With all eyes on the battle between brick and mortar retailers and e-tailers, many investors are missing out on the opportunities offered by the $9 billion U.S. home shopping market. This is especially true since home shopping companies have expanded their online and mobile commerce businesses, which are complementary to their core home shopping operations.
The three largest U.S. home shopping players are QVC, HSN (NASDAQ:HSNI), and ValueVision Media (NASDAQ:EVLV). QVC is currently owned by Liberty Interactive (NASDAQ:QVCA), and Liberty Interactive has plans to spin off its current tracking stock into two separate tracking stocks this year: QVC Group tracking stock (currently Liberty Interactive) and Liberty Digital Commerce Group tracking stock. This will help to create a pure-play investment opportunity in QVC, the largest home shopping company in the country.
While investing in Liberty Interactive or the future spin-off of QVC seems to be an obvious choice for capitalizing on the domestic home shopping market, ValueVision Media, the smallest of the three players, could potentially be a better investment. Being the biggest U.S. player means further growth on a larger revenue base will be tougher for QVC. In fact, QVC has shifted its emphasis overseas, setting itself with the goal of penetrating a new foreign market every two to three years.
On the other hand, ValueVision Media has the greatest room for growth among the three. Although its U.S. household reach is roughly the same as its larger peers, at about 90 million, ValueVision Media only boasted about one-fifth and one-tenth of QVC and HSN's units shipped, respectively. Moreover, ValueVision Media earned a mere $7 in revenue per household reached, compared with $24 for HSN and $60 for QVC. Going forward, ValueVision Media has put in place strategies to bridge the gap between itself and its competitors.
Price point and purchase frequency
Previously, ValueVision Media's more limited product offering and higher average price point were stumbling blocks to its goal of reaching out to a wider customer demographic. After ValueVision Media halved its average price point from $176 in 2008 to $81 in 2013 by diversifying its product mix, it grew its net units shipped by 132% over the same period, compared with a 21% corresponding increase in households reached. Currently, ValueVision Media's average price point ($81) is still slightly higher than those of QVC ($60) and HSN ($58), suggesting future potential to attract a more diverse group of customers.
Purchase frequency tends to be positively correlated with customer captivity. ValueVision Media has worked at improving customer purchase frequency, by increasing its proportion of beauty & fashion merchandise sold (versus jewelry and watches). Most of the beauty & fashion products are usually consumables that have to replaced within a short period of time, leading to an increase in the number of returning customers.
In the fourth quarter of 2013, ValueVision Media decreased its average price point by 20% and increased its average customer purchase frequency by 12%. The end result was that it achieved a 30% growth in the number of customers over this period. More importantly, while ValueVision Media improved its customer retention rate from 32% in 2008 to 51% in 2013, it is still a far cry from QVC's customer retention rate of 88%. ValueVision Media should see improvement on this metric, as it continues to lower price points and raise purchase frequency.
All three home shopping companies have evolved into multi-channel retailers, with online and mobile sales accounting for 46%, 43% and 37% of the revenues of ValueVision Media, QVC, and HSN, respectively. In the case of ValueVision Media, this represented a 1,270 basis point increase from 2009, where such digital sales made up only 33% of its top line.
Based on ValueVision Media's internal surveys, its average customer is a college-educated female with a mean income above $70,000. More importantly, ValueVision Media's customers tend to be "community-oriented; they want to be informed and entertained and value newness and unique products." This suggests that these people will prefer digital purchases because they won't have to worry about either a store being too far away or not being able to shop during the wee hours.
In response to customers' needs, ValueVision Media has iPad and Android apps providing content that is synchronized with the live broadcast of its programs, allowing customers to enjoy a true multi-platform shopping experience. The results speak for themselves: customers' satisfaction with ValueVision Media has increased from 36% in 2011 to 54% in 2013, based on Net Promoter Score, a nationally recognized third-party customer satisfaction indicator.
The importance of digital growth has been validated by data released from QVC and HSN. While customers who only made purchases through HSN's TV shopping platform boasted revenues of $838 per buyer, multi-platform buyers (through both TV and digital) spent $1,279 each on the products offered by HSN. Similarly, QVC's customers who bought products through all the different platforms (PC, mobile apps, and TV) spent nearly six times as much money as those who purchased solely via TV.
Foolish final thoughts
ValueVision Media delivered a good set of results in 2013, growing its revenues by 12% and quadrupling its adjusted EBITDA to $18 million. In contrast, HSN increased both its sales and EBITDA by a more modest degree of about 4% in 2013. Similarly, QVC's U.S. operations grew its 2013 revenues and operating income by 5% and 4%, respectively.
The financial results for the three home shopping companies serve as a validation of ValueVision Media's higher growth potential relative to its peers. Looking ahead, ValueVision Media should grow its top line and bottom line by increasing the number of customers, their purchase frequency, and expanding the digital business.
Mark Lin has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.