CUC International Inc.

707 Summer Street
Stamford, Connecticut 06901
U.S.A.
(203) 324-9261
Fax: (203) 997-8501

Public Company
Incorporated: 1974 as Comp-U-Card of America, Inc.
Employees: 8,500
Sales: $1.42 billion (1996)
Stock Exchanges: New York
SICs: 7299 Miscellaneous Personal Services, Not Elsewhere Classified; 7375 Information Retrieval Services

CUC International Inc. offers individual consumers access to various services and discounts related to shopping, travel, insurance, automobiles, dining, vacationing, credit card enhancement packages, and various discount and coupon programs. The company offers its services primarily through memberships to clubs and programs. Entering 1996, CUC had about 40 million members who paid $5 to $250 per year. The company was growing rapidly in the mid-1990s through acquisitions and internal expansion.

An Idea ahead of Its Time: The 1970s

CUC started out in 1973 as Comp-U-Card (Comp-U-Card of America, Inc.), a company launched to deliver shopping services, including home shopping, using computers and credit cards. The glaring flaw in the strategy—one that the company’s founder, Walter A. Forbes, acknowledged in retrospect—was that very few computers, particularly home computer systems, were accessible to shoppers at the time. Thus, Comp-U-Card, far ahead of its time, was destined to struggle in the dawning years of the information age, waiting for technology to catch up with its progenitor’s stratagem. Indeed, CUC would languish for a full decade before gradually emerging as a force in electronic commerce.

“It was a silly investment at the time because there were no home computers,” Forbes conceded in the April 24, 1995 Forbes. Nevertheless, he remained committed to the idea and continued to pour money into the flailing venture until its turnaround. Forbes was only 30 years old when he started Comp-U-Card. Only five years earlier he had graduated from the Harvard Business School before taking a comfortable job with a management consulting firm, helping other business owners and managers to run their companies. Shortly after going to work for that firm, he came up with his own business idea: electronic merchandising.

Specifically, Forbes became convinced that there had to be a better way to get merchandise from the factory floor to people’s living rooms, rather than going through the traditional, torpid, costly distribution systems that incorporated numerous warehouses, retail stores, and brokers. He believed that computers could do the job much more efficiently. Buyers could simply place their order with a credit card using a computer terminal, which would immediately tell the factory or warehouse where to send the merchandise. Lower costs and lower prices, among other advantages of such a system, would effectively obsolete the traditional retail industry.

Forbes, with the help of several friends, launched Comp-U-Card in 1973 (they incorporated the business in 1974 as Comp-U-Card America, Inc.). For three years Forbes and the other investors dumped hundreds of thousands of dollars into the venture in an effort to create a sort of electronic retail store. Meanwhile, Forbes continued to toil at his job and help to manage Comp-U-Card on the side. Because few people had access to computers, Forbes decided to try the concept using television. He tried to create a home shopping network through which customers could view products, call in with a credit card number, and have the goods delivered. Forbes later tried in-store electronic kiosks, which featured pictures of items that passersby could order electronically. Both the television shopping and kiosk efforts ultimately failed.

By the late 1970s Forbes and his fellow investors had dumped about $2 million into Comp-U-Card. The company showed little promise of returning the investment anytime soon, if at all. Still, Forbes was convinced of the merit of his concept. In 1979, in fact, he surprised coworkers when he left his job to devote all of his energy to Comp-U-Card. Forbes was hoping that, by the early 1980s, the number of consumers who had access to home computers would constitute a viable market for his electronic shopping concept. To that end, in 1979 Comp-U-Card launched its first online home shopping service, Comp-U-Store Online.

A New Strategy in the Early 1980s

Forbes was finally forced to accept the fact that the electronic shopping market still had not materialized. By 1982 Comp-U-Card was generating only a few million dollars in annual sales and still showed no signs of recovering the millions of dollars invested since the 1973 start-up. Still undeterred, Forbes decided to adopt a new strategy. After deciding to focus on telephone sales, he found that Comp-U-Card was uniquely positioned to capitalize on a related, emerging trend in the credit card business—”affinity” programs that offered credit card customers incentives like memberships in shopping clubs. Credit card companies, then, began offering memberships or discounts on memberships in Comp-U-Card’s discount shopping services as a lure to attract new customers.

Comp-U-Card’s first shopping service was dubbed “Shoppers Advantage.” Shoppers Advantage members paid an annual fee (about $40 in the early 1990s), which gave them access to a toll-free number that they could dial to place orders for merchandise. Members could purchase brand name items and have the goods delivered directly to their home. Aside from the convenience, the service was designed to deliver lower prices in comparison to typical retail channels. Comp-U-Card paid the credit card companies a percentage of the membership fees it collected and benefitted from access to the credit card companies’ mailing lists. Everybody involved benefitted, with the exception of competing retailers.

Comp-U-Card was able to offer low prices on its goods for several reasons. Aside from bypassing expensive brokers, Comp-U-Card took bids from numerous distributors. When a caller would phone in to purchase a pre-selected item, the Comp-U-Card representative would ply the database to find the lowest bid from hundreds of distributors on the particular item. Comp-U-Card would effectively award the sale to the lowest bidder and add a mark-up of about five to ten percentage points to the price to cover its overhead (i.e. the toll-free phone call, shipping, and administrative costs). Many manufacturers initially refused to sell through Comp-U-Card for fear of irritating their retail customers, but Comp-U-Card was eventually able to convince most major manufacturers to use the channel, and the service grew to include more than 250,000 items by the early 1990s.

Thus, with its telephone shopping club marketed through credit card companies, Forbes had finally found a winning strategy for Comp-U-Card. Indeed, from about $4 million in 1983, Comp-U-Card’s annual revenue rose past $50 million in 1985. Realizing the viability of the new strategy, Forbes changed the company’s name to Comp-U-Card International in 1982 and in 1983 took it public to raise expansion capital. Comp-U-Card followed up with a second offering in 1984. Shortly before the first offering, moreover, Forbes sold licenses for its shopping clubs in Europe and Japan for about $6 million. The company’s membership base exceeded one million in 1984, signaling the beginning of growth that would swell Comp-U-Card’s membership ranks to 40 million by the mid-1990s.

By 1986 Comp-U-Card’s sales had increased to nearly $90 million. More important, the company was showing healthy profits by then (net income totaled nearly $30 million between 1986 and 1988). Comp-U-Card’s gains were also the result of complementary programs designed to piggy-back off of the success of the shopping club program. In 1985, for example, the company launched Travelers Advantage, a full-service travel club that guaranteed the lowest price for all travel arrangements to its members and returned five percent of every dollar spent through the service. Travelers Advantage eventually became an important profit center for the company.

Diversifying in the Mid-1980s

As it expanded its membership programs, Comp-U-Card began diversifying in the mid-1980s as part of an overall strategy to create a multifaceted marketing organization that profited from technological changes in the marketplace. In 1986 the company acquired two companies: Benefit Consultants, Inc., a marketer of accidental death insurance through credit unions and banks, and Madison Financial Corp. (FISI*Madi-son), the nation’s largest financial marketing organization and a provider of enhancement services (analogous to Comp-U-Card’s shoppers club enhancement service) to more than 6,000 financial institutions. The acquisitions helped push Comp-U-Card’s sales to $142 million in 1987 (fiscal year ended January 31, 1987), about $9 million of which was netted as income.

Company Perspectives

As a leading provider of membership-based discount services, CUC International Inc. is dedicated to delivering the highest value at low prices to its nearly 34 million members throughout the world.… Because of the value we deliver, most consumers who have joined CUC’s services renew their memberships each year, reflecting their confidence and trust. Our goal is to make our products and services even more accessible to a broad range of consumers through both global expansion and our support of the newest delivery technologies.

Reflecting its growing diversity, Comp-U-Card changed its name in 1987 to CUC International, Inc. It also launched another membership service, AutoVantage, which offered a variety of products and services for every phase of car ownership. Going into 1988, CUC was boasting about ten million members in all of its clubs combined. During that year, CUC bought a short-notice travel business and opened new satellite centers for its auto, travel, and shopping club services. Those efforts helped the company to boost sales to nearly $200 million in 1988, earning Walter Forbes a spot on the Business Week ”CEO 1000” list. By the end of the 1980s the company was pulling in sales of close to $300 million and offering a growing diversity of discount products and services to its millions of members.

After rocketing throughout most of the mid- and late 1980s, CUC’s stock price lurched downward in 1989, and shortsellers lined up to cash in on what many analysts expected would be a big drop in the company’s value. The problem stemmed largely from questions about CUC’s accounting methods, which seemed to artificially inflate earnings and emasculate cash flow. CUC executives acknowledged the problem and changed their accounting methods, adding credence to critics’ claims that the company risked a downturn in profits if its customers didn’t continue to resubscribe to its clubs. The critics had a point. If a significant portion of CUC’s members did not resubscribe to its clubs, the company would have to incur huge marketing costs trying to replace them.

In fact, CUC achieved a membership renewal rate of about 70 percent that made it the envy of the industry. That meant that CUC, unlike many other subscriber services, could more easily profit from membership growth rather than maintaining an existing membership base. That benefit was reflected in sustained sales and profit gains; sales rose to $450 million in 1991 and $644 million in 1992, while net income climbed to $16 million annually. That growth was partly the result of more acquisitions and the start of new membership clubs. In 1989, for example, CUC launched Premier Dining, a national discount dining program. In 1991 the company started HealthSaver, which offered discounts on drugs, eyewear, and other health-related merchandise. Incredibly, by 1992 CUC was employing 5,000 workers and operating its network (mostly through licensees) in 36 countries.

Expansion through Acquisitions in the Mid-1990s

During the early and mid-1990s CUC expanded greatly with significant acquisitions. In 1992, for instance, it acquired the venerable Entertainment Publications, the leading publisher of discount coupon books and promotions in North America. Similarly, in 1995 CUC bought Welcome Wagon International Inc. In addition, the company continued to add new services and membership clubs, including a new Home Shopping Travel Club and PrivacyGuard, which provided access to personal credit rating, driving, medical, and Social Security records. Furthermore, CUC entered into potentially lucrative partnerships to provide services with such big companies as Intel, Time Warner, and American Airlines.

Meanwhile, CUC continued to market its existing clubs geared mostly for shoppers, travelers, and other consumers. Indeed, by 1995 the company was sporting roughly 40 million members in its clubs and still achieving average resubscription rates of more than 60 percent. Interestingly, CUC returned to its roots in 1994 when it purchased the NetMarket Company, a leader in bringing commerce to the Internet. Finally, it appeared as though the interactive market for home shopping by computer was finally emerging as a viable distribution channel, just as Forbes had envisioned it more than 20 years earlier.

CUC sustained its blistering expansion drive into the mid-1990s, doubling revenues from $738 million in 1993 (fiscal year ended January 31, 1993) to $1.4 billion in 1996. During the same period, CUC’s net income rose from $25 million to $163 million, making CUC a major force in its niche of the membership/electronic marketing industry. Signaling Forbes’s intent to pursue his original dream of electronic commerce, CUC began pitching its clubs on the Internet and various online services in 1995. More important, early in 1996 CUC surprised observers when it announced a possible plan to pay a big $1.8 billion to acquire Sierra On-Line and Davidson & Associates, education and entertainment software manufacturers. CUC claimed that the purchase represented its first big move in a bid to become the biggest provider of online content in the world.

Principal Subsidiaries

Benefit Consultants, Inc.; CUC Europe, Ltd. (United Kingdom); Entertainment Publications, Inc.; Essex Corporation; FISI Madison Financial Corporation; Interval International, Inc.; National Card Control, Inc.; The NetMarket Company; Welcome Wagon International, Inc.; Credit Card Sentinel Limited (United Kingdom); North American Outdoor Group, Inc.; GETKO Group Inc.