Exporting Into Niches

Three Award-Winning Companies Use International Trade to Make the Most of Narrow Markets

By Theresa Sullivan Barger

This year’s three New England-based winners of the Small Business Administration’s Exporter of the Years awards sell to such narrow audiences that they’ll never be household names. But they’ve made a name for themselves within their respective industries by improving on an existing product and increasing their sales through exporting. Although the three winners – Fantasy Entertainment, Maine Scientific and Wyrepak Industries – rely on constant technological improvements to remain competitive, all say they use an old standby – trade shows – to market their product.

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.

Like the other winners of this year’s exporting award, 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.”

A Better Coil

Maine Scientific, of Richmond, Maine, also makes a product with a narrow audience, but their customers are generally at the other end of the age spectrum. The firm’s primary product is a specialized electronic coil used in hearing aids.

The manufacturer has always exported, doing about 40 to 50 percent of sales in exports the first year. In 2003, 91.5 percent of its sales were through exports.

John M. Knizeski, III, and his father started the business in 1993 when they realized they could make an existing product better.

“ There’s really nothing new under the sun, we just make it better,” the company president said.

Knizeski and his father were selling for hearing aid companies in Scandinavia and Barbados and, once they had perfected their coil and launched Maine Scientific, tapped into existing contacts to sell their product.

In 2002, Maine Scientific moved to a former shoe factory in Richmond, increased employment from 19 to 30 people, and expanded manufacturing operations to two shifts.

The company has always exported its product, Knizeski said, because foreign markets were just an easier sell. The European hearing aid manufacturers automatically include the coil in their products, while American companies have more options for how they make their hearing aids.

Maine Scientific is also producing coils for surgical imaging equipment, and that represents the business’s largest growth area. While the company is strictly marketing to domestic clients for now, it will expand into foreign markets down the road.

With such a small pool of possible customers, how has Knizeski managed to expand his business?

A willingness to take risks has made all the difference in his company’s success, he said. “You find yourself climbing out on a limb a lot,” he said. “Sometimes those risks, you don’t see anything from them.”

For example, he said, they came up with what they thought would be an improved coil so that it could be handled robotically for assembly. Very late in the process, while these components were in production, they discovered a design flaw. “It turned out to be an unreliable component,” he said. They discovered that they could find the flaw by hand-inspecting each piece, and launched a very expensive testing and sorting procedure.

“ It brought our yields down to 50 percent,” he said.

One way Maine Scientific has expanded its product line without taking on all the risk and expense is by entering a partnership with a customer to create a new product that meets the customer’s needs. Customers would express an interest in a device, but they didn’t want to pay for the research and development.

“We had to bear the brunt of the development costs,” Knizeski said. While Maine Scientific retained proprietary rights, it has been able to negotiate with the customer to help cover 20 or 25 percent of the costs. Because Maine Scientific maintains the rights, the company has been able to sell the same part to others.

Maine Scientific puts its mouth where it’s money is. When there’s a problem with production or quality, the employees don’t just go ahead and ship to meet deadline. “When you’ve got a problem, you have to be honest,” Knizeski said. “We know that we have some customers that really, really depend on our product. We do an inspection on everything mechanically and electronically. If we notice a problem, we’re on the phone.”

If that meant incurring the cost of shipping incrementally rather than all at once so that the customer can have the coil they need and keep their production on schedule, that’s what they’ve done. It’s all about trust, he said.

Wired for Opportunity

When Raymond Browne and David Monighetti bought Wyrepak Industries in 1990, the Middletown, CT, machinery and equipment manufacturer attributed less than 5 percent of its sales to exports. Browne and Monighetti saw the expansion potential overseas and immediately began selling in European markets.

Like Fantasy Entertainment and Maine Scientific, Wyrepak sells to a niche market. “We saw avenues we could go after,” Monighetti said. “We export because we’re chasing the customers.”

Today, about 60 percent of its sales are through exports to Europe, Canada, Mexico, Africa, the Middle East, New Zealand and South America and its workforce has grown to 18 people, including three in a sales office in the United Kingdom.

Wyrepak deals in equipment for the wire, cable and specialty textile industry, including fiber optics. To survive the recession and lower its overhead, the company contracts with wire welding and machine shops to manufacture its product to its specifications.

One decision that proved to be key to their survival was their acquisition of a competitor, Watkins U.K. As part of their plan to lower overhead, they closed Watkins’ manufacturing function and set up the U.K office mostly as a sales office.

“ It allowed us an entrance into the European market that we were struggling with. It’s a lot easier to deal with Europe when you’re in Europe,” Monighetti said.

One if its competitors was also a customer who had supplied yet another business with equipment using Wyrepak pieces. When the competitor’s business folded, the end customer bought directly from Wyrepak. Again, survival has opened up new doors.

“ Now they’re looking at us for other products that they haven’t looked at us for in the past,” Monighetti said.

Wyrepak has found marketing success with both old and new sales vehicles. Although they’re expensive, Wyrepak attends the major industry trade shows, including in Singapore and China. Since 1994, Wyrepak has been an exhibitor at the major wire and cable exhibition held in Dussledorf, Germany. In addition to advertising in international trade publications, the company has put more energy into its website.

At least 20 percent of its domestic and export business is generated through the Internet, he said. Through its website, Wyrepak has made sales to countries they may not have had the resources to market to in person, such Trinidad and Tobago, South Africa, Chile and Venezuela.

Another key to Wyrepak’s success, Monighetti said, has been strong partnerships with freight forwarders who help them get their product to their customers efficiently and in compliance with all local importing regulations.

“ You can have the best product in the world. If the client can’t get it when he needs it, it doesn’t matter,” he said. When you’re trying to get your product into customers’ hands, he said, “there’s a whole laundry list of people with their hands out. The trick is to find the best way to do it with the fewest number of hands.”

Like their award-winning peers, Wyrepak’s greatest challenge is staying abreast of market demands and changing technology.

“ We’re constantly changing our product,” Monighetti said, “as the customer updates their equipment.”