The niche play

Corporate giants look awfully intimidating at first, but they can be outwitted by upstarts. The key is to find the cracks in their defences

Advertisement

Date this idea to that grim era when the Calgary Flames were an embarrassment, rather than Stanley Cup contenders. Five years ago, George Davidson and Bob Christianson, both oil patch executives, were like many Calgarians: saddled with Flames seats they couldn't use and were forced to give away to friends and family. In 2000, the two sports buffs met during an executive MBA course. For their class project, they devised a concept that would allow season-ticket holders to sell unwanted seats on-line, rather than to sleazy opportunists who hang out at the arena on game day.

Their project begat RepeatSeat Inc., an upstart firm that provides internet ticketing systems to clients that include sports teams, theatre companies, concert promoters and business conferences. Davidson, 51, and Christianson, 49, call it "private label ticketing"--RepeatSeat provides the clients with software and services that allow them to offer their customers secure on-line purchasing, using their own brand (e.g. the theatre's name) rather than that of a ticketing agency. No lineups. No orders lost in the mail. And, interestingly enough, no consumer profile for RepeatSeat. Despite its modest public face, the company is now doing more than just scalping the scalpers in Calgary. It has found a niche in the middle of an industry dominated by Ticketmaster, the $700-million-a-year (U.S.), Calif.-based agency with the crushing fees, predatory instincts and a lock on rock concerts.

Davidson and Christianson are hoping to profit from some insights about consumer attitudes toward on-line ticket purchases, as well as the competitive edge to be gained by injecting new technology into a mature industry burdened by costly infrastructure. So far, they have invested $10 million into their 35-employee company. The duo forecast revenues of about $7 million this year, and they now have close to 200 clients, ranging from the Flames to small venues such as New York City's Tribeca Performing Arts Center. They like to compare RepeatSeat with WestJet, the challenger to Air Canada. But their story is less a heroic confrontation than a tactical end run--after all, this is a company that doesn't slap its name on every ticket. "We've been able to build a business without going head to head with Ticketmaster on every deal," says Christianson.

The history of contemporary capitalism is an amazing run of variations on the David and Goliath story, with generations of entrepreneurs knocking the foundations out from under seemingly impregnable empires. Sometimes, the giants defeated themselves. Others withered after unheeded advances in technology left them exposed. Sometimes a slumbering corporation woke up in time to snuff out these pesky challengers. But in many cases, nervy, energetic upstarts have laid waste to behemoths that were once giant-killers themselves.

Everyone can name Davids who became Goliaths: Microsoft, Dell and MCI. But there's also a special breed of small business that carves out space in concentrated sectors dominated by multinationals. "The important strategy for these companies is to target their competitors' weak spots," says Larry Ginsberg, a small-business consultant and adjunct professor of entrepreneurial studies at York University's Schulich School of Business. "Don't take them head on, or they'll crush you."

Ginsberg's advice for these entrepreneurs is to identify business lines the large players ignore or take for granted, and then strike: "It's targeting where the big guys don't perform well," he says.

Davidson, president of RepeatSeat, and Christianson, executive vice-president and COO, are aiming at two chinks in Ticketmaster's armour: its approach to on-line ticketing and its service charges. They have also targeted small venues below the company's radar screen. Ticketmaster's empire was constructed around close relationships with large venues and leading concert promoters. But Davidson and Christianson contend that its delivery model has become "archaic," with its reliance on kiosks, call centres and a website that penalizes customers for buying over the internet. Ticketmaster even charges a $2.50 fee for tickets that customers print out themselves, and that doesn't include a $3.25 handling fee. "There has to be a perceived notion of reasonableness," scoffs Davidson. "They just keep grabbing revenue here, there and everywhere."

It takes outsiders with fresh perspectives to see why such tactics smack of domination. The ticket business traces its lineage back to the 1970s rock concert scene, but Davidson and Christianson don't have the backgrounds you'd expect. Davidson comes from construction; Christianson from oil-field services. In other words, these two know something about erecting infrastructure, yet they've built their ticketing business entirely around website technologies, with features such as bar-coded tickets that can be delivered to the user's computer.

For the second-tier sports-and-entertainment venues that have become RepeatSeat's bread and butter, such as the New Jersey Pride lacrosse team or Gilley's nightclub in Dallas, the company's software offers a "data capture" system so the clients can study their customers--a service that isn't consistently offered by their larger rivals. Davidson and Christianson have also gone after new markets that have had little appeal for the big distributors, such as business conference registration.

The growth of specialized e-commerce, even after the dot-com bust of 2000 and 2001, has provided a variety of such openings for upstarts to insinuate themselves into established fields. Abebooks.com, a Victoria-based on-line bookseller, worked itself into a market dominated by Amazon, Indigo and Barnes & Noble. Abebooks specializes in used and antiquarian titles, but does so without ever handling stock. The company, founded in 1995, discovered that its competitive edge came from promoting its proprietary database software to independent booksellers. Once converted, those independents can upload their titles into Abebooks' search engine, allowing consumers to locate hard-to-find books across a network of hundreds of stores around Canada, the U.S., and, lately, Europe and Australia. Abebooks earns a transaction fee on every sale.

Now, Abebooks sells 20,000 to 30,000 books a day, and has two million registered users and a roster of 12,500 booksellers in 48 countries. In fiscal 2003, Abebooks' gross merchandise sales--the value of all books sold through its website--were $130 million. (The company's net revenue is much smaller, representing the take from transaction fees applied to each sale.)

Used and antiquarian books are a "perfect product for e-commerce," says Abebooks CEO Hannes Blum, primarily because they can be so tough to find. Until recently, the big on-line sites paid little attention to the used market. Blum argues that eBay's auction model didn't fit. As for Amazon, it became a customer of Abebooks earlier this year. "Amazon has to focus on a hundred different things," says Marven Krug, Amazon Canada's former general manager and now Abebooks' director of product development. "Abebooks has to be good at only one or two things." Toronto's redTO.com, a local search engine and directory publisher, is also targeting a gap in the e-commerce world. In doing so, it is challenging two rival industries, both of them dominated by huge competitors. Roger Abbiss, the 45-year-old telecom entrepreneur who founded redTO.com last year, set out to create a branded search engine geared to the under-used websites of local businesses.

More and more consumers are doing research on-line, yet local websites are often impossible to find with conventional Google or Yahoo searches. "As a fairly heavy internet user, I often encountered frustration in trying to find things on-line," says Abbiss. "As the novelty of the web wore off, my impatience grew. The hardest things to find were local websites. 'This can't be good for small businesses,' I thought." Abbiss also figured that even small businesses would be willing to pay to advertise through a local on-line search engine. After just 18 months, he feels vindicated in his gamble: RedTO.com now has 65 employees, and the company projects that annual revenues in the Toronto market will reach $20 million within five years. Beginning next spring, redTO.com is also planning to expand into other urban markets.

But in taking on formidable empires like Google and Yahoo, Abbiss has also found himself going up against Yellow Pages and SuperPages. This spring, redTO.com started publishing its own directory--the Red Pages, with both phone numbers and website addresses--for less computer-savvy consumers "like my mother," Abbiss deadpans. RedTO.com distributed 250,000 copies in July, and is planning to print another 200,000 in January.

Emitting the easy-going cool of a small ad agency, redTO.com operates out of a converted open-concept warehouse in Toronto's garment district. Abbiss, with his ponytail and arty Queen Street specs, very much fits the image of a high-tech entrepreneur. This is his third such venture: He launched a long-distance reseller in 1990 and sold it two years later. In 1995, he launched Optel Communications, which provided local telephone service in Ontario and Quebec. Optel grew into a 700-employee, $50-million-a-year firm, but then went bankrupt in 2001. In both cases, Abbiss's primary opponent was Bell Canada.

In short, Abbiss understands the perils of trying to sneak past very large opponents. "The scuttlebutt is that we've drawn a little attention from Yellow Pages," he says, before adding this white flag: "We don't discourage our customers from advertising in the Yellow Pages. Frankly, I still use the Yellow Pages from time to time when I can't find something I want on-line."

The conventional wisdom is that small companies shouldn't try to compete with huge, deep-pocketed rivals on price because they risk getting squashed. That may be true with commodity goods and mature markets, but small businesses with new delivery models, such as an internet-based ticketing agency, find they actually have a price edge because their older, larger competitors are burdened with costly overheads.

Davidson and Christianson of RepeatSeat trumpet what they consider to be their advantage: service charges of around $2 per ticket, compared with "convenience" fees as high as $10 on top of per-order handling charges of $3.25 for Ticketmaster. "What would you rather pay on four seats?" Davidson asks. "Forty dollars in services charges, or $8? Consumers understand that the pricing structure didn't make sense."

In other cases, a niche player gains an edge even in a commodity business by keeping things simple. Tom Hutchinson, the Edmonton-based founder of the Rainbow/Magic Lantern movie chain, has 17 theatres in Alberta, Saskatchewan and Ontario, and jostles for space among giants like Cineplex Galaxy, AMC and Famous Players. His movie houses are positioned in all three segments of the market: first-run Hollywood, discount Hollywood (i.e. mainstream films the major chains have stopped showing), and alternative/art-house. Yet they enjoy a reputation for affordability in the era of the $14 movie ticket and the $4.25 bag of popcorn.

"I don't like movies," Hutchinson admits gruffly from his office in Edmonton, where Magic Lantern is the only player in the art-house/alternative segment. "I don't watch them. I don't even own a television set." Hutchinson, 53, got into the movie exhibition business in high school and returned to it after college, when he bought a small theatre.

He's long understood that many movie purists are indifferent to theatre glitz. Since starting Magic Lantern in 1984, Hutchinson has seen several "ridiculous swings" consume the movie industry, the latest being the late-1990s megaplexes decked out with arcades, food courts and extravagant exteriors. Hutchinson doesn't want to build Silver City complexes, with all the associated expense. He can charge $8 a seat and draw moviegoers who want to see a film, not an amusement park. "We've watched the CEOs come in with their big ideas, get thrown out, put in jail. Patience," he adds, "is a virtue because what we're after is plain, ordinary people. I'm not really interested in wealthy suburbanites. We're not trying to make everyone our customer."

Niche players, by definition, don't want to reach everyone, and that's precisely why they take root. But for some, there comes a time when they must leap into broader markets or face defeat at the hands of expansion-minded competitors.

This is a lesson Kawartha Dairy grasped when the family-run firm repositioned itself five years ago. Run by four brothers--Jeff, Don, Monty and Barry Crowe--who inherited the business from their parents, Kawartha was a popular local dairy that distributed its high-quality products in small grocery chains, schools and restaurants in the lake country around Peterborough, Ont. The 150-employee firm's "head office" is still a converted clapboard house in the town of Bobcaygeon. To expand, the brothers realized they'd have to compete with national and multinational dairies like Beatrice, Parmalat, Natrel and Saputo. In the ice-cream business, the rivals included Unilever (with brands such as Breyers), Nestl and Chapman's.

In 1999, the Crowes recruited Blake Frazer, who had formerly headed up Parmalat's Western Canada sales and marketing operation. Frazer began updating Kawartha's brand by modernizing its packaging. But he also launched a marketing campaign that focused on the dairy's local roots and promoted the legendary appeal of its rich ice cream. Kawartha widened its niche by introducing new flavours, but stuck with its time-tested formula, which uses fresh cream. The company adopted a similar approach with its chocolate milk and eggnog.

Frazer got more space for Kawartha products in larger, more mainstream supermarkets such as IGA. But his marketing coup was recognizing that Toronto cottagers who enjoy Kawartha ice cream during the summer would seek it out in the off-season in the city. That is how Kawartha has come to be sold in urban supermarkets such as Highland Farms, and high-end Toronto food emporiums such as Bruno's, Pusateri's and All the Best Fine Foods. "A lot of this is on the strength of customer testimonials," he says, referring to hits on the company website, which was set up in 2000.

York University's Larry Ginsberg argues that such customer endorsements are vital for small businesses trying to carve out turf between giant firms. In the case of service or consulting outfits, satisfied clients who can be prevailed upon to make introductions are often the most effective promotional device.

Other companies have discovered how a bit of media exposure can trigger much-needed word of mouth. That's how Icynene Inc., a 77-employee, Mississauga, Ont.-based maker of spray-in foam insulation, cracked open a niche in the highly concentrated conventional-insulation industry, dominated by Owens Corning, Johns Manville (now owned by Warren Buffett) and Dow Chemical, which supplies Styrofoam insulation.

Icynene started in 1986, when the founders sought to develop a safer version of UFFI polyurethane foam insulation. While UFFI was an energy-efficient product, emissions were suspected of causing several illnesses in the 1970s. Those fears proved to be groundless. The foam is now used throughout Europe and is legal in the U.S. Even so, Icynene's founders hired chemists to synthesize an emission-free alternative. The turning point came when the product, which Icynene claims can cut home heating bills, was shown on a U.S. home improvement television show in 1994. Today, the company has its insulation in more than 100,000 homes and businesses, four-fifths of them abroad.

Rankin says Icynene is primarily a marketing company. "You have to keep blowing your horn," he says. "What we're doing is spending the money up front to get the word out there, so people know we're here." Among the company's key marketing initiatives are the courses they provide to architects and contractors to demonstrate the product and build awareness within the construction industry.

argeted promotional techniques like Icynene's raise the question of how much profile small businesses should seek out, particularly if industry Goliaths haven't taken much notice yet. Rankin admits that Icynene tries not to stir up its competitors. Rainbow's Hutchinson also prefers to keep a low profile. And Kawartha has expanded incrementally, steering away from dealing with the head-office buyers at big supermarket chains who could place huge orders. Indeed, York's Ginsberg counsels upstart players to dodge the media altogether. "You don't want the big guys to see you until you're well established," he says. "There are many examples of small companies that got flattened because they inadvertently got too much publicity."

RepeatSeat's founders don't agree. They sought to build a profile for themselves by going after important clients and inviting influential executives onto their board. They've also capitalized on their local profile in the Calgary business community. "We've made a very conscious decision to be aggressively known in this market," says Christianson.

Abebooks, in turn, presents a case study in how niche players can hone a marketing strategy once they've become established. Initially, Abebooks' advertising focused on the sheer volume of titles in its database. But last year the company hired Lisa Stevens, a marketing whiz from Sony Music, to recalibrate its message. The first step was to analyze the results of an extensive on-line survey. The responses reflected something the founders understood instinctively: Aficionados regard their site as a community for book lovers. Abebooks' new on-line and magazine-based ad campaigns now focus on the sense of discovery and emotional payoff that occurs when someone locates a favourite book they thought they'd never find.

Such shifts illustrate Abebooks' steadily expanding sense of its own franchise. In 2001, the company acquired a similar used- book site in Germany, and it is currently building a presence in Australia and New Zealand. Blum says the next step is to establish a service for Spanish-language titles. But the company's boldest move has been to strike up a relationship with Amazon.com. The Seattle-based giant made its own foray into the used market in late 2000--a move that Blum says brought new attention to used books. But Abebooks' veterans understood that used and antiquarian booksellers are an eccentric, counter-culture lot--and so are a lot of their customers. That demographic detail worked against a mass operation like Amazon's. "There's not a lot of rationale in the antiquarian market," says Blum.

Rather than going head-to-head with Amazon, Abebooks instead struck up a reseller relationship: The two e-commerce companies created a web tie-in so Amazon customers could find Abebooks titles on Amazon. Abebooks made a similar arrangement with Barnes & Noble's BN.com. Blum acknowledges there was a risk in getting into such a partnership, but adds that Abebooks felt its assets were safe: The database software was proprietary, and he wasn't worried about undermining the relationship with its eclectic loner booksellers.

Today, Abebooks finds itself in the enviable position of drawing part of its customer base from traffic drawn to Amazon. This raises an entirely different set of problems from those faced by upstarts looking for a niche. As Blum says, "We're focused on not becoming too dependent on the 600-pound gorilla."

RepeatSeat isn't at that point yet. But the company's concept is good enough that there's now cash flow, investors and a client base. This fall, RepeatSeat begins providing on-line ticketing for the Cineplex Galaxy movie chain, the company's first national deal. As well, Davidson and Christianson are now well enough known to get meetings with such heavy-duty prospects as the owners of the Denver Broncos.

In other words, it's time to hustle. On a recent trip to Toronto, the duo lined up a feverish schedule of meetings with bankers, prospective clients and investors. Having both worked in the oil patch, they know what it's like to go after a gusher, and likewise what's involved when small guys scurry around the feet of giants. Davidson, as it happens, has worked on oil deals in the Middle East, where the quintessentially deep-pocketed Goliaths are thick on the ground.

Isn't that kind of venture far riskier than doing business with the likes of rock promoters and professional sports teams? Davidson smiles coyly. "Maybe."