Cut loose by Learningsmith, WETA links up with KCET chain

Store of Knowledge keeps its alliance with public TV

Originally published in Current, June 23, 1997

By Steve Behrens

WETA has split with the Learningsmith retail chain, but is still selling Barney dolls and Ken Burns tapes in the mall. The Washington, D.C., station held its grand opening this month for a new Store of Knowledge in a shopping center just outside Washington, D.C.

The Learningsmith chain dropped its relationship to public TV last year, except in Boston, and some stations like WETA have hooked up with the competing Store of Knowledge.

Both chains were started in conjunction with pubcasters and traded on the names of local stations, but as Learningsmith grew, its new investors opted out of the relationship and the royalties that the chain was paying to stations on gross sales.

The experience holds a lesson for pubcasting stations and other nonprofits that usually must turn to private investors to capitalize revenue-generating ventures.

When things are going well, the investors stick with the original idea, says Andy Griffiths, v.p. for finance and administration at WGBH, Boston. And when results go off-track, the investors change the idea to get back on-track.

"Any time you do a partnership with a private business, there's that risk," says Griffiths.

Learningsmith is still running about 35 stores around the country--including several Washington-area outlets that are now unaffiliated with WETA--and plans to open 20 more stores this year, according to co-founder Marshall Smith.

Store of Knowledge, meanwhile, is growing at about the same rate; the chain has 32 stores open now and will have 50 by November.

In city after city, stores of the two chains have been pictured as answers to stations' financial problems. The Kansas City Star last fall touted KCPT's first Store of Knowledge as its "boldest venture into capitalism."

But in Washington, at least, WETA didn't get back into retailing for the money.

"Anyone who sees it as a get-rich possibility is pretty naive," says Linwood Lloyd, executive v.p. "It's safe to say that a station shouldn't enter into this relationship for profits alone."

WETA attached its name to a new store "as a way to bring the station into contact with people in a positive way," says Lloyd.

"Can I leave my 10-year-old at the door and know she will buy a good present for her sister?" Lloyd asks. "I think the Store of Knowledge passes that test with flying colors."

Pounding in the rafters

WETA's first Store of Knowledge branch, where 1,700 parents and kids turned out to meet Arthur during the grand opening, is located high in Pentagon City, a bright, glass-topped mall across the Potomac from Washington. The shop is two floors up from the Museum Company and the Disney Store.

There's a racket of urgent pounding coming from loudspeakers in the rafters, and, sure enough, Irish dancer Michael Flatley and his minions are strutting across a vast projection screen hanging overhead.

A shopper comes across multiple displays of videocassettes of Flatley as well as the British slapstick series Mr. Bean. There are familiar public TV faces in every department--Martin Yan in cookbooks, Bill Nye in science, Poirot in mysteries, Brother Cadfael's Herb Garden in gardening, and Andrew Weil in self-improvement.

The shop has good-sized displays of products related to Wishbone, Sesame Street, Barney, Big Comfy Couch and the hot-seller Arthur, but Thomas the Tank Engine commands much more shelf space since he's got a whole railroad to sell.

A third of the merchandise and half of the 50 top-sellers are related to public TV in the national chain, according to Susan Pacini, director of marketing and promotions at the Carson, Calif., headquarters.

The non-PTV products include gyroscopes, puzzles, rubber snakes, craft kits, videocassettes from A&E and other cable networks and a surprisingly big selection of Lucille Ball products.

Sales this year break down this way, according to Pacini: 40 percent toys, 23 percent video, 15 percent books, and 14 percent novelty gifts. Only 7 percent is computer software. The planners of WETA's new store thought better of installing a row of computers like the ones Learningsmith had for shoppers to try out software.

Each store has a kiosk with a hotline phone hooked directly to the local station, and featured videocassettes of local productions such as Huell Howser's California Gold programs in KCET's stores, and KRMA's "Klondike and Snow" program about the Denver Zoo's polar bears, in the Denver store.

The mall locations give good exposure to visiting pubcasting stars. Denver's KRMA booked appearances by TV chef Nick Stellino, Arthur and other names that the station was flying in for pledge drives, says Trudy Fowler, the station's development and marketing director. A thousand fans ventured out into a late-winter snowstorm this year to see the Kratt brothers at the store.

Though it's a small 4,300 square feet--about the size of a Gap for Kids shop--the Denver store has significantly higher sales than any other, says Pacini. It sales reached nearly $1 million in December alone, according to Fowler. The store opened last fall as an original part of the new Park Meadows mall in Littleton, a yuppie suburb south of Denver.

"On weekends there are so many people, it's difficult for them to interact with everything we want them to interact with," says manager Jack Broekstra.

When investors take control

The Learningsmith chain started more than two years before Store of Knowledge, with much the same formula.

Griffiths and WGBH publishing chief Karen Johnson took their retail ideas to Marshall Smith, a well-known retail innovator in the Boston area, who had opened the city's first all-softcover bookstore, Paperback Booksmith, in 1961, and branched into the Videosmith business in the 1980s. Smith was an idealistic businessman and a great partner, as Griffiths recalls.

The station invested several hundred thousand dollars, about half of what Smith put up, to open the first two stores, in Chestnut Hill and Harvard Square.

After they proved successful, WGBH called together executives from other major stations to seek partner/investors for expansion beyond Boston. "There was a lot of enthusiasm and no money," says Griffiths.

Learningsmith moved quickly to nail down sites in desirable malls in 1992, and brought in private investors for the capital to do it. In 1993, Smith gave up majority control to bring in a second wave of investors. The chain expanded to 15 stores, including one in Los Angeles without station affiliation. By 1994, annual sales were up to $40 million, according to the Boston Business Journal. But Smith's and WGBH's equity had been diluted. The founders--he and Griffiths and Johnson from WGBH--were soon off the board.

Suffering from problems of rapid growth, the company stopped to regroup in 1995, replacing Kathleen Calcidise, a former Victoria's Secret executive who had been president for only 10 months, with Janet Emerson, who had headed retail sales at Boston's Museum of Fine Arts. Emerson held off on further expansion and shifted the merchandise mix toward toys and games. "We were looking too much like a bookstore," she told the Journal. Smith, who remains a minority owner, says Emerson has been a "terrific" president. A Learningsmith spokesman did not return a request for comment.

After the chain's rapid expansion, the new board majority couldn't live with the percentage-of-gross royalties that Smith and WGBH had given to public TV stations.

"As they went over the numbers, they felt the affiliation with the public television stations was too expensive," recalls Griffiths. "The stores affilated with stations were not doing that much better than those that weren't."

WGBH accepted the logic. "We basically bought the idea that the amount of royalty we were getting could not be sustained," says Griffiths. "In an expansion mode ... this was putting break-even farther out than they could imagine."

The affiliation with public TV was probably worth a lot when the chain was getting going, Griffiths speculates. "Once the stores are established, it probably means less."

Learningsmith decided to renegotiate station agreements, ending the affiliations. WETA and the company agreed to part in fall 1995, effective November 1996, according to Lloyd. Learningsmith kept only its link with WGBH, where it seemed more valuable, Griffiths says.

The relationship had been declining in other ways, Lloyd felt. "As succeeding management teams came on board, they got further and further from the philosophy of the [original] relationship. ... The visionary perspective that Marshall Smith brought to the enterprise was replaced by ... straight-up retailers. We were finding the stores were less and less identifying themselves as WETA-Learningsmith stores. It was reaching the point where it was not a good service to members."

"We decided the thing to do was basically file for divorce," Lloyd told the Washington Post.

Though Smith remains a minority owner in the chain, he has turned his attentions to a new chain of four Cybersmith software/Internet/cappucino stores in the Boston area.

They rode out of the West

When KCET heard about the original WGBH-Learningsmith deal in the early '90s, it already had its own pilot store at its Hollywood headquarters and was talking with Leonard Straus, a prominent retailer on the station's board of directors, says Gary Ferrell, the station's chief financial officer.

KCET and Straus eventually took the idea to Michael Kaplan, chairman of Lakeshore Learning Materials, a family-owned school-supply company. Lakeshore, KCET and the venture capital firm of Riordan, Lewis and Haden formed Store of Knowledge in August 1993 and opened their first store in the Glendale Galleria the following April. By fall 1994, KCET had four stores going. Now the chain is headed toward 50; it will add stores this year in Twin Cities, Norfolk, Houston, San Diego, New York, Pittsburgh, Detroit and St. Louis. The KTEH Store of Knowledge opened in San Jose this month. Nearly all are affiliated with stations.

To a casual observer, the stores are similar to Learningsmith's, though Ferrell says only 20 percent of the chains' merchandise is stocked by both. They nevertheless avoid going head-to-head in the same malls, he says.

KCET remains a part-owner of the parent company, Store of Knowledge Inc., while other affiliated stations become part-owners of local subsidiaries. KCET holds two seats on the parent's nine-member board and another station rep holds a third seat, according to Ferrell.

Like Learningsmith, Store of Knowledge requires no cash investment by stations and will give them a royalty for use of the call letters, but it's a small percentage of net sales rather than gross. In at least two cities, the station's royalty is approximately 25 percent of net, according to station personnel. They don't expect net profits for two or three years.

A major financial upside for stations may come from their part-ownership of the local Store of Knowledge outlets. WETA, for instance, will own 15 percent of its local stores. But the stations won't know what that equity is worth until the chain goes public. Their equity would be converted to stock in the national chain, worth whatever the stock market dictates.

A station could end up with stock worth several hundred thousand dollars per local store, according to one informed guess. Or it could be worth much less or nothing if the chain falters.

The chain is "committed absolutely to a relationship with the local stations," works closely with them on promotions, and gives them a veto on merchandise and promotions, according to Ferrell.

While the stations' financial gains from the chain aren't known yet, KCET's research indicates the chain helps the stations' public goodwill. "The viewers perceived these stores as being a benefit the station offered to the community," says Ferrell. And station members get a specific benefit in some cities; KCET's members get a 10 percent discount on purchases at the chain.

KCET expected some backlash about the link with a retail operation, but it hasn't materialized. Fowler in Denver also has heard no such complaints.

"[Customers] go to that store because they trust us," says Fowler. "They believe the merchandise will be of good value and quality. That's what makes it work, because our name is attached to it. That's what public television represents--quality and value."