Last summer, along shopper-frenzied Main Street in trendy downtown Freeport, Maine, there were whispers about something serious that few hearers believed. The mills of rumor grind slowly in Maine, but they grind exceedingly fine: For the first time in 78 years, the story went, L.L. Bean Co. was going to start charging customers for postage and handling. This was hot, but widely discounted, gossip.
After all, the L.L. Bean empire (some $600 million in annual sales) was built on three principles: practical field-tested goods (Did not L.L. himself invent the Maine Hunting Shoe? Is not the chamois cloth shirt ”the same one as worn by L.L. Bean”?); an unconditional money-back guarantee; and a rock-solid policy (except for heavy items) of ”Shipping-ppd. Means Postage Paid by Us.”
At any other company in the world, a charge for delivery would have been tacked on 20 years ago, or the cost of shipping would have been incrementally added to the cost of goods. But in the world of L.L. Bean, it is a particularly painful decision. Competitors could boast about good merchandise at a fair price; they also could promise complete satisfaction. But no one else offered free postage. It was the Third Commandment on the company`s birch-bark tablets.
Facing the facts
Leon Gorman, president of L.L. Bean Inc. and grandson of founder Leon Leonwood Bean, simply couldn`t give up one of the company`s proudest boasts when a management group told him last summer that the Visigoths were at the gates and the bottom line was edging uncomfortably close to the great divide between profit and loss.
After a dozen years of pretax profits in the range of 10 and 12 percent, L.L. Bean was slipping below the 5 percent level; as low, rumor had it, as 3 to 4 percent. It was time to charge for shipping and handling.
Knock out just one leg of a three-legged stool, and you lose stability. Leon Gorman put off the inevitable. When the fall and winter and Christmas and spring catalogs arrived without any mention of postage or packaging fees, the skeptics thought they had been right.
Wrong. The rumor was true. It is just delayed until this year`s summer catalog (mailed in April) arrives.
When L.L. himself ran the store, small profits were ordinary. He made less than $20,000 on annual sales of $1 million in the 1940s. Even as the company started to grow in the 1960s, profits depended on increased traffic in the factory store on Main Street, not on catalog sales. The closest the company ever came to a real crisis was after 1955, when the new interstate highway and Maine Turnpike bypassed Freeport (Main Street was also U.S. Highway 1).
Customer parking was also a problem. The store had none. For seven years, sales in the factory store steadily declined. In 1962, young Leon Gorman, over L.L.`s mild objections, bought a vacant lot across a side street from the store and put in a parking lot for the motorists, so as not to delay them on their way to Bar Harbor and Machiasport. Store sales increased immediately and carried the company in the black for the rest of the decade.
L.L. Bean Inc. is privately and closely held, so hard numbers are unavailable. But it is no surprise if profits are down. Many mail-order companies have faced significant increases in costs in the past few years, including higher charges by credit card companies.
Bean, in addition, has added hundreds of middle-level managers in the past two decades. They operate its increasingly complex catalog system (more than 20 specialized catalogs in addition to the seasonal standards) and supervise stock-keeping and product acquisition for the company`s greatly expanded product line: everything from home furnishings to women`s wear suitable for the office. Customer service is a major department, in part created by the very complexity of the catalogs and by the acquisition of new customers who want something more specific than a green shirt and a red felt hat.
Mail order is a labor-intensive business, from shipping room pickers and packers to vice presidents for quality control. L.L. Bean has been generous with managers` wages and with fringe benefits in general, and recent jumps in company-paid medical insurance premiums have added to the high cost of running an increasingly high-tech business.
The most obvious source of new income was a simple charge for delivery. When the decision was made, the Feb. 25 announcement from the company explained that the need to charge for shipping was due to a steep increase in both U.S. Postal Service and United Parcel Service rates-the latter, in particular.
About 70 percent of Bean`s deliveries move in the big brown trucks, and United Parcel had bumped the charge for delivery to residential addresses up an average of 55 cents, from $1.93 to $2.48 for packages going 500 to 1,000 miles, most of Bean`s business.
Keeping costs down
If it had just been a decision to absorb the 55-cent increase, possibly scattering the cost throughout the catalog prices, L.L. Bean could have done it. But the larger question was the company`s rumored decline in
profitability. The average mail-order catalog purchase is surprisingly small, $10 to $12. Many an order is for a pair of socks, a cap, a long-sleeve undershirt or a colorful bandanna.
Bean`s estimated $600 million in annual sales may have come from as many as 6 million separate orders, and at the new $3.50 charge for shipping, that would be an additional $21 million in income, almost as much as the pretax profit last year. And the Bean charge would still fit the company`s image:
It`s less than the industry average of $5.25 for shipping.
The main thing to remember about Bean customers is that they are cost-conscious. The company has carefully priced itself just under the
competition since it was founded.
On the other hand, most so-called mail order is actually telephone order, and most payment is by credit card. There is some question whether anyone knows, or cares, if there`s a shipping charge. Credit card bills just show the total, not the items and surcharges, and they come a month later.
Bean has been through major changes, all of which were predicted to be the end of the world: L.L. died in 1967, and nothing changed for two years. Then, in 1969, Leon Gorman put carpet on the stairs of the original Freeport factory store, padding the ghost-creaky old treads. Wouldn`t be the same, they said. And it wasn`t. The retail store got bigger and better and more profitable, drawing millions of consumers to Freeport and spawning a host of factory-outlet stores up and down Main Street.
In 1970, Gorman decided to build a corporate headquarters and manufacturing and shipping facility on the outskirts of Freeport, turning all of the old factory and store building into retail space. Then, the company started to grow at an annual rate of 15 to 20 percent.
The miracle of compound interest turned L.L. Bean from a $3 million company when Gorman took it over to a half-billion-dollar giant in just 20 years. Catalog mailings went from 1.5 million a year in 1960 to 120 million last year. It hasn`t been the same.
