Zones, Inc.

Zones, Inc.

1102 15th Street Southwest, Suite 102
Auburn, Washington 98001
U.S.A.
Telephone: (253) 205-30000
Fax: (253) 205-2558
Web site: http://www.zones.com

Public Company
Incorporated: 1988 as Multiple Zones International, Inc.
Employees: 527
Sales: $460.77 million (2003)
Stock Exchanges: NASDAQ
Ticker Symbol: ZONS
NAIC: 454113 Mail-Order Houses

Zones, Inc. is a direct marketer of information technology products to small-to-medium sized businesses and the public sector. Zones sells its products through catalogs, the Internet, and legions of account executives. The company began by selling primarily Mac software to consumers—something Zones still does through an inbound call center—but during the late 1990s the company shifted its market focus to corporate customers. Zones sells more than 150,000 products made by manufacturers such as Apple, Cisco, Epson, Hewlett Packard, IBM, Microsoft, and Sony, among others. The company's facilities in the Pacific Northwest are complemented by a distribution center in Wilmington, Ohio.

Origins

Zones recorded electric growth during its formative years, quickly emerging as one of the fastest growing companies in the country during the 1990s. The company sprang from modest beginnings, however, starting out with six employees who occupied a 5,000-square-foot warehouse east of Seattle, Washington. Joining the six employees was the person who hired them, Sadrudin Kabani. Kabani, who led the company during its first six years in business, incorporated his company in late 1988, christening it "Multiple Zones International, Inc.," its corporate title throughout the 1990s. Kabani's strategy—to sell computer software and hardware by mail-order—would not have struck the casual observer as a recipe for exponential financial growth, particularly during the late 1980s when the computer industry had yet to demonstrate much substantial growth itself. Zones grew explosively, nonetheless, generating $11 million in sales in 1989, $22 million in 1990, and $48 million in 1991.

Direct marketers such as Zones were positioned ideally to reap the rewards of the computer industry's phenomenal growth. Without the overhead of traditional retailers, direct marketers were able to sell products at a lower price than retailers who had to pay for prime real estate and attractive store design. Further, computer shoppers proved to be especially price conscious, employing a purchasing strategy that fit perfectly with the business strategies employed by entrepreneurs such as Kabani. Many consumers chose to visit a retail shop to look at a product before returning home to place an order for the same product with a direct marketer. Accordingly, Zones enjoyed an advantage in an incredibly fertile market, one that Kabani and his successors exploited with great success.

Zones's business orientation underwent several distinct changes during the course of the company's development, as it rethought its address to the computer market to maximize growth opportunities. Initially, the company focused on selling software, particularly software designed for Apple Computer, Inc.'s Macintosh (Mac) systems. Much of the company's growth early on, when annual sales more than doubled every year, was derived from the sale of Mac software. Kabani placed advertisements in consumer magazines such as Macworld, MacUser, and MacWeek, offering readers a selection of software and hardware, but mostly software, at discount prices. His business flourished, attracting the attention of a local entrepreneur, Firoz Lalji. Lalji, a Ugandan with a degree from the London School of Economics, started a chain of camera stores named Kits Cameras, Inc. in 1981, a business that recorded robust growth. Kits Cameras enriched Lalji, giving him the financial resources to invest in the success of other entrepreneurs. In 1990, when Zones was just beginning to attract attention, Lalji purchased half the company. Initially, Lalji remained in the background, letting Kabani run the company, but before the end of the decade Lalji made his presence known, taking firm control of Zones and transforming the nature of its business.

Strong Growth During the 1990s

When Lalji made his initial investment, the most daunting problem facing Zones was how to expand fast enough to keep up with the volume of business the company was generating. After reaching $78 million in 1992, the company's revenues swelled to $113 million in 1994 and skyrocketed to $242 million the following year. The vigorous financial growth stretched the company's ability to find qualified new employees and dictated numerous moves to new, larger facilities. Zones, during the first half of the 1990s, appeared to be always on the move, barely able to settle into new headquarters before its growth necessitated another relocation. In 1991, the company moved out of its original 5,000-square-foot facility and established itself in a 26,000-square-foot building. In early 1994, the company was forced to move again, signing a lease for a 45,000-square-foot facility. Roughly two years later, as its sales neared $500 million, the company felt the constraints of its 45,000-square-foot headquarters and leased an entire seven-story building.

The forces driving Zones's physical expansion drew their power from the evolution of the company. Kabani began increasing the company's offering of computer hardware in 1992, not long after he began developing business in Europe and Asia, where the software market was growing at twice the rate of the U.S. market. By 1993, Zones had licensed affiliates in eight foreign countries—Denmark, Sweden, Norway, Switzerland, Belgium, Japan, and Hong Kong—and two company-owned offices in France and England. Customers in these countries, as well as those in the United States, were solicited not only through multi-page advertisements in consumer magazines but also through two publications produced by Zones, the Mac Zone, introduced in 1990, and the PC Zone, introduced in 1992. The publications, which were issued on a monthly basis by 1995, represented the essence of Zones's function in the computer market.

Kabani, in a June 18, 1993 interview with Puget Sound Business Journal, described his company as "the conduit between manufacturers and customers." More accurately, Zones represented a filter more than a conduit, with the company's staff responsible for determining how the manufacturer was presented to the customer. By the early 1990s, there were at least 30,000 products that Zones potentially could offer in its mail-order catalogs, but the company vetted the field, only including a product in its mailings after it gained the approval of its product-review staff. Zones, through the Mac Zone and the PC Zone, never offered more than 5,000 products during the early 1990s. The company's vice-president of business development, in a May 21, 1993 interview with Puget Sound Business Journal, explained, "The vendor will know their product, but we know what will sell to our customers." Kabani added his views in the same publication on June 18, 1993, saying, "It has to fit our customers' needs. If it doesn't fit, it can't be in (the company catalogs), even if they try to pay for it."

Zones flourished during the mid-1990s. The company's sales demonstrated vigorous growth as it successfully increased hardware sales. In 1994, after two years of ramping up hardware sales, Zones generated 53 percent of its revenue from the sale of hardware. By 1996, the company derived 82 percent of its business from hardware sales. Zones had less success, however, in penetrating the market for Windows-based software and hardware. The competition in the PC market was more intense and more complex than the market for Mac products. "On the Mac side," Zones's head of corporate relations said in an August 8, 1997 interview with Puget Sound Business Journal, "we're one of three large resellers that dominate about half of the market. But on the PC side, it's much more competitive and there are many more channels of distribution. There are integrators, value-added resellers, resellers, and superstores. It's a long list."

Stumbling in the Late 1990s

When Apple Computer began to falter at the beginning of the late 1990s, Zones felt the sting of its over-dependence on Mac software and hardware. The company's sales, which had been making annual leaps upwards, flattened. To inject new vitality in the company, a new chief executive officer and president was hired. John DeFeo took over management of Zones in January 1997 and attempted to help the company contend with problems associated with its rapid growth and its inability to achieve satisfactory results in the PC market. "The company was managing itself by looking in the rear view mirror," DeFeo remarked in an August 8, 1997 interview with Puget Sound Business Journal. "We have to learn to look through the windshield and look at the road ahead and react to what we see coming as opposed to what's already happened."

Zones did change its perspective, but DeFeo was not the agent of change. He spent a little more than a year in charge of the company, achieving $490 million in sales at the end of 1997—only a marginal increase over the $457 million generated the previous year. The company's stock, which had been trading at $28 per share in late 1996, plunged to $4.25 per share by the summer of 1997. New, comprehensive changes were needed to help Zones adapt to the changing dynamics of its market, and the person to initiate such change was Firoz Lalji.

Company Perspectives:

The company is dedicated to creating a learning community of empowered individuals to serve its customers with integrity, commitment and passion. It strives to achieve this by stimulating a positive and collaborative workplace environment, delivering high speed and quality service to its customers, and adapting to external changes with flexibility, innovation and leading edge technology.

Lalji Taking Command in 1998

Lalji built Kits Cameras into an eight-state, 145-unit chain by the end of 1997, the year he left the company to take active control over his investment in Zones. Lalji was appointed president and chief executive officer of Zones in March 1998, beginning a tenure that ushered in profound changes for the company. Lalji gave Zones a new business model that started to dictate the company's actions in 1999. At the time, the company's financial performance stood in sharp contrast to its record of growth throughout the decade. After years of exponential sales growth, Zones's financial progress was halted. Annual revenue, which jumped from $113 million in 1994 to $242 million in 1995 and to $457 million in 1996, rested at $487 million in 1999. Worse, the company was no longer profitable, posting a $6.6 million loss in 1999. For the next several years, Zones continued to record lackluster financial results, but a new version of the company was being built to fundamentally correct its problems.

Beginning in 1999, Lalji started to move the company away from consumer sales and focused on serving small-to-medium sized businesses. The company severed its business ties overseas in 1999, divesting majority control over operations in Germany, Austria, Switzerland, Mexico, the United Kingdom, France, and elsewhere. Zones did not entirely abandon consumer sales, but the future of the company as envisioned by Lalji was as a business-to-business, or B2B, company. The change in the company's market posture took time; the financial merits of the switch in focus were not immediately evident. When Zones brokered an agreement with Microsoft in 2000, however, Lalji's vision offered its first tangible evidence of success. The company's stock value more than doubled when it was selected by Microsoft to be the computer behemoth's primary supplier of computer products and distribution services to its 20,000 U.S.-based employees.

Thanks in large part to the arrangement with Microsoft, Zones's sales swelled to $634 million in 2000, but the company's turnaround was not completed with one deal. Further, Microsoft did not typify the type of customer Lalji was pursuing—though the boost to Zones's business was welcomed by Lalji. Instead of targeting multibillion-dollar companies, Lalji was after the 500,000 U.S. businesses with between 50 and 1,000 employees, the market for which was highly fragmented. No competitor in the $100 billion market controlled more than a 5 percent share.

The financial benefits from the company's new strategy were slow to materialize because corporate customers typically replaced their computers every three years. In 1999, the purchasing cycle was reset, with a wave of purchases during the year signifying the arrival of the next wave in 2002. Recessive economic conditions, however, reduced technology spending, delaying the industry's historical cycle metrics. The first positive evidence that Lalji's strategy was working arrived in 2003.

Zones lost money in 2000, 2001, and 2002. Sales at the end of 2002 were $414 million, substantially below the total recorded six years earlier. In 2003, the first signs of a turnaround were on display. Sales increased to $460 million and the company returned to profitability, posting $1.5 million in net income. Lalji was encouraged by the results. Technology spending in the corporate sector was increasing, and Zones had established more than a foothold in the B2B market. Lalji, convinced he was on the right track, announced plans to make Zones a $1 billion-in-sales company by 2005. The goal was decidedly ambitious, requiring the company to more than double its sales in two years. Lalji's success in achieving his goal would be measured in Zones's ability to firmly establish itself as a dominant direct marketer of hardware and software to corporate clients.

Principal Subsidiaries

ZCS; CPCS; Zones Corporate Solutions.

Principal Competitors

CDW Corporation; PC Connection, Inc.; Insight Enterprises, Inc.; PC Mall, Inc.; Apple Computers, Inc.; Systemax Inc.; Dell Inc.; Hewlett Packard Company; International Business Machines Corporation.

Key Dates:

1988:

Zones is founded.

1990:

Firoz Lalji acquires 50 percent of Zones.

1990:

The Mac Zone is distributed to potential customers.

1992:

The PC Zone is first published.

1998:

Lalji is appointed president and chief executive officer of Zones.

1999:

Zones begins to focus on corporate clientele.

2002:

Lalji promises to make Zones a $1 billion-in-sales company by 2005.

Further Reading

Baker, M. Sharon, "Multiple Markets Vex Multiple Zones," Puget Sound Business Journal, August 8, 1997, p. 1.

—, Multiple Zones IPO Filing Offers Some Surprises," Puget Sound Business Journal, May 17, 1996, p. 3.

—, "Multiple Zones Readying IPO," Puget Sound Business Journal, April 19, 1996, p. 1.

Bowman, Robert, "Keeping Service Up to Speed," Distribution, June 1993, p. 52.

"Multiple Zones Swings on Microsoft Deal," Puget Sound Business Journal, March 31, 2000, p. 20.

Park, Clayton, "Fast-Growing Multiple Zones Tests Selling Via CD," Puget Sound Business Journal, November 12, 1993, p. 15.

—, "Multiple Carving Solid Niche in Mail-Order Software Sales," Puget Sound Business Journal, June 18, 1993, p. 50.

—, "Multiple Zones Goes Abroad with Software-Catalog Clones," Puget Sound Business Journal, May 21, 1993, p. 12.

"Q1 2004 Zones Inc. Earnings Conference Call," America's Intelligence Wire, April 30, 2004, p. 4.

Tice, Carol, "Multiple Zones Focusing on Its B2B Business," Puget Sound Business Journal, September 8, 2000, p. 5.

—, "Zones Targets Profitability with B2B Strategy," Puget Sound Business Journal, June 28, 2002, p. 26.

—Jeffrey L. Covell