Vertical branding tries two paths to move merchandise: company does both retail distribution and direct marketing of products.

FRESH from the Electronic Retailing Association Conference last week in Las Vegas, Nancy Duitch settles into a de-briefing ,session with her senior managers. Around the table people present products from ERA that they think Vertical Branding Inc. might want to launch with infomercials aimed at consumers.

Duitch, chief executive at Encino-based Vertical Branding, figures the initial pool comprises about 100 products. Vertical Branding will conduct extensive research on 10 of them. Only six will actually appear in company-produced TV commercials, and Duitch hopes three will eventually make the company a profit.

In a unique strategy, Vertical Branding works in two business segments that normally don't go together--direct marketing and retail distribution.

Currently the company owns or has exclusive licensing agreements for six products in the personal care, home cleaning and home improvement categories. Its best-known brands include Hercules Hook, a wall hanging system that requires no tools for installation; Zorbeez, a synthetic towel for household chores; and the DermaFresh line of cosmetics and skin treatments.

"We look for products that can have an evergreen application at retail," said Duitch. "Our strategy is that every product will have a place on a store shelf."

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The company launches products with direct marketing campaigns on TV and the Internet. TV exposure drives Internet traffic.

"We're OK if we lose money on the TV side, as long as we make the money up with the Internet sales," said Duitch.

In the next step, the company puts its product into retail stores. Duitch points to the Hercules Hook as an example. Hardware stores have sold wall hooks for decades, but the Hercules only leaves a small hole in the plasterboard and doesn't require tools, making it a good match for female consumers. Stores can still sell their regular product line, but in the meantime "we have invented a new category in the hardware business for hooks," Duitch said.

But the company's two strategies have the potential to conflict with each other.

"It's very hard to establish distribution in retail if the retailers know the products are for sale on television," said Larry Steven Londre, president of Londre Marketing Consultants in Los Angeles. "It's a whole different marketing model. Retail is retail and direct is direct."

Londre cites a letter that Home Depot sent to suppliers in 1999 asking them not to sell directly to consumers or risk having their products pulled from the shelves. A company that sells directly to customers becomes a competitor, not a supplier, according to the letter.

Vertical Branding counters with this argument: A direct marketing campaign and the consumer awareness it generates can make a product attractive to resellers, including retailers, home-shopping channels and catalog publishers.

"We currently have products placed with many of the nation's largest retail outlets, including Wal-Mart, Target, Costco, and Bed Bath & Beyond," the company's annual report states.

In addition, the company's overall strategy uses the infomercial format as a launch pad for retail, although Duitch concedes that not all products can successfully make the jump.

"The real profitability for this business is the retail side," she said. "We don't consider our selves a direct marketing company. We consider ourselves a consumer product company that uses direct marketing to brand our products."

Reverse merger marketing

Vertical Branding became a publicly traded corporation in 2005, thanks to a reverse mortgage with MFC Development Corp., a real estate firm. The merger allowed Duitch to buy out her partner, but it also brought a $7 million net operating loss tax credit and some real estate assets the company will sell gradually.

The stock trades over the counter, with a price in the range of 70 cents per share. The company lost almost $2.8 million last year and had an accumulated deficit of $6.2 million at the end of 2006. But the company has strung together two profitable quarters so far in 2007.

In June the company announced a $5 million line of credit secured by inventory and accounts receivable. But Duitch may need additional capital to pursue her strategy of growth by acquisition. Her ideal target would be an e-commerce site in the beauty or personal care sectors "with good technology but not the capital or infrastructure to grow."

Looking forward to 2008, Londre predicts tough times for direct marketers like Vertical Branding. "Media costs are going to be more expensive with the Olympics and elections," he said.

Duitch plans to move ahead with new products launches next year and counts on her team to control costs. "Marketing and sales should lead every company. Analytics should follow suit," she explained.

"We have three full-time analysts, one in marketing, one financial and one forensic. That's very unusual for a company this size."

Joel Russell

Staff Reporter