Exporting Into Niches

Fantasy Entertainment of Hudson, NH, the 2004 Exporter of the Year for New England, is in the business of selling fads to teenagers. The company distributes photo kiosk machines to more than 25 countries abroad and maintains 4,000 in the U.S.

Kyle Nagel founded the business in 1995 with 12 people and 12 machines.

The 80-person company, which now has 1,200 machines abroad, did nearly $50 million in sales last year and is expecting similar revenues for 2004. About 8 to 10 percent of their revenues come from exports.

Nagel saw a business that wasn’t living up to its potential and knew he could do better, said Todd Catania, international sales director for Fantasy Entertainment.

“He saw a need in this niche market of coin-operated novelty machines,” Catania said. “He’d go to these machines; they’d be dirty, out of order, not kept up. He figured, you could make a lot of money if you managed them properly.”

The firm started buying used photo kiosks and refitting them to offer color digital photos. They established a model to ensure the machines were properly maintained and customers got refunds if they malfunctioned. After blowing their largest competitor of the water, Catania said, they began diversifying.

Since novelties have to be new and different, Fantasy expanded with kiosks that offer custom backgrounds, photo stickers or a “portrait studio” where customers can get a “sketched” version of their photo. “Watercolors” and “oil paintings” came next. Fantasy’s kiosks are in Disney World and Disneyland as well as malls and movie theaters across the U.S., Spain, the United Kingdom, Hong Kong, Brazil and western Europe.

The software allows the kiosks to offer nine different languages and the entrepreneurs who buy them decide which languages they want to offer their customers. The machines are built to order in the New Hampshire facility and shipped so that when their customer receives them, they just plug them in.

The company makes a small profit on the machines, but higher margins by selling the paper, ink and other supplies (called consumables) necessary to keep the machines working, Catania said. “We get a percentage of revenue for every picture taken. We have machines sold back in 2,000 that we’re still generating revenue from.”

That business model also keeps the lines of communication open between Fantasy and its customers, so when it has a new product to sell, it has a ready customer base, he said.

Looking back, Catania said he feels the company waited too long to begin exporting. International entrepreneurs started asking about the kiosks in 1996 and the calls kept coming, but nobody tracked them, he said. Finally, when the international interest became even heavier in late 1999, Nagel brought in Catania and they launched their exporting business in 2000.

If they had been around longer, they may have had a stronger foothold to withstand competition from a knockoff of their portrait studio, he said. While their patent was pending, the competitor sold it for less and didn’t require those who bought the kiosk to buy the “consumables” from them the way Fantasy Entertainment did.

“We couldn’t shut them down until we had that patent. We had to beat them on quality, service and price. They had an inferior product. They sold theirs for less,” he said. “These machines were so popular that people who weren’t aware of our product bought the inferior one. We probably lost 300 to 500 locations in Europe.”

The company considered changing its business model, by not requiring the purchase of consumables from Fantasy, he said. “We decided to stay on course. We wanted a link to our customers.”

Once they received their patent, they took the other company to court and ended up settling through mediation. That company no longer manufactures the portrait studio. “We weathered the storm.”

One of Fantasy Entertainment’s challenges is deciding the best way to come up with a new product. “Do we align ourselves with a new company that has a new product or do we develop it ourselves?” Catania said.

In the meantime, they’re growing revenues by broadening their customer base. The International Resource Center in Portsmouth, NH, has helped Fantasy Entertainment by identifying new markets, he said. For instance, after a free trade agreement was passed with Chile earlier this year, their contacts at the resource center told them about the country’s potential.

Chile is an ideal source of new business, he said, because Chileans have a high disposable income and the country has lots of outlets for their product, such as movie theaters, shopping centers and entertainment centers.

The International Resource Center, Catania said, has helped his firm break into new markets. “They’re a great resource for information and linking you to the right people.”