Inside a Florist's Valentine's Day with Jim McCann, Founder & Chairman at 1-800 Flowers.com

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3:06It's time for some money rehab.

3:15Hey, Money Rehabbers, it's Morgan Lavoie, the executive producer of the show. Happy Valentine's Day, everyone. As you know, this week we're re-airing some of our favorite episodes of Money Rehab. And so in honor of the day, we're taking you behind the scenes of what it's like for a big flower company on Valentine's Day. Enjoy. Happy, happy, happy Valentine's Day. And listen, let's be real. I know Valentine's Day isn't all hearts and roses and chocolate for everyone. So if Valentine's Day is not your favorite holiday, I am sending you so much love and I would be thrilled to be your Valentine. Plus, today is not only Valentine's Day.

4:00It is also the Super Bowl. Not the literal NFL Super Bowl that was Sunday. But if you're in the flower industry, today is your Super Bowl. To give us the scoop on this sneak attack complicated flower business is Jim McCann, founder and executive chairman of 1-800-Flowers.com. And spoiler alert, Jim has maybe one of the best answers for the tip you can take straight to the bank question ever. So listen till the end. jim mccann welcome to money rehab nicole the last time i saw you was very very early in the morning so early was it like four or five in the morning it was five in the morning uh i did your show at cnbc a couple of times and boy that's getting up real early in the morning it is to be fair in the middle of the day in europe and the closing bell in asia but i was amazed at how on the game you were.

4:58But you came in, you understood what was going on in the Asian markets, what was going on in Europe. You tied the whole thing together. A few times I caught myself just going, wow. Oh, Jim, can you come back every day? Stop it some more. That's really kind. That's really kind. Just the truth. Well, you had left a great impression on me and so impressed by everything that you've built. This is our Valentine's Day episode. You and I chatting on a day when 1-800-Flowers.com had earnings and you beat them, by the way, and the stock is up. You went public in 1999, so almost 25 years ago. Does this stuff still phase you?

5:37Oh, sure it does. And Nicole, we all like to keep score. No one likes to go out and play tennis and just volley around wondering who won. You keep score. And it's a good discipline being public. And I was just chatting with a friend who was saying the same thing. Wow, wow, the market really reacted positively to your earnings today. How come you're not more excited? I said, because I've been there when it wasn't reacting so great. It's nice to have your investment community respond positively to how things are going. But you can't get too excited about it because there's another quarter coming.

6:07I'm sure Valentine's Day must be, what, top day, top three biggest days of the year for 1-800-Flowers.com? On the floral side of things, it's a big, big holiday for all of our brands. but it's especially big in a floral category. And it's the second largest floral holiday. Apparently there are more moms than sweethearts because Mother's Day is our biggest floral holiday. Our biggest holiday overall, Nicole, is the Christmas holidays because all of our food gifts are popular and our popcorn, our cookies, our chocolate, our gift baskets. And of course, all of our Harry and David gifts are extremely popular at Christmas time.

6:47So the Christmas season is our biggest overall holiday. Mother's Day, our biggest floral holiday. Valentine's Day, a strong holiday, but number three. Maybe biggest roses day? Oh, by far, biggest roses occasion for sure. And it's quite a task to have the right number and the quality of roses for Valentine's Day. For some reason, St. Valentine decided he wanted to do his thing in the middle of February, which isn't the most optimal time for growing roses around the world. So we work with our growers literally around the world in preparation for this holiday. It takes 14 weeks to grow a rose from a cutting to being able to harvest the next crop.

7:27So we do a lot of things with our grower community 14 weeks before Valentine's Day and 14 weeks after Valentine's Day to use a larger amount of roses in our products to afford them the opportunity to grow all the roses we'll need on the Valentine holiday. So it's quite an orchestration. We'll sell probably 15 million roses directly. We probably sold this week 15 million roses directly for Valentine's Day. Close off retail floral partners to sell probably the same amount again. So that's a lot of roses. 15 million roses. So what would the cost of that be? Well, unfortunately for us in the flower business at 1-800-Flowers, the cost of roses hasn't gone up probably in 10 years.

8:13Huh. Inflation hasn't impacted? Really, inflation has whacked us on the cost side of things, but not on the product itself. So the consumer has been getting a better deal every year for the last 10 or 12 years because there's so much we've done to increase the quality and the quantity available that we haven't had to raise prices. Did you hear that voice? No excuses. Should you buy 1-800-Flowers.com stock for your significant other or somebody you love or flowers? Definitely buy flowers because if you buy them stock, they're going to throw it at you. What? Come on. There's something called romance out there.

8:58I know you're a money gal, but there's something about sentiment and romance and old-fashionedness and stop with the stock certificates. Wait a minute. Hold on. So you would say that would be the best investment for a partner would be the actual flowers. Absolutely. Invest in the relationship. Even though your stock is obviously going to go up. Our stock will do fine if you just buy your flowers. So how big is the flower industry in general? How much do roses account for it? And then how much does your business account for the overall shebang? Well, I'll give you my best estimations. I think that the flower business is probably overall a$14 billion category all in.

9:40And the gift part of the flower business is probably a$8 or$10 billion business. And we're about 20 % of that. So this leads me perfectly to my next question. Can you tell us a little bit more about the model for the company? You alluded to it, but I'd love to double click. Sure. Do you own land worldwide? Do you oversee the planting and harvesting? Or are you working with smaller florists and only touching orders and delivery? Like a marketplace, you said that for Valentine's Day, you're starting to work with growers 14 weeks in advance. But can you give me a sense of how that all fits into the overall model?

10:19Sure. It's a complicated model in the sense that we deliver product every way you can imagine. And being a same-day deliverer of product, it makes it a little bit more complicated on the last mile. But frankly, it's been our competitive advantage through all the different iterations we've experienced in the 24 years that we've been public and the 40 plus years that we've been around. So, yes, it's complicated, but that's to our advantage in the long run. So we have a network of the very best florists, let's say just in this country, we have 6 ,000 of the best florists in this country who work with us every day, filling our orders.

10:54and we work with them in terms of forecasting exactly what we project will be the kinds of orders we'll have in each of the areas that we cover each of the zip codes. So forecasting and modeling is extremely important because as you know, we're dealing with a very perishable product. And so having that direct relationship with the very best florist around this country is paramount to our success. How do we predict it? How do we work with our grower community to say, This is how we're going to need our product in each market. So the distribution works. And this time of year, you know, it's in the Northern Hemisphere.

11:29It's difficult to grow a lot of products. So this time of year, we'll be reaching into South America. We'll be reaching into, in some cases, Africa for our European partners to go where the equator is to grow our product to get it to our markets. as we get into different parts of the year, then our buying of product will move more to North America, to our growers around the US and around Canada to provide the product for us. So it's a lot of planning, a lot of orchestration, a lot of modeling, a lot of predictability so that a retail florist who's the very best at what they do knows their market like nobody else can.

12:04And now we're giving them a great deal of data and input in terms of what to expect in their market, make sure they have the right product, The flowers, the containers they're going to need, they can plan their budgeting around their staffing, how many drivers they'll need, what areas they'll need to cover, and to get that data back to us so that if you place an order with us, you'll get pinged the minute that order is delivered and there's a huge smile on the face of the recipient you intended. Indeed. Let's take a step back for a second. Flowers you mentioned are, of course, perishable. And this might resonate with some of our listeners that have businesses or thinking about businesses in other perishable goods markets.

12:43So this means you have a very small window of time to sell your product, so to speak. What do you think the biggest challenge is and what have you learned to overcome a perishable business making that successful? Well, it's a little bit different at different times of the year. So this time of the year, weather is our primary concern. So we work a lot with FedEx, for example, on moving product around the country. And so we're watching the weather maps very closely. My advice is sell sweaters. perishable products are tough i mean when you pull into a fancy town like let's say los angeles you don't go to beverly hills and say this is where all the florists live it's a it's a tough business it's a good business there's lots of wonderful people in it but there are so many variables that can give you grief you can have everything planned out perfectly and an ice storm you know we just had ice storms throughout the southwest all of a sudden And planes can't fly.

13:38Florists can't get their trucks out. So you have to plan around that. And then you have to have the customer service people in place to be able to deal with the order that was supposed to be there today, but nothing was moving. So where is she going to be tomorrow? We want to reroute the flowers to make sure they get to the right place. So there's a lot of intricacies. It's a lot like watching sausage being made. You don't want to. But after 40 plus years of doing this, we have it down to a pretty good science. But I don't encourage it for the people who are faint of heart. Oh, OK. These would be analogous to people who are starting food companies, too.

14:13I mean, a lot of weather challenges. Indeed. The good news about food companies are that people eat every day and they don't have quite the spikes in demand that we would have in the floral and gift business. And frankly, one of the reasons we got into food gifts is we saw that our customers, especially during, I mentioned during the COVID period, we didn't know what was going to happen when COVID first started in March of 20. And like a week or two in, all of a sudden demand went through the roof. At the same time, all of a sudden we were trying to learn to work from home for those people in office settings, keeping our people safe in production.

14:48and in answer to your question about agriculture, agriculture is a big part of what we do with all its commensurate risks. So we have food acreage production around the country, most heavily concentrated in Oregon, where our Harry and David operations are. We have 5 ,000 acres of agricultural production where we grow the world-famous pears that we're known for. And we have a million pear trees that we tend to every day. We grow peaches, we grow apples, we grow kiwis, we grow grapes. So we grow our food. So we're absolutely vertically integrated there. On the flower side of things, because the different growing seasons will take us to other countries throughout the year, we don't own the land.

15:29We'll contract grow with people who own their land to say, I need 15 million roses this week. So we have to guarantee them the right return on that so that they'll plant the plants, that they'll tend to them, they'll harvest them and get them to us on time. So there we don't own the land, but we're contracting with the best growers in the world to produce the products we need when we think we need the most. And those pears are very pretty. I always look at them and I'm like, wait, are these real ones or fake ones? Well, they're so different than the pears that you'd see normally in a grocery store.

16:00But living in LA, you would know that once a year we do a big deal with Trader Joe's and the pears that are delicious and almost perfect, but didn't make it to our gift selection. We have a deal with Trader Joe's where we have one week where we sell those pairs off. And boy, is that a big week for us in Trader Joe's when we have those pairs in their stores. And that's a really smart partnership to get some of the excess inventory. But you don't need me to tell you that with Trader Joe's. So I'm just thinking a little bit more about all these weather forces. When I was at CNBC, when we met and NBC acquired, or NBC, of course, was a parent company.

16:41And the Weather Channel was part of the family. And so I did a lot of segments for the Weather Channel and just talking about how interconnected finance Wall Street is with weather patterns and trends. So this could be a good lesson for even newbie investors to pay attention to some of these trends because it could dictate where you put your money during what certain times. Can you tell us a little bit more about how to follow rough patches or natural disasters vis-a-vis your investments? Well, I can only speak to what we do. And let's take, for example, the pears. We grow them in southwest Oregon.

17:23There's only three spots on the globe that they grow in southwest Oregon and Chile and in New Zealand. And we grow them in all three spots. So it's different seasonality. So it gives us a much longer selling season by being able to grow in those three different spots because it's three different times of the year that they come in. But I never thought I'd be so focused on the impact of climate change, which I am now convinced is real and dangerous. And we need to be very serious about it because I see the weather impact it has on us in southwest Oregon and how that has an impact on our crop, our yield, the quality of our product.

18:08It's a little bit of a high desert climate environment. Clearly, we move off flower production to different parts of the country, different parts of the world based on climate change and what temperatures are doing. and in particular with the droughts in the west of the country. You're keenly aware of that in terms of where you live. But those drought situations are real and changing kind of quickly. So it's, and then there's a last mile. So Valentine's Day, middle of winter, toughest time of the year from a weather point of view. So I'm keenly aware of the pass in Northern California called Donna's Pass and whether or not there's snow on it because our trailer trucks have to get through that area to the airport.

18:51And if that pass is closed, we have a nine-hour extra drive down through the southern part of California to get to the appropriate airport. So weather is a variable that, as we became much more involved in the agricultural part of the business through Harry and David at all, I became much more aware of. So I have more reasons not to sleep effectively at night. Hold on to your wallets. Money Rehab will be right back.

19:20And now for some more money rehab. So as the company and the space has grown, there's obviously been new players in the space, BOOX, Bloom Nation. How much M &A activity are you thinking about? Is your trigger finger itchy? What do you think about these new business models in the flower space? Well, you know, this is a tougher environment to grow in, Nicole. Organic growth, which has been the primary growth engine for us for these many years, is going to be a little tougher in this year and maybe the year after, and certainly in the last year. So then we say, okay, we have a nice balance sheet.

19:54We have a good platform. So when we make an acquisition like Things Remembered, which we just acquired, a very small acquisition. What is a very small acquisition to you? Just to clarify, because somebody else might not think it's small. A sub$10 million acquisition. All we bought was intellectual property. We bought the brand, we bought the customer list, inconsequential amount of inventory, and then we relaunch it. So we already have the technology platform. We have the fulfillment facilities. We have the machines that do the etching and the laser cutting. We have the glop of the glop of the machine in place.

20:25So there we would expand our product line a little bit because they had a different mix than we do. And so, but we already have the backend. So we can afford the body intellectual property, spend less than$10 million for it, and have every expectation that we'll grow that brand to$100 million brand. And we'll do that fairly inexpensively because we already have 30 million customers to introduce that brand to. And we can do that relatively inexpensively. We don't have to go out and acquire new customers. We already have 30 million affluent, gifting, thoughtful people who would most likely be interested in when there's a wedding coming up in their family to get that beautiful bride's groom and wedding gifts that things remembered is known for.

21:10And all we have to do is introduce them that they can use their loyalty program with us and they can buy those. We don't have to build a new building. We already have a building that has plenty of capacity. We don't have to build a new technology platform. We already have a terrific technology. So some of the redundancies are taken out. Exactly. We already have a legal department, an HR department, a finance department, a tech department, all of those things are already in place. So we buy little brands. One of the ways we grow is we buy little brands that we know our customers would be interested in.

21:38And we have the ability inexpensively to grow them to about a hundred million dollars. Then it gets a little bit more expensive to grow beyond there because we've used up what we call our house media, our customer database, our social media marketing efforts, our direct marketing, our catalogs. And we've done that with a company called Sherry's Berries. We're doing that now with a company we bought a year ago called Vital Choice, which is all about better for you foods. And then we're also looking to say, if it's tougher for us to grow, it's really tough for the new companies you mentioned who require new financing because they're not profitable yet.

22:16So maybe they're a couple of few years away from profitability. Well, if they have to go back to the market for capital now, oh, it's painful. In a couple of conversations, the term I've heard by those companies who were in the market saying we need more capital before we can get profitable. They're hearing that the terms to get that capital are punitive. Tell me more about that. Well, you know, when everyone's nervous, if you don't have a very clear line of sight to profitability, if you can get capital, and there's a real question as to whether or not you can, you're going to be paying 25, 30 % cost of capital.

22:53And boy, you better have one heck of a business because how many companies, How many businesses have margins enough to justify that kind of cost of capital? I don't know many. You're saying that the economy, as it's slowed down, as the market has gotten tighter, as the debt markets have closed up, it's harder to raise money. It's harder for some of these startups to get the traction that they would have otherwise potentially had. Well, not the traction. Get the capital. How do you get the capital? How do you get people to say, OK, I'm going to invest in this because capital is tight? And you see in the private equity community, for example, when you have a shop that has both a credit side to it and an equity side to it, well, the private equity guys are saying, well, I work my tail off and I commit capital to these businesses for four, five, six, seven years.

23:41And I'm targeting 14, 15, 16, 17 % IRRs, internal rates of return. Well, I can do it through the credit side of the shop and get 12%, 13%, 14%, 15%, be at the top of the cap table and have a lot less risk and have my money out sooner. So you're seeing when capital gets tight, it goes to the credit markets where they're more protected and they get almost as good a return without the risk of being in equity. So the cost of paper, the cost of bringing on debt for companies has gotten a lot more expensive. A lot more expensive. And what do you think the ramification of that is going to be? And what do you see in the overall space?

24:21Do you think some of these smaller, I guess comparatively, companies will get acquired, will go bankrupt? What's your prediction? Some will go away. Some will be acquired. Maybe some will muddle through. I'm not sure how, but you have two things working. Cost of your capital has gone through the roof. It's triple, quadruple what it was a year ago. So cost of capital. And your cost of customer acquisition has exploded. It's what people call CAC, C-A-C, cost of acquisition of a customer. That's, you know, you can see it in Google rates and public information. It's gotten a lot more expensive to acquire a new customer.

24:59So if you've been around for a while and you have a good customer base, you can spend less on new customers and rely on your existing customer base, which is less expensive to tickle, to stimulate the purchase from you than it is to find a brand new customer. So if you're in a business of forming a business where you've got to go out and acquire your customers new, it's gotten a lot more expensive than it was two years ago, even a year ago. and the cost of your capital to go do that has gone up because those investors see that it's become a lot more expensive for you to get new customers. So your certainty of success has gone way down.