion that you want. Now if after 10 conversations the CEO’s still saying no, it’s gonna be no. You have to decide as the executive if you still want to stay with that organization.